The world of economics is a strange and wondrous place. Reducing things to the lowest common denominator, you can’t buy apples for ten cents a piece, sell them for a dollar a dozen and expect to stay in business very long. But according to industry reports, that is exactly what Chevrolet plans to do with the upcoming Chevy Bolt. Sources say Chevy will lose $9,000 on every Bolt it sells. If that is so, why bother selling them at all?
In a word, the answer is California. One out of every 8 cars sold in the United States is purchased by someone who lives in the Golden State. Regulations imposed by the California Air Resources Board require manufacturers to sell a certain number of zero emissions vehicles in the state in order to sell their conventional products there as well. Here’s how the math works.
In 2015, Chevrolet sold just under 220,000 vehicles in California. To avoid penalties imposed by CARB, Chevy needs about 31,000 zero emissions vehicle credits or 14% of total sales. Being a battery electric car, each Chevy Bolt sold counts as 4 credits. The Chevy Volt with its range extender combustion engine earns 2 credits for every sale. To satisfy CARB, Bloomberg says Chevrolet must sell 10,082 Bolts or 7,698 Volts.
Let’s extend the numbers out. 10,082 Bolts that lose $9,000 each equals a loss of roughly $91 million. But that still leaves Chevrolet selling about 210,000 conventional vehicles in La La Land. I have no idea what Chevy makes on each of them but light truck sales are very strong in California and conventional wisdom says the big manufacturers make a profit of about $10,000 on each one. Why else would they market them so aggressively?
Let’s assume (keeping in mind the dangers associated with that word) that the average profit on all those 210,00 conventional vehicles is $4,000. According to my Radio Shack desktop calculator, that means Chevrolet earns a gross profit of $840 million on sales in California. Subtract the $91 million loss the company takes on the Chevy Bolt and it is left with a net profit from selling cars in the great state of California of $749 million. The lesson is that you can make money buying apples for 10 cents a piece and selling them for a dollar a dozen if you are also buying oranges at 10 cents a piece and selling them for $5.00 a dozen. And you thought economics was boring!
The problem is what happens going forward? At present, CARB only requires about 3% of cars sold within the state to be ZEVs but by 2025 that number will ratchet up to 15.4%. To meet governor Jerry Brown’s goals, 40% of all California cars will need to be ZEVs by 2030. “California will continue to act as the ballast, as the center of gravity, for clean air and climate policies in the U.S.,” said Levi Tillemann, author of “The Great Race,” a book on the future of automobile technology. “Trump will thrust the state back into the role of clean-air crusader, and that’s a banner a lot of people in California don’t mind carrying.’’
“The idea that automakers will sell 40% of their vehicles at a loss in California is ludicrous,” said Eric Noble, president of the CarLab, a consulting company in Orange, California, who reckons most electric cars lose at least $10,000 per sale. By contrast, Elon Musk says the CARB standards are “pathetically low.” During the second quarter earnings call earlier this year, he said “There’s massive lobbying by the big-car companies to prevent CARB from increasing the ZEV credit mandate, which they absolutely damn well should.”
Where will this all end up? Stay tuned. Under President-elect Trump, the federal government may eliminate CAFE standards altogether. But some observers think that won’t matter all that much even if it does happen. Luke Tonachel, a senior analyst for the Natural Resources Defense Council says the CARB mandates force American companies to innovate, which they need to do in order to remain competitive in global markets.
Some European countries are talking about banning combustion engine cars altogether by 2030 or sooner. Tonachel says if the Big 3 don’t find ways to remain competitive, “U.S. manufacturers could lose market share.”
In the twilight world of economics, market share is what it is all about. The Saudi’s have deliberately driven down price of oil in order to preserve their share of the oil market. Companies live and die on market share. What California does is almost irrelevant. Car makers will need to build cars that meet global standards to preserve their market share or go out of business. Not even Donald Trump can save them from that.