About That Chevy Volt Price Cut

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

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

Why?

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

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

That's obviously a disappointment. At some point a couple of yearsago, GM said it hoped it would 60,000 world-wide in 2013, 45,000of whom in the US. Tesla learned from this mistake of setting highexpectations, saying nothing and letting the world be amazed at anestimated 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 theTesla Model S: Gasoline prices remain not too far around $4 pergallon, and other gasoline/diesel cars are becoming ever-moreefficient. For example, a 2014 BMW 328 diesel yields 37 miles per gallon and the2014 Mercedes GLK 250 diesel yields 28 MPG -- and that's a four-wheeldrive SUV.

Further down the stack, you can buy a Chevrolet Cruze diesel and get acombined 33 MPG, or go with the easiest and most proven offuel-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 besold rationally on cost advantages, except perhaps if you take intoconsideration long-term maintenance advantages. Electric cars need tobe sold on a superior driving experience -- quiet, smooth ride withgobbles of torque. Once you have driven one, you won't go back.

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

The average American drives 12,000 miles per year. With the Priusyielding 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 peanutsfor the vast majority of people. Most people spend more than that oncoffee. Hey, while we're at it, let's do the math on that, too: Twolattes every morning for $3.75 apiece is $7.50 per day. That's $2,737per year, or almost three times a much as you spend on gasolinedriving a Toyota Prius for one full year.

The other angle from which you need to understand GM's decision toensure that the Volt MSRP was brought in line with actual transactionprices, is that the Volt is potentially on its last year of its lifecycle. The all-new Volt 2.0 could be announced as early as January2014 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 modelnears production, you have to discount the old stuff. Just watch howquickly a smartphone goes from $199 to $99 to free on a two-yearcontract, making way for the next model.

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

Same thing with the 2014 Chevrolet Volt now: Taking $5,000 off theMSRP is simply the normal thing to do when an all-new model, radicallyre-worked from the ground up, is right around the corner. And in theautomotive 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 Volt2.0 is that it will be the very first all-new replacement of amainstream plug-in car. All other "new" electric cars are eithercompletely on their first generation, have undergone only minormodifications, or are very small-volume (exotic) cars.

As such, the all-new 2015 Chevrolet Volt 2.0 is likely to deliver bothdramatic cost reduction (over $5,000), improved efficiency andimproved refinement in terms of comfort and telematics. The exacttiming of the introduction and production of this car is simply notknown, but I'm on record as having said a January 2014 introductionand a mid-2014 production, being within realistic reach.

Some people will ask: Why even bother with the Chevy Volt? Why notjust 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 evenclose. If the world ended today, the Volt would have been one hugemistake.

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

1. Customer satisfaction rate: 91%. It's the highest of any GM carin 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 wereprevious GM owners -- not in the last decade or two, anyway. MostVolt buyers have come from other brands -- Toyota, etc. If you're GM,how do you cancel a car that takes more customers from other brandsthan 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 willbe fixed. I wrote about this a couple of months ago.

2. More body styles: Many people love the Volt architecture, butthey 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 didthis, sales of the Volt drivetrain would go through the roof.

3. General development and refinement: Better suspension, betternoise/vibration/harshness (NVH) treatment, better telematics, betterplastics in the interior, and so forth. This comes in the all-new2015 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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