Chevy Volt and the Cost of Bravery

By · July 20, 2008

General Motors can’t catch a break with its green car plans. As hybrids steadily gained market share in the first half of this decade, the company stayed out of the game. As late as 2003, Bob Lutz, the company’s product chief, said that hybrids don’t make “economic or environmental sense.” When GM finally stepped forward, it did so with all of the passion of a CPA—producing unconvincing low-cost Saturn pseudo-hybrids or hulking gas-electric systems best suited for undesirable full-size SUVs. These efforts were all numbers and no guts.

Finally, GM executives threw all caution to the wind and conceived the Chevrolet Volt plug-in hybrid—an inspiring vision of what a vehicle could be at the beginning of the post-petroleum age. Unfortunately, GM might have missed the mark again—this time completing tossing out the business planning that it over-applied in the past. It appears that the brave and brilliant design of the Chevrolet Volt might require a price tag of roughly double the cost of its primary hybrid competition, the Toyota Prius and Honda Civic Hybrid—and at the same time become a big money-loser for the company.

The details of the Volt’s genesis are told in the current issue of The Atlantic. The article, entitled "Electro-Shock Therapy,” explains that panic set in at GM throughout 2005 and 2006 as the company suffered annual losses in the billions and a deteriorating public image—especially regarding the environment. An unnamed executive told Atlantic writer Jonathan Rauch, “Everyone’s thinking the same thing: We’ve got to turn this thing around. We’ve got to get our mojo back on advanced technology.” The executive said, “The PR guys want something more sexy and dramatic, a singular point for our message.”

Steve Harris, GM’s top PR executive, had been looking with envy at the positive PR that Toyota garnered with its smash-hit hybrid, the Prius, and thought, “That could have been us.” Less than a year later, at the 2007 Detroit Auto Show, the company unveiled the Chevy Volt, a vehicle designed to resurrect GM’s image and to deliver an attractive, affordable, and petroleum-free ride for most of America’s daily driving. The Volt was an instant media sensation.

In the 20 months since its unveiling—a period of time in which the cost of a gasoline rose as rapidly as GM’s bottom line fell—the promise of the Volt expanded from heroic to messianic proportions. In fact, on Friday, Republican presidential candidate Senator John McCain told a crowd of 500 GM autoworkers "The eyes of the world are now on the Volt. It's the future of America and the world." McCain sees this single vehicle as a “vital and integral part of our ability to break our dependence on foreign oil."

So, GM’s stakes in the Volt have grown from earning positive PR points, to saving the company, to saving the world. The company now has no choice but to deliver the car—at any cost. And therein lies a potential major problem. In the Atlantic article, Lutz said that the company tossed aside the normal budgeting and business process when creating the Volt.

“[Normally] you define the whole future of the car on paper before you give the go-ahead to start spending some serious engineering and design money on it. And in this case it was completely backwards. We saw that we had a smash hit that hugely resonated with the public, and we just decided: let’s go to work. No business case, but let’s get this thing into production-ready form, and we’ll worry about the cost and investment and the profitability later.”

At the time of the unveiling, the target purchase price was rumored at $25,000. Until recently, the company was hinting at $30,000. Lutz now reckons that $40,000 might be possible, but that $48,000 is more realistic.

There’s further evidence that the costs are running away. The company is lobbying for a $7,000 federal tax credit for customers of the Volt and other similar plug-in vehicles. On Friday, McCain pledged to do his part, if elected, to offer $5,000 credits. That adds up to somewhere between $50 million and $70 million of taxpayer dollars going to support purchases of the vehicle—if GM is indeed able to meet its target of 10,000 units in the first year. That government support will increase if Wagoner and Lutz deliver on their promise to produce the Volt in large quantities, as many as 500,000 units per year, within a few years. Similar tax credits will be available for other plug-in hybrid and electric vehicles, promised from Toyota, Nissan, Mitsubishi, Ford and others. GM’s brave move toward plug-in vehicles has inspired the entire industry to begin going electric.

Even at $48,000, GM will be taking a substantial loss with each sale of the Volt. In an interview with on the morning of the Volt’s unveiling in Detroit, Lutz acknowledged that the company would have to subsidize the cost of the vehicle for “about as long as Toyota subsidized the price of the Prius” before it became profitable. That took Toyota about 10 years. If the Volt is a success, then GM could become a victim of its own success, suffering losses before the vehicle reaches economies of scale and starts turning a profit. If that’s the case, then GM and the Volt could also become a martyr in the process: ushering in a new age of green vehicles but hurting itself in the process.

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