Is General Motors Years Away from Profits in the Electric Cars Industry?
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The electric car industry is in the growth stage. Its technology is considered an eco-friendly alternative to traditional automobiles because the cars operate on rechargeable batteries instead of gasoline. Due to the expansion in the industry, competition in the electric car industry is also growing over time. General Motors (NYSE: GM), a multinational automotive corporation that is among the world's largest automakers by vehicle unit sales, has also increased it’s focused on the electric car industry. Let’s see whether or not this move by General Motor’s will benefit shareholders.
Price wars hurting General Motors
In 2013, the electric cars’ market share reached 3.83%, up from 3.38% in 2012 and 2.23% in 2011. General Motors’ Chevrolet Volt is one of the most famous brands in the electric car industry with sales of 4,421 units, beating sales of Nissan Motors’ (NASDAQOTH: NSANY.PK) Leaf, which sold 3,695 units. However, the Volt still remains behind the 4,900 units of Tesla Motors’ (NASDAQ: TSLA) Model S sold. Over time, a price war has been growing between the electric car makers. In terms of price, Tesla’s Model S is far more expensive with a price tag of $69,900, compared to $39,145 for the Volt and $28,800 for the Leaf.
Despite being the most expensive, Tesla is the leading market player. General Motors and Nissan are trying to increase their sales by reducing prices. Nissan has dropped the Leaf’s price by $6,400 to $28,800, while General Motors has ,offered a discount of $4,000 on its 2013 Volt model and $5,000 discount on the 2012 model to reduce the price of a Volt down to $28,495. General Motors Canada is also proposing a seven-year interest-free loan on the purchase of a Volt.
In the last month, Nissan has sold more than 62,000 units of the Leaf worldwide. Nissan will further boost its sales by reducing its price and offering low-cost leases like those that have increased sales in Washington state. Nissan has moved its production to the US, reducing shipping costs from Japan as well as risks associated with the foreign exchange rate. This is increasing competition for General Motors.
Expectations regarding the sale of the Volt and Leaf were high, but both failed to meet their expected targets; only the Tesla S model came close to its sales target. In the first quarter of 2013, Tesla sold 4,900 units of the Model S, beating its own forecast of 4,500 vehicles. Tesla expects to receive 20,000 orders of the Model S per year, though it failed to meet its monthly average target of selling 1,633 per month and sold only 1,425 units in May. General Motors sold 1,607 Volts that month, down 4.3%.
High production costs also a headwind
General Motors is losing money every time a Volt is built. According to Reuters, each Volt currently costs $75,00 to manufacture, while other estimates range from $76,000 to $88,000. This means that General Motors loses $49,000 on each Volt, primarily because the company cut the price of the car in order to push sales. The reason behind the Volt’s high manufacturing cost is its complex technology and its low sales and production volumes. General Motors plans to reduce the Volt’s production cost by $7,000 to $10,000, making the next car in the line profitable.
In the month of May, General Motors sold 252,894 vehicles in the US, up 3% year-over-year, while retail sales increased 9% and fleet sales were down 10%. In the first quarter of 2013, General Motors reported net revenue of $36.9 billion, down 2.4% year-over-year. The company also reported net income attributable to common shareholders of $0.9 billion, down from $1 billion a year ago. General Motors’ total market share was 17.5% in May, down from 18.5% the previous month.
The much desired breakthrough
General Motors and BMW plan to introduce a new specification for a DC fast charger that will charge 80% of the car's battery in 20 minutes. The BMW i3 and the Chevrolet Spark would be the first cars employing this device. The successful implementation of this new charging technology will create an competitive advantage for both BMW and General Motors.
According to General Motors, the upcoming Spark EV is the most efficient production electric vehicle in the world. The Spark EV is now available at two dealerships, one in Los Angeles and another in Costa Mesa, and features a starting price of $27,495. General Motors has a target to have 500,000 electric vehicles on the road by 2017.
General Motors’ overall strategy is to increase the sales volume of its electric cars while reducing their manufacturing cost. General Motors needs a breakthrough in the electric cars industry like the one that it’s working on with BMW. Without that breakthrough, General Motors is years away from making money on the Volt as its competition will be increasing every day. So far, General Motors is not benefiting from its move into the electric car industry.
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