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Are Hybrids "loss leaders" for Manufacturers?

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  • gagricegagrice San DiegoPosts: 29,094
    They (broken record) are building them now as FAST AS THEY CAN.

    Yes, you have said that many, many times. I don't believe it for a minute. You can put your trust in a company like Toyota. They did not make 12 billion in profit by wasting money building hybrids that have a very small return on investment. They are making the money on PU trucks, that is why they can build a new factory in one year to double their production.
  • larsblarsb Posts: 8,204
    The waiting list for Priuses has gone from 4-9 months down to 4-6 weeks. This indicates a "faster moving supply chain:

    http://tinyurl.com/5ragp

    Waiting lists are BAD for business - not good. Why would Toyota risk ALL those lost sales by intentionally making Priuses slower...Makes no sense.....

    Toyota expands advertising campaign for Priuses - (hmmm, wonder why they would do that when they really (wink wink) dont want to sell them?):

    http://tinyurl.com/4ctrb

    Toyota expands Euro allotment of Priuses (hmm, still trying to sell them?):

    http://tinyurl.com/4te9r

    Toyota "expanding production" of the Prius:

    http://tinyurl.com/3n979

    Prius sales in Feb 2005 DOUBLE the Feb 2004 number:

    http://tinyurl.com/4b89j

    Toyota Prius European Car of the Year 2005 (oh NO says Toyota - now we have to SELL THEM in Europe TOO??????):

    http://tinyurl.com/5ss9d

    There's more where that came from. Does NOT look like a company trying to AVOID INCREASING Prius sales, does it?

    PS
    If this were a real debate, the moderator would ask me to sit down now and end the proceedings. There is not doubt that Toyota is
    A) actively advertising and trying to sell the Prius
    B) meeting the demand with additional production
  • kernickkernick Posts: 4,072
    you: Waiting lists are BAD for business - not good. Why would Toyota risk ALL those lost sales by intentionally making Priuses slower...Makes no sense.....

    me: you should research then what a "loss leader" is and why they are used. Examples:
    A super market will sell eggs this week at $0.50/dozen, to get you in the store. In this case to buy addition items.
    A store may sell computers for $199, but limit it to 10. But they get a few hundred people come in to see if they can get one (many people miss the fine print of that 10-limit.
    And an auto dealer may advertise 1 base-model car at a loss, sell it for a loss, but switch everybody else who comes in for that car to the other 20 loaded models they have on the lot.

    I would not find it surprising that Toyota enjoys having people come in to inquire about the Prius, find out it's 4-6 week wait, and offer them a Corolla or Camry instead. A lot of people who car shop want a car in the next few days or week, and don't want to wait a month+.

    I know of 1 mothballed GM plant in Framingham, MA. There are probably others around the country. If Toyota's making money, and they should be making a lot of money on the Prius selling it at MSRP, then they should be able to buy a few of these closed plants and start rolling hybrids off them.

    But here's another thought. Maybe Toyota is telling the truth about making a profit on the Prius? But if that profit is small that would not be enough to justify a new plant. If Toyota's making $100/Prius that doesn't justify putting out $100M or so for a plant, or to pull production from Camry's which might make $500/car.

    That is a possible scenario. If you're going to build a plant, you're going to decide to build the most profitable vehicles - highest return on investment.

    Most companies look for at least 8% return on their investments. That means if a plant costs $100 million to buid, + so much to operate, it still needs to generate $8M in profit. Otherwise the company would have been better off investing in bonds. So the Prius could make money, just not enough.
  • larsblarsb Posts: 8,204
    It just does not apply to the Prius. Simply doesn't. :)
  • stevedebistevedebi LAPosts: 3,846
    "I know of 1 mothballed GM plant in Framingham, MA. There are probably others around the country. If Toyota's making money, and they should be making a lot of money on the Prius selling it at MSRP, then they should be able to buy a few of these closed plants and start rolling hybrids off them."

    Is that a state-of-the-art plant? It might cost more to update it than it would to build a new, modern plant.
  • gagricegagrice San DiegoPosts: 29,094
    I would not find it surprising that Toyota enjoys having people come in to inquire about the Prius,

    I think we are beating our heads against a brick wall. There is a very small minority of people in this country that are disillusioned about the hybrid technology. They have it in their minds that it is going to save this planet. They are even further mislead by companies like Toyota thinking that they share in this utopian dream.

    If Toyota was serious about building a new facility for hybrids, to meet the demand they could have taken the very generous offer that Ahnold flew to Japan and presented to them. All they have said is we are going to increase production of the Prius and we may build a factory in China to do that. Maybe if we can squeeze enough Yen out of the bank to proceed.

    "This year our target is to more than double to 20,000 hybrid vehicle sales in Europe,"

    I'll bet they would love to sell their whole production of hybrids in the EU if they could. With the RX400h selling for 56k Euros before taxes they would make a killing. People in Europe want real economy and will continue to buy diesel cars.
  • kernickkernick Posts: 4,072
    Since you or I have no way to tell the absolute truth, it is illogical to eliminate all possibilities. You only weaken any argument you have, by failing to consider any possibility you don't like.

    I'm sure there were many people who thought Enron was a great, ethical company, and that they were going to have a great pension. Your fooling yourself if you think somehow Toyota and Honda has all brilliant, saints working for them and the Big 3 has all stupid, devils.

    If you want us to believe your theory, then explain why a company with billions in cash, can't meet demand for Priuses when it was known last year. You refuse to address how car companies such as Ford managed to increase production on a model by 0.5 million in little over a year. 40 years later and with the supposed efficiencies of Toyota and they can't do that or better?
  • stevewastevewa Posts: 203
    Because

    (a) they make profit on their other models too, so it's not a smart move to curtail production of those in order to make more Priuses.

    (b) Prius is still a unique model with unique components. Ramping up production of Prius is dependent on ramping up all of those things (batteries and electronics, hybrid transaxles, body components, etc). OTOH, the Five Hundred and the Freestyle (?) share a common platform, so when Ford found that they were selling more Freestyles than Five Hundreds, there was not as big an effort required to shift production. Once more models use the same set of components as Prius it will be much easier to balance production of the various hybrid models to meet demand.

    (c) Toyota has been ramping production. If as you say the point of the Prius is to draw people into the dealership then sell them something else, why not just keep production where it was?

    This theory also assumes someone looking at Prius would be amenable to some other model of Toyota. I don't think that's a credible assumption.
  • Ads running rampent on TV now. They must be gearing up to sell alot of PRIUSES because the ads are now everywhere. I can only imagine that this saturation of advertising means that they will be delivering more and more cars to meet the demand. Eat your Gas Guzzlers "BIG THREE"
    Culliganman (free us Prius)
  • kernickkernick Posts: 4,072
    First - Thank you for making some points to discuss, rather than just saying "it isn't so because it's Toyota or Honda".

    a) Yes as I mentioned before, with current production facilities, a company will produce those models which make them more profit. If a Tundra makes $1,000 profit, a Camry $500, and a Prius $250, you don't switch either from Camry or Tundra to Prius. The same would hold true on expansion plans; a company would decide to increase whatever models were the most profitable first. You'd increase all if there is demand but the most profitable get the attention (new Tundra plant?)

    b) Yes, but Toyota has been famous for Lean Mfg. and Kaizen techniques, that make production lines simple and expandable. There is no reason if you have 2 battery lines and 2 transaxle lines, why they could not be replicated by a factor of 5 or 10 - within a year. Surely Toyota has the cash to do so.
    Ford and Mercury. A better analogy would be overall demand for them since they are the same car. If these vehicles were a big hit, such that Ford could sell 3X as many, I bet by next year Ford would be producing that.

    c) For marketshare; to raise their CAFE number, and if they are making a small profit; it is better to make $100/car than $0. And I guess the more they make the more they can spreadout their R&D costs.

    you: This theory also assumes someone looking at Prius would be amenable to some other model of Toyota. I don't think that's a credible assumption

    me: Why? I would think that people are buying Prius's foremost for fuel economy. If they don't get a Prius what are other high mileage decent size cars - the Corolla is tops in mpg in its class, and the Camry is not bad either. It's more likely they would shop there then go over to a Chrysler dealer which doesn't have any high mpg cars, or look at a Ford Focus.
  • yerth10yerth10 Posts: 428
    Toyota increased the production of
    Prius-2003 to 40,000
    Prius-2004 to 110,000
    Prius-2005 to 180,000

    I am sure they may also increase production of future models to 1,000,000 / year before
    OPEC raises Oil Prices to $ 100/ barrel.
  • gagricegagrice San DiegoPosts: 29,094
    According to this Pulitzer Prize winning auther Toyota is using hybrids as "Loss Leaders".

    This wouldn't be the first time that Lexus has been accused of dumping. When the original LS 400 came out in 1989 with a sales price of around $35,000, most observers regarded it as a loss-leader priced to establish the brand's place in the market. Mission accomplished: Lexus is the bestselling luxury nameplate in the United States.


    http://www.latimes.com/classified/automotive/highway1/la-hy-neil23feb23,1,2569993.story?co- ll=la-headlines-sports
  • larsblarsb Posts: 8,204
    Losing $1000 per Prius means:

    2003 - lost $40 million
    2004 - lost $110 million
    2005 - losing $180 million

    Man, those guys are "loss leading" themselves into bankruptcy !!! :)

    Honestly though, anyone who thinks Toyota is using the Prius as a loss leader, answer me this:

    How could they POSSIBLY recoup the loss of that much money just by "having" the Prius available in their car line?

    And how and why could they justify having TWO MORE Hybrids coming out this year? More lost millions? And the Camry in 2006? They sell trainloads of those Camrys every day.

    They would be racking up maybe a BILLION in losses per year by 2007 or 2008 if they were losing money on these cars !! Does not SOUND like something the most profitable car company in the world would do.
  • gagricegagrice San DiegoPosts: 29,094
    Man, those guys are "loss leading" themselves into bankruptcy !!! :)

    You need to read the above article it explains it very well and gives a good review of the RX400h to boot...
  • larsblarsb Posts: 8,204
    quote gagrice-"You need to read the above article it explains it very well."-end quote

    Yes, I read that, and that's one writer's opinion. GM is saying that because they know they missed to boat and are covering to save face for THEIR stockholders.

    One can be an accomplished author and still disagree with Toyota and still not be right.

    I still say that if Toyota says they are making a profit, we have no right to doubt them, unless we are shareholders who are losing money along with them, and I bet the shareholders know the truth.

    I provided ample evidence yesterday to show why Toyota is not dragging feet on Priuses or other Hybrids, and I provided a good argument today as to why they cannot be losing money on the Hybrids.
  • mirthmirth Posts: 1,212
    ...we have no right to doubt them

    Sure we do! Why wouldn't we?

    ...I bet the shareholders know the truth

    Why would the shareholders know anything more than the average person? The only difference is that they own a piece of paper.

    I think we should stop trying to "prove" this issue to each other as there's really no way to do that.
  • larsblarsb Posts: 8,204
    Maybe it's a character flaw, but I generally trust people.

    Especially when the most profitable car company in the world, whom I know for a fact makes some of the finest cars on the road, tells me and the world (including the sitting Toyota Corporate board members who can find out the truth with a phone call) they are profiting on a certain car or not.

    And those corporate board members would not allow hundreds of millions of lost dollars. They would not be the most profitable car company in the world if they made stupid business decisions like that. They have a company to run and a profit to make.

    If they were lying, we would know. Somewhere, it would have leaked out. There are very few "secrets" in this "find out anything today" world we live in.
  • mirthmirth Posts: 1,212
    Tell that to the Enron investors...
  • larsblarsb Posts: 8,204
    Let's not take one example of corporate criminals and apply that to other companies.

    No other company should suffer or be blamed for wrongdoings because of Enron's crooks.

    That's like saying "your neighbor is a crook so you are too."
  • kernickkernick Posts: 4,072
    Well some people would argue that any corporation that made billions of dollars was ripping people off. So it all matters what you consider thievery or fair.

    But there is a point about Enron and other companies, is that accounting methods allow a transaction to be called a profit, when in essence there is a loss. You see this time and time again.

    With a couple of decent accountants, I could go in to a Toyota factory and without changing anything physically we could have the Prius lose $5K/unit or profit $5K/unit. We can shift or include overhead costs. Depending on what I want to show, I choose the accounting method and then can get up in front of a board and state that profit or loss. If the board doesn't ask questions on HOW that was determined or ask the right questions, or they don't state them clearly, there is no lie.

    It's an old accounting joke that management states what they want the reports to show, and they'll adapt the rules to show that. It works short-term for an entire organization; but if we're talking about a single product amongst many products, the true cost can be hidden by what accounting rules are chosen.
  • larsblarsb Posts: 8,204
    I'd rather not sit here and accuse Toyota of "creative accounting" when that is pure slander/guesswork/speculation.

    I'd like to think that they are smart enough to cut their manufacturing costs enough to show a profit on any car they build - as would behoove the most profitable car company in the world.
  • kernickkernick Posts: 4,072
    I would guess that the most profitable car company in the world would thus be paying the least tax, as taxes and profits have an inverse effect. So to become the most profitable, and minimize their taxes Toyota doesn't do any creative accounting? They report their true profits and pay 40+% tax?

    I'm sure you're going to tell me Toyota gives the consumer the best deals, yet somehow makes the most profits, but pays a great deal of tax, and gives the rest to charity? ;-)

    But tax authorities only care about overall finances. They don't care about internal accounting practices such as whether you want to charge all your utilities and property tax to 1 model. The SEC and their equal in Japan are not going to care what internal Managerial Accounting techniques a company uses - how creative it is. The executives at a company can say a vehicle costs $15K or $25K and the SEC will not give a darn as long as those costs end up somewhere. If A+B+C = 100, all the SEC cares about is that 100 gets reported, and not whether you want to call A 25, 60, or 95.
  • Toyota says it costs $1900 to hybridize the New Prius. So the question is: Is Toyota selling the New Prius at a high enough price to cover that extra $1900 expense?

    I'm leaning towards "yes". The New Priuses' true value as a TINY compact car, is only $17-18,000, but Toyota is selling it for $20,000.

    I don't think Toyota is losing money. They are covering their $1900 expense with a $2-3000 markup.

    troy
  • larsblarsb Posts: 8,204
    quote E-Troy:"I'm leaning towards "yes". The New Priuses' true value as a TINY compact car"-end quote

    Prius II is a "tiny compact car" huh?

    Strange that it is classifed as a midsize sedan. Hmm....
  • Yeah I forgot it was upgraded. Still, you're so busy nitpicking the details that you missed the main point:

    - The New Priuses' true value is only $17-18,000, but Toyota is selling it for $20,000. They are covering their $1900 hybridization expense with a $2-3000 markup.

    troy
  • kernickkernick Posts: 4,072
    you: The New Priuses' true value is only $17-18,000.

    me: You can't really add cost and value, they're not the same thing. Value is what the customer is willing to pay for. That will hopefully be more than than cost, and the difference is profit.

    If a person is willing to pay $25K for a vehicle that is its value. Whether $23K or $27K of labor, materials and overhead were expended to produce the vehicle is the cost.

    The question with the Prius and other low volume vehicles, or vehicles that don't share a common architecture - say 250K vehicles is, can you cover the costs.

    There was specific R&D and design of the Prius, specific tooling for the body pieces, a factory, the labor, the government testing, advertising , transportation ... And remember that money spent 3-4 years has to have a return of 10% or so, which is usually a guideline as to whether to invest money or not. Revenues generated early are more valuable then generating them a few years later. If Toyota put $100M into designing the PriusII in 2001, basically the cost is $100M + 10% interst compounded yearly. So the profit on the Prius would have to be $10M+ each year just to cover "the interest" of the investment. That is why if you want to make a profit on a product, you need to sell 100K+ vehicles each and every year. Otherwise you're not going to make a profit. Toyota may sell Prius's for more than the parts and labor, and pay some of those initial startup costs, but you really can't do that without volume.

    Or you end up having to charge a lot per vehicle, which is partly why cars like Ferrari, and the Viper are so expensive. The Corvette is more reasonable selling about 40K units, and its sister car - the Cadillac XLR(?) helps keep the cost down by sharing the expenses. But still they are relatively expensive.




    The Prius may be getting near the volumes where it can cover and repay those costs.
  • gagricegagrice San DiegoPosts: 29,094
    Another Toyota exec saying hybrids are profitable:

    A classic case of double speak!

    Hermance: You're believing my competitors again. We don't lose money on each and every vehicle.

    By having been there first and having gone through significant cost-reduction activities, these vehicles are profitable for us. Now, the argument the other folks make is that they can't see a business case; but it depends on the level of maturity of the technology, how much cost you've engineered out of the technology, whether or not they make business sense.


    In other words how much of the 2 billion in R&D did they write-off as advertising costs? You will not get a straight answer out of Toyota.
  • larsblarsb Posts: 8,204
    EVERY new car has R&D and advertising costs....

    We are talking about "making money on the car right now" based on what it costs to build it right now.

    And Toyota is doing that because they have engineered the process to be profitable.
  • kernickkernick Posts: 4,072
    you: We are talking about "making money on the car right now" based on what it costs to build it right now.

    me: so with this reasoning, I can open a donut shop and I consider that I'm making a profit if I just concern myself with the cost of the donut ingredients, the oven and any labor. The donuts I sell don't have to pay for the building, the counter, the cash register, any seating, lighting, heating?
    I can just ignore all the design costs that go into the building? and ignore that I have to tie up $200,000 for the building, while I could invest it elsewhere.

    No, you can't ignore those costs! Give it a try in any sort of business. You need to have a combination of profit per unit, and number of units sold to pay back the investment and the everyday operating costs.
    For a product to be profitable:

    (profit-per-unit x # of units) > (return-on-investment rate x investment) + operating costs.

    If designing, testing, certifying, tooling a factory, cost several hundred million $'s in investment that money + the money it could have been earned all need to be finanacially recovered.

    Toyota invested the money in the Prius II several years ago, so each year since then, that that money isn't paid back, is more money that needs to be paid. It works just like credit card interest.
    Borrow $100 today at 20% interest and payback $5 the first year, and now you're paying 20% on $115.
    With autos it is worse, as you could spend that $100M a few years before selling the first vehicle. So 100M becomes 110M and then 121M, by the time you sell the first one. That needs to be paid off by profit, for the product to be profitable.

    Now having just taken some Accounting classes, I'll tell you that some companies put on their Balance Sheets, assets such as Intellectual Rights, or Goodwill (PR) which can be nothing more then peoples' perception of your company.
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