Why GM Is Willing To Lose 9K On Each Green Vehicle Sold

General Motors Company (NYSE:GM) is expected to incur a loss of around $9,000 on every Chevrolet Bolt it will be selling in the U.S. The automaker is willing to bear the expenses as it believes that the strategy will pay off in the long run.

Other automakers including Fiat Chrysler Automobiles N.V. (NYSE:FCAU) and Nissan Motor Co. Ltd. (OTC:NSANY) are also incurring losses in order to sell zero emission vehicles (ZEV). Fiat Chrysler is losing $14,000 per vehicle while Nisan Leaf has advertised low lease deals for $149.

The reasons behind this strategy include:

State Guidelines

The state of California requires automakers to sell some environment-friendly vehicles in order to do business there. Nine other states have also adopted this strategy, including New York and New Jersey. Together, these states make up around 30% of the total U.S. market. This forces automakers to boost sales of ZEV in these markets.

Stricter state laws are expected to require ZEVs to contribute 15.4% of vehicle sales by 2025, which is five times the current level. To meet this target, sales of ZEVs, plug-in hybrids and fuel-cell cars will rise.

Moreover, after the development of charging-station infrastructure and decline in battery costs, global demand for ZEV is poised to rise significantly. There will also be huge demand for ZEVs in China as it is taking note of the climate change threats.

Tax Benefits

U.S. offers incentives for the productions of ZEVs. The government provides $7,500 of tax credits to buyers. In addition, the government gives credits to automakers for fulfilling the greenhouse gas reduction target set by Obama administration.

Appeal to Younger Customers

Chevrolet Bolt will appeal more to young, technologically savvy customers. Bolt offers 238-mileage, which is better than the other mass-market electric vehicles. It will be available to customers in California and Oregon starting this month. General Motors also plans to launch the Bolt in China and Europe. This will give it an advantage over electric automaker Tesla Motors, Inc.’s (NASDAQ:TSLA) mass vehicle Model 3, which will be available from next year.

ZEV Credits

General Motors will earn more credits if it sells more ZEVs. It can also sell the surplus credits to its competitors. This will have a positive impact on the results of the company.

Price Performance

In the last three months, General Motors’ share price increased 7.37% while the auto tire truck market share price declined over 1.09%. The company benefitted from better results recorded in the last quarter and its initiatives including expansion of Maven and investment in facilities. Expectations of higher earnings are also driving results.

GENERAL MOTORS Price

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General Motors currently holds a Zacks Rank #2 (Buy).

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