How Much Does the Chevy Volt Cost to Make? Is It Really $89,000?

© GM

Bob Lutz Weighs In

A Reuters article claiming that GM was losing $49,000 on each Volt it builds, and that each one cost $89,000 to make, created a bit of a feeding frenzy in the media lately. It's becoming almost trendy now to claim that no green technology can be commercially successful (everybody remembers Solyndra, which seems to have failed more because of bad management than anything else, and nobody remembers the Prius...). Today, the father of the Volt, Bob Lutz, wrote a piece in Forbes to defend his baby from those who attack it. The crux of the argument is:

The statement that GM “loses” over $40K per Volt is preposterous. What the “analyst” in whom poor Ben Klayman placed his faith has done is to divide the total development cost and plant investment by the number of Volts produced thus far. That’s like saying that a real estate company that puts up a $10 million building and has rental income of one million the first year is “losing” 9 million dollars, or several hundred thousand per renter.

© GM

Primer on the Cost of Making Stuff

This applies to everything, so let's dig deeper to make it clear how things work.

Fixed Costs

So let's say you are a manufacturer who wants to make a high-tech product that isn't just a slight variation on something that already exists. You'll first have to create the product, which usually means spending a few years in research & development, paying for the salaries of lots of engineers, the costs of building and testing prototypes, market research, finding suppliers, probably doing some advertising to make people aware of what's coming, etc. Just that phase can cost millions, hundreds of millions, or even billions depending on the product, and you haven't made a single dollar yet.

Then if you decide that you've come up with a viable product that people will want to buy, you need to actually be able to make it. So you invest more millions into building or retooling one or many factories where the product will be made. If it's a totally new product, it probably also means retraining most of your employees.

All of that is just the fixed costs for your product. Whether you then go on to make one unit or a million, that amount pretty much will stay the same (unless you later need to build more factories, buy more equipment and hire more people to increase production capacity). Total fixed costs can only go up over time, not down.

The goal is always to amortize, or spread, those fixed costs over as many salable product units as possible. This doesn't just mean units sold, though. For example, the second generation of the Toyota Prius used a lot of technologies developed for the first generation. Toyota didn't have to completely reinvent the wheel, so the fixed costs sunk into the first Prius were spread over more than one generation of the car. They were also spread - over time - unto other models like the other Toyota and Lexus hybrids. That's why developing the first hybrid or electric car or whatever will always be more expensive than subsequent models.

Variable Costs

We're not out of the woods yet. After all the fixed costs have been paid, you have variable costs. That's what it costs to build each individual unit. So let's say that to make a Volt you need to buy a battery from suppliers, you need X amount of steel, Y amount of copper, Z amount of rubber, etc... All those plus the labor costs plus the energy costs to run the plant are your variable cost per unit. If you make more units, those costs go up proportionally, and if you make fewer, they go down.

Over time you and your suppliers will usually improve various processes and benefit from economies of scale, This can reduce variable costs significantly. For example, if in 5 years the battery pack costs thousands of dollars less, that'll make a big difference when spread over thousands of vehicles.

© GM

In Conclusion

So there you have it. The Volt might not be making money now, and it's not assured that it will make some soon, but it's way too early to tell whether it's a success or not. Claiming that each Volt costs an astronomical amount to build is like claiming that Apple's initial batch of iPhones cost millions each because huge fixed costs were spread over a small number of units. Any product that requires huge investments to bring to market will lose money on its first units, that's just how manufacturing works.

Claiming otherwise is either a misunderstanding, or intellectual dishonesty.

Via Forbes

See also: GM Volt Sets Sales Record in August (2,831) but Nissan LEAF Still Struggling (685)

Tags: Electric Cars | Electric Vehicles | Hybrid Cars

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