Cleantech Market Intelligence
Why Upstart Automakers Tend to Fail
Did you hear how GM has had to recall 6,000 vans and SUVs due to faulty steering gear that could lead to a loss of steering control? No? How about when the company asked for the roughly 8,000 Chevrolet Volts on the road to be taken to a dealer for adjustments to the battery packaging? Needless to say, that Volt story got a lot more play than the steering gear recall. Although this may be unfair, as recalls are incredibly common – the U.S. Department of Transportation has an entire website devoted to them – and the Volt situation was not even an official recall, it is not surprising. New vehicle technologies will tend to attract extra scrutiny, as consumers look to see whether they work and opponents look for a misstep.
This recall issue highlights just one reason why it is so difficult for a start-up company to succeed in the car market. Unfortunately, the news has been full of stories on start-up EV and PHEV technology manufacturers and battery companies filing for bankruptcy or experiencing serious troubles. Aptera Motors, Bright Automotive, Azure Dynamics, Th!nk Global (which was briefly owned by Ford about ten years ago) and Ener1 have all filed for bankruptcy over the last nine months. The Fisker Karma plug-in sedan has been reportedly been plagued with problems including an embarrassing breakdown during a Consumer Reports test. These stories confirm to me that it is not merely difficult to succeed as a new entrant in the automotive industry, it’s next to impossible.
To begin with, making roadworthy vehicles is hard. This may seem obvious, but it’s surprising how advocates for new, clean vehicle technologies are willing to convince themselves that a newcomer with little experience in large-scale manufacturing can quickly start producing attractive, safe, reliable vehicles. Add in the development and integration of a new propulsion technology and this becomes even harder. Consider the need to make it affordable, and you’ve reached a degree of difficulty that is impossible to surmount without huge financial resources and a lot of time to develop a market-ready product.
The Long View
Because it’s hard, companies have to be equipped to deal with technological hiccups. GM is in a much better position to ride out its Volt battery problems than Fisker and A123 are with the A123 lithium ion battery recall. A123 has estimated that it will spend $55 million to replace the battery packs for five of its customers. That is over one third of the company’s estimated $149.4 million market cap as of today. By contrast, GM is expected to pay around $9 million to fix the Volt battery issue; the company’s market cap as of today is estimated at $39 billion.
Also, while the bad PR is going to hurt Volt sales, GM is better positioned to recover than a start-up company that may be depending on its one and only product. To its credit, A123 acknowledged responsibility and has promised to replace the batteries. However, its stock has fallen and the company is now the target of a class action lawsuit filed by shareholders, leaving some analysts wondering if A123 will be able to secure the additional capital it needs to pay for the battery replacements.. Fisker also quickly fixed the problem with the Consumer Reports’ Karma, but there are lingering questions about the company’s viability, especially given the Karma’s $108,000 price tag.
Finally, even if all goes well with a product introduction, there is a natural risk associated with forecasting demand for a new technology, as noted by my colleague Dave Hurst. Again, the companies most likely to be able to take the long view on a new technology, withstand bouts of bad PR, and marshal the resources to fix any problems are the big auto companies. I don’t think we are going to see a start-up company ride in on a white horse and remake the automotive industry. Like it or not, we have to depend on the big legacy auto companies to make the shift to electrification or other alternative technologies (although whether they have to be pushed or will jump is another matter). Fortunately, there has been some good news from the auto OEMs recently. Ford has announced it is expanding its electrified vehicle development facility, and the new Toyota Prius C hatchback is moving briskly in its first three months of sales.