Tuesday, February 7, 2012

Is Fisker Automotive's troubles the failure of "instant automaker, just add water"?


Yesterday news broke that Fisker Automotive reportedly lays off workers in wake of missing DoE loan milestones, namely that the Department of Energy has frozen the loan program for Fisker Automotive because Fisker has failed to meet the business development required milestones.  Because of the frozen loan program, Fisker laid off some workers slowing down some work they're doing.  There's surely some Republican right-wingers screaming about how this demonstrates the failure of the Obama Administration, but from my perspective I like the fact that the loan program requires companies to meet business development milestones because of how it ensures companies receiving federal support are also "real" companies that are going to do real things, like manufacture thousands upon thousands of vehicles.

While writing my report yesterday on Fisker's layoff, this thought came to mind.  The failure here is of an idea that you can jumpstart a full sized electric car company from the ground up within a couple years.

That is, if you read the Dept of Energy Conditional Commitment Letter in Fisker Automotive loan you see that Fisker committed to selling 11,000 Karma's by September 30, 2011 at an average price of not less than $87,900 per car.  That would be almost $1billion in revenue by Sept 30, 2011 for a company that was founded in 2007.

Instead of meeting that sales goal, the company has shipped 250 or so Karma's to customers and then in late December they discovered a flaw in the battery pack.    The flaw could have led to Karma's catching on fire and burning, so Fisker and A123 (the battery supplier) did the wise thing and replace the battery packs in all the vehicles they'd sold.  We learned at the time of the recall Fisker had produced 1200 Karma's and were building 25 per day.  In short between various and sundry delays, including the recall to replace battery packs, Fisker is well behind the goal of 11000 sales by last September.  If their production volume remains 25 cars a day it will take 396 days to produce 11000 Karma's, much less find buyers for that many high end high priced luxury plug-in hybrid sedans.

That's a LOT of cars for a start-up automaker to be selling.

It seems to me that someone in the Department of Energy thought "instant automaker, just add water".  Well, okay, that is an over-simplification, especially if you read the Conditional Commitment Letter and see the carefully thought-out structure of the deal.  But the milestones Fisker are required to meet are big.

On Facebook Chelsea Sexton wrote: So frustrating- want to root for plug-in programs, DOE tech investments. But those volume numbers were delusional from day 1, and DOE/investors bought them? Inexcusable. People w actual EV industry experience need to be involved in diligence process, esp when tax dollars involved.

We have it there from Chelsea herself, the idea that Fisker could sell 11,000 Karma's by Sept 30, 2011 was delusional.  I have to echo Chelsea Sexton's thought, and wonder just what the Department of Energy was thinking.

Why do we think this was delusional?  How many successful automaker startups have launched in America in the last 50 or so years?  Approximately zero.

Who can we think of as possible automaker startups?  Tesla Motors is still in its startup phase and has yet to prove it can become successful.  Tucker Automotive, DeLorean Motor Company, and several other companies all tried to start and died.   Instead the story of the automotive industry over the last 100 years has been consolidation.  A hundred years ago there were hundreds of automakers in the U.S. but today there are three in the U.S. and another handful of automakers in other countries.

The success Tesla Motors has achieved was not in building a car from the ground up.  Instead Tesla got engineless vehicles from Lotus which they reconstructed with an electric drive train.  That gave them time to get their feet wet as an automaker without having to learn, from the start, the skillsets as a corporation required to manufacture a car from the ground up.  Similarly Coda Automotive is buying an engineless vehicle from China and retrofitting it at a facility in Benecia CA with an electric drive train.  They're getting their feet wet as an automaker without having to build a company from the get-go that can design and build a car from the ground up.

The Fisker Karma is a ground-up design with almost all the parts custom to that vehicle.  Meaning that unlike Coda and Tesla, Fisker's plan was to head straight into the designing and building cars from the ground up.

What's the total market for expensive luxury plug-in hybrid cars from a start-up automaker?  Well, I see that Lexus sold over 2 million cars in 2010.  The 11,000 Karma's that Fisker committed to selling would be less than 1% of that number.  While not all of the cars sold by Lexus cost $89,000 this puts Fisker's sales goal into perspective.  Another factoid to place it into perspective is that the production volume for 11,000 Karma's per year, is to build 30 of them a day 365 days a year.  Maybe you'd set the production volume at 50 per day to accommodate days of downtime.  Fisker says they're currently building 25 cars a day.

Start-up automakers have an advantage over entrenched large auto-makers.  A large auto-maker (Ford, Chrysler, GM, etc) have large factories etc and large yearly sales, and to make their business work each company has to maintain enough sales volume to keep manufacturing scale high enough to make money on products sold for razor-thin margins.  The large auto-makers must maintain high sales volume to keep the business going.

A start-up automaker can size their manufacturing plant and size their business to be profitable on a smaller production volume.  In theory.  It means they can buy a smaller factory building, they don't need as many robotic assembly machines, etc.  Where a large automaker would go broke on a vehicle with only 10,000 sales, a small automaker could size their business so they make a bundle at that volume.

Fisker outsourced their production to a contract automaker in Finland.  This is in the best modern outsourcing tradition in industry because it theoretically makes for a nimbler company.

Having gone through the numbers in this post, I must say the inspiration for this was the "instant automaker just add water," but after putting it into perspective it doesn't seem so outrageous.  Fisker is already producing 25 cars a day, so bumping it up to 50 a day isn't that much more.  This makes their 11,000 sales goal more reasonable.  They didn't meet that goal but this can be laid at the feet of the repeated delays Fisker experienced.  Perhaps if they'd met their original goals they'd have built and sold a few thousand Karma's by now.

The concerns I have about Fisker are

  • Whether Fisker can find 11,000 buyers a year for the Karma
  • Whether Fisker can transfer manufacturing to their own plant
  • Will the buying public trust a start-up car company that has little experience with very few cars on the road
  • What's the total market for high end luxury plug-in automobiles?  Is it big enough for not only Fisker, but Tesla (Model S) and BMW (BMW i3 and i8)?

1 comment:

  1. You are off by a factor of 10 on Lexus sales. They sold 229K cars and trucks in the U.S. in 2010, and 198K in 2011. And that was with 10 models! The premium price LS sold 9,568 units in all of 2011. That means that the Fisker Karma was trying to outsell the Lexus LS in its first year in the market. That IS delusional!

    If a start-up automaker is going to sell an $88,000 car, it will be expected to have the fit and finish, NVH levels, and overall refinement of other $88,000 cars. I think start-ups fail to understand the level of resources and expertise the big guys put in to achieve these objectives. The start-up must also learn how to design structures that will successfully pass the myriad of crash safety and other regulatory tests, plus achieve quality and long-term durability targets that are now expected as the price of entry for any automobile. And don't forget the need for properly developed telematics systems, high-end audio, and all the other technologies now available even on low-end C-cars. Gearing up to make a modern, competitive automobile is a very expensive proposition, which is why so few start-ups even have a chance.

    ReplyDelete