The Cost Of Regulation

Recently, Gary Vasilash asked: What Price The Future?

Recently, Gary Vasilash asked: What Price The Future? Granted, his question was limited to the price of the Chevy Volt, which he compared with that of hybrids currently on the market. It brought to mind two things. First, GM picked the wrong brand to carry this new technology to market. Second, government mandates will drive the cost of new cars through the roof in the next few decades.

When Bob Lutz pushed the engineering staff at GM to "out Prius the Prius," he had Toyota, in his sights. And who better to attack Toyota's supremacy than Chevrolet, GM's biggest brand? A full EV wasn't going to cut it, so something more palatable had to be found. That's when someone at GM came up with the idea of using a gasoline engine as a range extender. Brilliant! Just like a house in a thunderstorm, the gasoline engine would kick in to provide power to the batteries when the initial charge ran out and the Volt went "off the main grid."

Unfortunately, though this technology is pretty transparent to people in the auto industry, consumers still see it as a risk. A point not helped by the fact that in the years between concept and production, GM has blurred the line between an extended range vehicle and a full-on EV. A majority of consumers still believe the Volt runs on battery power alone (technically, it does), and cringe at the thought of running out of charge in a desolated area far from a wall plug. They are risk averse. They are Chevy buyers more used to reliable family transportation than Star Wars propulsion systems. They don't understand that the gasoline engine will get them home, or across the country.

In hindsight, going to market with the Cadillac Converj concept would have been a better move. As a relatively low volume vehicle, the Converj would have been more in tune with the slow ramp-up in volume the Volt will endure. But, more importantly, the Cadillac image attracts a buyer much more willing to be an early adopter of new technology than your typical Chevy shopper. Plus, it would have burnished the Cadillac image, increased the transaction price to a profitable level, and built a halo around the technology that Chevy could have lunched off for years.

Which brings me to my second point: Why is Aston Martin readying a bespoke version of the Toyota iQ? Why is Ferrari helping Fiat built a "hot" 500? Why is Lotus working with its Malaysian owner on a Lotus version of a Proton city car with unique bodywork and electric power? There is only one answer: Government regulation. Global CO2 regulations are tightening at a rapid pace, forcing all automakers to produce small, highly efficient cars that will be sold at a loss. It is why Porsche tried to buy VW, hoping to add VW's small cars to its fleet CO2 numbers. This is a poiitical distortion of the markets, and will have little effect in pollution levels or so-called "global warming." But it will be costly.

I wrote about this in a recent blog post on my own site, but will save you the tedium of re-reading it here. The Cliff Notes version is this: Between 1970 and 2010, car prices rose about 800 percent. Of this, roughly 30 percent was due to inflation. [True, there were increases in comfort and convenience items, as well as un-mandated safety technologies, but the bulk of the increase was driven by engineering costs arising from government safety and pollution mandates.] Thus, a $5,000 Cadillac in 1970 morphed into a $40,000 Cadillac today. Take this forward, and that same Caddy will set you back a cool $224,000 in constant (inflation-adjusted) dollars in 2050. The Volt? It will run you $229,600 in constant dollars, or $328,000 with inflation factored in. It's enough to make you wonder if Fannie Mae and Freddie Mac will be writing mortgages for vehicle purchases in 2050.