American Elephants


The Defense Dept. Will Buy Volts, Instead of Military Equipment, to Make Obama Look Good. by The Elephant's Child

Today, GM’s Volt electric car is much in the news because GM is losing up to $49,000 on every Volt it builds.( This doesn’t sound right!) They have sold only 13,500 Volts this year, 33.75% of it’s 40,000 goal. Even at that, hardly anyone wants to buy one. Such a dilemma. The “Optics” are very bad for Democrats who have just proclaimed GM being “alive” as one of the Obama administration’s great triumphs.

GM’s reluctant initial investment in the Volt was over $1 billion. Since it’s release on the market, the company has spent even more trying to re-engineer the vehicle to keep it from catching fire when charging overnight. Most inconvenient for the buyers who were apt to lose their garages as well as the car.

But not to worry, the Obama administration is going to help out General Motors again by buying up its struggling line of electric cars for the Department of Defense to “green up” the military, at the Volt’s baseline price of $39,995.  The DOD plans to buy 1,500 Volts for $60,000,000 + tax. This is not an addition to the DOD budget, so it will displace some other military equipment purchases. Brilliant, positively brilliant.  And, of course add in the amount that GM is losing on each car. Obama simply can’t stop spending, nor sending good money after bad.

GM is investing $10.5 million in their Florida retirement community that will run entirely with Volts — instead of golf carts? Burn up the old folks?

They told us that math wasn’t Obama’s strong suit, but really…

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Here’s the original source of the $49,000 loss per vehicle estimate, an article in Reuters:

GM is still losing as much as $49,000 on each Volt it builds, according to estimates provided to Reuters by industry analysts and manufacturing experts. GM on Monday issued a statement disputing the estimates.

Cheap Volt lease offers meant to drive more customers to Chevy showrooms this summer may have pushed that loss even higher. There are some Americans paying just $5,050 to drive around for two years in a vehicle that cost as much as $89,000 to produce.

And while the loss per vehicle will shrink as more are built and sold, GM is still years away from making money on the Volt, which will soon face new competitors from Ford, Honda and others.

GM’s basic problem is that “the Volt is over-engineered and over-priced,” said Dennis Virag, president of the Michigan-based Automotive Consulting Group.

And in a sign that there may be a wider market problem, Nissan, Honda and Mitsubishi have been struggling to sell their electric and hybrid vehicles, though Toyota’s Prius models have been in increasing demand.

Comment by Subsidy Eye

Yes, I know it came from Reuters, but the Reuters article didn’t explain that DoD would be forced to buy so many, which I think is the far more important and worrying part of the story. One of the commenters on the Breitbart story said that GM is NOT losing $49,000 on each car, it was just that Reuters didn’t understand the difference between marginal cost and sunk cost, but didn’t explain further. Oops, I missed a link.

Which is why I bother to point out that Reuters’ claim of a $49,000 loss per unit is clearly the byproduct of the author’s economic ignorance.

The calculation confuses sunk costs – i.e. the $1.2 billion GM spent developing the Volt – with marginal costs – i.e. the incremental cost of parts, labor and other inputs to produce the next Volt. Spreading out the sunk costs across the Volt’s modest production volume gives us an average all-in cost, which is important to know for the purpose of analyzing the overall profitability of the Volt, but it is not the right benchmark to gauge whether or not GM is better off producing that next unit.

The article cites estimates of $20,000 – $32,000 to build an incremental Volt. If these estimates are accurate, then GM can discount the $39,995 base price significantly and still earn a profit on every incremental Volt it sells.

That doesn’t justify the Volt’s existence, because they plainly have no hope of selling enough Volts to earn back their $1.2 billion in sunk costs, let alone turn a profit on the enterprise. But that is very different from claiming that GM is losing money – i.e. is made financially worse off – with every Volt it sells.

I should add that it has been reported elsewhere that GM, in an effort to juice sales, is, as policy, making subprime loans. Read the whole link.

Comment by The Elephant's Child

I provided the link to the Reuters article only because you had included “This doesn’t sound right!” in your article, and because I hadn’t seen a link to it in your article.

But I agree with “Senator Blutarsky’s” analysis. Thanks for that. Confirms my suspicions.

Stories of government procurement as a means for supporting domestic industries is something of a hobby of mine (I know what you’re thinking: “Get a life!”), so I appreciate your bringing your readers’ attention to the rescue purchases of Volts by the military. On the other hand, maybe this will be a good recruitment ploy! Whatever else you may say about it, it’s a sporty-looking vehicle!

Wouldn’t be the first time that the military has chosen sporty and expensive over dull but cheap and functional. They do that with airplanes in particular in order, they say, to attract the best candidate pilots. See, for example, the chapter on military expenditure in The Federal Subsidy Beast : The Rise of a Supreme Power in a Once Great Democracy.

Comment by Subsidy Eye

Hello, and thanks for the link above.

I couldn’t agree more on the DoD purchase of Volts; a grotesque waste of taxpayer resources under any circumstances, let alone while we are running $1 trillion deficits.

Comment by Senator Blutarsky (@USSenBlutarsky)

I just wonder what motor pool they’ll put them in. I’m sure they’ll put a few in the DC area, but idle times in traffic will them, and it’s not difficult at all to put 100 miles a day on a lot of government vehicles in that area (for awhile, my regular route was from Henderson Hall (behind Arlington National Cemetery) to Quantico, to HQMC, to Patuxent River Naval Station, to Fort Meade, to the Old Executive (next to the White House)). Southern California has the same problem (I know several people who make regular trips from San Diego to Camp Pendleton or El Toro or 29 Palms; heat would be a serious factor, too)
My guess is they’re going to wind up as the cars sent out to recruiting stations.

Comment by Lon Mead




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