PRICE REDUCTIONS ON THE VOLT: THE CARMAKERS DOUBLE DOWN ON PLUG-IN TECHNOLOGY

8/6/13

As long time readers know, I have not always written favorably of the Chevy Volt and its kindred cars.   However, my problem with the Volt had little to do with the car itself, which is both relatively fun to drive and a technological marvel.  My problems with the Volt had just about everything to do with the inability of the numbers to work at anything like the car’s $40,000 sticker price, thus limiting its appeal to ostentatious greenies, a very limited market.

However…

Apparently, no one in the Volt’s short life has ever paid sticker price for the car, as far as I can tell.  A good buddy of mine leased one when they were relatively new at a monthly payment that reflected a sale price nowhere near its sticker price; in fact, if you played with the numbers, the lease had to be based on a price at which one could buy a similarly equipped conventional, mainstream mid-sized car.  At those numbers, the Volt makes a lot of sense, provided one drives more than a modest number of miles per year. 

GM has finally acknowledged reality, but not completely, by reducing the sticker price of the Volt by $5,000 to $35,000.  This is in line with a general trend of automakers’ reducing the prices, through very attractive lease deals and outright reductions of sticker prices, of their plug-in hybrids and pure electrics due to a very slow market for these cars.   GM says that reductions in the cost of manufacturing the Volt contributed to the decision to reduce its price.   This may be true, but Economics 101 tells us that it is weak demand at current prices, not falling costs, that leads to reduced prices.  If GM didn’t have roughly twice the normal inventory of this car sitting on dealer lots, it wouldn’t be reducing prices in response to a reduction in its costs of production; it would be maintaining prices and pocketing the reduction in costs.

So GM, Ford, Honda, and Nissan have reduced the prices of their plug-in offerings, making it easier for people to get into these cars.  However, these reductions in prices have trashed the resale value of these cars.  The Wall Street Journal reports this (Tuesday, 8/6/13, pages B1 and B2) morning that the trade-in value of a one year old Nissan Leaf is down 25% from a year ago; the trade in value of a one year old Volt is down 21%.   This cratering in trade-in values will have two effects.

First, it will, or should, infuriate those who bought plug-in vehicles, increasing their  overall costs of ownership and thus incurring ill-will for the car companies while providing another reason for people to sour on hybrids or electrics.

Second, and perhaps more insidiously, the incentive to lease, rather than buy, these cars will increase.  Even before these price reductions, as my friend who leased the Volt pointed out, it made little sense to buy a car in a period of rapidly advancing technology; better to lease and let the lessor take the risk of obsolescence.  (Yes, my buddy is a very smart guy.)  Now with the carmakers reducing prices in response to slack demand, the near absurdity of owning these cars has been exacerbated.   Unless the terms are heavily skewed away from leasing (They run in the other direction currently.), any thinking person will lease his or her plug-in hybrid or pure electric.   Thus, the ultimate lessors (the car companies, either through captive finance companies or the heavy subsidies they pay to third party lenders) will bear the risk, either of rapidly advancing technology and attendant obsolescence or of simply a cool reception in the market place, of owning these cars.

Not only, then, are the car companies taking a gamble by making and marketing these cars; by making leasing the only logical way for people to get into these automobiles, the companies are doubling down on their bets by making themselves the second owners, the receptacles, if you will, of these vehicles that may very well be obsolete or simply unwanted in the marketplace.

The impact on the stocks of these companies should be miniscule; electrics and plug-in hybrids are a very small part of their business.  But the implications for the technology of such vehicles, which still looks transitional, and perhaps for the company that specializes in such cars, Tesla (TSLA; See my 5/30/13 and 5/23/13 pieces, IF YOU WANT TO GET PEOPLE CHARGED UP, WRITE ABOUT TESLA (TSLA) and TESLA (TSLA):  THEGREENIES ARE CHARGED UP, BUT…), could be profound.

TESLA (TSLA): THE GREENIES ARE CHARGED UP, BUT…

5/23/13

In the interests of full disclosure, I am effectively short Tesla (TSLA); I am long the July 85 puts, which I bought a few days ago when TSLA was trading more than $4.00 cheaper than it is trading today.  So I am talking my position, and, so far, it is a losing position.  Certainly, I don’t think it will ultimately prove to be a losing position or I would have dumped it.  And I’m not writing this in order to provide a better opportunity to dump it.  Further, as I have said ad nauseam on this blog and in other forums, markets and stocks are notoriously difficult to call, so I never put any kind of real money into trades such as this TSLA trade.  I do it for the intellectual challenge, for fun, and to focus my thinking, largely so that I can write more effectively and entertainingly on such topics.

A lot of, but certainly not all, the “experts” love TSLA because, among other things…

·        Motor Trend and Consumer Reports love the Model S, the company’s flagship electric powered sports sedan

·        The company, using some of the proceeds of a $1 billion stock deal, paid back its $452 mm federal loan, making it the only U.S. car company to have, as Tesla puts it, “fully repaid the government.”

·        In some people’s opinions, electric power is a promising, if not the promising, propulsion system for cars in the future.

Some analysts have come up with ratios, such as market capitalization per vehicle produced, that show that TSLA is wildly overvalued relative to any other car company on earth.  But even these observers, who are usually, but not exclusively, bearish admit that these are irrelevant, perhaps even foolish metrics.   Yours truly does not like TSLA for a variety of even simpler reasons.

The Tesla Model S combines the downside of all electric powered cars (range anxiety and the negation of the automobile’s perhaps most attractive attribute, freedom of mobility (See my 5/9/13 piece, NISSAN LEAF:   WHY GASOLINE?  I’LL TELL YOU WHY GASOLINE!) with a $70,000 base price tag.  Thus, TSLA produces a car that few people want that even fewer can afford.  This is a recipe for success?

A less expensive Tesla model is planned, but not for launch until three or four years from now.  Further, after paying back the government, TSLA doesn’t have the cash to develop the more, but not quite, popularly priced car.  Unless it sells a lot more cars, produces a lot more cash flow per car (which would perhaps involve increasing the already astronomical price), or can convince more investors of its vast potential, TSLA may be a one or two (if it comes through with its planned Model S based SUV, as seems likely) product, boutique car company.   And even if it could do another big stock deal, or co-founder, Chairman, and CEO Elon Musk comes up with more equity, would such dilution be good news for existing holders?

Bullish analysts point out that Tesla is a supplier or potential supplier of electric car technology to other car companies.  Great…TSLA can sell technology for a car that few want and/or can afford to companies who will find few customers to buy such cars.   There is also the argument that someone could buy out TSLA, which is always a possibility.  But one wonders about the business case for buying a company that produces a car few want and fewer can afford.   Maybe a GM, Ford, Toyota, Nissan, Honda, or VW can make better use of the TSLA’s technology than can TSLA, but does anybody really think TSLA knows something these guys don’t?   Still, I don’t completely discount the possibility of someone buying out TSLA; investment bankers can be awfully persuasive when selling their M&A services, especially when trading profits are harder to come by.

One can’t help but believe that much of the appeal of TSLA to Wall Street is that the Street is inhabited by people who can afford to spend $80,000 and up (Who wants a mere base model at $70,000?) to trumpet their green bona fides.   The rest of us have better sense.   And that sense tells us not only that even an “extended range” (200-265 miles at a steady 55, a concept with which not only yours truly is completely unfamiliar) car like the Model S makes no sense, but also that we couldn’t afford it even if it did.

The same common sense tells us that a stock that has more than doubled in just over a month’s time (On 4/17/13, the stock closed at $45.45; it closed today (5/23/13) at $92.73. Exactly a month ago, 4/23/13, it closed at $51.01.) is discounting a LOT of good news, probably a lot more real good news than TSLA is providing.

TSLA:              $92.73

S&P 500:         1,650.51

Dow                 15,924.50

NISSAN LEAF: WHY GASOLINE? I’LL TELL YOU WHY GASOLINE!

5/9/13

Nissan is currently running a rather engaging commercial on the radio in which it extols the virtues of the all electric Nissan Leaf, including its running the cleanest and one of the least expensive fuels and you, its driver, “wak(ing) up each morning with a full tank.”   Then the ad goes on to say that the question should not be

“Why the Leaf?”

but, rather

“Why gasoline?”

The immediate answer is, of course, cost and range.  The savings on fuel will never equal the additional money spent on a Leaf up front, even without using a discount factor (which would be zero anyway right now due to Ben Bernanke’s war on the elderly, but I digress) on those savings, unless gasoline prices go through the roof and/or one drives a lot of miles in his or her leaf.  But the latter is impossible because of the Leaf’s second big drawback, its range.  The Leaf is supposed to go 75 miles between charges, but even Nissan people admit that, under most conditions, the range is closer to 60 and can fall much further in cold weather.

Nissan, and Leaf enthusiasts, will argue that most people don’t drive their cars to the limits of the Leaf’s range.   They are correct; most trips to the train, to work, to shopping centers, etc. are not the 30 or so miles one way that would challenge the Leaf’s range.   But that retort only leads to the real answer to the Leaf’s failing to catch on, to the “Why Gasoline?” question, if you will…

It’s not that people necessarily drive their cars beyond the Leaf’s range on a regular basis; it’s that they CAN drive their fully or partially gasoline powered cars beyond the Leaf’s range any time they want. But with a Leaf, drivers are restricted to the Leaf’s range.  There is no spontaneity involved.   There is no option to change plans or just to “see what’s down that road,” as yours truly, whose (nearly) favorite activity is driving, is wont to do.  With a Leaf, there is no such freedom; drivers are restricted to their prescribed daily drive or perhaps to very slight deviations from it.

One of the reasons that we Americans, and most people everywhere, favor the individualistic car over collectivist public transportation is because we enjoy the freedom the car affords us.  We can go where we want when we want; we are not restricted by someone else’s schedule or itinerary.   (Remember the old radio ad “Your car is your freedom machine”?  It hit home with yours truly and surely millions of others.)  With the Leaf, however, we are restricted to the range the car affords us and thus to planned itineraries consistent with that range.   How scripted.   How dreary.

I have driven the Leaf and enjoyed the drive.   Admittedly, my expectations were low, but I came away thinking “Wow; that’s not such a boring drive after all.”   The Leaf is (obviously) quiet and handles very nicely, not at all like a golf cart.   It’s not as good a handler or performer as the Chevy Volt, which in turn is not as great a handler or a performer as many of the more conventional cars with which the Volt is compared.  Still, though, the Leaf is a nice car.  But without that range, and without the freedom that range allows me, I can’t see myself ever buying a Leaf.   Though most people don’t share my unadulterated joy in getting behind the wheel and heading for the open, or even not so open, road, I suspect most share yours truly’s sentiment regarding the restrictive aspects of owning a Leaf…or any other all electric car.