Green Price War Breaks Out to Spark Interest in Electrics

Aug. 7 (Bloomberg) -- Maryann Keller, president of Maryann Keller & Associates, talks about Tesla Motors Inc. and the outlook for the electric car industry. Keller speaks with Betty Liu on Bloomberg Television’s "In the Loop." (Source: Bloomberg)

As the auto industry struggled to recover from the recession, it swore off the deep discounting that destroyed profits and led to disaster. Now, a price war has erupted in the industry’s smallest segment: electric cars.

General Motors Co. (GM)’s $5,000 price cut yesterday on its Chevrolet Volt plug-in electric vehicle came in response to rapid-fire discounting on battery-powered models this year. It began with Nissan Motor Co. (7201) slicing $6,400 off the sticker of its Leaf electric car in January, followed by price cuts from Ford Motor Co. (F) and Honda Motor Co. on their EVs.

That left GM’s Volt alone atop the price ladder for mainstream plug-in electrics. Volt sales sagged 3.3 percent last month and its almost $40,000 sticker price made for a bad comparison on Internet searches of competitors such as the $25,010 Toyota Prius. So GM cut the price to $34,995 on a model on which it already loses money.

“It’s a competitive nightmare out there, so you have to play within the realm of what others are doing,” said Jeff Schuster, a Troy, Michigan-based analyst with researcher LMC Automotive. “The industry has gotten away from price wars in mass use, but in this area, it’s alive and well. You have to play the game.”

Photographer: Jeff Kowalsky/Bloomberg

The Volt’s design aimed to alleviate the anxieties electric cars invoke in car buyers. It can run about 38 miles on battery power before a small internal combustion engine kicks in. Close

The Volt’s design aimed to alleviate the anxieties electric cars invoke in car buyers.... Read More

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Photographer: Jeff Kowalsky/Bloomberg

The Volt’s design aimed to alleviate the anxieties electric cars invoke in car buyers. It can run about 38 miles on battery power before a small internal combustion engine kicks in.

Pricing Threat

Detroit has been worried the price-war game will play on a grander stage ever since the yen began plunging last year. That 18 percent drop since October, encouraged by Prime Minister Shinzo Abe, enables Japanese automakers to reduce prices while protecting profits. Nissan has cut prices on seven models in the U.S., while Toyota Motor Corp. (7203) is offering no-interest auto loans and earned a record quarterly profit of $5.7 billion, the most ever by a nonfinancial Japanese company.

So far, the green-car price war amounts to more of a skirmish than an all-out assault because sales of the battery powered cars are so small. Even with all the deals on these high-tech marvels, battery-powered cars will remain a slender slice of the U.S. auto market, according to LMC.

Pure electric vehicles, such as the Leaf and Tesla Motors Inc. (TSLA)’s Model S, will remain less than 1 percent of the market in 2020, while plug-in models like the Volt and Ford Fusion Energi will command just 2 percent of the market by then, LMC forecast yesterday. Gasoline-electric hybrids, such as the Prius, will grow to 5 percent in seven years from 3 percent now, Schuster said.

Government Encouragement

Automakers are pouring billions into developing alternative-powered vehicles in a quest to meet a federal mandate to achieve average fuel economy of 54.5 miles (88 kilometers) per gallon by 2025. California, which sets its own vehicle-emissions rules, has a goal of electric, plug-in and hydrogen-powered cars reaching 15 percent of new-auto purchases by 2025. Nine states, including New York, adopted their own version of California’s rules.

“Government policies can’t force consumers to buy something they don’t want to buy,” said Bailey Wood, senior director for legislative affairs for the National Automobile Dealers Association in McLean, Virginia.

President Barack Obama has predicted there would be 1 million electric cars on the road by 2015, based in part on research by Alan Baum, an independent auto analyst in West Bloomfield, Michigan.

“It’s certainly not going to occur,” Baum said in an interview yesterday. “We’re looking at ’17 or ’18 on that and that’s dependent on a whole lot of other things, like the pricing, the availability and the technology.”

Cost Hurdle

The high cost of alternative-powered vehicles is the biggest roadblock to consumer acceptance, Baum said. Even with the big price cuts and federal tax credits of as much as $7,500, electric cars and hybrids are still thousands more than comparably sized gasoline-powered cars.

“The key selling point of electric vehicles is you’re going to save money at the pump,” said Alec Gutierrez, an auto analyst for researcher Kelley Blue Book. “So when you have a sticker price starting at $35,000 or $40,000 in the case of the Volt, they just don’t present themselves as a tremendous value.”

It can take as much as 12 years to achieve the payoff on the premium for an electric vehicle, LMC calculates.

“That’s just far too long,” Schuster said. “There’s no question that price has to come down in order to get more momentum and more interest in the vehicles.”

Volt Sales

Momentum has been hard to come by for the Volt, a model GM touted as a game changer when it was lobbying for what became a $50 billion bailout to finance its 2009 bankruptcy reorganization. Chief Executive Officer Dan Akerson predicted global sales of 60,000 Volts in 2012, yet the company managed to move only about half that many, including 23,461 in the U.S.

The Volt’s design aimed to alleviate the anxieties electric cars invoke in car buyers. It can run about 38 miles on battery power before a small internal combustion engine kicks in. That gives the Volt a driving range of more than 300 miles, just like a regular car. No running out of juice on the way home.

That novel approach won the Volt accolades such as being voted the 2011 North American Car of the Year by journalists. Consumers have remained cool to the car, buying only when GM piled on the incentives, as it did in June, when discounts totaling $6,195 helped boost sales by 53 percent.

Development Costs

GM had been loath to reduce the Volt’s price because the car cost so much to produce. There is about $9,000 in research and development costs in each Volt, compared to about $1,200 in the average automobile, according to Sean McAlinden, chief economist with the Center for Automotive Research in Ann Arbor.

“You can’t make money that way,” McAlinden said in an interview yesterday.

Akerson said GM expects to reduce the cost of the next generation Volt coming in 2015 or 2016 by $10,000.

“We know we have to reduce costs,” Akerson said during an interview in April. “We’ve got to look at smart ways at getting it better positioned from a price perspective and that means we’ve got to take cost out of it.”

Making money on the Volt would help Akerson’s push to improve GM’s profit margins.

GM’s profit margin of 4.1 percent in 2012 trailed Toyota’s 4.3 percent from its most-recent fiscal year and Ford’s 4.2 percent in 2012. Honda and Nissan both fell shy of the 4 percent profitability mark, at 3.7 percent and 3.6 percent, respectively.

Minimal Damage

Because GM sells so few Volts, its impact on the company’s profit margin will be muted. Last month’s Volt total of 1,788 was close to the average number of Chevy Silverado pickups GM sold in a single day in July.

“The good thing about the Volt and the bad thing about the Volt is that the volumes are low,” said Anthony Pratt, director of forecasting for the Americas at auto researcher R.L. Polk & Co. “If they have to concede on price and lose money on every one, the amount of the revenue lost based on incentives won’t be as significant as a higher volume” vehicle.

The paucity of sales caused GM Chief Economist Mustafa Mohatarem to dismiss talk of a price war in the electric-car market.

“You’re trying to build a market for this technology; that’s all you’re seeing,” Mohatarem said yesterday. “People are trying to figure out, ‘Where is the demand for this technology?’”

One unintended consequence of GM’s Volt price cut: It could annoy the car’s small and loyal owner base, which already paid the stiffer sticker price.

“The price reduction is a great incentive for anyone who’s on the fence about it,” said Isaac Cuevas, a Los Angeles entertainment executive, who bought a Volt in December. “Had I known, I probably would have waited.”

To contact the reporters on this story: Keith Naughton in Detroit at knaughton3@bloomberg.net; Tim Higgins in Detroit at thiggins21@bloomberg.net

To contact the editor responsible for this story: Jamie Butters at jbutters@bloomberg.net

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