Setting it Straight: Chevy Volt vs. the Government

NEW YORK ( TheStreet) -- A recent report circulated in the media in the last couple of days, claiming that each Chevrolet Volt was attached to approximately $250,000 in government subsidies. There is a fundamental flaw behind the math in this "report" that discredits the entire report straight down to zero, in my view.

"This is a matter of simple math," said James Hohman, assistant director of fiscal policy at the Mackinac Center for Public Policy. "I added the known state and federal incentives that have been offered and divided by the number of Volts sold."

About 6,000 Chevrolet Volts were sold until about a month or so ago. That would imply a total subsidy amount of 6,000 x $250,000 = $1.5 billion.

Let's first ignore whether the $1.5 billion is an accurate number or not. Furthermore, the author of the study says that the number can actually be as high as $3 billion if certain production goals are met -- or as low as $300 million. It really doesn't matter much for the purpose of the argument at hand.

Follow TheStreet on Twitter and become a fan on Facebook.

Here is the point: Why divide whatever amount -- $1.5 billion or otherwise -- by the number of Chevrolet Volts sold to date? If he had done this study one year from now, when we could be looking at 60,000 Volts made, as GM repeatedly has promised, the headline number would be $25,000 per car -- not $250,000. You would divide the $1.5 billion by 60,000 instead of 6,000.

But why stop at a year from now? This investment in automotive propulsion technology is meant to be refined and influence generations of cars for decades. Some part of GM's Voltec architecture and techniques will drive sales of approximately 60 million cars over the next 25 years or so, in any reasonable estimation.

Thus, if you divide this $1.5 billion "investment" over 60 million cars over the next 25+ years instead of the 6,000 made over the last year, or the 60,000 to be made next year, the alleged government subsidy comes to $25 per car, or what you will pay for two movie tickets in Manhattan, popcorn excluded. That's very different from the nasty $250,000 per Volt headline floating all over the Internet in the last couple of days.

The Volt is only the first car in a 25-year program to bring out new propulsion technology into every new GM car and truck. Some of these vehicles will be extended-range electric just like the Volt. Others will be pure electric, such as the announced Chevrolet Spark Electric in 2013. Yet other models in the future may be hydrogen generators feeding a battery. Body styles will range across the board from family cars, minivans and trucks. The technology will evolve in numerous rounds going forward, much of which is naturally impossible to predict.

The absurdity of the math used can be further shown by asking what the study would have yielded if it had been done six months ago or a year ago. Six months ago, 3,000 Volts had been sold and therefore the implied subsidy was $500,000 per car -- half as many cars, twice the subsidy per car. One year ago, the first Volt was sold and therefore this one car must have cost $1.5 billion, according to the reasoning by the people who wrote the headlines around this study.

This is the way it works in almost every industry. The first iPad manufactured probably cost Apple $100 million or whatever. Does that mean Apple lost $100 million minus $500 on this iPad? Of course not. The development cost for any product is written off across large volumes, typically multiple generations, where both hardware and software accumulate constantly.

The first new pill Pfizer makes can cost billions as well. But everyone recognizes that you don't say that the first 6,000 pills manufactured cost millions of dollars each. I think you get the point. The methodology yielding the "$250,000 subsidy for every Chevrolet Volt" is absurd because it is based on only the cars sold to date.

I am, by the way, totally opposed to government subsidies. Government power and money leads to corruption and inefficiencies, if world history has taught us anything. Economists have won Nobel Prizes on this subject of "rent seeking" (James Buchanan, 1986, comes to mind), and I agree.

Obama Didn't Invent the Volt

There is a separate but related myth around the Chevrolet Volt that has to be crushed. It is often being suggested that the Chevrolet Volt is basically a government project, sort of like a mini-NASA, insisted on by the U.S. government. As far as the evidence shows, nothing could be further from the truth.

The idea for the Chevrolet Volt prototype came in January 2006, and GM showed this prototype to the public one year later, January 2007. A decision to move forward with an actual production plan came almost immediately thereafter, in early 2007. At that point, the body of the prototype was dramatically altered into something a lot more practical and aerodynamic. All the "how to produce a real car" decisions were made in the year that followed.

Between early 2007 and September 2008, all the essential parts of the Chevrolet Volt were developed. Basically, that's when the car was put together. This included the selection of LG as the battery provider.

The production version of the Chevrolet Volt was unveiled to the public in September 2008, at which point the promise was made that production would start by the end of November 2010. During these 26 months that followed the September 2008 introduction, the car underwent extensive durability testing, crash testing and software tuning. In addition, the logistics surrounding preparing for mass production of a car was put in place.

So there you have it: The car was essentially ready in September 2008, but the government's main involvement in GM didn't start until Christmas 2008, and the GM bankruptcy some six months after that. In other words, the development of the Volt was largely paid for before the government became involved.

As a result, the idea that the Volt was somehow a government invention is about as accurate as the idea that Al Gore invented the Internet. It has no relation to the truth whatsoever.

It has been said, although I don't know how accurate this claim is, that when the government started getting involved in GM around Christmas 2008, it wanted to kill the Volt because it did not believe in the Volt's prospects. GM allegedly resisted this idea tooth and nail. Perhaps someone at GM such as Bob Lutz, who was in charge at the time, could verify what actually happened here.

It is true that GM received various grants and tax credits for programs many of whom had principally to do with the Volt at some point along the way. It is also true that there is a $7,500 federal tax credit for Volt buyers who qualify. Some states also have additional tax incentives, often ranging from $1,500 to $5,000 per car. Some of these incentives are likely going to expire in the next few short years.

Government Involvement

Just to be clear: I am somewhere way to the right of Rush Limbaugh on the subject of government involvement in the economy. I also believe a pure free market, devoid of regulation and taxation, would encourage adoption of electric cars. In a pure free market, the cost of electricity would likely be significantly lower than today, encouraging electric cars.

That said, we can't rewind history, and I recommend critics of the Chevrolet Volt separate our common opposition to government spending from the actual car -- and the numerous other GM cars and trucks that will be built on new and exciting Volt-based technology in the future.

For all of us -- Neil Cavuto, Rush Limbaugh and me -- the three key points to understand are:
  • If the subsidies are as large as they are claimed to be -- $1.5 billion -- they should be spread over 60 million cars produced over the next 25 or so years, which means they would be $25 per car -- not $250,000 as claimed. At $25 per car, there are bigger fish to fry in terms of turning America around.
  • The Chevrolet Volt was essentially fully baked before the government got heavily involved in GM, exiting 2008. It was a free-market creation, with government incentives happening basically after the car had already been developed.
  • The car itself -- the Volt -- is actually an outstanding car. I would go so far as to say that it is in many ways the best car in the market today. The Volt combines a quieter and smoother ride from a Rolls Royce with the performance of a premium European sports car, while producing fuel economy that's often twice as good as a Toyota Prius. That's all you can ask for $40,000.
  • Anton Wahlman was a sell-side equity research analyst covering the communications technology industries from 1996 to 2008: UBS 1996-2002, Needham & Company 2002-2006, and ThinkEquity 2006-2008.