Bringing a new vehicle to market is a complicated and expensive process, even for established car companies. It’s not unusual to spend hundreds of millions of dollars to do it. So it’s no wonder companies like Honda, Ford and GM tend to stick with the tried and true -- and the profitable. Even those that went out on a limb, like Toyota with its Prius hybrid, lost a lot of money before eventually turning a profit for what many skeptics once dubbed a risky experiment. Similarly, whether GM’s Chevy Volt or Nissan's Leaf will be popular and profitable is today a question for debate.
Indeed, start-up companies -- such as any one of the finalist teams in the Progressive Insurance Automotive X PRIZE -- face an even steeper challenge, largely because of massive up-front capital costs. Cars not only have to be engineered, they have to be built, and part costs are a major barrier to profitability in low volumes. Even more expensive, however, are the machines used to put all those parts together. Auto-related news stories often feature one class of tooling machines common to the auto industry -- hulking robots that precisely lift, position and weld frames, doors and windows together on the factory assembly line to make a car.
Unfortunately, it costs far more per vehicle to produce a limited run of vehicles than it is to produce at high volumes. The limiting factor is that there are few ways to start small and cheap, and then scale up as demand increases. To use a simple example, if an aspiring automaker has to spend $10 million to produce 10 vehicles, then each vehicle has to bear $1 million of that cost, before adding any margin for profit.
Clearly, to make a business case to investors, startup car companies must prove that sufficient demand exists to assure their investors will get their money back, plus a bit more. That means selling enough cars to make up the cost of the parts, labor, and excruciatingly expensive tooling.
Tesla Motors has taken heat from skeptics and admirers alike for selling its groundbreaking electric roadster for $109,000, a price far out of reach for most consumers. While hardly a car for the masses, it well illustrates the difficulty automotive start-ups face. Even with the successful sale of over 1,000 roadsters, Tesla nevertheless required a substantial government-backed loan to produce its next generation all-electric Model S sedan. Even with the loan, Tesla estimates the Model S will cost consumers more than $50,000, and that’s with a $7,500 federal subsidy.
Indeed, when innovation moves at a snail’s pace in the auto industry, it should come as no surprise that Tesla was the first American automotive IPO in more than 50 years.
It is my sincere hope that other automotive IPOs will follow. Certainly, the winners and finalists in the Progressive Insurance Automotive X PRIZE have proved that attractive and safe vehicles can get 100 MPGe, and I truly believe Americans are ready for such an automotive revolution. While the journey to this point has just begun for many of these teams, I look forward to the day when consumers have a wide range of truly ground-breaking energy efficient models to choose from.