# Some Basic Economics: It's Labor Costs, Not Materials

What percent of the cost of an item is materials, what percent is labor, and what percent is taxes?

To find out the answer, you'll need to watch the video below. While this film is from the 1950s, you might find that the percentages are not too far off from what we see today. Consider the wages paid to the workers who don't work any longer, and are on pensions.

;

About 5 1/2 minutes into the film, they start to go into the costs of the automobile. Eighty percent of the cost is the labor to create the car, mine the ore, shear the sheep, haul the steel, etc. The total for all the labor throughout the supply chain is \$1,200—for a \$1,500 automobile. For one of today’s \$30,000 cars, that would be \$24,000 in labor.

Raw materials is only \$22 of the total value of the \$1,500 car. This is the intrinsic value of the raw materials, as they are valued at the source, before extraction, transport, and processing. So the intrinsic cost of the raw materials in the car is only 1 ½ percent. In today's \$30,000 car that is only \$450.

The rest of the numbers listed in the narratives are the gross profits—less labor—for the rest of the supply-chain participants. Out of the reported profits would come the operating expenses, investments, and taxes paid.

Raw Material Producers earn a gross profit of 6% of the cost of the car. Parts Manufacturers earn a gross profit of 3% of the cost of the car. Dealer gross profit is 5% of the cost of the car. And 4.3% of the cost of the car is gross profit to the Automaker.

How close are these 1950s-era percentages to automobile manufacturing and selling costs today?

Over a decade ago, the Argone National Laboratory (ANL) released a report that estimated the cost of manufacturing and cost of an automobile. ANL produced the report to provide background for a Department of Energy effort to determine the cost to manufacture Electric and Hybrid Electric Vehicles. The report listed three different methods used to determine the costs to manufacture automobiles, two of which are in Table 3 below.

Profits drop from 4.3% of the selling price of the automobile to 2.5%, a 42% drop in profit. This study came out in April 2000 and is based on costs calculated in the late 1990s—over fifteen years ago.

Now, in both the film and in the ANL report, we are not talking about the cost to produce a specific car; just the average car. The investment in engineering and design labor, tooling and manufacturing equipment, the engineering labor costs to design the manufacturing plan and process, the labor to construct the manufacturing plant, the R&D costs—the typical automaker pays all those costs long before the first new automobile ever hits the showroom floor. In other words, the cars sold today are supporting the cost of developing the cars that will appear in five or ten years.

Which brings us to the Chevy Volt, which sold really well in August 2012, when 2,831 Volts rolled off the showroom floor—some with a \$199 per month lease. If all sold for the base price of \$39,999, the combined GM and Dealer network brought in about \$113 million in revenue in August. One problem: It cost about \$89,000 to build each Volt. Call it a \$49,000 loss per vehicle. GM lost \$138 million selling those 2,831 Volts.

Reuters estimates that GM invested between \$1 billion and \$1.2 billion developing the design and manufacturing facilities for the Volt. As GM sells more Volts, the cost of the investment per car goes down. The trick is, how long will it take GM to sell enough Volts to reach a break-even point?

The Chevy Cruze is the gasoline-powered sister to the Volt. The estimated manufacturing cost for the Cruze, including development costs, is between \$12,000 – \$15,000 per car. GM will have to sell over 120,000 Volts before the invested cost for tooling and design drops below \$10,000 (and an additional \$15,000 – \$20,000 for manufacturing and materials). As of September 2016, GM had sold 13,500 volts, about 1,500 per month since introduction. At that rate it will take over 80 months to reach the 120,000 vehicle mark—almost seven years.

Seven years is a long time for a car to go without styling changes—and any styling changes and improvements will drive the investment costs up again.

GM goosed August 2012 sales for the car with heavy dealer discounts and a special low lease rate.

Think about the cost of developing the Volt, and how those costs are supported. GM received a huge taxpayer-funded bailout. In September 2012 the US Treasury held 26.5% of the outstanding GM stock. In the same year, GM offered to buy back the Federal Government’s shares at the then-current price of \$25 per share. According to the Wall Street Journal, the break-even price for the investment was about \$53 per share.

### Articles in This Series

##### More Like This
Finance

Call Us! 877-674-7495       info@dksco1.com