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Old 12-08-2008, 08:50 AM   #1
Tea cups
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Default Are hybrids profitable? Car makers haven't figured out how to make money on hybrids

http://www.washingtonpost.com/wp-dyn...112403211.html

Quote:
The Car of the Future -- but at What Cost?

Hybrid Vehicles Are Popular, but Making Them Profitable Is a Challenge

By Steven Mufson
Washington Post Staff Writer
Tuesday, November 25, 2008; Page A01

Many members of Congress believe they know what the car company of the future should look like.

"A business model based on gas -- a gas-guzzling past -- is unacceptable," Sen. Charles E. Schumer (D-N.Y.) said last week. "We need a business model based on cars of the future, and we already know what that future is: the plug-in hybrid electric car."

But the car company Schumer and other lawmakers envision for the future could turn out to be a money-losing operation, not part of a "sustainable U.S. auto industry" that President-elect Barack Obama and most members of Congress say they want to create.

That's because car manufacturers still haven't figured out how to produce hybrid and plug-in vehicles cheaply enough to make money on them. After a decade of relative success with its hybrid Prius, Toyota has sold about a million of the cars and is still widely believed by analysts to be losing money on each one sold. General Motors has touted plans for a plug-in hybrid vehicle called the Volt, but the costly battery will prevent it from turning a profit on the vehicle for several years, at least.

"In 10 years are they [at GM] going to solve the technological problems with respect to the Volt? Sure," says Maryann Keller, an automotive analyst and author of a book on GM. "But are they going to be able to stake their survival, which is really more of a now to five-year proposition, on it? I'd say they can't. They have to stake their future on Malibus, the Chevy Cruze, and much more conventional technologies."

U.S. automakers faced a barrage of demands last week that they provide evidence and assurance that they would use federal bailout money to transform their companies to produce automobiles of the future, using advanced technologies and featuring hybrid or plug-in vehicles. And in his "60 Minutes" interview on Nov. 16, Obama said that before backing a big loan package he wanted to be sure "that we are creating a bridge loan to somewhere as opposed to a bridge loan to nowhere."

But there's no guarantee that the new business model would be any more viable than the current one. Automobile experts estimate that the battery in a plug-in vehicle could add at least $8,000 to the cost of a car, maybe considerably more. Most Americans will be unwilling to pay the extra price, especially if gasoline prices languish around $2 a gallon.

That's why one of the mysteries about GM's plans to introduce the Volt in 2010 is how much it will cost to buy one. "What's the Volt going to cost? I would be happy to answer that if you can tell me the price of oil in 2010," said Robert A. Kruse, GM's executive director of global vehicle engineering for hybrids, electric vehicles and batteries. "I can tell you to the penny what it will cost GM, but pricing is much more related to market conditions."

The hurdles ahead for the Volt and other cars with new technologies pose dilemmas for automakers trying to gauge a market that is still very young for cars that don't exist while trying to stay in business during a downturn.

"These are hard choices," said Toyota chief technology officer Bill Reinert, part of the Prius design team. "Do you bet on lighter, smaller, more fuel efficient but ultimately less profitable cars or do you hold back a little on technology development and look at new versions of existing cars."

Many experts say that gas guzzlers will not fade away as long as Congress fails to impose higher taxes on gasoline to steer people toward fuel-efficient cars.

"You'd think from reading the media that we have had a burial ceremony at Arlington cemetery for the last pickup truck," said James Womack, a management expert who has written about the automobile industry. "I can easily imagine three years from now when public is focused on a new set of priorities . . . that this whole thing would go poof."

Eager to reduce U.S. dependence on foreign oil, Obama proposed a $7,500-a-vehicle tax credit for plug-in vehicles during his presidential campaign. Roughly half of Americans don't earn enough to take advantage of such a big tax credit. (A head of household would need to earn almost $50,000 to have a federal tax liability that large.) Many others don't have the cash to purchase an expensive vehicle then wait for a federal refund. To spur sales of new vehicles, the price must be reasonable at the point of sale, say many industry experts.

Womack warned that it takes time to design a new vehicle, change assembly lines and then turn a new product into a profitable one. "For anything that's really new it's still about four years," he said. "To get your money back, you need to make that product for eight to 10 years with only cosmetic changes."

Helping automakers over that hump may take more money and patience than Congress or its taxpaying constituents have.

The experience of Tesla Motors, a Silicon Valley sports car maker, illustrates the challenges of making a radically new automobile. Founded by a group of high-tech multimillionaires, Tesla has been trying to become the first new successful American car company since Chrysler, which was founded in 1925.

Tesla's founders set out to make all-electric vehicles. The company's first: an all-electric sports car with a price tag of $109,000 that can go from zero to 60 mph in a bracing 3.9 seconds. As of a week ago, only 63 had been delivered to customers; a couple of dozen were nearly ready and the company has about 1,200 back orders.

"The reason we started with a $100,000 sports car is that when technology is new it tends to be expensive," says Elon Musk, the co-founder of PayPal who is the chief executive of and a big investor in Tesla. "It just takes time to optimize the right design and work up to economies of scale. . . . Why we didn't start with a Honda Civic is that it would be a $70,000 to $80,000 Honda Civic."

With a chassis made by Lotus in England, body parts made by a French carbon fiber firm Sotira and battery parts from Taiwan, Tesla has had supply-chain problems ranging from customs delays to a fire in the tunnel that goes under the English Channel. Initially a two-speed vehicle, the early Teslas were rough on transmissions, which have been eliminated in new single-speed versions. Recently Musk has hired some veterans from the Detroit automakers to smooth out production problems.

"For sure, this game looks a lot easier than it really is," said Jon Lauckner, GM's vice president of global program management. "You've got to get 3,000 parts all together in one place to assemble a vehicle."

Tesla isn't any different from the Detroit Three in one regard: It too is looking for government assistance. Eager to make a luxury sedan as the next in what it hopes eventually will be a full line of electric vehicles, Tesla Motors has applied for $400 million in low-interest federal loans under the $25 billion loan package approved by Congress a year ago.

But GM and other car companies, while preparing plug-in vehicles, are more likely to live or die based on the sales of conventional cars that get better fuel efficiency through improved transmissions, reduced weight or hybrid technology. GM says it will offer nine hybrids for sale by the middle of next year. Reinert says that Toyota will eventually offer hybrid versions of all its car models.

Still, production of the new cars will be limited. GM, for instance, plans to produce only a little more than 10,000 Volts in the model's first year.

"People ask us when will we produce not just 10,000 but 50,000," said Frank Weber, GM's global vehicle line executive and chief engineer for E-flex systems. "I say when the battery and power train costs have come down significantly."

Weber added: "We never said this program in the first generation was there to make money. You cannot expect this type of technology to make money from day one."

The economic downturn has also changed the equation.

"Will the U.S. auto industry ever be as profitable as it was from mid-90s to the early part of this decade?" asks automobile expert Keller. Those days were "magic. It was like printing money for everybody. Everybody from Toyota and GM to Ford and Nissan were feasting on our desire to drive around in those giant vehicles."

But the industry has gone from feast to famine. Auto industry experts say that the basic problem is that the U.S. industry geared up to make 18 million cars and light trucks a year and that it will be lucky to sell 11 million this year. How far sales will climb back -- and when -- is anybody's guess.

"There's fluff and there's reality," Keller said. "The fluff is the Chevy Volt . . . That's not going to save GM in the next five years. What will save GM is more small sedans and more crossovers. That's what people are going to be buying."
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Old 12-08-2008, 09:42 AM   #2
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hmmm ... nowhere does it actually say that Toyota is losing money on the Prius. Its just analyst opinions. And even if they are, it seems to be worth it to them long-term to establish a strong leadership position. Honda's Prius-fighter will be out soon; presumably Honda also thinks its worthwhile.

Quote:
But the car company Schumer and other lawmakers envision for the future could turn out to be a money-losing operation, not part of a "sustainable U.S. auto industry" that President-elect Barack Obama and most members of Congress say they want to create.
Yup. Forcing US companies to produce unprofitable cars that may not sell well if gas prices stay down is a recipe for disaster.

Quote:
Many experts say that gas guzzlers will not fade away as long as Congress fails to impose higher taxes on gasoline to steer people toward fuel-efficient cars.
Yup again. IMO people should be able to decide for themselves if they want to use less gas or not. But if the gov't wants to encourage fuel efficiency, just raise gas taxes and let the market do the rest. Its the most efficient approach and also makes money instead of spending it.
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Old 12-08-2008, 09:46 AM   #3
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hmmm ... nowhere does it actually say that Toyota is losing money on the Prius. Its just analyst opinions. And even if they are, it seems to be worth it to them long-term to establish a strong leadership position. Honda's Prius-fighter will be out soon; presumably Honda also thinks its worthwhile.
If they were making money hand over fist on the Prius, don't you think this would be something Toyota would be shouting from the mountain tops (to their shareholders)? Toyota does get a LOT of positive attention from the media (i.e a lot of free press) for the Prius. I'm sure Honda wants in on that (Hybrid Civic doesn't garner the same press), even if they, also, may not make any profit on it.
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Old 12-08-2008, 09:56 AM   #4
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One problem is, they haven't figured out how to make hybrid or plug in cars that look cool (or even normal in some cases) that would appeal to a lot of people enmasse. The prius and the new Honda Insight both have the same funny look.
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Old 12-08-2008, 10:00 AM   #5
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IMO people should be able to decide for themselves if they want to use less gas or not. But if the gov't wants to encourage fuel efficiency, just raise gas taxes and let the market do the rest. Its the most efficient approach and also makes money instead of spending it.
so... you want to raise the tax to make ppl feel like they should buy hybrids? this approach might be feasible under a strong and healthy economy when people are buying cars. in our current situation, the last thing people need is MORE TAX. plus, pushing the hybrids to the consumer this rapidly only encourages the manufactures to mass produce them instead of making them better. i still dont see how hybrids are the future of the auto industry... and i dont think im alone here.
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Old 12-08-2008, 10:32 AM   #6
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One problem is, they haven't figured out how to make hybrid or plug in cars that look cool (or even normal in some cases) that would appeal to a lot of people enmasse. The prius and the new Honda Insight both have the same funny look.
There were some articles on this recently (sorry, don't remember where). Honda made their Insight look different because that is what the buyers of these cars want. It's a new "status symbol" and therefore can't look like a regular car. Remember, Honda makes/ made hybrid Civics and Accords and neither has sold as well as expected.

I'm sure we're still a decade away from anyone making money on hybrids. It's not hard to see how Toyota or anyone else looses money on hybrids when you do the math. The recent estimates I saw were that Toyota looses about $1500 per Prius today as compared to close to $3000 when it was introduced. I guess that could be even worse now if Toyota is kicking in any of the discounts currently offered on the Prius, $1500-$2500 off MSRP.
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Old 12-08-2008, 10:42 AM   #7
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Taxation is fine with me IF I see some results from it. I am an unmarried male making over $50k/year, which basically means I get raped for a very large portion of each paycheck. What does my money go to? Supporting bail-outs that I don't agree with, programs that I don't care to support and paying for drug addicts to live on my welfare money along with the folks on welfare that actually might deserve it. Roads I drive on are crap. Local infrastructure in general is in terrible shape. And do I see a penny from the government to help me out? Nope. A grant to help me start my own business? Nope. A grant to pay for school (which I've had to pay 100% out of pocket)? Nope.

I'm actually not off topic on my own diatribe/rant, and here is my point. People should be taxed on what they use rather than what they make. The gov would have better control over keeping markets stable, and people wouldn't feel as cheated. You want hybrid/clean energy technologies? Tax gasoline and electricity, then use that tax money for research/development, subsidization of hybrid sales to keep the vehicle affordable while the technology developes, plus higher gas prices mean higher customer demand on fuel efficient vehicles which in-turn spurs quicker development. But when people are already bitter about having a huge income tax, it's harder to get product specific taxes in place, because that won't get a politician re-elected.
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Old 12-08-2008, 10:46 AM   #8
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Honda made their Insight look different because that is what the buyers of these cars want. It's a new "status symbol" and therefore can't look like a regular car. Remember, Honda makes/ made hybrid Civics and Accords and neither has sold as well as expected.
I read those too. But, that's just like making the 08/09 impreza look super aggressive to cater to the select few that like it that way (ie, the WRX/STI owners). When Subaru changed their core design to be more mass appealing sales went up quite a bit and they still satisfied (most) of the fanboys with the flares on the STI.

Hybrids should be the same. Regular looking models for the X% of regular buyings and a different looking model for the (much smaller) percentage of people that want to have the different funky looking hybrid.

IMO, the hybrid civics and accords came out at a time when hybrids were still a hippy kinda idea. Now that they have more general appeal, it might fare better now.
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Old 12-08-2008, 10:54 AM   #9
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I'm actually not off topic on my own diatribe/rant, and here is my point. People should be taxed on what they use rather than what they make. The gov would have better control over keeping markets stable, and people wouldn't feel as cheated.
Not to go too OT, but the government can't even keep markets "stable" in the most closed economies in the world where they completely control the economy.
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Old 12-08-2008, 01:04 PM   #10
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Not to go too OT, but the government can't even keep markets "stable" in the most closed economies in the world where they completely control the economy.
I never said they would have complete or even particularly reliable control over any market... My theory is that they would have better control, which isn't even saying much given our current ecomonic status. At least this could possibly be applied in focused aspects like stimulating specific instances of technological developement, in this case hybrid/hydrogen/electric/etc. cars, or least more efficient versions of the cars we have today.

I don't claim to think I have the solution for the world of the future. The economy as a whole always reacts in unexpected ways, and the variables involed are so vastly complicated, that I'd have to be a idiot to think that any entity can have perfect forsight and control over any one particular market, much less the entire economy as whole.

BTW, I completely agree with your comment on Hybrids being a status symbol. In the Prius price range... If you want MPG, get a diesel. If you want performance get a WRX/MS3 or equivalent. If you want miles per dollar spent over the life of the car, go with a Corolla. But if you want to make some sort of screaming statement about how green you are and how you're a soldier fighting to better the health of the earth, you buy a Prius... An expensive heavy car with the build quality ever so slightly below that of a Corolla ( I think my step mom's corolla uses better interior materials than her friend's Prius) and fuel usage that only betters the Corolla by enough to earn the high sticker price back many many years later. If gas stays even remotely close to where it is right now for the next few years, then the Prius is purely a status symbol as the Corolla becomes a much more economical choice over all, especially when you consider that it will probably need far less meaintenance after 10 years or so of use and will probably have a longer operating life with far fewer complex parts to break and no hybrid batteries to go bad.

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Old 12-08-2008, 01:28 PM   #11
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so... you want to raise the tax to make ppl feel like they should buy hybrids? this approach might be feasible under a strong and healthy economy when people are buying cars. in our current situation, the last thing people need is MORE TAX. plus, pushing the hybrids to the consumer this rapidly only encourages the manufactures to mass produce them instead of making them better. i still dont see how hybrids are the future of the auto industry... and i dont think im alone here.
You raise the tax to account for the actual cost of operating a larger heavier vehicle.

So I'd raise taxes on vehicles by GVW to pay for roads that wear out quicker, pollution cleanup, military spending to protect oil interests - those types of things.

I'd also raise the gas tax for pretty much the same reason although that means some users would get over penalized (i.e. long commute people)
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Old 12-08-2008, 01:46 PM   #12
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...IMO people should be able to decide for themselves if they want to use less gas or not. But if the gov't wants to encourage fuel efficiency, just raise gas taxes and let the market do the rest. Its the most efficient approach and also makes money instead of spending it.
Government needs to tax gas alot more IMO. Not only to raise more revenue but to FORCE people to think more efficient. Move closer to work, take public transit and perhaps invest more into clean homegrown electrical solutions. I am extremely tired of spending our money to the middle east. I rather build more coal plants than continue this wealth transfer to the middle east, environment be damned.

I was watching al jazeera the other day and they were talking with some OPEC board members. They were going over the "sweet spot" for selling oil. It is as high as we can bear before turning to alternative energy... Screw these countries and screw the oil corporations!
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Old 12-08-2008, 01:54 PM   #13
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The unbelievably rapid decline from $400 to $1.7x isha gallon would certainly support the theory that they want to charge as much as they can without waking us up from our fast food induced slumber and actually reducing our consumption.

Demand and consumption go up and down a few points - not 50% like the price has.
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Old 12-08-2008, 02:06 PM   #14
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"What's the Volt going to cost? I would be happy to answer that if you can tell me the price of oil in 2010," said Robert A. Kruse, GM's executive director of global vehicle engineering for hybrids, electric vehicles and batteries. "I can tell you to the penny what it will cost GM, but pricing is much more related to market conditions."

That is the basic problem with GM. They build the cheapest they can and charge "what the market will bear". They keep looking for a home run to rape the consumer on and get a windfall.

Price of gas will alway fluctuate. You can do all the cost analysis you want, it will change monthly. You are better off using less, there is a whole demographic that will pay to use less.

Peace,

Greg
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Old 12-08-2008, 03:54 PM   #15
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BTW, I completely agree with your comment on Hybrids being a status symbol. In the Prius price range... If you want MPG, get a diesel. If you want performance get a WRX/MS3 or equivalent. If you want miles per dollar spent over the life of the car, go with a Corolla. But if you want to make some sort of screaming statement about how green you are and how you're a soldier fighting to better the health of the earth, you buy a Prius... An expensive heavy car with the build quality ever so slightly below that of a Corolla ( I think my step mom's corolla uses better interior materials than her friend's Prius) and fuel usage that only betters the Corolla by enough to earn the high sticker price back many many years later. If gas stays even remotely close to where it is right now for the next few years, then the Prius is purely a status symbol as the Corolla becomes a much more economical choice over all, especially when you consider that it will probably need far less meaintenance after 10 years or so of use and will probably have a longer operating life with far fewer complex parts to break and no hybrid batteries to go bad.
1. the Prius and the Corolla are not equivalent in terms of build quality, available amenities, interior room, or mpg. this has been hashed and rehashed many times here and elsewhere. (for example my parents drive an Acura... and a Prius. the Corolla wasn't on their short list when they were in the market -- they don't wear hair shirts for austerity's sake at their age.)

2. assuming equal initial cost and with the dubious assumption that mileage is equivalent a TDI VW will have significantly higher fuel costs over its lifetime than a Prius. 87 octane is much cheaper than diesel, and this has been true when the price is both low and high.
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Old 12-08-2008, 04:15 PM   #16
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If they were making money hand over fist on the Prius, don't you think this would be something Toyota would be shouting from the mountain tops (to their shareholders)? Toyota does get a LOT of positive attention from the media (i.e a lot of free press) for the Prius. I'm sure Honda wants in on that (Hybrid Civic doesn't garner the same press), even if they, also, may not make any profit on it.
Possibly true. The key point though is that we are getting the more efficient cars already and it doesn't cost US taxpayers a dime.

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so... you want to raise the tax to make ppl feel like they should buy hybrids? this approach might be feasible under a strong and healthy economy when people are buying cars. in our current situation, the last thing people need is MORE TAX. plus, pushing the hybrids to the consumer this rapidly only encourages the manufactures to mass produce them instead of making them better. i still dont see how hybrids are the future of the auto industry... and i dont think im alone here
I'm actually opposed to any incentives or disincentives. But if you want to reduce fuel use, raising fuel taxes is the most logical way to do it. Whether the consumer buys a hybrid, or a diesel, or a motorcycle, or takes the bus, or just pays the extra cost, is up to them.

As for the MORE TAX, how do you think all of these bailouts and subsidies are going to be paid for?
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Old 12-08-2008, 04:17 PM   #17
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Originally Posted by WRXBrakes View Post
The unbelievably rapid decline from $400 to $1.7x isha gallon would certainly support the theory that they want to charge as much as they can without waking us up from our fast food induced slumber and actually reducing our consumption.

Demand and consumption go up and down a few points - not 50% like the price has.
The price of oil was inflated to begin with, largely due to the same monetary expansion that caused the stock market and housing price bubbles. It is now back to a more normal range.
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Old 12-08-2008, 04:25 PM   #18
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Forcing US companies to produce unprofitable cars that may not sell well if gas prices stay down is a recipe for disaster.

This guy can predict the future.
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Old 12-08-2008, 05:51 PM   #19
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Visited with a car nut buddy of mine this weekend. I didn't know this but made total sense. #1 driving factor for Diesel fuel cost is our Military activity, 2nd largest is commercial aircraft use - jetfuel and diesel are virtually identical with small differences. 3rd largest impact is the Trucking and Train business. There for the cost of diesel at the pump for us regular peeps impacts our perception of diesel costs vs car shopping interest for the few very fuel efficient diesel passenger cars.

The hybrid thing will be a very tough nut to crack for a long time especially as they stand now where you still need gas to use them and they post milege comparable to highly profitable and simple diesel cars.

The hybrid we have now is more of a marketing gimic vs a true solution or profit center.
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Old 12-08-2008, 06:33 PM   #20
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My god what a completely useless article.

So a company brings out a BRAND NEW technology and NO WAI!1!! it isn't profitable from DAY ONE?!?




Car companies today might not make a dime on a model that uses existing technology until it is on it's last year of production, and some people are surprised that high-tech models might take many years to break even on?? The more cars sold means the more cars to which they can amortize the cost of development and eventually count on improved efficiencies and cheaper costs.
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Old 12-08-2008, 06:49 PM   #21
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Originally Posted by WRXBrakes View Post
You raise the tax to account for the actual cost of operating a larger heavier vehicle.

So I'd raise taxes on vehicles by GVW to pay for roads that wear out quicker, pollution cleanup, military spending to protect oil interests - those types of things.

I'd also raise the gas tax for pretty much the same reason although that means some users would get over penalized (i.e. long commute people)
alot of countries do that already.. here there is a road tax, and your vehicle is taxed by size/displacement oh and gas is always high. i remember the shock on my face when it cost me about $50us to fill an s13 waay back in 2004
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Old 12-08-2008, 06:56 PM   #22
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Originally Posted by SQ3.0dotJP View Post
alot of countries do that already.. here there is a road tax, and your vehicle is taxed by size/displacement oh and gas is always high. i remember the shock on my face when it cost me about $50us to fill an s13 waay back in 2004
We have it the opposite here - cause we're smarter...

I'm pretty sure if I get an 8500 plus lb 'vehicle' I can write it off much faster/better than a regular car.
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Old 12-08-2008, 07:36 PM   #23
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Honda isn't planning on building 200,000 Insights next year to lose money.
Toyota wasn't planning on building a new factory in the US to build next-gen Priuses to lose money either.

Now the domestics? Yeah, I can believe they're losing money on them. Supposedly Ford is only building 25,000 hybrid Escapes a year, and only planning on building 25,000 total hybrid Fusion and Milans next year...

The Fiesta and Cruze are going to do more to improve the domestic's CAFE than their hybrids or the Volt will, at least in the next few years.
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Old 12-08-2008, 08:07 PM   #24
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Originally Posted by WRXBrakes View Post
We have it the opposite here - cause we're smarter...

I'm pretty sure if I get an 8500 plus lb 'vehicle' I can write it off much faster/better than a regular car.
We're much smarter. We currently have the most efficient transportation in the world. I'm very much opposed to raising taxes for the purpose of promoting a less efficient option.

It's all very simple. As oil becomes more expensive, other alternatives become more viable.
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Old 12-08-2008, 10:15 PM   #25
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Originally Posted by CryderSpeed View Post
This guy can predict the future.
It's not difficult in this case. I forget to add that those cars will be competing with models from Toyota, Honda, VW, etc. Anyone remember how the imports got their first big toehold in the US car market? Yup, the '70s oil crisis.
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