At Witz' End: Detroit Auto Show: Reality Check - Part II
Posted Mar 3rd 2009 11:53AM by Gary Witzenburg
In my first column reality checking the Detroit Auto Show, some of you questioned my assertion that even Toyota's relatively high-volume hybrids are probably not profitable. Of course, Toyota has lowered the costs of its Hybrid Synergy Drive components over many years and hundreds of thousands of units. But I believe they're still too high for any Toyota Hybrid - even the Prius or the soon-to-come higher-priced Lexus HS 250h - to turn a profit.I can't prove it - Toyota is not about to share its cost numbers with me or anyone else - but that's my opinion, and these are "opinion" columns. Yours may differ, and yours may be right. But I'll bet no one outside of Toyota knows for sure.
What most folks outside the industry don't see or comprehend are the enormous costs of designing, testing, developing and validating every one of the thousands of parts and pieces that go into every modern vehicle. Beyond the mostly expensive and relatively low-volume hybrid system components themselves are all the Prius' specific body, chassis, electrical and comfort and convenience parts and pieces, few of which are shared with other vehicles. The addition of the new Lexus HS 250h on the same architecture will help by raising the volumes of parts that are shared, but I doubt whether even that will turn a profit at its higher prices but much lower volumes.
Am I suggesting that Toyota is fibbing by claiming that Prius is profitable? It depends on how they calculate their costs. If they add up the costs of all those parts and pieces - including the still very expensive battery, EVT transmission, motors, wiring, control systems and more - and toss in the relatively minor cost of assembly, the total may indeed be less than the Prius' average selling price. But they would have to discount all those years and huge costs of design, testing, development and validation, which must be spread out ("amortized") over hundreds of thousands, even millions, of units. Their business plan has depended on long-term profitability from growing sales of higher-priced luxury hybrids and sales of the Synergy drive system to other OEMs, neither of which has fared as well as hoped.
What I don't understand is why Prius' profitability seems so important to some ABG readers. If each unit sold does make a buck, bully for them. If not, so what? Toyota's whole hybrid program is still a hugely profitable investment as one of the best-ever image-building efforts any automaker has ever carried out. Whatever they have spent on it through the years is worth far more than any amount of paid advertising they could have bought for similar money. What should be important to potential owners is whether any EV's or HEV's selling price is worth the long-term gas savings it offers, whatever its cost to its manufacturer.
That said, let's reality check some other electrically-powered vehicles showcased at this year's Detroit North American International Auto Show. Follow us after the jump.
BMW X6 and 7 Series Hybrids
BMW will offer two production hybrids by the end of 2009. The first, a 2-Mode (GM's technology, co-developed with BMW, Daimler and Chrysler) hybrid version of its large, heavy, oddly proportioned coupe/sedan X6 crossover, promises "about 20%" better fuel efficiency than its conventional counterpart. The second, a "mild" hybrid version of its all-new 7 Series luxury sedan, adds a 20-hp electric motor to its 4.4-liter twin-turbo V-8 to "significantly reduce both fuel consumption and emissions."
For real? Very.
U.S. annual sales? 20-30K each.
Profitable? Maybe break-even. While the 2-Mode powertrain is seriously expensive, BMW is one of few brands able to charge serious money for every car it sells. The much less costly mild hybrid 7 Series sedan has a better chance.
Mercedes Benz BlueZero concept
Sort of an upscale Teutonic Volt, this 5-door hatchback was shown as a battery EV in Detroit but - like GM's E-Flex architecture - is designed to carry either a small gasoline engine or a fuel cell to generate electricity to keep it going beyond its battery's limited range.
For real? Could reach production, but not soon.
U.S. annual sales? Maybe 10-20K
Profitable? Could sell in small numbers for large dollars (see BMW comments above).
Smart ForTwo EV
Daimler's electrified Smart 2-seat microcar will launch in Berlin, then Paris, Rome and other European cities before a few hundred land on U.S. shores in 2010. According to Automotive News, it will likely be offered lease-only at a premium price in a handful of U.S. cities (sound familiar?). "The technology is quite expensive," said Smart Communications VP Anders-Sundt Jensen. One reason: it will use a downsized version of Tesla's battery pack - thousands of lithium-ion computer batteries wired in series and parallel. Smart says EVs could eventually account for 20-50 percent of its global production...depending (of course) on government incentives and development of charging station networks.
For real? Available in very small volumes in 2010.
U.S. annual sales? With a too-big sticker and a range of 60-70 miles, maybe 500.
Profitable? No chance.
BYD EVs and hybrids
Chinese battery maker turned fledgling automaker BYD launched a plug-in dual-mode hybrid compact in China last December and plans to follow with a larger model later this year and a battery EV by 2011. All use the company's own lithium-ion-phosphate battery technology, which it claims is cheaper, safer and more efficient than other lithium ion chemistries. But, like all Chinese makers so far, BYD seems nowhere close to meeting tough and expensive U.S.-market safety, emissions and damageability requirements.
For real? Believe them when you see them, then beware.
U.S. annual sales? 20-30K.
Profitable? Would have to sell in high volumes at low prices.
Tesla, Fisker, Aptera
There's good reason why no upstart automaker has survived, and all but three long-established U.S. companies have failed, since World War Two: the U.S. government. No small-volume company, no matter how smart and rich its leaders and backers, no matter how appealing its products, can hope to meet U.S. federal standards at a cost that permits sustainable profits even at high sticker prices. Tesla has sold more than 150 electric roadsters at $109K, showed a $128,500 high-performance version (the Tesla Sport) at Detroit and promises a $60K electric sedan - but recently admitted that the roadster costs $140K to build. Fisker, with backing from oil-rich Qatar, unveiled a gorgeous retractable hardtop plug-in hybrid Karma S convertible to accompany its yet-to-be-built (or U.S.-certified) $88K Karma swoopy sedan. Farthest fetched of all, Aptera (which, granted, wasn't at Detroit) envisions selling 100K odd-duck, ultra-aero, 100-mile-range, commuter-coupe electrics in the next five years at prices ranging from $25-45K. Sorry, EV lovers: these are all super-cool concepts, but I'll be shocked if any survives the next two years.
For real? Tesla: yes, for now; Fisker and Aptera: doubtful.
U.S. annual sales? Zero to a few.
Profitable? When electric pigs fly.
Reader Comments (Page 1 of 2)
Josh 12:06PM (3/03/2009)
Another great post explaining the real challenges of building an electric car. I am wondering what you think of the new Honda Insight. I would guess that the Insight may be the first Hybrid to reach true profitability. Honda's system is relatively cheap to build. The drive-train is pretty conventional which makes it cheaper to develop and build and, they are going to produce such a large volume which should help.
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Josh 12:09PM (3/03/2009)
Nevermind, I should have read your last post.
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Sebastian 12:22PM (3/03/2009)
For others, Gary's thoughts on other Detroit cars can be found here:
http://www.autobloggreen.com/2009/02/03/at-witz-end-detroit-auto-show-reality-check-part-i/
jharlan 12:27PM (3/03/2009)
The truth hurts, doesn't it? It takes a lot of money (serious money). Kind of reminds me of the DeLorean. What a cool car that was. I thought it had a chance, but it didn't make it.
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Toshi 12:37PM (3/03/2009)
So basically this is a column where the author speculates that Toyota hasn't recouped their R&D. Why? Because he says so and because he says that R&D is expensive.
This is an entirely fluff opinion piece.
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oldraven 3:43PM (3/03/2009)
That's pretty insightful, since Gary says exactly that in his blog.
James Bowe 6:29PM (3/03/2009)
No, gary said it was his opinion. Toshi calls it "fluff opinion". There is a big difference. Toshi is implying that this particular opinion isn't based on anything meaningful. According to Toshi, it's nothing but an idea in Gary's head, completely independent from any real world facts. And therefore, not simply opinion, but an ignorant and worthless opinion.
If he wanted to write a speculative opinion piece, he could have said that he wonders what their costs are and whether they turn a profit. But he doesn't use this piece to wonder aloud. He uses it as an artful attempt at convincing his readers that the Prius indeed does not turn a profit, even though he states that he has no idea for sure. I'd like to bounce his own question back at him, why is he so concerned with whether or not it turns a profit?
Like all opinion writers not worth reading, his main goal is to convince you that he's right. The sign of a weak, insecure, and truly stubborn mind....
Zel 1:16PM (3/03/2009)
'What should be important to potential owners is whether any EV's or HEV's selling price is worth the long-term gas savings....'
Getting off of oil. Period. It is an immeasurable profit, for today, and our future. Ask what the savings were on sending a man to the moon? None, if you are looking for money back from Nasa. But look at the profit made by the world...then you will know, it is the same for EV's.
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jeffzekas 1:20PM (3/03/2009)
I find it amusing, that whenever technology is invented or developed abroad, an American will say, "Well, they must be losing money." Possibly, or perhaps that, if a government invests all of its resources in a technology, then that device becomes cheaper and simpler (two American examples: nuclear bombs and laptop computers). So, Mr Witzenburg, the Japanese and Europeans probably ARE making a profit on their hybrids, due to direct and indirect government subsidies (free health care allows European and Asian carmakers to cut costs, whilst high taxes on imported vehicles gives their domestics a price break). Here is an interesting historical example to ponder: during the cold war, US military strategists were amazed at how fast and cheap the Mig fighter planes were. How could the Soviets produce such fast, sophisticated (and effective) aeroplanes, at one-tenth the cost of the US? Well, eventually, a Mig was captured, and what did the scientists discover? The Russians used the basic principles of cheap, effective technology: Keep It Simple, Stupid! (KISS). The Mig was made out of the same steel used in coat hangers (in contrast to the exotic alloys used by the Americans). The controls were basic, simple and mechanical (in contrast to the complex, expensive, hydraulic controls used in the American Saber jet). The Russians used basic, simple flight instruments; the Americans, in contrast, used expensive, complex computers. The Russian planes, though unsophisticated, were fast, effective, and, due to their low cost, could be fielded in greater numbers on the battlefield. A similar discovery was made, when US soldiers captured AK-47 rifles: cheap, simple and effective, compared to our AR-15 (later the M-16/ M-4) which was fickle, jam-prone and easily damaged. How does this apply to hybrid automobiles? Keep it simple, stupid!! Follow the Soviet example of cheap (but effective) technology. Follow the European example, by providing national health care (thus making expensive UAW health care redundant). Give government subsidies to Ford and GM aimed at developing current and future technology. Yes, the Japanese can build advanced vehicles, and make a profit... by ignoring this fact, one falls into the trap of, "Well, they can't do it, so we can't do it."
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Sasparilla 1:40PM (3/03/2009)
Hey Jeff just to add one more thing to your list of the Mig 15, the engine was a direct copy of one given to them by the British several years earlier and gave the jet its fantastic performance - i.e. the British Government subsidized/enabled their competitive journey into the jet age.
Jason 2:06PM (3/03/2009)
The MIG analogy is a pretty bad one. The USAF captured several over the years, including a few defections that landed on US bases, and one thing was VERY clear: the MIG, while aerodynamically capable, and very fast, was so technically inferior it would never have stood up in a dogfight. The plane required enormous strength to pilot, and was so parsed down that a pilot would never be able to take advantage of all its technical abilities. The only impressive bit was the speed achieved in later versions, and that was accomplished at the expense of all other attributes.
As for healthcare, you're acting like Federally provided health care is free, it isn't. The taxpayers have to front the bill, and those who are strapped with most of the cost are: you guessed it: big companies, like Ford and GM. It wouldn't be any cheaper for them in your model, they would just pay less to workers and more to the government
Now your example that almost worked, the AK-47. You're right about it being cheap and simple, which makes it a great gun for the 'masses'. However, it is also inaccurate at medium and long distances, making it fairly ineffective in military engagements. It's a spray-and-pray gun that works well in short-range engagements, like urban warfare, particularly when you have no concern for collateral damage. The US, however, would be lambasted by the world if we went around urban environments firing .312 caliber, high speed, armor piercing rounds with an inaccurate weapon.
Is the author a little pessimistic about profitability? sure. Is he most likely right? yup. The thing of it is: car companies that have global profitability don't have to make a net profit on hybrid/new fuel vehicle projects, they only have to sell them for slightly more than the production cost. The Prius and its competition are essentially prototypes that, through market sales, slightly offset research cost. They also allow for free market research, and amazing PR. It's a long-term investment for car companies that realize there really won't be cheap oil forever, and that having the tech ready for the future will pay off large dividends.
Chris M 3:56PM (3/03/2009)
To expand on the "KISS" principle: Compare the Toyota Hybrid Synergy Drive to the GM Dualmode hybrid - both are capable of EV and combined mode driving, both replace conventional transmissions, both substantially improve efficiency, both have regenerative braking. But the Hybrid Synergy drive has far fewer moving parts thus cost much less to build - if it wasn't for the big NiMH battery, the Hybrid Synergy drive might well cost LESS than a conventional automatic transmission.
Unlike the GM Dualmode, the Hybrid Synergy Drive has no clutches to wear, thus the Hybrid Synergy Drive is much more reliable.
The only advantage for the GM Dualmode is fractionally higher efficiency at high speeds, and it is questionable whether that slight improvment is worth the extra complexity and cost.
paulwesterberg 7:25PM (3/03/2009)
In addition to free health care, car company executives in other countries are paid a more reasonable salary & benefits.
Business leaders who take pride in their work.
http://www.businessweek.com/globalbiz/content/feb2009/gb20090210_949408.htm?campaign_id=rss_daily
I think Gary meant to say:
GM could never produce a prius that was profitable.
Sasparilla 1:35PM (3/03/2009)
Just to put up an answer to the author's pondering of why it would seem important to reader's that Toyota can make money on their Hybrids - it probably has to do with the generalized meaning of that term "profitable" and the perceived viability of being able to continue to make and sell them. Say they aren't profitable is basically saying they can't do that for too long - it means something different to the average reader - your target audience here.
Something to keep in mind is this is also the message (they can't do that profitably) the US auto industry would constantly say as the Japanese came and ate their lunch/market share in the 80's and 90's (before hybrids) and what they said about hybrids etc. previously after the government funded hybrid research - so it sounds like that same excuse to not do something that the US auto industry would give to the US consumer previously. And particularly the people reading this site will be aware of this old message from the big 3.
My personal view is that Toyota views its hybrid technology as a long term enabling technology (much as parts of GM viewed the EV1 technology and appears to currently view the Volt technology) - you'll loose money overall for a good while on it, but you'll eventually be significantly ahead of your competitors with it (if you do things right, of course).
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jeffzekas 1:37PM (3/03/2009)
Another comment: My brother is a mechanical engineer. Back in the late-60's, he (along with other Americans) developed Variable Valve Timing (known at Honda as V-Tec, and now used widely by Porsche, among others). His comment at the time: "Why should I go to Detroit? They aren't interested in new technology! And the Japanese? They don't want to pay an American royalties on our patents, so they'll just steal the idea!"
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andrichrose 2:07PM (3/03/2009)
Mr Witless , but surely the big three have failed , isn't this why the
American taxpayer is bailing them out , they have colluded and
conspired to keep their gas hungry monsters in production regardless
of the instability caused on the planet due to the ever increasing
appetite for oil , caused untold damage to the health of everyone
from the pollution caused , wasted fortunes mounting legal
challenges to every environmental law that may or may not
effect their ability to sell these cars unhindered !
And you talk about profitability , GM have not turned a profit in
almost 13 years , so how much are they losing on every car ?
By the way, in toyotas hybrid synergy drive , both the function of
the alternater and starter motor is replaced by the core electric
motor , thus removing some complexity and cost !
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Throwback 2:46PM (3/03/2009)
Ford has not recieved any government money. As for bail outs, PSA, Renault, Toyota (the finance arm) have all asked for, or recieved funds from their respective governments.
Len_A 4:03PM (3/03/2009)
Automakers colluded? What a lot of nonsense. They've made the larger vehicles that the customers wanted. Else explain why Toyota and Honda's bread-and-butter cars, the Camry and Accord, grew several inches in length and width, AND grew by over three hundred pounds each since 2000. Nissan's Quest minivan grew from a "compact" minivan and grew to a "large" size minivan, and grew by 440 pounds. Toyota nd Nissan spent upwards of a half billion dollars each to get into the full size 1/2 ton pick up market with each of them spinning off two full size SUV's each. What, they colluded too? Damn, that's some nasty stuff you're either smoking, snorting, or drinking (or some combination).
Nissan spent nearly a billion dollars to build the Canton, Mississippi plant, building: a full size ½ ton pick up, two full size SUV’s off of it, two mid size SUV’s and a minivan that gets worse gas mileage than the Ford designed model it replaces. But Detroit gets slammed with the “gas guzzler” nonsense? That money is on top of the half a billion they spent developing the Titan pick up.
Let's not forget that Honda gave us the Ridgeline pickup truck. Honda spent hundreds of millions of dollars to develop and built the Honda Ridgeline, a pickup truck that gets only 15 miles per gallon in the city, no better than 2009 rear drive Ford F-150, but has only half the usability – it takes two trips with a Honda Ridgeline to bring home or to the worksite the amount of cargo that a Ford F-150, Chevrolet Silverado, or Dodge Ram. But Detroit makes gas guzzlers.
A recent nationally syndicated newspaper column had a reader asking why their new 2008 Honda Odyssey gets 5 MPG less than their previous 2001 model. Little did they realize that Honda, another darling of you Detroit critics, made the Odyssey 300 pounds heavier. Toyota did the same with the Sienna, and as I already said, Nissan did the same with Quest – hell the Quest grew by 440 pounds. Gas mileage, on all three NON Detroit minivans, either didn't grow or went down slightly.
But Detroit colluded to make gas guzzlers. Damn, what a bunch of idiotic garbage.
Chris M 4:10PM (3/03/2009)
Len-A, yes, all automakers are guilty of producing big honkin' gas guzzlers. The difference is at the other end of the scale, as Detroit failed to produce much in the way of high efficiency fuel sippers. (please spare us that ad hype from GM on "having the most models getting over 30 mpg" as most barely qualify. Raise it to "models getting over 34 mpg, and GM is behind Toyota and Honda, and GM has nothing better than the 36 mpg Aveo - made in Japan.)
12 years after the introduction of the Prius, 8 years after the introduction of the Civic Hybrid, and the "Big 3" still have nothing to rival them.
oldraven 9:52AM (3/04/2009)
@Chris M,
Both of the Cobalt and Pursuit XFE models are rated at 37mpg highway. And the Aveo is a Korean car.