Automaker General Motors (click ticker for report: ) appears to have halted production of its Hybrid Chevy Volt for at least four weeks. Since the Volt was supposed to be an innovative product, this announcement certainly comes as a shock. We estimate that GM has spent tens of millions of dollars marketing the vehicle (who hasn’t seen the commercial where drivers brag about not going to gas stations?), which appears to have resulted in just 10,000 units sold versus a company projection of 45,000.
What went wrong with the Volt? We think it was a bevy of factors. For one, even with a $7,500 tax credit, the sticker price for the plain-Jane model is nearly $32,000—it’s not prohibitively high, but a consumer can purchase several, fine automobiles from GM, Ford (click ticker for report: ), Chrysler and Toyota (click ticker for report: ) for a lot less. The MSRP on a Ford Focus or a Ford Fiesta is less than half of that and still provides drivers with good fuel economy.
Another contributor to the weakness with the Volt is the electronic car model itself. In the Sun Belt—Florida, Texas, Arizona, etc.—a 40 mile driving radius simply isn’t enough due to suburban sprawl (the average one way commute time is growing). Therefore, drivers have to opt for gas consumption with their electric models, which register 35 mpg with city driving and 40 mpg with high way driving. While both figures are significant improvements over SUVs or even cars just five years ago, the mpg numbers are roughly in-line with non-hybrid, combustion engines of cars that cost less than half the price of the Volt. The vehicle might sound attractive to a city driver, but urban drivers might either live in a high-rise with no access to a power outlet in a public garage (or they may not have a garage at all). As a result, electric cars don’t really fit either demographic (as GM has found out).
Though we certainly appreciate the Volt’s fuel economy, we wouldn’t be surprised to see continued innovation with respect to the combustion engine, leading to increased fuel-efficiency gains. Today, fuel economy on some small cars is on par with hybrids like the Toyota Prius. We wouldn’t be surprised to see the innovators in the US automotive industry–namely Ford and Toyota–make tremendous fuel efficiency gains with new or existing models, rendering electric/gas hybrids somewhat obsolete.
We’re much bigger fans of Ford and Toyota than GM, but we continue to think Ford is the best investment opportunity of any auto OEM. Clearly Toyota has a superior cost structure, but we think that fact is already reflected in its valuation (read: we think there is more upside with its peers). Not only is Ford pushing the limits with fuel economy on small combustion cars, but we think the firm is dedicated to catching up to GM in China. Today, Ford CEO Alan Mulally announced the company will bring luxury Lincoln vehicles to China by 2014. It may seem counter-intuitive, but we’d rather have Ford jumping into the market while everyone is struggling, rather than trying to play catch-up when the market is booming.
Without question, both Ford and GM are cheap at current levels. However, the Volt mishap is a prime example of why we think Ford is a better company that understands what the consumer wants, especially in North America. Ford scores just a 3 on the Valuentum Buying Index (our stock-selection methodology) as a result of concerns we have with its technicals (risk of a breakdown). However, we think there is substantial technical support for the company’s shares around the $9 per share level, which indicates to us that downside may be limited from here. Given the tremendous valuation upside and technical support, we hold Ford’s shares in the portfolio of our Best Ideas Newsletter.