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Are Hybrids "loss leaders" for Manufacturers?



  • 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.

  • 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.

  • 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: 28,850
    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.
  • gagricegagrice San DiegoPosts: 28,850
    No, you can't ignore those costs!

    Unless what GM President says is true. They added the 2 billion in R&D to their advertising budget and wrote it all off. In which case the people of Japan & the USA paid it with the loss in tax revenue from Toyota. With a big bank account Toyota can dump a lot into a project and not feel it. They have DEEP pockets.
  • You can "write off" advertising costs? If so, the laws need to be re-written.

    So, Toyota says it costs $1900 per Prius for the hybridization. Are they, or are they not, recouping that cost? i.e. Does Prius Hybrid have a pricetag $1900 higher than the non-hybrid would cost?

  • gagricegagrice San DiegoPosts: 28,850
    You can "write off" advertising costs? If so, the laws need to be re-written.

    It is one of many Big Corporate loopholes...
  • kernickkernick Posts: 4,072
    you: So, Toyota says it costs $1900 per Prius for the hybridization.

    me: what does that mean, can you tell us specifically? Is it the parts? Is it parts and labor? Is it parts, labor, overhead, and design?

    I can tell you that it is very expensive to design and build a vehicle that does not share parts with other vehicles. Low volume vehicles have very high costs because if it costs $100M to design car A and the same for car B, and car A sells 100K units, and car B sells 500K units, which is going to need to make mucho profit? Car A. And if you have a factory and you're only running it at partial capacity as the Prius must have been from the sales numbers you saw that increased every year, then for those first few years a lot of money was lost. A factory has certain fixed costs (property tax, repairs, heat, lighting, security ...) no matter if you barely run it.
  • larsblarsb Posts: 8,204
    Toyota is going to decide in June exactly where in North America it is going to build hybrids.

    so all you "woe is me, cars built in Japan bad bad bad" guys can finally buy a hybrid built in the USA.... :)
  • mirthmirth Posts: 1,212
    ...constructed in the USA anyway, with 90% of the parts built in Japan.
  • stevedebistevedebi LAPosts: 3,788
    "You can "write off" advertising costs? If so, the laws need to be re-written.

    It is one of many Big Corporate loopholes..."

    That is not a "big" corporate loophole. Advertising costs are part of the cost of doing business, and can be written off by all companies, and rightfully so.
  • gagricegagrice San DiegoPosts: 28,850
    That is not a "big" corporate loophole. Advertising costs are part of the cost of doing business, and can be written off by all companies, and rightfully so.

    You are right it is for all businesses. It is a big tent and many questionable charges get thrown into that column. Hummers, corporate jets, trips, lunches, dinners, R&D on the hybrids, "loss Leaders".
  • kernickkernick Posts: 4,072
    And what do you think the cost of that Prius Super Bowl ad was? That was 30 sec right? Maybe $500K? $600K? That means that ad meant they gave a Prius away every second. That is why high volume is critical for products, or else you charge $40K - $80K for low volume vehicles like Porsches?
  • Chicago Tribune today had two Toyota dealers ads informing the buying public that they now have several Prius cars INSTOCK. This would indicate to most that there is a change in the winds at Toyota and the old saying of "supply & demand are both running strong. Ads on T.V. and much more cars on the lot equal hybrid success.
    Culliganman(gas @ $2.09 today)
This discussion has been closed.