I would not say it's a lie, just spin and/ or accounting. On a material cost basis, they're probably profitable. On an operating cost basis, they might be profitable. If they fully amortize the R&D and the application / integration engineering costs into the profitability of the product, there's no way they are already profitable. On the other hand, if Japanese accounting practices or Toyota's internal bookkeeping lay all the R&D costs in a separate, non-product bucket, it could pencil.

Here's some quick and dirty math.

SUPPOSE Toyota spent $1 billion in R & D over the years they spent developing the system. That is NOT a high number, especially considering how many years it's been in development. Consider the salaries of the people working on it, the prototype builds at both the component level and the vehicle level, and some serious lab testing and track testing time. $1 billion is conservative.

Now, let's suppose that the R&D work applied to the Prius, the HiHy, the Camry, and the RX. In other words, they didn't have to undertake a new R&D project for each. They would have to ENGINEER each application. This ain't just plug & play. You have controls and software work, calibration work, computer modeling of how the hardware will react in a crash, etc, etc. Let's be conservative and say they spend $75 million per model on that. I count 4 models, so that's $300 million.

Now we have to tool up to make this puppy. We want to go high volume, so we're gonna have to spend some bucks. A fat thumb estimate would be in the $400 million, assuming one set of tools (ie - all the motors for each type vehicle are built in one facility. All the batteries are tooled for one facility. All the vehicle assembly is done in one assembly plant, etc)

Then there's vehicle integration cost. A hybrid is more than just electric motors and a big battery. There's developing the regen braking system, re-engineering the rear compartment to accept the battery, wiring, sometimes you have different fascias to improve aero and differences in body panels to reduce weight. Let's say that's about $50 million per model, times 4 models is $200 million. Now we're at $1.9 billion. And we're not even in production yet. Now let's say that Toyota's cost to purchase all the material is in the neighbor hood of $1,000 per vehicle. Again, this is a VERY conservative number. We'll say just the differential in labor cost (not the total labor) is somewhere in the $500 per vehicle range.

Toyota just sold is 500,000th Prius. Let's give credit for 40,000 RX and 60,000 HiHy (I'm guessing, and it makes the math easy). Camry is too new to have a volume impact on the calculation. So now we have 600,000 cars that the R&D costs, tooling costs, system engineering costs, and vehicle integration costs need to be amortized over. You also have a conservative $1,500 in material cost that attaches to each unit.

1.9 Billion / 600,000 cars = $3,167 per vehicle
Plus material & labor cost of $1,500 per vehicle
We're at $4,667 in cost per vehicle. What's the price for the option? Hard to say, since it's not a stand alone option. But if I take the website prices for Camry LE, SE, and XLE and average them, I get $21,555. Camry HV is $25,900, so the "difference to be hybrid" is $4,345. The dealer will get about 20% of that, so Toyota's revenue for the hybrid package is about $3,476, compared to a cost of $4,667.

Now, this is quick & dirty math, and significant swings in any of the numbers will obviously skew the equation, so I tried to err on the CONSERVATIVE side. If Toyota is calling it profitable because R&D is treated differently, then so be it. In any event, it definitely WILL BE profitable, especially if the pricing stays up. I just find it hard to believe that it is already profitable.

I've been wrong before (I think that was back in 2002 )

Peace,

Martin

I am NOT the official voice of GM with respect to Hybrid issues

I am NOT the official voice of GM with respect to Hybrid issues

I am NOT the official voice of GM with respect to Hybrid issues

The only problem with this analysis is using the cost of the principle, the total development budget, as an expense. In reality, that investment money has an interest cost and that is what has to be paid off as part of the operating budget The principle gets paid down over a much longer interval and represents an obligation upon future earnings with the plant and equipment (and patents) as collateral.

I bought a house for $100k but the monthly payments were mostly for the interest and a little bit of the principle. In about two years, the house will be paid off. This is what Toyota's investment in the HSD accomplished, it bought a house. Now Toyota is in a position to use that house, the HSD architecture, to expand all of their product lines with fuel efficient, nearly emission free, vehicles.

Japan has also had the advantage of 0% interest for years and years. This makes the cost of investment dollars much less than countries that run trade and government deficits. It gets even worse when these deficits force inflation of the prime rate. Soon, all you're doing working like heck to just pay the interest.

Bob Wilson

Operation Iraqi Oil Freedom:

Automatic, stock, project car.

My other 1500 cc car:

Automatic, stock, backup car.
Free speech, dialog and knowledge thrives without the poison of SPAM.

if your cost analysis is correct, and who really knows except toyota and honda, then i maintain that toyota and honda have already built these additional costs into the price of their hybrid vehicles and lobbied the government for tax incentives to offset the cost to the consumer. this means that toyota and honda have normalized their costs of their hybrids to their other cars and take as much profit as they do with their other cars. in the case of the dealerships, they are making more profits because of their markups.

it seems to me therefore that toyota and honda have figured out a way to make the vehicles profitably.

If Martin's analysis was correct, then it is very clear that Toyota is selling the vehicles for a loss (it is not built into the cost of the car). The tax incentives are totally irrelevant. A cost of $4,667 is greater than a revenue of $3,476. The only way to dispute this without debating his numbers is to say that R&D should not be factored into the price of the car. In his analysis, Martin assumed that this was part of the cost of the car and this seems fair to me.

I don't think anybody is saying that Toyota will not recoup their cost. Nor is anybody saying that Toyota has made a bad investment. They will recoup their cost--it is just a matter of time.

If we want to debate his numbers, that is another story. However, I think he is much better at estimating these numbers than any of us. It seems that he has been very fair in all of his analysis.

you have a net of around $1k. given the assumptions regarding r&d costs and the method for calculating the wholesale price, i don't find a $1k net for a car costing $25k very significant. it is around 4% which given the assumptions probably falls within a reasonable margin of error. a small difference in the avg. wholesale price of the car of $500 would cut the net in half, for example.

all i'm saying is that it does indeed look like what toyota is saying about making a profit on hybrids may indeed be true. i'm not understanding why this is hard to swallow.

I'm pretty sure that 4% would be considered HUGE in the eyes of the automakers. The dollar amounts that Martin used were meant to be conservative. I'm not familiar with the field, and maybe you are more familiar with it than I am. If Martin's estimates are way off, Toyota may have already turned a profit. I do not find this hard to swallow. Maybe I'm just a sucker, but I think his assessment was fair.

Ok, let's assume Toyota's R&D means a loss. That bill was paid from 1994-1997 when they finished their development. No doubt we can find the annual Toyota financial statements showing Toyota is going out of business with these massive losses in the 1990s right? How about any Toyota losses?

Occums razor suggests there is a simpler explanation . . . R&D is not an expense that has to be applied to just the first "n" products that use that technology. Rather, R&D is an investment for current and future profits. Invested wisely, it yields the products that keep a company in business. Spent foolishly, it leads to plant closings, laid-off workers and eventually, usually too late, management changes.

Bob Wilson

Operation Iraqi Oil Freedom:

Automatic, stock, project car.

My other 1500 cc car:

Automatic, stock, backup car.
Free speech, dialog and knowledge thrives without the poison of SPAM.

I'm with you on this one. American companys are wayyyyyyy too short term profit. They are doomed in the long run (if they don't shape up).

Bingo!

I am NOT the official voice of GM with respect to Hybrid issues

I am NOT the official voice of GM with respect to Hybrid issues

I am NOT the official voice of GM with respect to Hybrid issues

sorry - been lurking for a bit and cannot resist pointing out some rather good comments from Bob Lutz at the London Motor Show yesterday.

http://www.just-auto.com/article.aspx?id=88417

To quote "with all those beliefs out there, you have to do a hybrid for public policy reasons."

hehe .. bless. honesty at last.

Martin.