It has been two years since General Motors admitted that there was little demand for the Chevy Volt (as reported here)due to there being "no plug-in market." Their answer was to "create market" to drive sales for the politically popular but economically-nonviable Volt. GM manipulated sales for the Volt through the use of subsidized leases at a time when President Obama's favorite, green wonder-car was being criticized for low sales as it failed to live up to the early hype.
GM was able to use taxpayer money in the form of electric vehicle tax credits to help drive down costs to lessees. Taxpayers chipped in $7,500 for each Chevy Volt placed on the road for terms as low as two years. The taxpayer subsidies, along with inflated residual values and other GM incentives, provided for low monthly lease payments and led to a full two-thirds of all Volt "sales" being attributed to leases. That's about three times the lease rate for the overall industry.
So, what happens to resale values of vehicles with little mass appeal that are forced upon the public with subsidies and manipulated leases? The result was predictable; those leased vehicles are now being returned and resale values are plunging. Having won many awards in the past, the Chevy Volt is now the front-runner to be the recipient of the highest depreciating vehicle award.
A search on the Manheim auction site, a primary indicator of vehicle wholesale value, shows that 81 Chevy Volts, model year 2012, were sold at auction for the week ending August 2nd. The average price was $14,871 for vehicles that are only two or three years old, primarily coming off of the manipulated leases. That equates to an absurd loss of values for Chevy Volts of about 65% in only two or three years.
To quickly review how lease terms are calculated, lessors (in the case of GM vehicles that would have been crony, government-owned financial company Ally Financial) set the residual values for vehicles at the expected time of lease termination. The residual value is the amount of money the lessors expect to receive when they have to sell the leased vehicles after they are returned. The lessee pays the difference between the original price of the leased vehicle and the residual value, plus a small lease rate. The higher the residual value, the lower the monthly payment.
So, we now have Chevy Volt resale values suffering as a result of lack of demand and manipulated leases. Financial institutes that lease Chevy Volts to consumers will need to recalculate residual values lower to reflect market conditions. At least they would in a free market devoid of political intrusion. GM and/or Ally Financial will have to absorb losses for the Chevy Volt lease returns that sell for less than the original residual values. The already low sales numbers for the Volt will be hurt if leases stop being manipulated through the use of artificially high residual values and politically-driven incentives. The supply of low-priced, two year old Volts on lots will not help new sales either.
The Chevy Volt fiasco has been one more example of how government should not intrude upon industry and free markets. The Volt obviously had political roots as it was thrust upon the public with media-driven hype that it was to be a savior for GM and the answer to America's reliance on foreign oil. The wonder-car was to save us from terrorism and global warming all at once!
The management at GM was, and still is, reluctant to admit that the Volt has been an utter failure. The slim demand would have been even slimmer without GM "creating demand" as it loses thousands of dollars on each vehicle. GM management tried to deceive the public by blaming low sales on a lack of supply, even as it became evident that the demand did not exist for the car that President Obama said he will buy in just two more years.
I do not expect GM to back down from its strategy to focus on money-losing green vehicles like the Volt. In fact, GM is doubling down by offering a Cadillac version of the Volt, the ELR . Not surprisingly, that car is also a failure at double the price of a Volt.
Those who outright purchased their Chevy Volts will lose out on the high depreciation but there may be beneficiaries as those looking for a good deal on a Volt now have a supply of low-priced, used models to choose from. And President Obama can get some consolation in knowing that he should be able to get a heck of a deal on a two year old Chevy Volt when he leaves office.
Mark Modica is an NLPC Associate Fellow.
