Peter VanDerWal wrote: >All past expenditures are irrelevant from a purely economic point of >view. I'm not an expert on economics so I'd recomend a basic >economic class at your local comunity college, however consider: > >Let's assume I spend $1 million on R&D. Bye-bye, the money is spent and gone.
I understand what you are trying to say, but real life just isn't this simple. > Now let's say that R&D has developed a product that will cost me >$1 million per year to manufacture (total costs) and will return >$1,000,010 per year. Do I go into production? Well yes, from a >purely economic point of view that's $10 profit. Actually, the correct answer is no. You'll be $10 ahead, and about $99,990 behind where you'd have been if you'd put the million in a real investment. Let's add some detail to your example to show the point more clearly: Let's assume that at the start of my EV project, I am looking to develop an EV that will carry four passengers and still have room for groceries, travel 200 miles on one charge, etc., etc. My market research has indicated a certain level of interest in the product optimized at a certain price level. My goal (to keep the math easy) is to net a 10% rate of return. Further assume that I have estimates from R&D experts in the field who say that this goal is probably attainable on, say, a $1,000,000 initial R&D budget. My estimate is that at the end of the research period, I will be able to invest another million to go into production, and turn out 1,000 units per year in the projected price range at a net profit of $200 per unit. $200,000/year, with my $2,000,000 invested = 10% return. After spending the first million on R&D, though, I learn that my initial estimates were wrong. If I spend my second million to go into production at this point, my 1,000 units per year will only net me $20 per unit. My total rate of return is now only 1%, and even my marginal rate of return for investing in the production line is only 2%. I can probably think of better ways to invest that second million. Heck, if I crank out a few more SUVs I can get my 10% marginal rate, which at least nets me a 5% overall rate of return. Or, I can try to invest still more in the R&D. Let's say my experts tell me I can probably get my target vehicle by spending another million on R&D. The problem with that is, of course, that now my investment is *three* million, not two, and my total ROI is only going to be 6.7%. And that's *if* I can still believe my experts, so it is clearly not risk-free. On the other hand, if I plow that money back into my lucrative and stable SUV business at the 10% marginal rate, I'll get the same 6.7% overall return, and at less risk. Let's say I take the risk and I'm wrong again. My estimates now say my target vehicle will cost me *another* million in R&D. Now I've invested four million, and *if* I can get my target vehicle I'll have an overall rate of return of just 5%. If I'd invested the extra three million after that first year in the 10% sure thing, though, I'd now not only have incurred less risk, I'd also have more money. My four million investment would be clearing $300,000 for a 7.5% overall rate of return. The longer the R&D goes, the worse these numbers get. At what point should I cut off the EV project altogether? >>>Hand built it's questionable, build in proper production lines >>>with economy of scale working for them they could almost certainly >>>turn a proffit. >> >> >>And on what, exactly, do you base this claim? Economies of scale >>require sufficient demand to sustain them, and a significant >>up-front investment. > >On the fact that they build the Corvett in similar numbers to what I >suspect the EV1 would sell (if it was for sale). Mass produced the >PbA EV1 would probably cost less than a Corvett (it has fewer parts). First, you don't really know if it could be sold in similar numbers to the Corvette. Second, you have no idea what it would cost to manufacture. Fewer parts is at least a starting point for an argument, but is hardly persuasive without any data at all on the expenses associated with those parts. Further, the Corvette is a well-established vehicle that now is pretty optimized. With an EV you would need to account for an entirely new support network for parts, troubleshooting, customer service and repair, not to mention new assembly methods, safety testing, etc., etc. There are a hundred reasons why these two vehicles may not be economically equivalent to produce and support. >>Just why do you think you know better than a major auto >>manufacturer what is and is not likely to be profitable in their >>market space? > >Because this is a free country. I'm intitled to my opinions. No one suggested that you weren't. On the other hand, your opinions are more likely to be accepted by others if you can defend them with facts and credible evidence. Josh chimes in: >[W]hen one questions whether the larger businesses are not >only ignoring potential demand but are actively seeking to forestall the >technology, one is so often met by the response that one must be >*anti*-capitalistic. Criticism of big businesses is automatically >assumed to be a clueless criticism of them for seeking profit. But >this case is precisely the opposite, and it is the ostensible >defenders free market concepts who are allowing GM and the like to >"hide in their skirts" while they continue their contempt for >customer demand and newer better products. Unless I am totally mistaken about what it is you are trying to argue, it sounds to me like you are saying that GM (and other auto makers, presumably) *could already make a profit* selling EVs. All I'm asking for is some evidence that your claim is correct. It is critical to recognize that some unidentified level of consumer demand does not equate with profitability. Demand for what product, at what price, and at what costs? Further, you must support the claim that selling EVs would not just be profitable, but that they would create substantially (though not identically) the same rate of return as alternative uses for the same investment capital. That's a tough burden, but you're the one making the counter-intuitive claim that a company is intentionally turning down a profit opportunity and is potentially engaging in anti-competitive practices. I think it is tremendously funny that I'm being equated with big business, as I am about the most liberal person you will ever meet. But I do think it is a pretty good working assumption that if people can make money, they will. There are plenty of reasons to believe that auto makers are nothing more than rational actors acting rationally. David does bring up a good point, though: >We've managed to so twist our economic system round >that next quarter's profit is more important than anything else That is an excellent observation. If investors as a group engage in day trading, companies will cater to day traders. If investors are in the market for the long haul, then businesses will be more comfortable showing a near-term loss with the expectation of future return. That will encourage the R&D needed to have a socially responsible *and* economically viable product. If you are lucky enough to be able to play the stock market, please remember that *how* you invest makes as much difference as what you invest in. Barring something extraordinary, this is my last post on this topic. If you haven't long ago hit the delete key, you may now breathe a sigh of relief. -- -Adam Kuehn
