The radical concept of profit

Regular readers know that I am not a fan of Government Motors, its bailout, or the Chevrolet Volt.

Investors Business Daily reports the unbelievable news that the Volt costs GM more than twice its sticker price. Which makes them conclude:

This is no shocker, but it should be an alarm to voters who think this president deserves another term.

A little more than two weeks ago, the Obama administration released rules mandating a near-doubling of gas mileage standards for cars sold in the U.S. The mandate will not be met at no expense.

The industry can’t magically build fleets that average 54.5 miles per gallon by 2025 without steep cost increases just because politicians and bureaucrats demand that it does.

If automakers are to comply with the more restrictive rules, they will have no choice but to build more electric cars, such as the Chevrolet Volt, a plug-in hybrid that gets 60 miles a gallon.

While that might satisfy the environmentalist lobby and most Democrats, it isn’t practical.

If GM is losing nearly $50,000 on each Volt it makes, how much will all the carmakers be required to lose when Volt-like cars have to be the main models in their fleets in order to obey strict, new mileage standards?

Or, more appropriately, how much will taxpayers be forced to lose to subsidize the administration’s unwise but politically correct fuel economy rules? …

A record number were sold in August. But those sales numbers were inflated by: Two-year, $5,050 leases for a car that costs about $89,000 to build; loans to risky buyers, which GM is offering in a desperate effort to boost sales; and a $7,500 federal tax credit for the Volt that’s part of the administration’s green energy initiative.

Another sign that the Volt is a problem for GM: With Chevrolet falling well off the pace to sell its target of 40,000 cars this year – only about 13,500 have been sold – GM has shut down Volt production for the second time this year. The latest stoppage begins Sept. 17 and will continue for four weeks. …

Obama’s Government Motors needs to shut down the Volt line indefinitely, not for a mere month. Only when it makes money off the cars should it place them back into production.

A better version of that last sentence is that GM should shut down the Volt until it can figure out how to make and sell the Volt at a profit. That’s not happening in the foreseeable future when the profit margin of the car is minus-50 percent.

In fact, the Volt debacle helps prove the prediction that GM is headed toward another bankruptcy. (GM probably should be happy it’s selling so few Volts at a $46,000 loss each.) GM profitably sells pickup trucks, SUVs, and Corvettes. Those are all vehicles going away with the aforementioned 54.5-mpg standard. GM can sell small cars, but GM cannot make them at a profit. After one bailout in an era where people keep cars longer and in an economy that may never return to where it was in the 1990s, GM’s priority from the beginning should have been how to make fewer cars at a higher profit margin.

Sign up for the free In Business Wisconsin Report – your weekly resource for local business news, analysis, voices, and the names you need to know. Click hereIf you are not already a subscriber to In Business magazine, be sure to sign up for our monthly print edition here.