Trough Leader

Holman Jenkins argues that despite the fact that GM's all-electric car the Volt will likely lose money on every sale, GM knows exactly what it is doing with this program.  The main customer, apparently, is not the end consumer, but the government.  GM is betting that an Obama, beholden in his new presidency to unions and environmentalists, will be open to a massive government subsidy of the US auto industry.  The Volt program may be part of a plan to buff up GM's attractiveness at the government trough:

GM executives are not nuts. They justify the costs and
risks of the Volt as a way of changing GM's image in the minds of
consumers and politicians. To commit a pun, the Volt is GM's vehicle
for making a bailout of GM politically acceptable.

The company has already started signaling it expects
Washington to provide a whopping $7,000 tax credit to Volt purchasers.
In Europe and the U.S., under whatever fuel economy and emissions
regulations prevail, GM also expects special favoritism for the Volt.
The goal is to re-enact the flex-fuel hoax, in which GM receives extra
credit for making cars that can burn 85% ethanol, even if they never
see a drop of such fuel.

CEO Rick Wagoner last week laid out the case to Barack
Obama personally for turning GM into a ward of the state, by way of
direct and indirect subsidies to support a transition to "alternative"
fuel vehicles. GM has done yeoman's work getting its structural costs
(i.e., labor) in line, but shareholders should note that a big part of
the company's turnaround gamble consists also of eliciting favor once
again from Washington after a period in which the domestic auto makers
were nothing but whipping boys on Capitol Hill.

  • Dan

    Hard to believe, but GM's market cap has fallen below $6 billion. By comparison, a stock called PlanetRX.com (PLRX) - a web pharmacy - had a market cap of nearly $11 billion during the late 1990s Internet stock boom (the stock is no longer traded).

    How the mighty have fallen.

  • Max

    This is stupid, as anyone who ever has been to a business economics course should know: Government subsidies don't last and it can turn pretty ugly in the end (see Nokia in Germany; almost 60 Millions in fines to pay).
    Also, subsidies are no market force you can plan, so in the end this plan can go wrong.

    On the other side, this might be a good gamble, given that f.e. VW has done a similar poject in boosting their appeal in Germany, when they released a Golf III, which actually couldn't be sold at that price with all the niffty extra technology. So, they had red numbers just to change the basic outfit in the middle of the golf lifecycle and reap in a profit afterwards (while leaving customers baffled with badly equipped basic versions).

  • Solar Lad

    This is stupid, as anyone who ever has been to a business economics course should know ... subsidies are no market force you can plan, so in the end this plan can go wrong.

    Not so much stupidity as desperation. GM was functionally bankrupt before they had sales decline this year by 50% in all of their most profitable lines; a Hail Mary play is all that they've got left.

    Or all that the current management and shareholders have left, at any rate - the carbuilding will continue regardless.

  • Josh

    I agree, Max, that it is stupid. But I don't believe for a minute that GM is the stupid party. They are well aware that merely performing the most rational and beneficial acts from an economic standpoint are not enough. They must pander to congress because congress demands and rewards such behavior. Witness the facts: Congress has already mandated the disastrous ethanol subsidies that are increasing farmland, increasing prices, and doing nothing to ease fuel shortages. Congress is toying with the idea of punishing oil companies by confiscating their "windfall profits".

    Of course, congress is partly pandering to public opinion, and partly to its own members' emotional need to "get the bad guys". What's GM to do?

    You can make the case the GM may be evil for playing along in this fool's game. But not stupid - they're doing it for good reasons.

    Max, what does the comment about Nokia paying fines refer to? My Google-fu is weak today...

  • epobirs

    Actually, it is natural that this would be the thought process of a major auto maker. Due to CAFE requirements, the big car makers were accustomed to selling their low-end models at a loss to push up the average mileage of the entire product line. Thus the losses on something like a Mercury Bobcat (mostly same as Ford Pinto and what I drove in the early 80s) were easily absorbed from the high margins on a big luxury cruiser. For decades, the only small cars that were comfortable and had good feature sets were foreign sport models that got pretty lousy mileage. Small models with good mileage didn't have a market until the consumers really demanded it. The economy of the Prius could be easily beaten by just making a more pleasant version of the Geo MEtro and selling it for $16K.