Adventures in Supply and Demand: Discontinuing The Car of the Year

Even in an industry where poor decision-making seems to run rampant, it wouldn't necessarily be expected that a manufacturer would discontinue one of its best products without good reason. Yet according to The Hill, "Days after General Motors announced it was temporarily suspending production of the Chevy Volt, the electric car was named European Car of the Year" by The Geneva Auto Show.

Of course the announcement of the suspension preceeded the announcement of the award. However, this award was only the latest in a parade of praise the Volt has received, including the North American Car of the Year in 2011. In addition, it has been widely lauded as an achievement in green technology, including by the bible, Motor Trend. Indeed a quick Google search of 'Chevy Volt awards' returns a veritable cornucopia of options.

As noted above, however, GM has put the line on hiatus. This is to work off a backlog of stock after the company fell short of the 10,000 sales number it set for the vehicle last year. Many analysts see the $40,000+ price point as the main deterrent to increased sales volume.

What went wrong here? It seems very simply that GM didn't do its homework on price point demand for its product. While the technology in the Volt is apparently top-notch, and while there is no end to the praise it has received, there are limited individuals who are willing to spend in the neighborhood of $40,000 to $50,000 for a new car in a tough economic environment. This is true even with government subsidies or if they will save some money on gas costs in the long-run. Of course there is the matter of exploding batteries as well, but let's stick to price points in today's post.

Maybe it was due to the hype around the product that GM overestimated the market's capacity to absorb it. After all, the number of Volts that have been sold isn't insignificant, it is just less than estimates, and subsequently production. Maybe the hype got to the planners' heads. Maybe planners concluded that price points wouldn't matter as much in the wake of high praise and green appeal. However it seems that, even in the green revolution, price points matter.

Fans of the Volt don't necessarily have anything to fear as many analysts have concluded that the current stoppage is not a signal that the line will be discontinued, just that production numbers will be reevaluated. Ironically, their conclusions are based on the very same thing that perhaps got GM into this mess; the overwhelming praise the vehicle has received. In other words, while hype led to overproduction, it could also lead to saving the line. After all, as noted in the very first line of this post, no one (not even auto industry execs) wants to let go of a potential winner too easily.

So, readers might ask, what is the lesson to be learned from this situation? Maybe there are two. The first, of course, is do not flout the laws of supply and demand. The other might be that you can't expect people to deviate wildly on price points just because a technology is new and exciting. Unless, of course, you are Apple...