Launching a New Car Company is No Small Feat

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.

 

Comments

[Brian]

That’s a very interesting story. So what will “David” do? turn right or left when he gets to the cross roads.

We managed to meet the required goal. I applauded everyone. So, let’s turn left… let’s say I have one hundred friends that are in trades and they are going to take a chance and help me build, machine, weld, volunteer, endorse, market, patent and so on, you get my point why? Because it will change the lives of my countrymen develop new jobs or opportunities and now “we” begin. Payment =volunteers=payment.

So here we are at the cross roads if we turn right, there are greedy people, that want 100% of everything, your business, your signatures, your guarantees because I believe that this will change the future and I also want 100%. Payment = debt (money/money) years go by because someone wanted 100%. Good luck, you did a great job.

[Bart Viaene]

Still, building radically innovative EVs from scratch IS possible.

Just take a look at the TWIKE story : three Swiss students built it and submitted it to a competition, which they won.

Hundreds of interested people wanted to buy one. The students promised to build the vehicles for them if the prospects volunteered to pay for their vehicles a couple of years up front. And so they did, proving there was a real demand for it...

The students started up a small organization which designed and ordered the necessary parts all over the world. They didn't build a robotized factory, as this was far beyond their means.

Instead they concentrated on establishing a network of service centers in small "green" companies willing to expand into EVs.

And so happened. They suffered a major set-back when after attracting an investor to build a large series. The investor pulled out when hit by the economic crisis (Swiss Life, Swissair, Swiss Bank... you remember ?)

German friends then took over production of the TWIKE, returning to the original approach, giving it a major technological overhaul. Powered by the enthusiasm of nearly 1,000 TWIKE pilots, the manufacturer listened to customer whishes and tried out a new model with great success in the X Prize.

A two-seater TWIKE costs about 25,000 euros (33,500 USD). Half the cost are the batteries... there is no circumventing that, until these drop in price. Battery price has to be compared to gas price, as batteries are "consumables" - although they cost much more, they last much longer.

The other half is exactly the cost of two top class mountain bikes (my sub-top class Cannondale with Rohloff gear box costs about 5,400 USD four years ago, and over these four years I needed even more in necessary gear : helmets, shoes, clothing, tools, spare parts, etc...) - all of which I don't need for piloting my TWIKE.

I spend 400 USD per year on insurance and road tax, 200 USD on tires and maintenance, and about 1 USD per 100 miles on electricity.

I had to replace the old NiCad batteries by LiOn batteries after 11 years of use, and I had two accidents (without physical harm, a TWIKE is really safe) which needed repairs.

No parking fees, no car wash costs, no speeding tickets, no technical control fees, and a lot less traffic jams (a TWIKE can escape them much faster than a larger vehicle). Anyone can do the math.

There is a bright future for the "slow growth" approach of EV manufacturing, and it would be even brighter if governments would refrain from issuing impedimenting legislation favoring ICE cars and obstructing EVs (homologation, for instance).

Look at China : there are thousands of "garage" EV manufacturers starting up shop over there, as they have NO regulations for bringing EVs on the road.

Safety concerns are valid, but you have to do the math fairly : if you ask pedestrians and cyclist which vehicle they would prefer to be hit by: a car or a TWIKE, the answer is 100% in favour of the TWIKE.

Safety is about protecting the health of EVERYONE, not just the driver and passengers !

Besides that, a lightweight TWIKE is safer than any massive car for the driver and passenger in 50% of the accidents : those in which you hit a wall, a tree, a pole, a ditch... as it is the vehicle's mass which crushes you against an immovable object. Only in vehicle-to-vehicle collisions, the heaviest vehicle is safer for the driver and passengers (but NOT for those in the lighter car, and these count, too !) - but that is an arms race... if this were a valid argument, we would all be driving tanks soon.

You cannot choose your accident type...

So no matter what the impediments (battery cost, hesitating investors, obstructing legislation...), the future of lightweight EVs such as TWIKE and TW4XP is bright.

The first car manufacturer who dares to gamble the house on such a vehicle is sure to make a killing in the huge future markets of Asia.

Those who don't dare to take this road will be pushed out of the market just as surely as the big gas guzzlers were, by Asian and European compact cars.

It is the survival of the fittest all over again.

The only major impediment for classic car manufacturers is : how to convince customers that "LESS IS REALLY MORE"...

Current cars are mobile palaces. EVs will have to bring comparable luxury in a lightweight package.

TW4XP is doing a really nice job, here : the only vehicle in which you have enough room to excercise, touch your toes and knot your shoelaces :-)

Pedaling a TWIKE or a TW4XP really redefines the sports car. Try that in a Porsche !

[paul]

After reading about a small family run business that makes electric cars in Japan for what the articles purport to be the equivalent of about 10,000 us dollars, i hardly believe in the "no small feat" claim...
A small business with a small production run can do it, so why not the big elephants??? These are hand made. no robots... Yet we are led to believe that an electric vehicle is more expensive than a conventional ICE powered car, or some silly hybrid that just means more parts to break down that makes more money for the elephant.

Google this to read about the cheap hand made cars i am talking about; Takeoka Jidosha Kogei electric car family business