Eco-nomics: Supply and Demand and the GM Volt

A Portland-based car writer, Edward Niedermeyer, has an Op-Ed in The New York Times today criticizing GM and the US government for what he sees as filings of the Volt:

...G.M.’s vision turned into a car that costs $41,000 before relevant tax breaks ... but after billions of dollars of government loans and grants for the Volt’s development and production. And instead of the sleek coupe of 2007, it looks suspiciously similar to a Toyota Prius. It also requires premium gasoline, seats only four people (the battery runs down the center of the car, preventing a rear bench) and has less head and leg room than the $17,000 Chevrolet Cruze, which is more or less the non-electric version of the Volt.

In short, the Volt appears to be exactly the kind of green-at-all-costs car that some opponents of the bailout feared the government might order G.M. to build. Unfortunately for this theory, G.M. was already committed to the Volt when it entered bankruptcy. And though President Obama’s task force reported in 2009 that the Volt “will likely be too expensive to be commercially successful in the short term,” it didn’t cancel the project.

Nor did the government or G.M. decide to sell the Volt at a loss, which, paradoxically, might have been the best hope for making it profitable. Consider the Prius. Back in 1997, Toyota began selling the high-tech, first-of-its-kind car in Japan for about $17,000, even though each model cost $32,000 to build.

By taking a loss on the first several years of Prius production, Toyota was able to hold its price steady, and then sell the gas-sippers in huge numbers when oil prices soared. Today a Prius costs roughly the same in inflation-adjusted dollars as those 1997 models did, and it has become the best-selling Toyota in the United States after the evergreen Camry and Corolla.

I think Neidermeyer makes some pretty fundamental logical errors. To start with, given production limitations, GM should set a price that does not leave too much excess demand, the rationale at this point for selling the Volt at below cost is only if supply far outstrips demand and they expect reasonable economies of scale.

Comparing it to the roll-out of the Prius is nonsense. Give that the Prius was really the first of its kind, Toyota was trying to build a market to get precisely these economies of scale. But fortunately for GM, Toyota has done all the heavy lifting. Hybrid electric cars are now an established part of the market. I can't see any reason to think that GM should sell the Volt at a big loss. I think GM has the luxury of selling it at the high price initially and lowering it to grow the market as costs come down.

The fact that the government has a substantial incentive program in place is a separate matter, surely GM can figure this in as it figures out the initial price and if demand is high enough, the subsidy will end up being almost entirely for GM, not for consumers.

Neidermeyer has a number of other complaints about the car itself: not big enough, not distinctive enough, etc. But this is for the market to decide, not a single car writer.  Over the next number of years we will see how the market feels about GM electric ventures and how well GM can parlay its initial investment in R&D into newer and better vehicles and technologies.  This will be the real test of GM and whether it has a future.

Wither Saab?

It seems more than likely. GM has not been able to make it viable for the US market. I think the likely scenarios are that some european buyer will take it and will pull out of the US, or that it will just be folded into Opel and assets and the brand will die. Either way, as a Saab owner and enthusiast, I will be sad. What will the professoriate drive?

But the question remains, why on earth continue to focus on Buick and GMC. Buick's audience is dying and serious luxury buyers will look to Cadillac, which GM resuccitated nicely, and GMC is just rebadged Chevy trucks, no? Chevy and Cadillac are the the core of the GM empire (with Opel in Europe), who needs anything else?

Should Detroit Declare Bankruptcy?

I own a GM car.  It is a 21st Century beast however, built in Sweden on a platform that is shared by Chevrolet, Saturn, Opel and others.  It is a good car, I have no complaints, well designed, fairly well built (though a far cry from the quality that Japanese car manufacturer's produce) and wonderfully fuel efficient yet with plenty of zip thanks to a smallish four cylinder engine that is turbocharged.  In short, it should be a pretty darn good car for toady's marketplace.  But sales of my car in the US have been abysmal.  And herein lies the problem with GM in my view.  Too many brands, too many dealers, too many cars - all leading to not enough focus on a core set of cars and research supporting new innovation.  

It is tempting to blame the relics of the strong labor movement for GMs downfall, as I have seen done many times in the last few days in the press, but closer scrutiny reveals that this is more a function of the past labor contracts and not the current labor contracts that are pretty much in-line with those of foreign manufacturers that are doing business in the US (though the effect of these contracts is still lagged). So don't blame labor for this mess.  GM's web site lists 13 brands!?!  Apparently they have over 7000 dealers to Toyotas 1000, this is just too many irons in the fire, no wonder they have not been able to remain dynamic and competitive.

Many observers are saying that Detroit's problems are of its own making and the cure is Chapter 11 bankruptcy.  This would allow them to renegotiate union contracts, get out of pension obligations (at great expense to the US taxpayer presumably), and renegotiate with creditors.   I was of this opinion at first blush.  The problem with this solution is that the traditional device of this type of bankruptcy is the ability (under chapter 11 protection) to secure commercial credit, and this type of credit is not now available - meaning that chapter 11 would quickly turn into chapter 7 and the liquidation would begin.  Perhaps this is all for the best, but in a time when the economy is in a deep, deep nosedive and shedding jobs like crazy the hit that this would deliver may just be a knock-out blow.    I am fairly well persuaded by this line of thought.

But maybe there is a middle way.  Perhaps a government bailout of GM, for example, could be a part of a chapter 11 filing, in the form of a credit guarantee.  Or perhaps some of the provisions of chapter 11 could be imposed on a bailout (insisting on a renegotiation of labor contracts and pensions, for example).  Why must it be a $25 billion hand out or a potentially disastrous chapter 11?  Let's provide them the opportunity to shed dealers, discontinue brands (which is hard with outstanding dealer contracts) and refocus on a core set of products.  

I believe preventing the collapse of Detroit is vital to our efforts to dampen the blow of the economic crisis right now, but lets do it in a way that leaves Detroit dynamic and competitive when it is all over.