GAO: Advanced Hybrids May Not Be Best Way for GM to Rebound

picture-98.pngThere’s a lot of good information (and bleak news) in this GAO report on GM’s and Chrysler’s efforts to become viable again–including this picture that shows the key relationships in the industry and the credit that underlies each of those relationships.

But I wanted to point to GAO’s explanation of something I’ve often argued–to much skepticism here and elsewhere. Investing heavily in new technologies like hybrids may hurt GM’s efforts (certainly in the short term) to become more viable.

In a section addressing the things that GM and Chrysler aren’t doing to achieve viability, GAO warns that advanced technology vehicles don’t have the return on investment GM needs to become profitable again.

Several panelists noted that not only is developing advanced technology vehicles expensive, but also the return on the investment in those vehicles can be low because the initial demand for new technologies can be slow to develop. For example, the Toyota Prius was on the market for 10 years before reaching 1 million units sold. According to our panel, given the high development costs and low initial demand, especially if gasoline prices remain relatively low, these new vehicles are not likely to generate a profit for several years. Thus, changing the companies’ product mix to include more advanced technology vehicles may not be the best way to improve the financial bottom line in the short term. Furthermore, at least one panelist questioned whether the necessary energy infrastructure, such as electrical outlets to charge batteries, will be available to support these new technologies. Without adequate infrastructure, consumers will be reluctant to purchase these new advanced technology vehicles. GM officials acknowledged these challenges but indicated that the company decided to continue investing in advanced technologies even during the current financial crisis because they need this technology in their fleet to help meet federal fuel economy standards in the future. In addition, GM officials said they are planning for higher oil prices than current futures market expectations, in order to make GM’s plan more robust against oil price volatility. [my emphasis]

Now, frankly GM is right to remain committed to the Volt even given such challenges. The Prius took a long time to become profitable, but the halo effect Prius has had on Toyota’s overall brand is one of the main reasons people believe a company that invested heavily, strategically, in the Tundra is all about gas efficiency.

But I wanted to point out that even GAO presents GM’s focus on things like the Volt as a challenge to returning to profitability, not the primary means to do so.

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17 replies
  1. Synoia says:

    Yes, we may need a gas tax to fund the transition, and encourage people to change.

    Even if we take action the respoce limits appraching us are going to change our lives. An example of this is the way Canadians plan theur cities (high density, high rises, mass transit), and don’t encourage urban sprawl.

    • Petrocelli says:

      As a Canadian (Toronto), I can tell you that we suck at planning our cities … our Urban Sprawl is out of control.

      Marcy, Plug- in Hybrids will be a game changer. The problem with alternatives is, there is no clear voice about the disparate technologies – Hybrids, EVs, Clean Diesels, etc.

      There will be a surge in Solar Panels for Homes as financing becomes increasingly available. In the same way, when people are able to use Plug- in Vehicles or EVs and more sensible lease/purchase terms are available, there will be a corresponding jump towards these vehicles.

      The problem with “experts” is when they can’t see the Forests for the Trees.

  2. Hmmm says:

    (Wading in where I probably don’t know enough to; please be kind when pointing out the vast amount I don’t know:) Does this change the prospects for US automakers licensing existing hybrid drive designs? I buy that the expense of developing a totally new technology, or developing a catch-up hybrid technology from the ground up, would be problematic for the US automakers at this difficult stage. However since Toyota via the Prius line has already the created a non-trivial consumer pull for hybrids, and since from a fuel-consumption and emissions POV there is a public policy argument for hybrids (though yes, I acknowledge the issues of higher energy consumption and higher toxics production during manufacture), couldn’t GM and/or Chrysler profitably do like other auto co’s have done and license one of the existing hybrid drives and build some of their own cars on top of them? The initial investment on those drives was already made, by someone else, and given Toyota’s own money problems I would imagine the license fees would be significantly more attractive now than they have been in the past. True, this would not be making new investment in their own drives with the associated expected payoff in the future, but then again the premise is that the US companies would now not be investing in new technologies anyway.

    I guess after reading the Better Place electric vehicle piece in the Sunday NYT I’m feeling neither pure electric (not enough infrastructure to support long-distance driving for the foreseeable future) nor old school ICE (because of emissions and oil import policy implications) is an appropriate power plant for ordinary cars in US at this point, and hybrid while very far from perfect does the best job of hitting the range/emissions sweet spot in between. There’s something to be said for having an electrical generator right there in your car for when you need it. And I don’t really buy that most families will have either just one pure-electric vehicle, or an electric and an ICE — not as long as 2-income is the norm, and commute patterns stay the way they are.

  3. bmaz says:

    But I wanted to point out that even GAO presents GM’s focus on things like the Volt as a challenge to returning to profitability, not the primary means to do so.

    I don’t think anybody with any understanding of the forces at play here has ever opined differently (not saying this is an overly large group). That said, the Volt is a halo vehicle and it is not really ‘in development” anymore. The Volt, depending on the continued viability of GM, is ready for production. In fact the initial production steps are already in process to begin the actual physical manufacturing very soon. The main focus of GM should not be on cutting edge alternative vehicles; however, at this point, it would be foolish to can the Volt program. The Volt is not just an American Prius, it is much, much more technologically.

  4. TarheelDem says:

    The folks working on the auto bailout and the folks purchasing energy-efficient automobiles under the stimulus plan need to get together. The stimulus purchases could be the bridge of demand that allows the Big 3 to transition to energy-efficient models.

    A second strategy would be to finance the research and development through creating energy-efficient military vehicles and propulsion systems. Even the use of the military to provide relief in national disasters involves lots and lots of trucks and other vehicles.

    What we have in DC in a fundamental lack of imagination.

    • Petrocelli says:

      I disagree only slightly … what DC often lacks is political will.

      CorpAmerica is to blame for the lack of imagination.

  5. ferrarimanf355 says:

    They should have kept the Advanced Performance division alive. That would have been a better use of money if they knew about this.

    And a gas tax is the easiest way for the Dems to lose their hard-won gains. Leave it alone. Let me fill up my car in peace. Let me buy a Mustang in peace.

      • ferrarimanf355 says:

        The average American will scream bloody murder if $4/gal gas comes back by tax or some other fiat.

        • Hmmm says:

          That may or may not be true — for example, the screaming in 2008 wasn’t all that loud, people pretty much rolled with it and aren’t even asking the obvious question of how it’s even possible for gas to be so much cheaper now than it was then. (Clue: Profits!) But whether it’s true or not, do you disagree that Americans should as a patriotic duty — and as a duty to the world at large — learn to get by with less consumption of it?

            • Hmmm says:

              Maybe, but what if I buy a Shelby GT500?

              Huh, “what if?”. Well, that’s kind of a non sequitur, but sure, I’ll play along. If you keep it garaged then we have no issue. Collecting can be fun. If you race it all on your lonesome a couple times a year but use something efficient in your daily life, then no real harm done. But if you commute 100 miles a day in it, or race it on a track that attracts thousands of fans driving hundreds of miles each in ICE cars — or if 100,000 other people start using them that way — well, then I’m sorry to say that would mean being some sort of carbon pig.

              One either believes that large scale patterns of energy consumption matter more than having fun driving, or one doesn’t. I admit to being a foulmouthed feminist with definite judgements about folks who don’t. When Obama spoke about it now being time to put away childish things, I think this is one of the things he meant.

  6. bobschacht says:

    Thanks for continuing this series on the Auto Industry.

    Part of the solution here includes what I think Obama has already done: Or maybe its just the Dept of Homeland Security or some other Big department?
    They announced that their entire fleet of new gov’t business cars would be fuel-efficient models. I can’t remember the source, but two of the most powerful leading edge game changers are
    (a) Government fleet purchases, and
    (b) California

    To get huge fleet contracts like those usually guarantees the viability of a new line of vehicles, doesn’t it?

    Bob in HI

    • prostratedragon says:

      I doubt that the purchases announced earlier this month are huge by fleet purchase standards [My emphasis]:

      By June 1, the government plans to spend $285 million in stimulus funds to buy [overall 17,600] fuel-efficient vehicles from General Motors, Ford and Chrysler. The purchase is slated to include 2,500 hybrid sedans, the largest one-time purchase of hybrid vehicles to date for the federal fleet.

      By comparison, the GAO report notes that GM and Chrysler each have baseline sales assumptions for car and light truck sales for this year of around 10 million units. So it’s hard to see how priming the pump for GM’s hybrid line —a worthy thing for us to do through the fedgov in the name of promoting the use of these vehicles imo— is going to have an impact on the firm’s bottom line in this immediate time frame where the problem is.

      There’s also an “Obama-Biden comprehensive New Energy for America plan” one of the objectives of which is

      Put 1 million Plug-In Hybrid cars — cars that can get up to 150 miles per gallon — on the road by 2015, cars that we will work to make sure are built here in America.

      Here again the scale and the timing of the program, which unlike the hybrid purchase also lacks policy tools at the moment, are not helpful for a firm with the immediate cash flow problems that GM has right now. The question that confronted the GAO (and GM) is how the company can return to a self-sustaining degree of profitability in the shortest time frame possible, while the question of whether and under what circumstances hybrids or any other alternative fuel vehicle can be profitable is for a longer term than it appears GM is to be allowed unless it comes up with something in a hurry.

  7. earlofhuntingdon says:

    All valid points. Automotive executives have always struggled with them. Big Auto is very capital intensive. By high-tech (much less financial industry) standards, their traditional returns on investment are low (I would argue, normal) and the time to market (from conception to first product sale) is quite long.

    That put auto outside the mainstream before predatory finance became the norm for many businesses. It’s farther outside it now. But as you rightfully say, manufacturing generally and auto manufacturing in particular remain fundamental parts of a healthy economy.

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