There were plenty of entertaining moments on last night’s Autoline After Hours. Fortress Detroit’s ugly bunker mentality proved at every turn what people (specifically, former GM consultants) mean when they accuse the American auto industry of problems of culture (with footnotes!). But TTAC is here to help. And our first suggestion to those feeling threatened by the collapse of their comfortable, familiar world is to read more. Seriously. “You don’t think Toyota makes any money on their hybrids do you?” asked one torpid apologist. Unless the Nikkei (via Green Car Congress) is part of the dreaded “we hate Detroit” conspiracy, it turns out that Toyota does make money on their hybrids.
And so does Honda. About $3K worth per car, as it happens. In fact, Toyota made about a billion bucks in profit on sales of second-generation Prius hybrids last year alone. And hybrids are Honda’s fourth largest revenue stream after luxury, midsized and small cars (not “crossovers and SUVs”). Maybe if all that PNGV money had been responsibly and realistically spent, Detroit would have a profitable hybrid too. But success in the marketplace breeds more success, while wasted government handouts seem to beget only more wasted handouts.
“La la la” with fingers in your ears hasn’t been working for a long time. Detroit is finding out that no matter how hard they wish, it won’t be 1955 tomorrow.
There are Detroit apologists, for sure. But there are also Japan apologists. Just sayin.
Profit is very dependent on volume. Last year they made money due to high demand. This year they are parked in Long Beach and there are cheap leases. Profits not so much. Anyone that gives a profit number without qualifications is just BSing you.
Now with Honda having a direct (copy) competitor we shall see how big the pie is and who gets what piece.
I don’t see how Toyota could sell, at a premium price, over one million units of a model that had $1 billion in R&D costs, and not turn a profit.
The argument that the product loses money makes no sense. Just so long as they can pass on the cost of the battery, which is outsourced and doesn’t particularly scale so well, they should be able to make money on it. And you’d have to live under a rock to not know that hybrids sell at a premium, which is coincidentally more than the price of the battery.
Detroit is just jealous that they didn’t figure this out themselves. They can’t admit that Toyota is simply a better company that beats Detroit like a red-headed stepchild at just about every turn. Pride comes before a fall, and the fall is happening as we speak.
Go find that graph that was posted a few days ago showing how to calculate a breakeven point. Variable profit on an upward sloping curve does indeed represent an increasing level of profitability as additional units are sold. That is the simple way that most people measure profitability. No good business person would ever just leave an understanding of “profit” at this extremely basic level.
Calculating breakeven is the next level – where you want to see if the dollars you made repaid all the dollars you had to shell out in order to earn those dollars. Some people want to repay their investment before they declare making profit.
And next you still have to factor in the cost of capital and risk and all that stuff that nobody likes to dive into because it is boring.
Hybrid programs have fixed costs and investment that need to be repaid. $3K (US dollars) of margin on 1 million units will not pay back all the investment necessary to execute the product… but it gets you very close. The Prius and Insight don’t get advertising for free. They didn’t engineer themselves for free. And the tooling didn’t show up for free.
And it is very clear that Toyota hasn’t achieved a sustainable this level of margin until very recently; their earlier generation Prius was likely sold with almost no margin (or even negative margin). Honda’s margins are less than Toyotas.
The key is that Toyota and Honda were steadfast at establishing their Hybrid program on a long term strategy. They had the resources to invest and the culture to facilitate a long-term plan. And the result is that it it is sustainable for them on a long-term basis.
But it is a wrong assertion to simply declare that all hybrids are profitable. That type of logic is akin to saying “If A is true – and B kind of looks like A – then B is true.”
Detroit pursued hybrids with very little success in spite of billions in investment and research dollars. Their goals were ill defined with no strategic fit. The resulting products are extremely expensive to build on a variable basis and cannot compete price-wise in the marketplace. And the endeavor vacuumed what little corporate resources they had. Other technology was not investigated while the companies diverted resources into the Hybrid game.
So this comes back to the notion that Hybrid was not the savior for Detroit. Their own corporate culture and failed execution once again screwed them over.
Hybrid programs have fixed costs and investment that need to be repaid.
So does every single other car on the road today. Unless you can identify uniquely high costs (which you never, ever have on any of the threads that you’ve posted on this topic), you haven’t proven anything at all.
But it is a wrong assertion to simply declare that all hybrids are profitable
Based upon the available data, it’s the only sensible conclusion to reach. The R&D costs have been amortized over a large base of sales, and there’s absolutely no evidence to indicate that they cost more to assemble or market than the price that they fetch.
If you have evidence to support your position, then provide it. But you’ve offered none at all.
Pch101 –
I still fail to comprehend your logic that “every other car has these fixed costs, so they do not apply to hybrid vehicles.” And why is it that you are automatically contributing “something” with your baseless claims as well? We both agree that a positive margin is a sign of variable profit. Where we’ve always disagreed is how much money we’re trying to payback.
Other cars built by automakers that play in the volume-business have margins around $5K to $8K. And they tend to sell quite a large number of these cars. It costs a carmaker about $2B of investment (suppliers and supply chain investment done by the OEM and assembly-plant facilities costs) in order to get a brand new car platform into a plant (or plants) at a level where they can get all their parts and run two shifts straight-time. The R&D, marketing, and other “people” costs usually total over $1B. Factor in the notion that Hybrids are unique with different requirements, and you’re looking at an even bigger bill.
But yet you always claim that hybrid was just a $1B venture and all the ancillary costs are irrelevant because every car has them.
I don’t view it that way; if Toyota hadn’t spent a dime on hybrids, that means they wouldn’t have done a Prius. Then they could have spent a few billion doing other things (like participating in F1). To me, Prius and Hybrid are intertwined. The Prius isn’t built off of the Corolla platform with 90% parts-bin items.
But anyway, you speak of $1B while I speak of over $3B. We’ll never agree because your intuition tells you that $1B is all it took to make “hybrid.” While I think $3B is what it took to make “Prius.” You’ll never agree with me because you somehow want me to divulge some Bill of Material and CapEx spreadsheet or something.
Yes. Toyota’s and Honda’s Hybrids have variable margin today.
No. They have not fully paid back all of the dollars spent.
Yes. It is very likely in the next few years they will pay back their investment, and thus become profitable.
No. Detroit is nowhere close to breakeven on their hybrid programs.
Who would ever buy that God forsaken piece of shit Prius. Just Look at it. Does everyone want to ride around on a microwave oven. I mean if power line towers cause cancer… Hybrid’s equal obsolete cars equal no used cars equal future profits. Environment loses.
I still fail to comprehend your logic that “every other car has these fixed costs, so they do not apply to hybrid vehicles.”
You obviously don’t understand the point.
All cars have fixed and variable costs. For your point to be valid, you would need to demonstrate that the fixed and variable costs of the Prius are uniquely higher, and that they can’t capture them in the price.
Here’s an exercise for you — tell all of us reading this exactly what costs more on a Prius is compared to a conventional car, and how much is that cost. Since it’s your argument, I want specifics.
Do the door latches cost more?
Do the tires cost more?
Do the windshields cost more?
Does the turn signal lever cost more?
Does the radio cost more?
Do the seats cost more?
Do the power window controls cost more?
Do the workers cost $100/hour more than the guys who build Corollas?
Do they embed diamonds and gold ingots in the dashboards, and fly in shaman from Mozambique to provide a unique religious ritual before shipping the Prius off to the dealer?
You tell us what is so dramatically different about the Prius in terms of costs.
I’ve already told you what I see. I see R&D that got amortized down to a low amount, and a battery pack that gets passed right on to the consumer.
If you see something else, provide specifics. No more vague comments that say nothing — I want details, facts and support.
Frank, I’m not sure if that is sarcasm or not…but, electric transmission lines do not cause cancer, and neither will a gas-electric hybrid car. But don’t hold that cell phone too close to your head…
There is no doubt TMC has turned a profit on their hybrid program. The technology is spread across various models from Toyota and Lexus. People focus on the Prius, but the Camry hybrid and Highlander hybrid sell better than some other builders petrol models.
Toyota has to be one of the best companies to get a new technology on the road from a trust stand point. The company is not perfect, but if Kia or Chrysler had rolled out the hybrid technology first, I doubt it would have survived. Toyota has earned the trust of many consumers. I have met generations of buyers. The kind of thing GM and Ford had and starting losing in 1970s. Toyota did not become the top selling company over night and if GM or Ford ever hopes to get that title again they will need to work at for a decade or two.
No matter how big to small, I am glad Toyota is turning a profit on their hybrids because it has helped to get other builders to try new ways of making their vehicles get better fuel economy. The nice thing about hybrid technology is no matter if diesel, gas, or hydrogen fuel becomes the most effective engine you can tie to it a hybrid system.
In the end, all electric seems to be the way to go. We just need better solar and battery technology.
PCH101 –
I’m telling you – to do a brand new unique chassis regular car (ie; not hybrid) with those regular radios, windshields, doors panels, axles, center consoles, cross-car beams, engine cradles, suspension modules, 4 tires and a spare, a badge on the trunk, high-strength steel b-pillars, etc will set you back a cool $3B over about a 30 month window.
Thus, this unique platform car will need to pay back $3B of investment and expensed cost. What do you want me to do to prove this to you? I can’t wave a magic wand and have it ammended to the 10 commandments.
Look at Toyota’s Capex spending as stated in their annual reports and compare it to how many new car they launch per year globally. Dig around a bit more and look at their R&D costs; and you can probably find their marketing and ad spend somewhere. The numbers are mind boggling high – and that’s because volume automakers spend a crazy amount of money to do the regular car with regular parts.
Why do you think GM is always trying to badge engineer and clone? It costs a lot less money to do a slightly tinkered clone than a brand new completely unique chassis car every single time you offer a new product.
$1B will get you a badge-clone. $3B gets you a brand new car with unique components. I don’t even think it’s possible to know how many more $B it took to pull off the special hybrid stuff necessary on the Prius.
Since I can’t seem to edit my own comment:
Any company that has been producing hybrids for a while have paid off their initial R&D and are no longer losing money on each vehicle sold. Toyota and Honda started their development over 15 years ago. Moreso for Toyota since they were, for the most part, the only game in hybrid town over the past few years. This doesn’t even include the amount of funding by each companies’ respective domestic government.
The Prius probably makes approximately the same net profit as either the Camry or Corolla for Toyota. If you took the hybrid-ness out of the Prius, you’d have a 5-door car that is approximately the same size as the Corolla and probably around the same price…$3k-$4k less depending on equipment levels. Add the drivetrain, batteries back in the mix and you’re pricing the vehicle in such a manner that you’re just passing that cost onto the consumer. Like I said above, Toyota started their hybrid program in the early 90s, and introduced the Prius in 96. That’s quite a long time to have paid off the initial investment from both Prius sales and sales of every other Toyota product.
I’m sure Honda is still paying their hybrid technology, the original Insight and/or Civic never sold well or moved the game forward for Honda. But those both laid the groundwork for the newer model and it uses the same IMA drivetrain. Again, it’s priced at a level that the technology is passed onto the consumer, if it wasn’t then it would be the same price as a Civic LX/EX sedan.
Who knows where Ford is in terms of profitability on it’s hybrids, but we all know where GM must be.
I’m telling you – to do a brand new unique chassis regular car (ie; not hybrid) with those regular radios, windshields, doors panels, axles, center consoles, cross-car beams, engine cradles, suspension modules, 4 tires and a spare, a badge on the trunk, high-strength steel b-pillars, etc will set you back a cool $3B over about a 30 month window.
Again, you have said absolutely nothing with that statement. A new Corolla platform has a cost, a new Camry platform has a cost, etc.
All of the cars cost money. For your argument to make any sense at all, you need to show that the costs for the Prius are higher and cannot be recovered in the sales price.
You have failed on these counts. Again, show me how it costs **more** to build the Prius. No one denies that it costs money — the issue here is the alleged difference.
It’s obvious that you can’t meet this challenge. All that you keep saying is that it costs money to build cars, and I think that all of us reading this knew that before you brought it up.
Seems to me that if these companies try to grow on a 3k per car margin they will follow Chrysler before too long. Am I wrong?
Toyota Dealer here:
Don’t know about Toyota, but the dealers and sales reps are making money on the Prius.
Tom
There should be a warning at the top of TTAC’s comments thread that arguments with Pch101 will result in failure and public humiliation.
I have a question. The article states:
“In fact, Green Car Congress says that the companies make as much money on each hybrid as they do on each small, gasoline-engined vehicle they sell.”
Since Honda lost ~2 billion last quarter, and it’s estimated Toyota may claim a loss of over 6 billion last quarter, then they are not making a profit!! The “gross profit” mentioned in the article must simply refer to the sale cost vs. construction costs, and not include development, advertising, ect. Other wise there is a huge disconnect between this magic profit per car and the billions of dollars in losses.
PCH101 – I really don’t understand your logic. I know you love to be right – but you’re not making any sense.
Let me break it down into simple math.
Let’s pretend a Corolla costs $3B to make and they sell 1M of them. What margin across the 1M units would it need to break even?
Let’s pretend a Prius costs $3B to make and they sell 1M of them. What margin across the 1M units would it need to break even?
You still contend it only costs $1B to make the Prius; and presumably it only costs $1B to make a Corolla. $1B is not enough.
You still contend it only costs $1B to make the Prius; and presumably it only costs $1B to make a Corolla. $1B is not enough.
That is not what I said.
What I’ve pointed out to you is that the unique costs of the Prius are largely in the battery, and those costs are passed on in the form of the infamous Hybrid Premium that everyone who dislikes hybrids bitches about.
The burden of proof is on you — this is your argument, after all. You’ve claimed that the Prius has uniquely high costs, so tell us what those are.
Don’t be shy, I really want to know. If the taillight lenses and radio antennas and gas caps cost ten times the price of every other car on the road, then expose this here and now. It’s your argument, so provide the list.
Quoted from the Nikkei:
If Honda sells 200,000 Insight hybrids worldwide in the first year of its release, the company would generate sales of more than 350 billion yen [US$3.6 billion]. Since it estimates a gross profit margin of more than 15% on the car—priced at under 2 million yen&mash;its gross profit on Insight sales is projected to hit around 60 billion yen [US$622 million] in the first year, or around 300,000 yen per unit.
The gross profit earned on the Insight is still low when factoring in the large R&D costs involved in its development. However, the profit margin on its hybrid operations has risen to the level where Honda can count on it to generate the fourth-largest revenue stream behind its luxury, midsize and small car operations.
Holydonut is definitely correct in writing “The key is that Toyota and Honda were steadfast at establishing their Hybrid program on a long term strategy. They had the resources to invest and the culture to facilitate a long-term plan. And the result is that it it is sustainable for them on a long-term basis.”
PCH101,
I am really surprised that I cannot communicate the investment requirements of a new car to you. This is … really odd … I feel like I’m in an episode of the Twilight Zone.
First – let me step back a minute to clarify something. Most of my discussion revolves around an automobile (any automobile) paying back its investment in order to achieve a breakeven/simple-payback. The hybrid costs are a secondary item, but for the sake of avoiding confusion let’s ignore hybrid for now.
The reason I am leaving out hybrid is because you always spin it where I’m trying to explain a payback of the incremental costs of hybrid development. Rather, I am trying to explain payback of the overall vehicle program.
So let me try this again.
Let’s pretend you have a car with a “normal” configuration on a unique platform/chassis. I will refer to this vehicle as “The Car.”
The Car will cost $3B of investment, research, expense items, etc. In order for The Car to become profitable, it will need to have a positive variable margin (where the variable revenue exceeds the variable cost). In addition, enough units must be sold at this variable margin in order to pay back the $3B of investment.
Let’s pretend The Car has a variable margin during its entire lifetime of $3K. Let’s also pretend The Car will sell 250K units over 4 a four year lifespan (1M total units).
The Car would make $3K times 1M units for $3B. It will break even.
Is this car profitable? No, it is simply… breakeven. (Again, I’m leaving out any discussion of risk and WACC and stuff).
But what if The Car $1K of margin for the first year and ramps up to $3K by Year 4? Has The Car reached break even? No. It has not.
$3K margins (US dollars) are actually on the low-end of what a volume automaker would want in order to break even on a “normal” car.
— ———————
So let’s now step into the realm that (unfortunately) most people think of when they picture hybrids. They picture incremental costs. They picture the stuff that isn’t on a normal car and the incremental pricing that is passed on to customers.
You should not confuse the two scenarios with each other. And this is why we never seem to agree on anything.
Yes, the Toyota and Honda hybrids have incremental costs that are likely covered by the incremental pricing.
But no, not all cars are the same. The Prius has no “base” non-hybrid vehicle. The Camry, Highlander, Civic, Altima have a base car you can use as a jumping off point. When you start getting into these discussions things quickly fall apart because it’s a matter of perspective.
And that’s why I wanted to step back and just talk about payback for a regular car with whatever margins you think that regular car is achieving.
I’ve always said the same thing – Toyota will be profitable on the total Prius Program. This is a testament to their long-term strategy and strength of execution.
I am trying to explain payback of the overall vehicle program.
And what you continually miss is that **all** vehicles have costs associated with development and production.
We already know that. Please, no need to repeat that.
If you are correct, the Prius must have either uniquely high per unit costs or very low sales.
Since we know that the sales volumes are high, it can’t be the latter.
So,I want you to tell me what those are. Does the steel cost more? Do the workers cost more? Do the dashboards cost more? What exactly costs more?
I want details of what costs more. Tell me what makes a Prius cost Toyota far more money to build than any other car in that general price range.
You have never told us this, despite your many posts on this subject. I suppose that you never will, because your argument is not defensible.
Toyota is so far ahead of the pack it’s scary. Once they roll out the PLUG-IN Hybrid versions of all their current Hybrids it will be game over for every other technology out there. Burn zero fuel during the week going back and forth to work, then flip a switch and you have unlimited range to visit grandma or go on vacation. The GM volt is a joke with 40 mile range. Also when you realize how much money Ford and Nissan paid Toyota for the Escape,Fusion,and Altima Hybrids because they couldn’t wait 10 years to develop their own hardware and software. Believe me Toyota has all the marbles. Toyota’s only problem is that if they dominate the market too much there will be protectionist measures put against them here and around the world.
PCH101 – did you even bother reading my post or did you just skim it and retort blindly?
If I ask you “does the Nissan Maxima break even” – how would you go about answering that question?
You’d have to estimate the dollars spent on the product as well as the dollars of margin times the volume. And I agree with you – all cars have costs that need to be repaid.
I tried desperately to abstract the incremental costs of the Prius out of my discussion and yet you felt fit to bring it all back in.
My argument is not defensible with you inane criteria where you are demanding some declaration of incremental costs. Since you conveniently ignore my real argument (which is $3B of investment is hard to pay back), we are getting nowhere quickly.
did you even bother reading my post
Sadly, I did. It failed to address my questions to you, as has every other post that you’ve made on this topic.
Let’s try this again.
* Profit = Revenue – Cost
* Cost = Fixed Cost + Variable Costs
* Revenue = Price X Units sold
OK, here’s what we know about revenue –
* Units sold is high (1+ million)
* Price is high (the infamous Hybrid Premium)
* Conclusion: High unit sales X high price = Above average revenue
And here’s what we know about cost —
* Above average R&D costs
* Production costs are about the same
* Cost of the battery reflected in the sales price
Add it up —
-Toyota took a relatively high R&D cost (about $1 billion, a bit more than the norm at the time) and spread it across a million units. Not bad at all.
-Toyota takes the cost of the battery, and makes the customer pay for it. At the very least, that’s a wash.
-Most of the other costs are the same. Steel, labor, plastic, rubber, etc. and the parts are about the same as similar cars.
This is a very simple financial exercise that makes it obvious that you’ve missed it. The R&D costs per unit end up being low, when you’ve sold a million of them. The battery premium doesn’t matter when the customer pays for it straight up.
That has profit written all over it, at least for Toyota. It may not be profitable for GM, that sells very few units and can’t get the premium, but for Toyota, it’s an absolute ball-out-of-the-park homer that helps them to make money. No brainer.
Re: Edward Niedermeyer
Thank you for finding that quote. It does a great job of identifying that profitability depends on margin times volume as well as consideration for investment dollars.
Detroit can only dream of achieving hybrid sustainability – which demonstrates yet again how they are always lagging their competition.
PCH101 – You went after incremental costs again. This is driving me crazy.
Can you please explain to me some points … this is the crux of our misconception gap.
Where do you get the $1B number from?
Does this $1B include the costs to implement “the normal” components in the Prius?
If the $1B is not enough to pay for the implementation of the normal components in the Prius, then how much more do you think Toyota spent on those normal components?
How much do you think Toyota makes (on average) for all Priuses sold?
Where do you get the $1B number from?
The $1 billion R&D cost figure is readily available in the media that reported it. I’ve provided a link to you in past threads, so go look for it if you are interested.
In contrast, I have never seen the $3 billion number that you claim without any support.
Again, let’s go back to the question that you refuse to answer — show us the incremental costs or revenue losses that would have to exist for your point to be accurate. I want proof.
Toyota sold 8300 Prius in the US in April.
You may think they make money at that volume but I don’t.
Toyota sold 4300 Prius in the US in April.
Why would you ignore the other million units that they’ve sold to date?
PCH101 –
I worked for a major OEM. I have done capital planning, business planning, investment planning, business forecasting, margin analysis, and just about everything there is to do with understanding how much money a volume automaker needs to spend to make a car work.
I believe Maximum Bob has also eluded to the dollars it takes to make a car work (which was linked in the past as well).
And I’ve also steered you into looking at corporate financial statements to look at Capex and R&D spending by the major OEMs.
$3B is real.
I’m not going to play your silly game with going back to incrementals. Every time we go into incremental costs you intentionally confuse the line between the costs it takes to do “hybrid” on top of a regular ICE as well as the costs to just do a regular ICE car.
Read Edward’s snippet that he just posted. It states the New Insight margins are estimated at 15%. In an article I believe you posted a few months ago people estimated that the Prius had 5% to 15% margins. This is consistent with a $3K of marign per unit. The “normal” car has margins around 25% (or more) for the volume-automaker. That is to quote Fritz, the reality. Go look at the revenue and variable profit in a financial report for one of the OEMs and divide it against the worldwide units shipped or sold.
I don’t need to dive into the specifics of incremental variable costs because you will not believe me unless I give you a Bill of Material showing the ins and outs at the part level. You can observe the pricing premium the marketplace and make your own conjectures on why the variable margin drops for a Prius or Insight versus a regular ICE car.
$3B is real.
Then prove it. Because you see, Fortune tells me otherwise:
Toyota unveiled the Prius in Japan in October 1997, two months ahead of schedule, and it went on sale that December. The total cost of development was an estimated $1 billion
http://money.cnn.tv/2006/02/17/news/companies/mostadmired_fortune_toyota/index.htm
Your numbers are unsupported, and for all the posts you make on this subject, you would think that you’d have something to back them up.
Once again, provide specifics. Do the hoods costs more? Do the windshield wipers cost more? Do the headlights cost more?
Tell us what costs more. If you know about the car, then you should be able to tell us. Here’s your opportunity to expose the great conspiracy, so take the bull by the horns and run with it.
the way I read it
PCH is saying
hypothetically
Toyota launching any new small car platform costs $2B (chassis, suspension, etc.)
the Prius would be $2B + additional $1B for R&D and battery.
PCH101
“Total Cost of Development” $1B
This is the expensed portion or “people” costs.
Capex for tooling and facilities to produce the “normal” parts on the car (windshields, cylinder liners, o-rings on the transmission as well as all the gear it takes to install and assemble the stuff in the plant) = $2B
Marketing and advertising and legal …. let’s just say it’s $0B.
$1B + $2B = $3B
Quit going back to incremental costs. I’m focusing on just explaining the “normal” car and you keep dragging us back into the realm of incrementals.
Sunday:
No, PCH101 is saying it is $1B to get a new car. End of story. If you pay back the $1B then you’re profitable. He cannot acknowledge that it could ever take $3B to have done the Prius. Because if you look at Prius margins times Prius volume, you don’t get back to $3B.
In the past I’ve invited him to do some analysis to understand Capex requirements for the volume OEMs… and he summarily refused the analysis.
He makes it seem like some stupid conspiracy like I’m refuting the Moon Landing. Rather, I’m just pointing out that it took a great deal of effort and strategy for Toyota to be where they are today… where they’re crushing Detroit with a vehicle technology that has become sustainable.
Capex for tooling and facilities plus the “normal” parts on the car (windshields, cylinder liners, o-rings on the transmission) = $2B
Fine. But as has been stated ad nauseum, **all** cars have those costs. All of them. Tell us something that we didn’t know.
If you were correct, the cost of the parts of a Prius should cost a whole lot more, or the development costs should be so much higher than normal that they can’t be recouped through the price.
But it looks like from here that they don’t. They sell lots o’ Prii, and at premium prices.
Quit going back to incremental costs.
Those incremental costs are are at the heart of your argument! If there are no additional incremental costs in making a Prius, then you’re making no point whatsoever.
PCH is saying
hypothetically
Toyota launching any new small car platform costs $2B (chassis, suspension, etc.)
the Prius would be $2B + additional $1B for R&D and battery.
Close. What I’m pointing out is this —
-It may cost more to develop a Prius as compared to a normal car, but they sell enough of them to cover the added cost
-The battery may add to the cost, but at the very least, they can break even on it, because hybrids sell at a higher price.
If the sales volumes are high (which they are), the cost of production is largely about the same as other cars like it (it is) and if the costs of the battery can passed on (they are), then the margins on a Prius should be about the same as they for other high volume cars in that price class. Since Toyota is normally profitable, there is no reason to believe that the Prius isn’t.
PCH101 is saying it is $1B to get a new car. End of story. If you pay back the $1B then you’re profitable.
That is not what I’m saying. And after what I’ve stated above, I can’t believe that you could possibly misinterpret my comments as badly as you have.
I never argued that the production costs were limited to R&D. Sunday is much closer to understanding the point than you are.
And again, we go into the dizzying world of incrementals – because this is the only way that the logic holds true for PCH101.
Prius variable margins were about 5% just a few years ago. They’ve ballooned up to 15% very recently. 5% doesn’t pay back your investment; 15% barely covers it.
But apparently PCH101 believes that all volume automakers make a paltry 5% to 15% of margin on their B and C segment vehicles. Whereas I’ve been explaining that the margin for the Prius for the past decade has lagged behind the margin of the regular ICE cars.
What is ironic is that even though PCH101 has never seen a bill of material showing the cost deltas to make a regular ICE car a hybrid car, he claims to know what are the incremental costs.
He’s allowed the luxury to avoid the challenge he sends to me to offer “proof.”
If we all agree to $3B, then why is it that you think that the Prius has broken even on investment? Its margins hit $3K per unit only very recently.
It doesn’t even have to be that complicated; Occam’s Razor suggests that a theory that rests on the contention that Toyota did something unprofitable in anything but the short-term is kind of unlikely to be true, wouldn’t you agree?
how much did it cost to launch the Prius.
$3B or $1B.
depends on how you want to define cost.
you are both right.
holytaco, you make a good point about margins being lower for the Prius compared to a Corolla.
its a new technology, people are aprehensive.
when VOIP first came out. to persuade customers to switch, Vonage used price ($15/month unlimited calling with US)
VOIP new customer acquisition cost is very high (advertising) and their profit margins were low. probably losing money to get a new customer. hoping they build momentum.
And again, we go into the dizzying world of incrementals
They’re at the heart of your argument. If you can’t demonstrate them, you have no argument.
There needs to be something amiss with the Prius for you to be correct. The price points have to be too low and/or the costs have to be too high to hurdle.
For you to be correct, the “hybrid premium” would need to be too low to hurdle the added costs. So far, you’ve clearly spent more time misinterpreting what has been said than addressing that basic financial reality.
Sunday:
depends on how you want to define cost.
I believe a Toyota spokesperson was quoted saying this a while back as well. I totally agree that it’s all a matter of perspective on how you approach the various costs (fixed, variable, incremental, etc).
In any event Toyota and Honda have executed hybrids a lot better than Detroit.
Pch101 –
I want you to provide me a bill of material showing the variable cost of a Prius compared to a regular petrol-powered Corolla.
Here very plainly is the heart of my argument:
If we all agree to $3B, then why is it that you think that the Prius has broken even on investment? Its margins hit $3K per unit only very recently.
If we all agree to $3B
Forgive me, I don’t recall any point when we did that.
So far, you’ve done your usual dance with this topic and provided nothing to sink our teeth into. It’s all based upon the idea that this Prius has massive secret costs unique to it that can’t be found anywhere else.
I call BS on that point. I want proof. Provide it.
Does the Prius have any goodwill/intangible benefits?
http://en.wikipedia.org/wiki/Goodwill_(accounting)
getting customers into the showroom, indirectly boosting sales of Toyotas ICE cars. free PR.
when the mass population associates hybrid with the Prius, that has to be worth something.
like vodka and Redbull. or Tivo (DVR) vs. ReplayTV.
PCH101 –
song and dance
You’ve done the exact same thing.
So instead of painting yourself as the right one and myself as the wrong one – let’s just drop the topic.
I want proof too, and I don’t think either of us are going to give up that proof.
Also, for the variable cost, look at a comparable non-hybrid and add the additional parts.
For the Insight, the additional parts are basically the motor/generator, battery, and controller, as pretty much everything else is standard-vanilla Fit part-wise, as the engine itself, CVT, etc, are all in the Fit AFAIK.
The only engine change to the internals is an additional “all-close” VTEC profile, to enable pure electric mode.
The Prius adds a bit more part count over a corrola: notably its has a clutch between the engine and electric motor and the fancy display. OTOH, they charge more fo it to boot.
Both vehicles are definatly highly profitable per-vehicle compared with the non-hybrid version, so the only “they don’t make a profit” concern would come from development costs.
FWIW, the seats on a Prius aree definately more expensive, by about 30%, than the seats on a Camry. This is driven by weight savings, which require the use of high strength steel, more complicated manufacuring processes, etc.
I examined torn-down Priuses, previous generation, and they look to my eyes like $35,000 cars. What they sell for is a lot less than that.
Ford’s own plans were to lose $4000 on every hybrid Escape. The rationale was that the resultant green image was worth the cost. I suspect that they are on the cost target.
Lots of Fords have been sold at a loss. My favorite is the Mark VIII, which cost Ford about $40,000 per car. A careful examination of the components that are (were) unique to the car will show you why.
Bob
Hey, not to break up the ongoing debate, but where did the blog post and comments go for last night’s Autoline After Hours broadcast? Did the suspension of the no-flaming rule just cause too much trouble because of the sudden influx of Detroit faithful, come to rip RF a new one? At least we got a chance here to clear up the hybrid misconception (which I’m surprised slipped through the original discussion without challenge; I guess RF had to pick his fights at least a little bit).
That was a great broadcast, BTW. It got me riled up for almost 2 hours after I finished watching it. But I was seriously disappointed in DeLorenzo’s ongoing personal assault, especially after you paid him a compliment. Brutal.
@ Bob Elton
Did your group also try to take a regular Prius and then strip out the hybrid tech just to see how the car would perform as a regular ICE? I was surprised to see that much of the Prius’ eco-gains were in the brilliant unique engineering attributes of the Prius beyond “the battery” and the traditional incremental changes people picture when they think Hybrid.
Toyota added “lightness” and brilliant engineering in so many places that it is kind of sad that the end customers don’t see the changes.
I think this is a testament to their ability to make their normal/basic cars very good products.
I hope that “Frank” never needs a Cab in Vancouver or Victoria B.C.as most of them are Hybrid and all of them Prius models! One of these hybrid models used by a Cab company attained 320,000 kms, as it was one of the first ones used out there, Toyota actually bought it back and shipped it to Japan for further study!
I examined torn-down Priuses, previous generation, and they look to my eyes like $35,000 cars.
If that’s accurate, then Toyota is working overtime to lose billions of dollars.
I frankly find that difficult to believe, particularly when you compare their financial statements to other successful automakers and see that their overall margins are competitive.
Hey Levecque, Frank probably lives in Tsawwassen. Give him the benefit of the doubt. Some folks out there decided to sell their homes after a power line (located on a, ahem, cough, pre-existing right-of-way) was upgraded to one Brazillion Volts. Something about hair standing straight up on dry days and all that.
Either this or he bought a new Chrysler Sebring a few days ago.
I work meters away from the Vancouver Cab Co that has the yellow Priora all over the city. I walk every day (when it’s not pouring outside) past their lot as part exercise and sometimes chat to the drivers:
This is more or less what I remember hearing over the years:
– “Prius does not break like the others do”
– “I don’t need to pay brake jobs every month anymore – man that was crazy”
– “my passengers call the dispatcher and REQUEST me to come pick them in the Prius ha! ha! ha! crazy people, I have the minivan for the airport people, I tell you, but they like it ha ha ha!” (must be read it with heavy Punjab accent and great smile)
– “this [Prius] I bought USED in the US, we have a broker that works for us and he buys our cars for us in California. They have many in Los Angeles, the price is cheap compared to here”
– “After duty, you know, and the inspections and the daylight kit that has to be done special for these cars that come with the special lights (he was talking about HID…) yeah we had a problem with the Canadian Tire inspector they wanted daytime lights, not lights on all the time, but we fixed that with regular bulb, the final price is still much cheaper than the Prius here in Canada. There aren’t many used for sale, people really like them and ask too much. The new ones the dealers charge too much for it. Better to buy in the US.. I bought one from the US for my daughter for graduation. Special gift, better than anything out there, it is made by Toyota”.
And there’s people thinking that there is no money being made on these things…
Correct me if I’m wrong, but doesn’t the 2010 Prius share the MC platform with the Scion XB?
PH101 and HolyDonut: You’re both right but you’re both wrong.
Most vehicles are not born in a vacuum. The most expensive part on any car is the drivetrain. Out of that the motor is the largest component of that. Very rarely will a vehicle have to shoulder the complete R&D cost which can be an extreme dollar figure. Therefore every vehicle that that part is used in will shoulder some of the cost. It won’t take long before that cost becomes so vanishingly small that the labour and material costs are all that anyone will see. EVERY subsystem is the same with some few exceptions.
Sheet metal and plastic moldings are, obviously, model driven. The glass is the same. The more of a particular model sold without changes the lower the cost. GM would be king here where they took the Cavalier through 20 years without changing that much.
One of the other exceptions is the supplier R&D.
A lot of the “new” systems that have been showing up are borne by both the car manufacturer but also by the supplier. Depending on the contract, the cost might be quite mild and the amortizing unit volume very reasonable. Case in point: the DSG unit developed by Borg-Warner and used by VWAG. VW hasn’t paid anywhere near the R&D costs for those units but they also don’t get exclusive use of it. So, point to PH101.
Buuut, the Prius doesn’t share that much componentry with any other of Toyota’s model line. That Atkinson engine is unique to the Prius AFAIK, yadda, yadda, yadda. Point to HD.
The electrical subsystem and the even more important software suite though, are being used for every hybrid that Toy makes and is being sold as part of the hybrid system to Ford and probably to the Koreans too. I’ll wager that excepting Honda and GM, any system that remotely looks similar to Toyota’s IS probably Toyota’s.
I betcha the even Toyota can’t put a price per unit for the R&D any more. It’s become too entertwined with other, saleable, products in the Toyota universe. And no, I very much doubt that Toyota is losing money on the Prius anymore.
@ mcs :
Yep, Toyota is moving towards a common unibody architecture to help the economies of scale when they share common components with some of their other small cars. This type of “sharing” makes up what GM could only dream of doing; sharing just enough while keeping product identity separate. When customers go to showrooms, they won’t know that the Xb, Matrix, Corolla, and Prius share many common part numbers. This is a stark contrast from a customer cross-shopping GM Lambda platform 7-passenger cars and wondering what makes them different between the brands.
But, don’t think for a minute that the Prius is just a badge-engineered Corolla with a battery and regenerative brakes. The Prius represents significant value for the consumer.
With the Prius, you’re getting getting a lot of changes for minimal incremental spending out of the consumer’s pocket. I’ve long told people that Hybrids are the best “value” for customers because they’re really getting a lot more features for not a lot more money. Customers always measure incremental costs in terms of what that customer will pay/benefit. If the Prius will save $3K of gas over the lifetime of the car then the customer will likely pay pay $3K or less more for the transaction price.
But if you distance yourself from this simple view – consider that in the past Toyota (and in the present the Detroit OEMs) have to spend many thousands of dollars more for hybrids than what they charge to customers. Hybrids out of Detroit tend to have zero or negative margins because the automaker has to put in a lot of content without having the ability to raise the transaction price to compensate.
From the customer’s perspective the customer will receive a boost in fuel efficiency and some snazzy badges on the side of the car. But the Detroit automaker has spent a crazy amount of money to make that car happen. It’s depressing to consider that Detroit was better off without offering the hybrid vehicle because the hybrid vehicles costs more than what was gained in the sale of the car.
Consumers don’t recklessly spend money – you cannot expect the customer to spend more than what they could obtain with other competitive/substitute products. So Ford, GM, and Chrysler often times will lose money on hybrids just for the sake of being competitive in the marketplace. They have federal regulations and other obligations to meet; so they offer Hybrids to avoid the penalties. Try finding a Hybrid GMC SUV in Detroit, and you’ll be met with frustration. Michigan doesn’t have the same strict CAFE standards as the “California Emissions” states. So you’ll find the hybrid GMC’s in California. When Detroit raises the price trying to make the margin hit less dramatic, people on TTAC post snarky comments about how stupid it is to raise pricing on hybrids in a depressed market.
Unfortunately, this is the reality in Detroit. Selling more hybrids results in more loss to the automaker. Crazy huh?
Toyota may make a profit on each Prius taking into account the sales price vs. cost to build one. It may have still lost cash (and maybe tons of it) on R&D and marketing etc. Toyota’s accountants are smart enough to use the needed tricks to segregate all of these things so they can claim a profit.
Many of these start up costs would be most likely be considerably higher for the Prius or Insight so unless they have heavily shared componets those costs are not well spread out. Perhaps they are making true profit on it now but odds are it was a loss leader until celebrity fags and a lucky gas speculation crisis made it popular.
These losses probably would have been unacceptable in an American business environment (perhaps European as well) which is why only the Japanese really pushed these things along until they sold.
I feel bad for Toyota’s customers. Toy might not be losing cash to get a Prius but their customers sure as hell are.
don’t think for a minute that the Prius is just a badge-engineered Corolla with a battery and regenerative brakes.
Nobody suggested that it was. The point being made was that it has many development components that are not unlike those of other cars. It’s not as if the sunroof in a Prius costs 20 times more than it does in a Camry.
don’t think for a minute that the Prius is just a badge-engineered Corolla with a battery and regenerative brakes.
There are other hybrid vehicles in the lineup. Surely the knowledge gained from developing the original Prius filtered into the other subsequent projects.
It may have still lost cash (and maybe tons of it) on R&D and marketing etc.
I have no doubt that it lost money in the beginning.
But the beginning was a long time ago. It would be difficult in the auto business to sell one million units of anything at a high price and not make money. At those volumes, it’s not just strictly a PR exercise.
“I examined torn-down Priuses, previous generation, and they look to my eyes like $35,000 cars. What they sell for is a lot less than that.”
One of the few cars I regret selling was a 2001 Toyota Prius that I had bought back in the summer of 2006 for $6500.
It had been maintained at the dealer every 3,000 miles. A brand new battery pack. Immaculate interior. Other than some minor dents in the right rear quarter panel, it was virtually a museum piece. This one had 113k and new top of the line tires to boot.
I ended up selling it for a $2000 profit on Ebay. Never even drove it out of the lot. Just took some pictures, wrote a description, answered a few questions, and that was that.
Ironically enough, I did the exact same thing to a two year old PT Cruiser during the same week. That one had only 199 miles and I got it for the (then) great price of $7000.
The point being made was that it has many development components that are not unlike those of other cars.
I think the point is already pretty well made for the unique ICE’s, electrics, and powertrains in general.
The fact that Honda has long resisted making a unique mainstream hybrid should tell you something about how it would cost even over and above the aforementioned.
I think the 3 Billion development number bandied about is ridiculous.
Developing models like the Sol/Sky Kappa twins then makes about as much sense making billion dollar piles of money and lighting them on fire.
I don’t see the car industry as being sustainable with 3 Billion model development costs.