Using the data from Munro & Associates, Reuters calculated that General Motors (NYSE:GM) spends an average of $89,000 to produce each Volt, while the revenue generated by each Volt sits at $40,000. This indicates a loss of $49,000 on each Volt sold. The number is large enough to devastate investors in the company (including the government) who are looking for a return on their investment. GM argues that the number reflects one-time product research and development costs. Basically, according to the company's argument, as the company sells more Volt cars, the average research and development cost per car will come down. I certainly agree with this argument, but it comes with a caveat: Will GM ever be able to sell enough cars to break even with Volt? This is a very tough call. In GM's defense, the company could use some of the knowledge it acquired during the research and development phase of Volt when building other cars. In the car industry, it is very difficult to specify exactly how much of research spending goes to which model.
Adding insult to injury was the company's cheap lease options this summer. The company's goal was to attract more people to the idea of driving an electric car. GM allowed people to lease a brand new Volt for two years at a cost of $5,000. Considering the high average cost of each car for GM to produce, the loss gets deeper. At the end of a two-year lease period, the car is likely to lose a much greater value than $5,000 as new cars tend to lose a lot of value within the first two years of usage. If the leasers don't buy the cars they lease at the end of the two-year period, this may hurt GM's investors deeply.
As more competitors enter the electric vehicle market with a variety of cars, it will get progressively more difficult for GM to restore the money it spent on Volt. Because of the low demand for electric cars, the market is likely to get saturated quickly. One exception to the rule might be Tesla Motors (NASDAQ:TSLA), a company some consider to be the Apple of car companies. The company produces high-quality electric vehicles with exceptionally good looks and the "cool" factor. Also, Tesla will probably need to sell far fewer cars to break even than GM. In an interview, Tesla's CEO Elon Musk said that the company needs to sell only 8,000 Model S cars to generate positive cash flow. Given how GM spent $1.2 billion on R&D for development of Volt and how each Volt sells for about $40,000, it would take GM to sell about 90,000-110,000 Volt cars to break even, depending on the profit margins.
If GM attempted to increase its asking price for a Volt, the car's already weak demand would diminish further. If the company decreased its asking price in order to bump up the demand, the profit margin would get dangerously low. The company will have to sell a lot of Volts at a decent price in order to at least break even with this product.
The company has invested $1.2 billion in this project and the analysts expect it to be several years before the company can retrieve its money. The investors of the company might not be too bothered if the company lost money on signature brands such as Chevy Corvette; however, the reaction to losing money on the Volt will be a different story. While Chevy Corvette has been helping the company's brand image for several decades, the Volt doesn't enjoy such a strong brand name.
Since December 2010, GM was able to sell 21,500 Volts even though the company's initial goal was to sell 45,000 Volts annually. Of course, one has to look at the total number of cars that have been sold in addition to the cars that will be sold during the lifetime of a model in order to predict the total cost per each car. However, the sales of Volt will have to ramp up so much before we can even talk about the car model being profitable.
Volt has earned many awards, including 2009 Green Car Vision Award by the Green Car Journal, 2012 Car of the Year in Denmark, 2009 Environmental Grand Prize awarded at the 2009 Festival International Automobile, Edmunds 2011 Green Car Breakthrough Award, and many more. The car is not bad at all; however, many people aren't comfortable with owning a fully electric car yet. As these cars become more widespread, more people might grow comfortable with the idea of driving one of them. At the moment, consumers pay a premium compared to gasoline cars even after a tax credit of $7,500, and a person has to drive an electric car for a long time before he or she breaks even in gas costs. In the future, as the electric cars get more efficient and make more financial sense, more people may opt for them.
I've recently sold my GM shares and I am tempted to buy Tesla. Currently, I only own two car companies: Ford (NYSE:F) and Volkswagen (OTCQX:VLKAY). I am putting my money in Ford instead of GM because I trust the ability and competence of the Ford's management more than GM management. I believe that Ford is more flexible in terms of addressing regional issues, such as the slowing sales in Europe. GM probably doesn't worry too much about losing money in certain markets as it can always rely on government money to get back in the game.
Disclosure: I am long F, OTCQX:VLKAY. 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.