About That Chevy Volt Price Cut

NEW YORK ( TheStreet) -- In a perfect example of lazy journalism, every single news outlet has reported overnight that General Motors ( GM) cut the base price of the Chevrolet Volt from $40,000 to $35,000.

Practically speaking, nobody who bought a Volt over the last year should feel cheated.


If Mr. and Ms. Journalist had done their homework, they would have known that ever since August 2012 -- one year ago -- GM had already offered close to $5,000 off every Volt sold, or implied in attractive $199/month lease offers. In other words, by cutting the base MSRP from $40,000 to $35,000, GM is merely codifying what had been the real-world price for the past year.

Of course, we can discuss until the end of time why Volt sales aren't higher -- at any price. That's not the point here. Volt sales have gone from very small in 2011 (under 8,000) to approximately 30,000 world-wide in 2012. At the current rate, 2013 doesn't look like it will be a big increase over 2012, and perhaps it will be almost flat.

That's obviously a disappointment. At some point a couple of years ago, GM said it hoped it would 60,000 world-wide in 2013, 45,000 of whom in the US. Tesla learned from this mistake of setting high expectations, saying nothing and letting the world be amazed at an estimated 21,000 sales in 2013. Worked wonders for Tesla ( TSLA) stock.

It is easy to see why the Chevy Volt is barely selling more than the Tesla Model S: Gasoline prices remain not too far around $4 per gallon, and other gasoline/diesel cars are becoming ever-more efficient. For example, a 2014 BMW 328 diesel yields 37 miles per gallon and the 2014 Mercedes GLK 250 diesel yields 28 MPG -- and that's a four-wheel drive SUV.

Further down the stack, you can buy a Chevrolet Cruze diesel and get a combined 33 MPG, or go with the easiest and most proven of fuel-efficient of choices: Toyota ( TM) Prius for about $25,000 base price, yielding 50 MPG on regular gasoline.

I have been arguing for years that electric cars are unlikely to be sold rationally on cost advantages, except perhaps if you take into consideration long-term maintenance advantages. Electric cars need to be sold on a superior driving experience -- quiet, smooth ride with gobbles of torque. Once you have driven one, you won't go back.

Gasoline (or diesel, as it may be) savings are just not a rational reason to buy an electric car. Let's take the baseline scenario of someone looking to buy a new fuel-efficient car: Toyota Prius.

The average American drives 12,000 miles per year. With the Prius yielding 50 MPG, that's 240 gallons per year. At $4 per gallon, that's $960 per year.

Even if you assume that electricity is free, $960 per year is peanuts for the vast majority of people. Most people spend more than that on coffee. Hey, while we're at it, let's do the math on that, too: Two lattes every morning for $3.75 apiece is $7.50 per day. That's $2,737 per year, or almost three times a much as you spend on gasoline driving a Toyota Prius for one full year.

The other angle from which you need to understand GM's decision to ensure that the Volt MSRP was brought in line with actual transaction prices, is that the Volt is potentially on its last year of its life cycle. The all-new Volt 2.0 could be announced as early as January 2014 and be in production around the middle of 2014 as a 2015 model.

As things go in technology, when an all-new and much-improved model nears production, you have to discount the old stuff. Just watch how quickly a smartphone goes from $199 to $99 to free on a two-year contract, making way for the next model.

GM itself showed this over the last year with the large pickups from GMC and Chevrolet. A 2013 Chevrolet Silverado was discounted $10,000 leading up to the 2014 model entering production in the second quarter of 2013. Nobody said a peep about that.

Same thing with the 2014 Chevrolet Volt now: Taking $5,000 off the MSRP is simply the normal thing to do when an all-new model, radically re-worked from the ground up, is right around the corner. And in the automotive industry, "right around the corner" means one year away, not two to four months away as in the smartphone industry.

The interesting part about the upcoming all-new 2015 Chevrolet Volt 2.0 is that it will be the very first all-new replacement of a mainstream plug-in car. All other "new" electric cars are either completely on their first generation, have undergone only minor modifications, or are very small-volume (exotic) cars.

As such, the all-new 2015 Chevrolet Volt 2.0 is likely to deliver both dramatic cost reduction (over $5,000), improved efficiency and improved refinement in terms of comfort and telematics. The exact timing of the introduction and production of this car is simply not known, but I'm on record as having said a January 2014 introduction and a mid-2014 production, being within realistic reach.

Some people will ask: Why even bother with the Chevy Volt? Why not just cancel it? Hasn't it been only a big pile of losses to date?

Without doubt, it's not paid back its development cost yet. Not even close. If the world ended today, the Volt would have been one huge mistake.

However, the Volt architecture has decades to go until it is time to write it off. In these early stages there are some good signs:

1. Customer satisfaction rate: 91%. It's the highest of any GM car in memory, perhaps ever. It's the highest of any car in the market, period. How do you cancel a car like this?

2. Brand conquest rate. I don't know many Volt buyers who were previous GM owners -- not in the last decade or two, anyway. Most Volt buyers have come from other brands -- Toyota, etc. If you're GM, how do you cancel a car that takes more customers from other brands than any other model you have ever sold?

What the Volt needs for market success are these things:

1. A fifth seat. You need to fit three people in the back seat. That has been the biggest objection by would-be customers. This will be fixed. I wrote about this a couple of months ago.

2. More body styles: Many people love the Volt architecture, but they need to replace a minivan or large SUV such as a Chevy Suburban. All they want is a Volt to fit into the body of a Honda ( HMC) Odyssey, Toyota Sienna, Dodge Caravan or Cadillac Escalade. If GM just did this, sales of the Volt drivetrain would go through the roof.

3. General development and refinement: Better suspension, better noise/vibration/harshness (NVH) treatment, better telematics, better plastics in the interior, and so forth. This comes in the all-new 2015 Volt 2.0 a year from now.

At the time of publication the author had no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

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