Hitting the Books: The spectacular financial failures of Fisker Automobiles

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Bad Karma: Fisker Government Funded Failure

Elon Musk says Tesla’s success is due to the quality of its cars, not government funding – but whether or not you believe it, it’s impossible to separate success from support. We cannot know if Tesla will rise to the top without assistance, and at the moment it is too early to tell if the company’s current success is sustainable without government funding.

But we can learn something from the startling failure of Fisker Motors. Fisker’s failure is a great example of how a government-funded innovation can go terribly wrong.

In January 2008, Fisker introduced the stylish and sporty Karma at the North American Auto Show in Detroit, Michigan. Leonardo DiCaprio was an early fan of karma, as were Al Gore and Carlos Santana. The comparisons with Tesla were automatic, and depending on who you think, were no coincidence: Just a few months after Karma debuted, Tesla filed a lawsuit alleging that Fisker had stolen its designs and trade secrets. The lawsuit was settled in Fisker’s favor. A year later, Fisker made headlines when it became one of five automakers to receive a $ 528.7 million loan under the ATVM loan program.

Fisker purchased a former GM manufacturing plant in Delaware. Then Vice President Joe Biden traveled to the site and waxed hair around the future: “Imagine when this plant, when we were standing on the ground now, makes 100,000 hybrids, coupes and crossovers every year,” he said.

And then, in 2011, news outlets began telling a different story: The hybrid sedans, coupes and crossovers wouldn’t be built in Delaware – or anywhere in the US, for that matter. Although the design work will be completed in the states, the assembly will take place in Finland. This means that the American people have lost nearly 500 bundling jobs – jobs they paid for to some extent.

Explanation of the CEO of the company Henrik Fisker? We had no manufacturing capabilities.

“There was no contracting plant in the United States that could actually produce our car,” he told ABC. “We are not in the business of failure. We are in the business of winning. So we are making the right decision for our business.”

Unfortunately for Fisker, assembling its vehicles in Finland wasn’t enough to keep the company in business – or in business at all, in that regard: in December 2011 – just a month after Fisker began delivering its first cars to customers – the company issued a recall request for all vehicles. Manufactured between July 1, 2011 and November 3, 2011. Reason: defective battery (a problem with hose clamps made the lithium-ion battery vulnerable to both short circuits and fires). The recall affected 239 vehicles, which included nearly all vehicles shipped to customers, as well as most vehicles at many dealerships.

In March 2012, Consumer Reports published a scathing review of the Fisker Karma. In addition to small issues – from design flaws to engine noise to battery recharge times – the vehicle actually failed during its routine testing. “While the speedometer calibration is performed on our test track (a procedure we do for each test car before it is put into service by driving the car at 65 mph between two measured points), the dashboard flashes a message and sounds a ‘bing’, the review states a fatal error. Our technician took the car off the lane and put it on hold to browse the owner’s manual for interpretation of the warning. At that point, the transmission has shifted to neutral and no gear will be used via the electronic transmission except for Park and Neutral. ”

The car breakdown was a milestone: “We buy about 80 cars a year and this is the first time in the memory that it cannot be replaced before it finishes the check-in process,” she said.

From there, things got worse: in October 2012, Fisker halted production of cars after A123 Systems, the company that manufactured the (defective and fire-exposed) Karma batteries, went bankrupt. (Notably, the A123 has also benefited from government assistance: In 2009, the A123 was awarded a $ 249 million grant from the Department of Energy as part of an initiative to manufacture electric vehicle battery components and components.) 16 a year later, Fisker was purchased at auction by The American unit of the Wanxiang Group.

On September 13, 2013, the DOE posted a lengthy update on its website, outlining Fisker failures and loan status.

“Unfortunately, as has been widely reported, Fisker Automotive has faced major setbacks in its production schedules and sales delays resulting in missing milestones stipulated in the loan agreement with the DOE,” the report stated. “After fully exhausting any realistic prospect of a sale that might protect our investment, the Ministry announced today that we are auctioning the remainder of Fisker loan obligations and offering the best possible refund to taxpayers.”

The update also indicated that of the $ 528 million that had been earmarked for Fisker, the US government had only disbursed $ 192 million by the time the company fell into disrepair.

But of that $ 192 million, only a small amount was recovered, leaving US taxpayers short of $ 139 million, and there was only an abandoned factory in Delaware and a few hundred fire-prone electric vehicles destined for the scrapyard. While government-funded research can, as Stephen Chow said, “unleash” important discoveries and innovations, they also hinder competition between technologies and prevent the market from precisely identifying which technologies are flourishing.

Moreover, supporting one innovation over another can discourage the development of a technology that may be superior. More promising companies that could have raised financing in the private sector may not get the opportunity if the government supports their competitors.

This happens because subsidies reduce the perceived risk of companies favored by the government, making them appear more attractive to investors. Government funding distorts investment risks to the point that even commercially invalid companies – like Fisker – can appear nearly irresistible. Case in point, after announcing the Department of Energy funding support, Fisker experienced a flood of private investment, raising $ 600 million before he even sold a car.

Worse yet, government funding of private companies encourages corruption, and may make corruption inevitable. Funding creates a symbiotic – or perhaps parasitic – relationship between the government and its private sector partners, making it extremely difficult to avoid the provision of mutual services. While companies with strong government relationships will receive funding, companies without political connections – innovative companies that may be equal or more worthy – will not get the support they need.

It’s impossible to know what would have happened had Fisker not received its federal funding. One thing is clear, though: US taxpayers will not be paying the bill for failure.

Nicholas Lloris, an energy analyst who testified to Congress in the Fisker case, might have summed up the situation better: “The federal government’s provision of the loan leads to the privatization of interest and the distribution of any potential losses among taxpayers.” If the company succeeds, the taxpayers will see no financial return on their investment. If the company fails, the taxpayer will incur a loss of 100%.

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