Friday, April 10, 2009

The Myth Of The Prius Success Story

One popular myth, spread even by Swedish libertarian writer Johan Norberg, is that the problems of Detroit auto makers and the (relative) success of for example Toyota is a result of the Detroit auto makers clinging on to gas guzzling models while Toyota has focused on "green cars" like Prius.

Immediately when you think about it, you realize one great problem with that theory: namely that any consistent environmentalist would reject all cars-after all even green cars will contribute to increased use of energy, which will ultimately through the price mechanism increase demand for all forms of energy. So, that is not a market which car makers can reach.

It is of course true that there are inconsistent environmentalists who, while worrying about "climate change", still want to drive cars. That group would presumably be willing to buy "green cars". Moreover, to the extent that "green cars" use less fuel, they can appeal even to people who don't care about "climate change". I mean, what car owner doesn't want to reduce his or her fuel costs, all else being equal?

But the problem is that all else is not equal in the real world. So people for whom "climate change" and fuel costs matter will often still choose gas guzzling vehicles. "Green cars" tend to cost more to build and they are generally less safe and have less comfort than for example SUVs. People who have a large family might be able to get them all into an SUV, but not into a Prius. And if you get hit by another vehicle, you generally have a better chance of survival if you're in a SUV than in a Prius. In short, "green cars" are simply worse cars in all aspect except fuel costs.

It should therefore be no surprise that "green cars" in fact generally sell very bad, and create even bigger losses than other cars. As George Will puts it:

"The stunning shift in consumer preferences that should make the White House's freshly minted auto experts feel vulnerable has been reported under headlines such as "Like a Rock: Hybrid Car Sales Plummet" (Wall Street Journal, Dec. 9) and "Hybrid Car Sales Go from 60 to 0 at Breakneck Speed" (Los Angeles Times, March 17). Absent $4 gasoline, customers, those nuisances with their insufferable preferences, do not want the vehicles the politicians want them to want, even with manufacturers now offering large rebates and other incentives.

The two best-selling vehicles in America this year are large pickup trucks (Ford F-Series and Chevy Silverado). In February, Toyota sold 13,600 Tundra and Tacoma pickups and 7,232 Priuses. It sells the Prius at a loss, which it can afford to do because it makes pots of money selling pickups."

The assertion that Toyota owed its previous profits to Prius is simply false, as they sell far fewer of them than they do of large pickup trucks despite selling them at a loss and having good margins for the pickup trucks.

Moreover, as Shikha Dalmia points out, it is simply not true that GM hasn't invested in "green cars". The only reason that these "green cars" make up such a small part of their sales is that hardly anyone have wanted to actually buy them.

"Indeed, Obama has already declared that he wants to make GM the world's leader in "building the next generation of clean cars." Never mind that GM can neither build these cars well nor sell them. Out of GM's top 20 "profit-contributors" last year, only nine were cars—the rest were all politically incorrect SUVs and trucks. GM sold less than 15,000 hybrids last year, and this year is going to be worse because industry-wide hybrid sales have dropped by two-thirds from their peak last year. Indeed, last year there was a waiting line for a Toyota Prius—today there is an 80-day supply sitting on dealer lots. Meanwhile, the Obama task force was forced to conclude that the crown jewel of GM's green lineup, the $40,000 electric Chevy Volt it developed expressly to impress D.C. Democrats, is "too expensive to be commercially successful."

And do note that the miserable sales numbers for hybrid cars comes despite the fact that the government tries to bribe people into buying them through tax credits and other subsidies.

Aside from ridding itself from the far too high cost of labor and excess capacity, a key for making GM profitable is that they build cars that people want. But if they continue to take bailout money from Obama that will be impossible, as Obama will use that bailout to order GM to build the cars that he wants consumers to buy, instead of the cars that the consumers themselves want to buy. And that requires that GM goes to a bankruptcy court, instead of going to Obama.


Blogger Kapitalist said...

Very good that you've attacked this myth! Thank you.

I've always thought it sounded strange, but never sat down to dig out the numbers myself. Johan Norberg has done more for liberty than any other contemporary Swede, but cannot always be 100% since he's so productive. Luckily, he has an open mind and would certainly welcome a contact from you to highlight this issue for him!

6:08 PM  
Blogger Allen said...

I'm glad to see some numbers touched on for the hybrids. I'd be curious to see what sort of sales and profits, if any, come from small cars in general in the US.

7:14 PM  
Blogger stefankarlsson said...

Kapitalist: Johan Norberg is indeed a generally good writer which is why I wrote "even Swedish libertarian writer Johan Norberg", to denote that his misleading analysis on this subject was an anomaly.

BTW, while I don't know if he has read this particular post, but I do know that he already knows of my critical view of the article I linked to as I have previously criticized it in Swedish. Norberg comments it, and doesn't really dispute my arguments, indicating that he realizes that I was right.

11:39 PM  
Blogger Kapitalist said...


Mr. Norberg needs very much to be battered hard from the right side too, whenever he deserves it! Not only from the mainstream side, as he is used to. Only principles, not men, can be defended.

It would be very nice with a systematic free-market-school criticism of his book "Perfect Storm"...

12:20 AM  
Blogger flute said...

One important thing to remember in this context is also that the energy required to produce a car (including mining of the raw materials etc) is roughly equal to that consumed by the car in fuel during its lifetime. This means that for "green" cars to give any meaningful contribution to reducing oil usage they would have to be very energy-efficient indeed. So "green car" is actually a contradiction. Scrapping old inefficient cars to replace them with newer more efficient cars might even give a negative energy saving for a good number of years!
The fact that "green" cars such as the Prius cost more than standard cars of the same size also leads me to suspect that they actually need more energy for their production than standard cars, though I haven't seen any research done on this.
From this perspective, if I were to buy a car today, I would choose a standard car with low fuel consumption. This is probably the best both for the environment and for my future fuel expenses.
P.S. I don't own a car, and I'm currently not planning on buying one.

11:43 PM  
Blogger Oldfashioned said...

Well, if the cost of: wars in Iraq and Afganistan, global warming, ice caps melting, homefires in California,......would be baked into the cost of oil at the pump, may be Americans would understand the real price of using those pick up trucks, and discover the beauty of "small is beautiful."

4:13 PM  

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