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Money Blog

Sep 11, 2012
12:38 PM

Why GM's Strategy of Losing $49K per Car Actually Makes Sense

Why GM's Strategy of Losing $49K per Car Actually Makes Sense

Reuters/Lucy Nicholson

The Volt is GM’s new, award-winning all-electric vehicle.

Monday, an article from Reuters reported that General Motors is losing $49,000 on every Chevrolet Volt they sell.

The simple math is that it costs GM $89,000 to make the car and it’s retailing for $39,995 at dealerships around the country. Even their leasing options appear to be costing the company potentially millions of dollars, given that it has sold only 13,500 this year. (They were hoping to sell 40,000.)

The weak sales are forcing GM to shut down the Detroit-Hamtramck assembly plant that makes the Chevrolet Volt for four weeks from Sept. 17, according to plant suppliers and union sources quoted in the Reuters article. It is the second time GM has had to call a Volt production halt this year.

“Cheap Volt lease offers meant to drive more customers to Chevy showrooms this summer may have pushed that loss even higher,” the article said.

“There are some Americans paying just $5,050 to drive around for two years in a vehicle that cost as much as $89,000 to produce.”

Reuters also reports that GM is still years away from making money on the Volt, which will soon face new competitors from Ford, Honda and others.

The biggest question raised by the discovery of Chevy’s huge loss on the Volt is why. Why would a car company knowingly take a loss of almost $50,000 per vehicle?

GM’s strategy will likely benefit Detroit in the long run because of the technology cycle. The company is banking on the idea that as technology improves, costs will decrease and profits will rise.

By debuting the car now instead of waiting until it’s cost efficient to do so, the company creates brand loyalty, establishes a customer base that likes all-electric cars and cements itself in the mind of consumers as the company that brought them the electric car.

Eventually, as new technologies are developed, the cars will become cheaper and easier to produce and GM hopes to corner the market on it when it does.

Electric cars and cars powered by alternative energy are the future and GM is betting that it has enough money to sell cars at a loss for long enough to still be selling them once it can make a profit.

If and when the technology becomes cheap enough to turn a profit the company will still be able to sell the Volt for around $40,000 despite the fact that future versions will probably cost less than $20,000 to produce.

In the meantime, they can force other car manufacturers who cannot sustain such a loss out of the marketplace for good. When that happens the workers at the Detroit-Hamtramck assembly plant are poised to be in a great position.

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