Lies, Damned Lies, Statistics and Voltonomics: GM acts on Sustainability Risk, Not its Uncertainty
As I read an article by Jim Kenzie of the Toronto Star Wheels Section, responding to Eric Bolling’s laughable arithmetic slamming Chevy Volt’s economics (on Fox Business Channel no less!), I recalled what my statistics professor used to say: “Statistics are unconvincing enough as it is, so if you want the right answer you have to include all the right variables.” (see http://www.wheels.ca/article/806266 for Kenzie’s story).
In the article, Kenzie corrects Bolling’s estimate of 18.5 cents a kilometer for the Volt to a more precise number of 2.5 cents. Still, Kenize – no fan of electric cars – notes that even with this differential, one would have to drive the $45,000 Volt over 416,000 km to justify its comparatively higher purchase price (compared to cars of its class). He writes of Bolling: “if we’re going expose electrics for the non-starters they are, we have to do it with facts. Accurate facts.”
Kenize has a point, but his facts are far from accurate. But like many (most?? analysts, and not just those on Fox News) he confounds the arithmetic cost of a product with its full value.
Voltinomics and Value?
As I have written in other places, value is in the eye of the beholder. What gives Rolex the advantage over Cartier over Patek Philippe? All high quality watches right? The only value differentiation is the name upon which consumers ascribe an arbitrary value for which they are willing to pay.
So it is for cars, clothes, food – every product has some intangible brand value. Even anonymous supply chains companies provide intangible value that corporate buyers are quite willing to pay for: good relationships, reputation, service, etc.
Brand value cannot be captured by an economic input/output analysis (e.g., the individual parts of a Rolex cost $95, labor and other costs total $1,200, ergo I should pay $1,295 plus a margin for profit. If it worked like that I would have at least two Rolexes!).
So, while Kenzie correctly spanks Bolling for bad arithmetic, his Voltonomics overlooks the fact people are willing to pay for the car’s inherent environmental value, just as many pay for the “status” value inherent in a Rolex .
Uncertainty Not: Risks? You Bet
It makes me sputter to hear econopundits whinging about the cost of sustainability. If we the market are willing to pay for the sustainability value in something it’s not a cost, it’s a value. And anyhow those same econopundits that say the market will value and pay for whatever it will value and pay for. These more conservative forces must be scared as more and more surveys show, consumers are increasingly willing to pay for the sustainability value inherent in products and services (see for example, Oliver Balch’s fine article on Ethical Branding, Briefing Part 3: Consumers – Ethics goes Bananas in Ethical Corporation, March 31, 2010).
And if you don’t think companies are responding, think again. GM is, in fact, thinking about sustainability markets with the Volt as it understands the risk of not responding to the inevitably more sustainable future of the personal transportation market.
Risk, in this sense, is the chance of some undesirable effect occurring within a set of uncertain probable outcomes. Actuaries, good business managers, and sage statistics professors know which variables to consider, which in the case of sustainability must include inherent sustainability value or what I call “CSR Brand Value©
Econopundits continue, by contrast, to operate from a position of uncertainty believing that from the set possible economic outcome, a sustainability dominated economics is a very low probability. Thus, things like electric cars and the like are ruled out on the basis of rather naïve, straight up pocket-book input/output analysis (just one of many ways to “dis” emerging stainable economics, so disruptive to entrenched management and economic practices and beliefs).
GM decided the opposite and invested significantly in the Volt. Its calculations might have looked like this: there is a 90% chance that 30% of all people with income over $100,000 looking for a new car this year will consider a Volt; and a 90% chance that 0.5% of them will actually buy one, despite the sticker price because of a “sustainability market driver” (all numbers are fictitious to make the point). More simply, some consumers place a high economic value on the environmental features of the Volt, and are willing to pay for them.
If an analyst remains baffled as to why a consumer would buy an “overpriced” electric car, they should be equally amazed why anyone would buy a SUV with gas at $4 a gallon.
An Enlightening Volt?
GM had to come out with the Volt to preserve its position in the increasingly sustainability minded personal transportation market. Kenzie’s proto-economics simply omits to consider Volt’s greater value, which, like a Rolex, goes far beyond a simple gas in/kilometers out analysis.
Volt’s true value to GM is risk reduction and know-how for future sustainability market developments that are by no means uncertain. In this sense, GM is already making great returns on Volt; and as markets drive sustainability further into the hearts and minds of consumers it won’t be long before its making a profit on the car as well.