Last year, General Motors (NYSE:GM) posted record sales with its electric plug-in car, the Chevrolet Volt. Sales rose to 23,461 units in 2012 from just 7,651 units in 2011. Is this great news for GM? Not really. As it turns out, GM loses up to $50,000 on each Volt that it sells.
When I researched the matter further, I found that electric batteries are extremely expensive to produce. These batteries alone can cost as much as an entire Ford Focus when considering their extremely complex cooling systems. For Chevy, experts estimate that the cost to produce each Volt ranges anywhere from $75,000 to $88,000.
The car currently sells at a massive loss at a retail price of $40,000, and sometimes even cheaper through Chevy's aggressive leasing campaigns.
Here is the breakdown:
|Fixed Costs||Cash Out|
|Standard Parts, Material and Labor||$12,000|
|Unique Parts, Material and Labor||$12,000|
As we can see, the majority of costs are fixed. When GM starts to build more and more of these cars, we should expect the fixed costs to decrease, as they will be spread amongst more units. However, that seems to be a very long way down the road with these types of margins.
This car is very expensive, even at the $40,000 price tag, when compared to the competition:
|Competitor||Electric Car||Base Retail Price|
The table shows that the Chevy Volt is on the higher end of the scale in terms of price. When Toyota can make a fuel efficient vehicle for $26,000, it must be an easy choice for consumers when stacked up against another environmentally friendly product that is double the price tag (while the Prius isn't a plug-in car, it is definitely still a competitor). This probably explains a lot about why Toyota can sell 250,000 Priuses while GM can only sell 23,000 Volts.
We have all heard the argument that the Volt is GM's investment into what it believes is the future. GM argues that although the Volt is expensive, the investment in the car is crucial for its future successes. Although this may be true, the demand for electric cars is not big enough for GM to justify entering this market now. My suggestion would be to wait until the market demand is great enough to support cars like the Volt. Until then, GM will be losing money as economies of scale will not be reached with the Volt.
Implications For Investors
As long as this car is on the market, GM will continue to allocate precious resources to it. Last year, GM even shut down the Volt factory two separate times because it couldn't hold all the inventory that was piling up. On top of the massive loss per vehicle, when the company shuts down a factory, it has to pay for union workers to stay at home and incur all the costs associated with inefficient operations. Management is also wasting their precious time on making decisions about this car instead of focusing on value added products.
But how much value can one car destroy in such a large company with so many products? Well... some quick back of the envelope math below suggests the Volt has a very big impact:
Chevy Volt: Units Sold in 2012
Estimated Losses per unit
Units Sold * Loss/Unit
821.3 Billion-1.17 Billion
GM Shares Outstanding
If expert estimates are true, the company is losing up to $0.85 a share on this car every year. This is a very big figure considering GM's current EPS is only $2.92. These numbers are quite shocking, especially because they don't even include the costs associated with shutting down the factory, marketing expenses, and the administrative costs associated with the Volt.
I do not fully understand why GM is still making these cars. The company has just emerged from bankruptcy and it seems like it is making the same mistakes all over again. Hasn't it learned this lesson from Saturn... Pontiac... Hummer... and Buick?
My recommendation is for management to cut this car out of the Chevy portfolio immediately. It does not make sense to sell products at a major loss.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.