by David Johnson
President and CEO
Recently, Green Car Reports ran an article, Fortune Puts Volt in ‘Dustbin of History’ Despite New Model Coming, which discusses the “success” (or lack thereof) of two different plug-in electric vehicles – the Chevy Volt and the Tesla Model S. Strangely, it doesn’t even count the Nissan Leaf or the Prius plug-in models. But I digress.
Maybe from a consumer or environmental standpoint, the most common measure of success is the number of units sold. But from a business perspective (and I’ll argue that is the key perspective – especially with respect to the environment), the only measure of success is profitability.
As is well known, it is not possible to “sell it at a loss and make for it up on volume!” Sales volume alone is quite insufficient and even combined with per unit profit margins is simply not enough to judge “success” of any product. The metric that matters is fully accounted profitability of the entire vehicle line. Said another way, every automaker judges success by calculating sales volume times per unit variable profit margin (revenue – cost of goods sold), less the investment dollars expended to bring that product to, and keep that product in, the market. Of course, a factor for time value of money also has to be applied to this calculation. Only after summing up all the pluses and minuses associated with a given vehicle line, can the judgment of “success” or “failure” be made. Every automaker wants each and every one of their vehicles lines to make a positive contribution, on a fully accounted, time value of money basis, to cover corporate overhead and provide a return to their shareholders. The company and its shareholders must reap a financial reward from having developed and sold the product.
“Sales volume” is interesting, and necessary, but also significantly insufficient to accurately measure “success.”
Sadly, for electric vehicles (EVs) such as the Nissan Leaf and Tesla S, plug-in-Hybrids like the Chevy Volt and even those hybrid vehicles with the smallest batteries (the most costly added part in every EV and PHEV and also in GM’s mild hybrids and Toyota’s non-plug-in Prius, for example) the investments have been very large and the variable profit margins negative or, at best, just slightly positive. The only electrified vehicle that can really boast of having a sales success is the Toyota Prius – all the other models, even in combination, barely register on the sales charts and none register a positive fully accounted profit.
They haven’t and they won’t.
As Toyota’s head of research and development Mitsuhisa Kato said, until we have the Nobel-prize-winning battery, one that is low cost, small size, light weight, high performance, it seems that all electrified vehicles will go the way of the Honda Insight, the GM EV-1 and Thomas Edison’s Electric Model T. To be fair, Fortune’s Alex Taylor III is correct about the Volt; It’s not a matter of if the vehicle will go out of production, it’s a question of when. And when that day comes, and the finance guys rack up the total costs and the total revenues, they will find that they have spent much more than they have gained – an economic loss for the company.