The Story Behind Chevy Volt's $40,000 Price Sticker

DETROIT (AdAge.com) -- In 2006, Bob Lutz was steaming over Toyota's success with the Prius hybrid. "I was getting so pissed off about reading about how the wonderful, far-sighted Toyota is the only one who understands technology," the storied 77-year-old executive recalled in an interview last month with Automotive News. In 2006, Mr. Lutz was GM's vice chairman for global product development; this month he became vice chairman in charge of marketing and other creative disciplines. His exasperation with the Prius gave birth to the Chevrolet Volt plug-in hybrid, scheduled to be produced in November 2010. A green-tech glow The Volt has given GM its own green-tech glow. But just as the Prius created publicity, so did Lutz's back-of-the-envelope calculation of the possible price of the Volt: maybe the high $20,000s. That estimate has come back to haunt the project. With costs running far beyond projections, GM engineers already are "beavering away," in Mr. Lutz's words, to make under-the-skin cost cuts soon after launch. The good news: Battery development and other changes to the unique engineering of the Volt give GM an opportunity to bring the cost down much faster than for a conventional car. The Volt uses a lithium-ion battery pack to power an electric motor for about 40 miles. After that, a small gasoline engine recharges the battery but never runs the car. When the car is not running, the Volt battery pack can be plugged into the electrical grid. The Volt team expected the car's battery-electric drivetrain to be costly. But the costs rose even higher than projected. As project managers developed the car, they found they couldn't use off-the-shelf systems from GM's compact-car architecture, such as power steering, which draws power from the internal combustion engine. So they substituted higher-priced electrical systems. The Volt is turning into a Cobalt-size Chevy compact with a $40,000 sticker. The story of how that happened shows the challenges of bringing new technology to a mainstream vehicle. Mr. Lutz's ally in pushing the Volt through a resistant GM bureaucracy was Jon Lauckner, 51, GM's VP-global program management. Mr. Lauckner is an engineer who started working at Buick in 1979, eventually taking product-development posts in Brazil and Europe. Before returning to Detroit in 2004, Mr. Lauckner headed GM's global mid-size-car program in Germany. He will become VP-global product planning this fall. In search of an iCar Mr. Lauckner was closely involved as Mr. Lutz cast about for GM's Prius fighter. One person with direct knowledge of the Volt program, who asked not to be named, recalled that Mr. Lutz wanted an "iCar" -- a leapfrog product to seduce consumers in the same way Apple's iPod music player did. Mr. Lutz said he initially saw an electric vehicle using lithium-ion batteries as the best bet. But Mr. Lauckner convinced him that a plug-in hybrid with a range-extending gasoline engine on board was a better option. Mr. Lauckner quickly sketched out the powertrain layout and estimated battery requirements, Lutz recalled. "Within 15 minutes, he had the vehicle basically laid out," Mr. Lutz said. "He did all the calculations, what the vehicle weight would be. I was smart enough to realize this made a hell of a lot of sense." But winning corporate approval for the Volt was a struggle. When Mr. Lutz proposed a plug-in, other GM executives flashed back to their painful -- and costly -- experience in the 1990s when they dashed far ahead of the industry by creating and marketing the EV1 electric vehicle. "One senior executive, senior to me, said, 'Bob, we lost a billion dollars the last time we tried that. What do you want us to do, lose another billion?'" Mr. Lutz recalled. Mr. Lutz persevered, getting permission to build the Volt concept for the 2007 Detroit auto show. The Volt was a hit, and GM decided to build it. Just one problem ... The big splash caused a problem, though. Mr. Lutz had told reporters he expected the Volt to sell in the upper $20,000s -- which he now concedes was a rough estimate. "When I said I hope to sell it in the 20s, I just thought, well, if a conventional car of that size with a conventional four-cylinder engine, we can sell it for $15,000 or $16,000, then let's notionally add $8,000 for the battery and we're at $25,000," Lutz said. "That's the way my brain worked on that one." The higher cost surprised Volt developers, said the person familiar with the program, causing sharp questions from GM financial executives, especially Chief Financial Officer Ray Young. But the program went forward. The Volt team knew the drivetrain would be expensive, Mr. Lauckner said in an interview. At about $8,000, the lithium ion battery pack, with batteries supplied by Korean firm LG Chem, is the big-ticket item. But GM also needed a compact 110-kilowatt electric motor and specialized microprocessors to control energy flow to the motor, he said. GM has not revealed the motor supplier. In a normal vehicle program, GM would have saved money by using standard nondrivetrain parts from its global compact-car architecture. But with the Volt, GM had to change many standard systems. GM found that traditional suppliers lacked expertise in electrical drive systems, while companies touting EV technology were small by automotive standards. "You have to go to suppliers that you think have the experience, the capability and the manufacturing scale to do this," Mr. Lauckner said. "In many cases, it's less than the number of fingers on your hand, with some fingers to spare." As GM looked at the cost of the project, it also built in worst-case assumptions for warranty costs, Mr. Lutz said. GM will put a 10-year, 150,000 mile warranty on the Volt battery pack and powertrain. Mr. Lauckner said that's necessary to meet California Advanced Technology Partial Zero Emissions Vehicle standards. High warranty-cost projections have an upside: If warranty costs don't hit projected levels, "the car is OK almost from day one," Mr. Lutz said. Average transaction: $43K GM needs to do more than cross its fingers on warranty costs, though. At $40,000-plus, the Volt will be a tough sell in a Chevrolet showroom. By comparison, the Prius starts at $21,750, including shipping -- putting it in a similar price range to other Toyota cars shoppers may be considering. The Volt's retail base price will be about $40,000, the person familiar with the program said, because "dealers need a couple thousand reasons to pick up the phone and order one." That means that GM will sell the Volt -- at a loss -- to dealers for somewhere in the mid- to upper $30,000s. Transaction prices, the source said, are projected to average about $43,000. Volt buyers will qualify for a federal tax credit of up to $7,500. But, the person said, the consumer will not recoup that until months after buying the car -- and still will have to finance and insure a $40,000-plus vehicle. The Volt has been costly in another way. The source said the $1 billion cost of developing the Volt is roughly equivalent to creating three new vehicles on an existing architecture. GM might have killed another project with the Volt's ballooning costs. But the Volt's high public profile -- stoked by a massive public-relations effort -- made that virtually impossible. Also, several other automakers are developing plug-in hybrids. GM doesn't want to lose its head start on what could be a successful technology. Range vs. cost That leaves GM with an urgent need to cut costs on the Volt. Dave Cole, chairman of the Center for Automotive Research in Ann Arbor, Mich., estimates that in five to 10 years, technological advances could cut the cost of the pack in half, to about $4,000 to $5,000. With those and other savings, GM might get the base price down to $30,000, Mr. Cole said. Messrs. Lutz and Lauckner expect future lithium-ion battery packs to offer better energy density. If so, GM will have a choice: Either keep the Volt's 40-mile electric range with a smaller -- and cheaper -- battery pack or keep the same size of pack and extend the range before the internal combustion engine has to kick in. Mr. Lutz said cost is likely to be the prime consideration. "I think it's all going to head in the direction of a smaller, lighter battery at much lower cost delivering the same range." GM could spread Volt costs by using the drivetrain in other vehicles, such as the Volt's sibling, the Opel Ampera, in Europe. A Cadillac plug-in concept, the Converj, is in limbo. Mr. Lutz said GM could also use the Volt system in other front-wheel-drive vehicles. But he predicted that GM will move slowly, because "vehicle price is going to be a big issue for a long time to come." In the meantime, GM will strain to push new technology into the mainstream. Range-extended hybrids like the Volt may one day play a major role in a greener automotive industry. But, as GM is learning, getting to the future is neither easy nor cheap.

The Story Behind Chevy Volt's $40,000 Price Sticker

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