Why GM Needs to Recalibrate its Volt Strategy

Last week President Obama promised he will buy a Chevy Volt once he’s out of office. “Five years from now when I’m not President anymore, I’ll buy one and drive it myself,” he told the audience at a United Automobile Workers conference. Well, it seems like Chevy wouldn’t mind closing this sale right now to drive sales upwards. Right now demand for the Volt is falling short of supply and as a result GM decided on Friday to suspend production of the Volt for five weeks, idling 1,300 workers at the Detroit-Hamtramck assembly plant.

Although the Volt’s sales didn’t meet GM’s expectations in 2011, the situation didn’t seem to be that bad – the company sold 7,671 Volts last year, short of its original goal of 10,000 cars. GM had ambitious sales goal for 2012, anywhere between 45,000 to 60,000 cars. Yet, the actual sales are growing much slower – GM sold 1,023 Volts in February and only 603 in January. GM’s plant was operating in accordance with its forecast, which gives you an idea why GM decided it doesn’t want to sit on a pile of unsold electric cars and decided to suspend production for couple of weeks.

If you start wondering if we’re seeing a sequel of ‘Who Killed the Electric Car’, stop right there. The chances GM will shut down the Volt are smaller than the chances Rush Limbaugh will buy one. GM needs the Volt badly, at least in terms of branding, and the company’s hope to see the Volt generating for GM the same halo effect the Prius generated for Toyota hasn’t changed in a bit. The only similarity between the events in the mid 90s and what’s going on now is that they both question GM’s management decisions.

Let’s look first at the demand side. If you looked at the sales figures from 2011, it was obvious that very few people right now are willing to pay $33,500 (the price is $41,000 but you get a $7,500 federal tax credit) for the car. "The price premium on the Volt just doesn't make economic sense for the average consumer when there are so many fuel-efficient gasoline cars available, typically for thousands of dollars less,” explains Lacey Plache, chief economist for auto information site Edmunds.com.

Even the rise in gas prices doesn’t change the cost-benefit analysis that much. Edmunds senior analyst Michelle Krebs pointed out on CBS news that even at $5 a gallon, it'll take the average driver 9 years to make up the cost difference over the similar-size Chevrolet Cruze. If the gas prices are going to be around $4 or even less, then the payback period will be longer. Even if we take the nine years break-even point as an assumption – how many people do you know that would be willing to invest in a green product that has a nine year payback time?

It’s not surprising then to hear from dealers that most of the people buying Volts and LEAFs right now do it because they want to be green. The problem is the number of people who want to go green and are willing to pay a hefty premium for it is relatively small. Most people who want to go green don’t like to pay a premium for it at all or are willing to pay just a relatively small premium in some cases. This group seems to be more interested in other cars that are moderately priced and offer good gas mileage, like the Chevrolet Cruze.

Two factors also complicated the picture for GM. First, there was a safety issue - battery fires broke out in three Volts following safety crash-testing last year. Although the National Highway Traffic Safety Administration determined that there was no reason for concern, the whole story, including GM’s offer to buy back Volts from any customers worried about safety certainly didn’t help building the image of the Volt as a safe car.

Second, the car became a policy issue. With President Obama focus on the administration’s contribution to the revival of GM and the auto industry, the Volt became another symbol of the political partisanship. Therefore we heard not only that Mitt Romney doesn’t have a Volt in his fleet, but also from Newt Gingrich during a campaign stop in Tulsa, OK last month: "Let me start from a simple premise that Oklahomans will understand: you cannot put a gun rack in a Volt.”

In all, becoming part of the political debate certainly doesn’t help the sales of the Volt.

On GM’s end it looks like the company had some difficult time in acknowledging reality. How else can you explain GM CEO Dan Akerson telling AP last December that “we want to ramp Volt production to roughly 60,000 in 2012. I think Prius in its second year did a lot less than that, half?” I understand this wishful thinking, but we are talking about December 2011, only couple of months ago, where there already was a clear indication that sales are not going well as expected.

It’s not that the Volt won’t reach the 60,000 benchmark, but it will probably take it more than one or two years to do so. I guess Akerson understands that comparing sales with the Prius right now might not be the best thing for Volt. GM needs to not just to recalibrate its supply, but also Volt’s value proposition, as what it offers now doesn’t seem to be good enough for car buyers, other than President Obama and the other few thousand current owners.

Raz Godelnik is the co-founder of Eco-Libris, a green company working to green up the book industry in the digital age. He is an adjunct faculty at the University of Delaware’s Department of Business Administration, CUNY and the New School, teaching courses in green business and new product development.