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 ornot. 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.

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Here is the point: Why divide whatever amount -- $1.5 billion orotherwise -- 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 millioncars over the next 25+ years instead of the 6,000 made over the lastyear, or the 60,000 to be made next year, the alleged governmentsubsidy comes to $25 per car, or what you will pay for two movietickets in Manhattan, popcorn excluded. That's very different fromthe nasty $250,000 per Volt headline floating all over the Internet inthe last couple of days.

The Volt is only the first car in a 25-year program to bring out newpropulsion technology into every new GM car and truck. Some of thesevehicles will be extended-range electric just like the Volt. Otherswill be pure electric, such as the announced Chevrolet Spark Electricin 2013. Yet other models in the future may be hydrogen generatorsfeeding a battery. Body styles will range across the board fromfamily cars, minivans and trucks. The technology will evolve innumerous rounds going forward, much of which is naturally impossibleto predict.

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

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

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

I am, by the way, totally opposed togovernment subsidies. Government power andmoney leads to corruption and inefficiencies, if world history hastaught us anything. Economists have won Nobel Prizes on this subjectof "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 thathas to be crushed. It is often being suggested that the ChevroletVolt 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 GMshowed this prototype to the public one year later, January 2007. Adecision to move forward with an actual production plan came almostimmediately thereafter, in early 2007. At that point, the body of theprototype was dramatically altered into something a lot more practicaland aerodynamic. All the "how to produce a real car" decisions weremade in the year that followed.

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

The production version of the Chevrolet Volt was unveiled to thepublic in September 2008, at which point the promise was made thatproduction would start by the end of November 2010. During these 26months that followed the September 2008 introduction, the carunderwent extensive durability testing, crash testing and softwaretuning. In addition, the logistics surrounding preparing for massproduction 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 untilChristmas 2008, and the GM bankruptcy some six months after that. Inother words, the development of the Volt was largely paid for beforethe government became involved.

As a result, the idea that the Volt was somehow a government inventionis 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 aroundChristmas 2008, it wanted to kill the Volt because it did not believein the Volt's prospects. GM allegedly resisted this idea tooth andnail. Perhaps someone at GM such as Bob Lutz, who was in charge atthe time, could verify what actually happened here.

It is true that GM received various grants and tax credits forprograms many of whom had principally to do with the Volt at somepoint along the way. It is also true that there is a $7,500 federaltax credit for Volt buyers who qualify. Some states also haveadditional tax incentives, often ranging from $1,500 to $5,000 percar. Some of these incentives are likely going to expire in the nextfew short years.

Government Involvement

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

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

For all of us -- Neil Cavuto, Rush Limbaugh and me -- the three keypoints to understand are:
  • If the subsidies are as large as they are claimed to be -- $1.5billion -- they should be spread over 60 million cars produced overthe 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 interms of turning America around.
  • The Chevrolet Volt was essentially fully baked before thegovernment got heavily involved in GM, exiting 2008. It was afree-market creation, with government incentives happening basicallyafter the car had already been developed.
  • The car itself -- the Volt -- is actually an outstanding car. Iwould go so far as to say that it is in many ways the best car in themarket today. The Volt combines a quieter and smoother ride from aRolls Royce with the performance of a premium European sports car,while producing fuel economy that's often twice as good as a ToyotaPrius. 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.

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