The Scandal of Chevy Volt-Gate!

Ho-hum, it’s another attack on alternative vehicles for being too expensive. Now it’s the Volt.  Then it was the Prius; the issue being that the premium for the hybrid electric vehicle did not make economic sense with gasoline below $5/gallon.  What such analyses always neglect is that a car is not a purely rational purchase decision. Rather than cite academic studies on the subject I’m going to quote Ford’s Chief Designer, J Mays whose job actually depends on selling cars:

“To me, the most important reason people buy a car is the way it looks. You don’t want customers to justify a car based on logic; you want them to justify the purchase based on emotion. It’s a bit like falling in love with a spouse. You don’t fall in love for practical reasons. You fall in love for emotional reasons. The practical things have to be there – but that’s just establishing trust, the price of entry. Ultimately, you need the emotional side to come through, just as it does in a relationship.” (media.ford.com)

Consumers will pay a premium for a car that inspires or excites them in some way. A two seat, 400 hp roadster with a trunk the size of a gym bag cannot be rationalized for its functional utility. People buy these vehicles for their social utility: they are making a statement about themselves. As the vehicle price point increases so does the ratio of social utility to functional utility. The buyer of an $80,000 midsize sedan expects to turn heads and impress the neighbors to a much greater degree than the buyer of a $20,000 midsize sedan that matches it. The reality of the market is that once you get beyond the low end of a market segment consumers aren’t buying functionality. Analyses that ignore this critical factor are absurd.

What Toyota has done right with the Prius is the same thing that any premium vehicle needs to find a market: it makes its owner feel special. The Toyota Prius has been a huge success. It routinely sits on WSJ’s Top 20 sales list. It accounts for more than half of all the hybrids sold in the US on its own (with Toyota selling 9 out of 10 hybrids).  Toyota owns the hybrid market. The Prius look, drive, and feel like something out of a new and better future. It’s not a thrilling drive, however it’s a distinct experience. The electric drive operates silently at idle and low speeds while offering drivers their first taste of the instant torque of an electric motor. The dash is set with LCD screens displaying novel information graphics within a futuristic and a unique console design. In the Prius, Toyota realized an experience that consumers wanted and for which they were willing to pay a premium. Whether the fuel costs penciled out over time was a secondary consideration for these buyers. Honda’s Insight, a functionally similar vehicle, has struggled for marketshare despite mpg in the Prius class: hybrid buyers at this stage of the market want an experience.

This brings me to the Chevy Volt, a plug-in hybrid with about a 35 mile range. GM is the first to mass market a plug-in. Like Toyota has done with hybrids, this puts GM in the leading position at the moment. If GM can set the standard, and the market segment finds buyers, GM is in a good position. But right now, like Toyota was in the early days of the Prius, the car is getting trounced for allegedly being too expensive to produce .This is a ridiculous way to analyze an investment in new technology for mass market adoption.
But it’s easy to do, and it makes a great headline so it happens. A lot. It’s frequently seen in the analysis of any alternative energy related development. We’re routinely told solar can’t compete: too expensive. Wind can’t compete: too expensive. I’m not linking them here on purpose but they’re easy enough to find. But such analyses are editorial documents written as if they were objective scientific documents. At some point in a major analysis you must propose a discount rate and an accounting for externalities, carbon emissions for example. If you don’t care about carbon emissions and need a fast return on the investment it can be hard to economically justify renewable energy technologies in the short run.  In fact, it’s hard for a new technology to compete with a mature technology on a pure cost basis. The mature technology has an economic inertia built into it that protects it from new entries. When the first cars started hitting the roads  in the 1880’s no one could have argued that they were cost comparable to the horse and buggy at the time. It took Henry Ford and his Model T (1908) to come up with a car that was viable to the mass market. Any analysis that doesn’t take into account energy security, climate change, and pollution costs  is going to be a rough on a renewable energy technology.

The Volt is taking the typical sorts of criticisms and a new energy technology related  venture will take, which usually ends up being, it’s just too expensive. This is a legitimate problem with the Volt, and the Nissan Leaf, that the Prius managed to avoid. It’s the same problem that every vehicle with a large battery is going to face: large batteries are expensive. A battery pack adds thousands of dollars to the purchase price of the vehicle. That’s a problem in a competitive market because a vehicle without that expensive battery pack at the same price can offer a lot more features to the buyer. I discussed this issue in my dissertation labeling it the feature gap. The Prius, with current MSRPs of 24-30k is right in the thick band of the vehicle price distribution (right skewed) in America, approaching , but not surpassing the American average of almost $31 k. The Prius can make up the feature gap generated by its battery pack expense  because 1) the battery is small (4.4 kwh) and thus adds less than a couple thousand dollars to the MSRP, and 2) Toyota has positioned the vehicle such that it has a genuine appeal to multiple market segments.
The Volt and the Leaf have the problem of coming in at a price that would exceed the the national average if not for the incentives. Even with the incentives they only manage to hit the Prius range. But these cars do not have the distinctive styling and features of the Prius. The Leaf’s styling is closely reminiscent of  an econo hatchback you’d find in the bottom end of the market, and the Volt looks very similar to the $20k Chevy Cruze, with which it shares a platform. Given the competition at this price range, $25-40k, depending on the incentives, these vehicles are competing against alternatives (e.g. Audi, BMW) that are wholly superior on a feature and attractiveness basis. Even if the Volt’s battery, electric motor, and gas engine add only $5000 to the price of car, that puts such a vehicle at a substantial disadvantage to competitors at same price point. All else equal an OEM can do a lot with $5000 of pricing room: nicer wheels, better paint, higher quality interior appointments, and so on.

The indications point to GM struggling with Volt sales. There is a market for the car, but not at the price. If the Prius is a lesson perhaps the mistake GM made with the Volt was letting it be a a low end Chevy in stature (i.e. the Cruze). There is plenty of money for Teslas . GM should have gone after the Tesla buyer by investing in the styling and amenities of the vehicle. The Volt should have been a Cadillac, not a Chevy. In fact a Cadillac version of the Volt is in the works. This is the case if GM is interested in making money on the Volt, but that isn’t so important right now. What GM is doing is buying down the build cost of the plug-in hybrid. If GM can win the lion’s share of a large future PHEV market by leading it now the expense will be worth it, but as for now it’s a gamble.

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4 thoughts on “The Scandal of Chevy Volt-Gate!

  1. Pingback: Links 9/22/12 « naked capitalism

  2. Why is it so hard for us to fall in love with a hi-tech car that saves the planet (while sticking it to the oil companies) …vs. the old ICE car with great paint job or styling? What does this say about our priorities? Maybe we, as a society, should just tax gasoline so everyone has the price signal we apparently need–e.g. $5/gallon– to make the prudent purchase decision so future generations can enjoy cars too.

  3. Wind and solar is more than competitive because it allows us to burn less fossil fuels and exporting them instead. Kinda like if you have a large property with trees that you were cutting down to burn to make electricity and now sell them as firewood instead like im helping an old hippie do right now.

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