Selling Hybrids at a Loss - GreenHybrid

sdctcher · #1 (**permalink**) 02-24-2005, 07:10 PM

I just finished reading an article in the February 23, 2005 Auto Section of the LA Times. It was basically about Toyota and the expected MSRP of the new Lexus 440h but also discussed the Prius and the forthcoming Highlander Hybrid.

The point was that the author had crunched the numbers for these cars and the various costs of additional car technical components to make the hybrids work as well as they do. His deduction was that all, even the Prius, are being sold, even today, at a substantial loss to the manufacturer. I would expect that this same thing is part and parcel of the Ford Hybrid. One reason I bought early was that I gambled that Ford would not sell a lemon and all the things that made the regular Escape into the FEH had to be worth more than $3,000 more. Since introduction, the FEH MSRP has risen by about $500 and I am guessing the 2006 will go up by at least another $500-$1,000.

Some of us may applaud Toyota and Ford (and Honda also, I am sure) for taking the loss in order to move forward better environmental citizenship and create a new market for hybrids. This is surely part of the reason.

The author believes, and has some proof for, the argument that there are other more business-like reasons. He quoted the amount of billions spent annually by each manufacturer for their entire line of cars and compared that to the amount of loss they may be sustaining on their hybrids.

His hypothesis is that the loss is a very small percentage and compared to the great publicity the companies are getting by introducing new environmentally-friendly technology, it is extremely cost-effective. The companies are betting that by the time the loss become intolerable they will have each secured a sufficient portion of the market and lowered production costs to be able to start making a profit per vehicle.

I believe he is right, and he emphasized that GM has missed the boat and will pay for it later. It is going to cost them dearly paying for catch-up.

If he is right about this hidden strategy, I find it fascinating and would hire the marketing genius behind it in an instant.

Just my opinion.

Mike

Jason · #2 (**permalink**) 02-24-2005, 07:22 PM

Yes, we've discussed this in length before. It's definitely a strategy, though I do know that Toyota has insisted it is making profit off its Prius II, though not much. I know for a fact that the Insight is being sold at a significant loss with each sale, though less than a hundred (I think) are sold annually. The only reason why the Insight is still made, I believe, is so that the Prius can't claim yet another title as "highest-mileage automobile on the market."

GreenAndBlue · #3 (**permalink**) 02-25-2005, 01:01 AM

My analysis, based on what I've read, and knowing something about Honda's past history w/ regards to stretching FE, is that Honda looks on that car with pride; it is a 'showcase' for them.

Even if they *were* 'only making it to keep Toyota from having the highest mileage car on the market', *and* they for some reason could not make it any more (pick a reason), word going around is that with the intro of the redesigned HCH, the Prius will drop a place in the FE ratings (as measured by EPA, which is the standard we all have to measure by).

Not to worry, though. Prius will still have the title of 'most known / recognized' hybrid...
Props to Toyota for marketing better than Honda

Back on topic of this thread... it's proven that the *first* to market generally captures / maintains max market share, even if successors' products rate *better*. The company I work for is living proof of this.

I would agree that GM will pay for their sluggishness....but I also predict that they'll try and catch up...by licensing HSD technology from Toyota, as Nissan is doing, and in keeping with Toyota's stated strategy of licensing the tech. to other makers. Toyota and GM have a long history of working together, as well (at least since the NUMMI venture, and probably longer than that). From what I read of GM's hybrid plans, they've got some catching up to do in the area of tech / engineering.

However, cost (ie; profit margin) will be the main impediment for US carmakers, especially if they're passing out $5000 rebates on their hybrids, the way they do on their ICE-only cars now. By the time GM comes out with their 1st gen hybrids, Toyota and Honda will be introducing their 3rd and 4th versions, respectively. With that kind of headstart, what does GM need to do to be able to sell their product over Japan, Inc ? They'll need to push 'works better' and 'costs less' (TCO perspective). But will they be able to ? Given past track records... I doubt it, sadly.

Look at what the main impediment to hybrid sales is now - price (there are others, but cost usually reigns supreme with consumers, given products of similar quality/value). If the manufacturers sold them at 'true cost' (assuming 10yr recovery of capital invested), you'd probably have 10% of the existing base out there now (and since that's now 1% of the US market, that would decrease to .001% - at that point, manufacturers would say "why bother" ?)

Honda's strategy (and now Toyota, with the RX400h) is to offer them (for now) on the higher priced variants in the product lines - because there's more margin built in from the outset. But as costs are recaptured, and the technology improves, I think you'll see these expanded greatly among the lines.

Honda has 3 hybrid lines *now* (and Toyota is soon to have 2 more as well); I can see Honda in about 3-4yrs time with commercials out stating they've got it in every product line (Honda only, not Acura, and they before Toyota because Honda has fewer product lines / segments). Probably each redesign cycle from here on out will include a hybrid variant. Next vehicle up for redesign is probably the Pilot or CR-V. Anyone want to lay odds ?

And, yes, I know the carmakers view hybrids as a bridge technology to Fuel Cell cars. Wonder how much *those* will cost, when the time comes ? (Ghosn of Nissan has been quoted as stating the existing FC cars cost > $250K in 'real' dollars to build now).

Jason · #4 (**permalink**) 02-25-2005, 08:43 AM

Wow. Great stuff there, really. Well said. One thing to mention: I was under the impression that Toyota was only licensing out it's first-generation Toyota Hybrid System, not Hybrid Synergy Drive.

GreenAndBlue · #5 (**permalink**) 02-25-2005, 11:47 AM

Jason - thanks for the kind words. And you may be right.

If you are, then it only further exacerbates the issue for GM, et al. And it's very, very shrewd on Toyota's part

EdW · #6 (**permalink**) 02-25-2005, 12:41 PM

Actually, I don't believe GM will be licensing hybrid technology from anyone. They've actually teamed up with DaimlerChrysler to develop a dual-mode hybrid system. Here's the article from Forbes.

Quote:

GM, DaimlerChrysler to Develop Engines
12.13.2004, 03:14 PM

General Motors Corp. and DaimlerChrysler AG are teaming up to develop fuel-saving hybrid engines in hopes of cashing in on an expanding market already dominated by hybrid leaders Toyota Motor Corp. and Honda Motor Co.

Financial terms of the agreement between GM, the world's largest automaker, and its German-American rival weren't disclosed Monday, but Tom Stephens, GM's group vice president for powertrains, said the collaboration likely will involve an investment of hundreds of millions of dollars.

The first of the vehicles is scheduled to debut in 2007 - when Toyota has said it hopes sales of its hybrid models total several hundred thousand worldwide.

Although hybrids overall make up only a minute percentage of global auto sales, Stephens noted that some analysts believe hybrids eventually could account for 5 percent to 15 percent of global volume.

GM, which has worked with DaimlerChrysler on transmissions, has also said it considers hybrids a bridge to longer-range hydrogen fuel cell vehicles, which require no fossil fuel and release no toxic emissions.

"Our planned cooperation will draw on the technical expertise of two of the largest auto companies in the world," DaimlerChrysler board member Thomas Weber said.

Hybrids draw power from two energy sources, typically a gas or diesel engine combined with an electric motor. Demand has grown worldwide because of concerns about the dangers of global warming, decreasing natural fuel supplies and the rising cost of those fuels.

GM and Chrysler already sell hybrid pickups, but the systems are less advanced and fuel-efficient than those used on cars sold by Toyota and Honda and on Ford Motor Co.'s hybrid version of its Escape sport utility vehicle, the world's first gas-electric hybrid SUV.

The announcement comes at a time when Japanese automakers and Ford., the other Big-Three U.S. automaker, are accelerating their efforts with hybrids.

Toyota, Japan's No. 1 automaker, said in October it would double the allocation of Prius hybrid cars for the U.S. market in 2005, part of a companywide goal to sell 300,000 hybrid vehicles worldwide by the end of next year. More than 100,000 Priuses have already been sold in the United States since 2000.

Toyota also plans to begin selling hybrid versions of its Highlander and Lexus RX SUVs in the United States next year.

Honda last week began selling its third hybrid car in the United States, a high-performance version of its popular Accord sedan. Ford's Escape hybrid went on sale this summer.

The GM and DaimlerChrysler jointly built hybrid system will be used in GM, Chrysler and Mercedes vehicles. Variants planned include rear- and front-wheel-drive versions for cars, trucks and other vehicles.

In a joint statement, GM and DaimlerChrysler touted its hybrid system as more flexible than the ones used by other automakers.

"We can go from sport utility vehicles and pickups trucks to compact cars without redesigning critical control functions," Stephens said.

The companies said the project will be open to other partners and may result in GM and DaimlerChrysler licensing hybrid technology to rivals.

In afternoon trading on the New York Stock Exchange, GM shares were down 19 cents at $38.74 while DaimlerChrysler's U.S. shares were up 98 cents at $46.81.

http://www.forbes.com/home/feeds/ap/...ap1708449.html

Here's a couple more articles that I found pretty interesting on the topic:

http://www.consumeraffairs.com/news04/hybrid.html
http://www.washingtonpost.com/wp-dyn...2004Dec17.html
http://www.canadiandriver.com/news/041214-1.htm
http://www.freep.com/money/autonews/...e_20041214.htm

GM already has hybrid technology in place in some of its bus engines. I like quite a few GM cars, and I hate to see them lagging behind like they are these days with the hybrid technology. But historically, this is the GM way. They wait and see what works, and then they improve on existing ideas, usually by working with other companies. They may be late to the party, but I applaud the efforts of both companies. I especially like that GM is planning to apply this technology to its large SUVs first. People aren't likely to stop buying large SUVs any time soon, so it's good to see that GM will apply this technology where it's needed most.

JeromeP · #7 (**permalink**) 03-01-2005, 11:22 AM

Ever since hybrids were introduced in the U.S. the media has been assuming and supposing that the manufacturers have been taking a loss on the vehicles. The economies of scale that have developed since, well say 1997 with the introduction of the first Prius in Japan do not logically lead to that conclusion. The Prius and other manufacturers' hybrids feel like unique cars in terms of public perspective, but they are mass produced and in the hundreds of thousands now. With that kind of production the logic that would lead to a "selling at a loss" kind of goes out the window. When you are producing over 100,000 of a particular vehicle in a year and that vehicle is basically identical mechanically for all units of production the costs of the "specialized" parts disappears. The production numbers are such that a "significant loss" is not likely to be realized. Selling the cars at cost might be more realistic, but I have my doubts about that, also.

This ties in with some buyer's desire for a more stripped Prius, and in reality Toyota has equipped the Prius in such a way that it is less expensive for them to manufacturer one model with bells and whistles than offering two models one with bells and one without. Any organization that wants to make a profit with manufactured goods needs to develop some kind of economy of scale, and Toyota has done that with the Prius by limiting options, choosing the high road as far as features and options, and basically creating identical cars on the assembly line, aside from paint and a few plug-in electronic super features.

I know we all like to get warm fuzzies when we think that corporations "care", but being realistic, if Toyota thought the break-even horizon was too far off for the vehicle, they wouldn't have produced it at all. Instead, any new product has a b/e horizon that is out in the future someplace. It is up to your corporate culture and other corporate goals to determine how far off into the future your b/e can be that is acceptable. Certainly Toyota's was pretty far out there, but I would be highly surprised if we were still looking for b/e on the third generation of Prius. That would be a pretty far out b/e point. So, right now that would be about 8 years without reaching b/e, which isn't acceptable for any organization for any reason.

Honda has it easier. They are not developing an entire platform such as what Toyota did. They are developing a power train and slapping it in existing platforms. Engine options, which are what Honda's hybrid offerings are, are the easiest to implement and have much shorter b/e horizons than developing a specific platform. Hybridization of vehicles is basically going to be about placing engine options in existing platforms, not designing a platform around a power train. However, Toyota's marketing was superior because they did choose to develop an entire platform specifically for the deployment of their hybrid technology. Honda did the same with the Insight, but the two of them have had very different paths.

But due to the sheer numbers of hybrids in being produced by the manufacturers individually, it seems highly unlikely that they are being produced at a huge loss.

EricGo · #8 (**permalink**) 03-11-2005, 07:46 PM

One of the senior execs from GM put forth the 'hybrids are a PR stunt' theory sometime last year. The article referenced in the OP is just regurgitation.

Toyota invested one billion $US to *build it's own chip foundry* for the HSD electronics -- unheard of in the auto industry, where practically all components are third sourced. They took out patents left and right, and may have locked up full hybrid tech. They responded to demand for the Prius by co-opting a factory meant to build multiple models to build only Prius. They have a published road-map that *all* Toyota models will have hybrid variants by 2010.

Hybrid tech is Toyota's gambit to *own* the auto industry, the idiot from GM with his head in the sand non-withstanding.

As far as the profit question goes, there seems little doubt the unit cost is currently profitable (although I have no idea how much, and how it compares to other models). The R&D has been amortized out of existence; time will tell if Toyota guessed right. I think they did.

ElectricTroy · #9 (**permalink**) 04-08-2005, 10:34 AM

Quote:

Originally Posted by GreenAndBlue

Back on topic of this thread... it's proven that the *first* to market generally captures / maintains max market share, even if successors' products rate *better*. The company I work for is living proof of this.

What company do you work for?

Actually, history shows first to market is typically the *loser*. Sony was first with Beta. RCA was first with laserdiscs. Sony was first with recordable CDs (minidiscs). Atari was first with home videogames. Apple was first with home computers (I think... or was it TI?)

First to market usually ends up failing..... supplanted by later companies.

troy

Jason · #10 (**permalink**) 04-08-2005, 02:11 PM

I don't think it's necessarily so with hybrids, though. The main difference is that Toyota by far has the most advanced technology with the largest market share and has countless other automakers licensing out the hybrid systems. Manufacturers, so far, have been completely unable to match Toyota's success. Even if they can, it will take years of additional development.