Lights Turned Off at Bright Automotive

...new technology can't target the mass market...

The long-run goal for electric vehicles is the mass market. The expense of new technology means that is not the place to start. Instead, there are two alternatives. One is to target the high end of the luxury segment; that is Tesla's strategy. It's not clear, however, that that market is sufficiently large for two firms to survive, and the second – Fisker – is late to market. Others, such as Aptera, wanted to turn out a (very) small vehicle and charge a (super) premium price for it. The vehicle itself would certainly have attracted attention. But the very rich insist on luxury as part of the package, and a tiny car can't deliver that.

The other option is to target a market that is particularly sensitive to fuel efficiency: commercial fleets. That was the strategy of Bright Automotive. Vehicles for (say) UPS in an urban area are on the road all day, with fuel a significant operating cost. But they're not on the road at night, and they may not travel long distances, only long hours. The space and weight of batteries is less of a constraint; there's no chicken-and-egg issue of whether there are enough recharging stations, because they are only needed at the corporate garage. And it's possible to create a value proposition, that the gains in efficiency will offset the higher up-front capital costs. Car purchasers aren't particularly good at that sort of calculation, focusing on "first cost" (purchase price) and not life-of-vehicle costs.

Bright in fact was able to attract purchase commitments from customers on the basis of actual vehicle cost and performance specs. What they needed was capital, in order to fund the nitty-gritty up-front costs of engineering and testing / regulatory approval, and to provide operating capital to let them produce vehicles – they would have to pay workers and capital equipment suppliers and (depending on their bargaining skills) suppliers of parts and components before they were able to deliver their first vehicle and build their revenue stream. And unlike the "supercar" entrants they were looking at production at a relatively high volume; they couldn't accomplish that on a shoe-string, taking the money from the first vehicle they shipped to pay for the parts for the second one. In other words, they intended to be a viable, volume operation, in it to earn a tidy profit on an ongoing basis. But to be a real company in the auto industry takes a lot of resources.

Reuben Munger, the founder, is a W&L econ grad, but that alone isn't enough to impress me, except that he was an exceptionally good student. Reuben is also a former investment banker, and had "skin in the game." Another notch in his favor. We were able to bring him to campus; he met with some of us faculty privately, and gave presentations to our students. What he said made sense, and I'm a hard sell, as I've sat through a lot of presentations of the business case for innovations in the automotive sector.

From the beginning those involved with Bright understood the venture to be risky. However, they were able to raise initial capital for the R&D part of the venture – including from General Motors – because there would be money available for working capital from the Department of Energy loan program.

Unfortunately, that loan program seems to have unofficially closed its doors. The undercurrent in media reports is that it is a victim of the election campaign, where the loans are being tarred by the failure of Solyndra. (See stories in the Washington Post and in Automotive News.) I also wonder if those involved at the Department of Energy were fixated on passenger vehicles; unless you know something of the industry, selling trucks to Snap-On doesn't sound sexy or central to US energy policy.

I've encountered that mindset, even among people with some real grounding in the auto industry, who ought to know better. But then I've benefited from serving as a judge for the Automotive News PACE supplier innovation competition [link], where I've heard the business case for innovations with target markets across the industry, from machine tool and test equipment suppliers, to suppliers of (not-so-generic) materials, to suppliers of components specific to the long-haul "semi" market, to suppliers to the aftermarket (replacement parts), and suppliers to dealers, as well as the "traditional" Tier I suppliers of parts that go into high-volume passenger cars.

One of the hurdles for a firm to win a PACE award is that they show a credible customer has purchased their innovation and has it in use, on the road. And often one customer isn't enough. So when I learned that a number of hard-nosed customers had signed up (I know a bit about one of them, Snap-On), well, I thought Bright should be a slam-dunk. Too bad, because the US needs firms like Bright.

Mike Smitka, Prof of Economics
Washington and Lee University

Toyota vs GM: Guess Who's the Dinosaur!

...economic theory says dominant firms adopt strategies that undermine their dominance ...

This isn't an enthusiast site, and I'm not a car guy. My family didn't have a second car growing up so tinkering with one never became a hobby. My attitude is horribly utilitarian: a car's function is to get me from point A to point B. So my own vehicle is 24 years old, my secondary one is 14 years old (while my wife's is only 8 years old). When I go on long trips I try to rent a car. And when I visit auto suppliers as a PACE judge or otherwise do the limited travel in which a normal academic engages, I also rent cars.

That said, I have written on this blog about the logic of a leading firm to "never be first" (in its heyday this was the case at GM, and in the past two decades became an operating motif at Toyota). Furthermore, there is an internal bureaucrat logic at large companies. I've not interviewed people about this, so I'm not being my normal careful academic self in stating it, but I surmise that if you're an ambitious engineer / designer / marketer at Toyota, you wanted to be associated with the Scion (Akio Toyoda's pet project) and with Lexus (prestige and profits). To work on the Camry would be a ho-hum posting. You wouldn't be using it as a platform to launch new technologies. It isn't a platform for future products for developing markets.

That would be quite different at a Hyundai or at today's GM. Hyundai started out with a very small market presence, both quantitatively and prestige-wise and in the size of its cars. The Sonata received a lot of attention, details well done including NHV, but I've not driven one for a couple years so don't know the new model. GM needs to reconquer the sedan market. I've driven both the Malibu and the Impala -- the latter so quiet that I had to double-check that I'd turned on the engine, and with a "clean" interior. I was impressed.

Then there's the Camry – I drove a new one with a few thousands miles on it. It was noisy, wind noise in particular. Then there was an occasional vibration from somewhere in the instrument panel, a matter of both design and (poor) build quality. Next was the instrument panel itself. I counted 12 active functions in the speedometer area, a cacophony of visual information (the mixed metaphor seems appropriate). Speed. Tachometer. Miles per gallon performance. Engine temperature. Odometer. On and on. Other than the speedometer, you really had to take your eyes off the road to decipher these functions – and it wasn't clear why a driver of a modern, automatic transmission family sedan would want a tachometer or most of the other functions. Dysfunctions, actually. There was also a large and hard-to-use LCD display -- and the gas mileage information on it didn't match that found next to the speedometer. Furthermore, the hands-free phone function didn't work consistently, particularly dialing out. The developers clearly hadn't done their homework on testing the bluetooth protocols of various phones against their system. Finally, it drove like a modestly responsive boat. That may be what older drivers want – and by older, I mean those pushing age 80. I don't think that's really their target market in theory, and in practice age 70-something drivers wouldn't be particularly receptive to the boatload of gadgets confronting them every time they got in the car.

So, this is congruent with economic theory. A dominant player plays it safe, and puts its resources into growth areas and pet projects of senior management. Over time of course they lose their dominance. But this sort of thing is not easy to turn around, viz. GM's experience. Toyota has a well-entrenched bureaucracy, structured in ways that date back to when they were an exporter of models developed in Toyoda City. On the marketing side in the US there was Toyota, and Southeast Toyota, and Southwest Toyota, rather than a national structure. And they've bought into the upmarket strategy, with profits (and internal kudos) from Lexus and not small cars. That no longer matches their actual market base and production base, and it leaves them ill-suited to tap new markets such as China and India.

I strongly suspect that this is well-known at Toyota itself; after all, there was an internal coup in Toyota that elevated Akio Toyoda earlier than planned under the normal bureaucratic progression, even before the recall scandal. The Camry suggests however that organizational dynamics are deep-seated and have to date resisted change.

Mike Smitka

Bush 43 at NADA 2012

LAS VEGAS ― Having hit a low in 2009 due to the trauma of two domestic automakers nearing bankruptcy and the overall industry in turmoil, the annual National Auto Dealer Association convention this year was indicative of the vigorous rebound of the industry as a whole. Attendance was brisk and the expo hall was packed with vendors. Spirits were upbeat and optimism abounded.

As the final speaker on the closing day, former President George W. Bush had the last word. The hall was packed during his 25-minute prepared remarks and subsequent Q&A, with outgoing NADA Chairman Stephen Wade asking the questions. The ex-president showed his human side with a liberal mix of applause lines and humor. He cracked up the room on numerous occasions with spontaneous off-the-cuff remarks. He devoted some time to trying to sell his book, But every time Bush mentioned Decisions Points, he added with a wry expression and a twinkle in his eye, “We still have plenty of inventory.” The line became funnier every time he said it. “Did I mention, we still have plenty of inventory?”

Despite the fact that the room was primarily Republican, based on an informal polling, (and my interactions over the years with hundreds of dealers) there was no booing or hissing for the fact that then-President Bush authorized the advance of a bridge loan of $17.4 billion from TARP funds to GM and Chrysler in December 2008 after having been turned down for a bailout package by Congress. In current RW rhetoric, this is known as “government picking winners and losers.”

So given the audience, and after first spending some time on his personal battles with alcohol, Bush addressed the economic situation he faced at the end of his presidency. In fact, the auto industry rescue/restructuring might as well be termed the rescue of the North American industrial base, since that is what was at stake. Bush spoke glowingly of the advice and support of Treasury Secretary Hank Paulson and Federal Reserve Chairman Ben Bernanke. He cited them as perfect examples of people a leader should surround himself with to offer insights on subjects about which the leader is unfamiliar.

Speaking of the massive government support for the financial services industry by his administration during the economic collapse of late 2008, Bush says: “In a normal environment, the free market would render its judgment and they could fail. I would have been happy to let them do so. As unfair as it was to use the American people’s money to prevent a collapse for which they weren’t responsible, it would have been even more unfair to do nothing and leave them to suffer the consequences. The consequences of inaction would have been catastrophic.”

Regarding the economic crisis, “If we’re really looking at another Great Depression, you can be damn sure I’m going to be Roosevelt, not Hoover.” “Wall Street got drunk, and we got the hangover.”

In his book, Bush says he “opposed the Carter/Reagan bailout of Chrysler.” “Yet the economy was extremely fragile, and my economic advisors had warned me that the immediate bankruptcy of the Big Three would cost more than a million jobs, decrease tax revenues by $150 billion, and set back the country’s GDP by hundreds of billions of dollars.”

Stipulations attached to the billions in Bush Administration “bridge loans” ultimately cost GM Chief Executive Rick Wagoner his job, despite the fact many have “blamed” the next President.

Bush refrained from getting involved in the current politics other than to say “he understands the immense pressures of the job, and that it would be counter-productive for him to weigh in.” Despite the occasional malapropism, he conducted himself with class and grace with a large dose of Texas one-liner humor. While history may judge him harshly on some issues, it seems clear that the decisive action he authorized saved the economy, and in particular the auto industry, from a catastrophic meltdown.

David Ruggles

Comment by Mike Smitka: Certainly Wall Street got drunk, but it was policy that supplied the hooch. Greed on Wall Street isn't new; the ability to indulge however was. Both historic checks were removed. The first was that of regulation, which limited the ability of bankers to gamble with other peoples money (bankers have long demonstrated an ability to keep winnings for themselves while sticking others with losses). The second was monetary policy, which historically kept the supply of funds roughly commensurate with normal loan demand. Here Bush also leaned on outside advisors, Greenspan in particular but also Paulson and to some extent Bernanke -- though Bernanke was in subordinate positions as a Fed governor and then chair of the Council of Economic Advisors, as he was not named Fed chairman until 2006, by which point real estate prices had largely peaked.

Bob Lutz, the VOLT, and the Right Wing

The recent media coverage of so-called “Chevrolet Volt fires,” especially by the conservative talk shows and Fox News, has attracted my attention and ire. Let’s set out the facts (and feel free to check them yourself):

1. Not one Chevrolet Volt has ever caught fire in normal use or in accidents. Not a single one.
2. The National Highway Traffic Safety Administration, even after the highly artificial crash test (placing the car on its back, even though it did not roll over in the test) nevertheless awarded the Volt NHTSA’s highest crash-safety rating: 5 stars. Volt is supremely safe.
3. The crashed Volt, its battery shorted by coolant from the period unjustifiably spent “feet up,” caught fire three weeks after said test. (I submit that this would provide adequate time for surviving passengers to exit the vehicle.)
4. On average, 278,000 cars with gasoline engines caught fire in the U.S. each year between 2003 and 2007, according to the National Fire Protection Association.
5. No factory-produced electric vehicle has ever caught fire, to the best of my knowledge.
6. The Volt, the most technologically advanced car on the planet, was conceived by me and my team well before any federal bailout of GM.

These are the bedrock facts.

Now, how did the U.S. right-wing media choose to report this admittedly headline-tempting news? A nationally syndicated editorial three-panel cartoon stated (I believe I remember the sequence): “Thomas Edison discovered electricity;” then, “Alexander Graham Bell discovered the telephone;” and, in the third panel, “But it took the US Government to discover fire!” (accompanied by a drawing of a burning Chevy Volt).

Meanwhile, my fellow cigar-aficionado and erstwhile friend Rush Limbaugh launched the usual outraged, breathless tirades, denouncing the Volt as a typical failed President Obama initiative, on a par, grosso modo, with the dreaded Obama Care. The screen regularly depicted an exploding Chevrolet Volt.

But the Oscar for totally irresponsible journalism has to go to The O’Reilly Factor on Fox News, with, as its key guest, Lou Dobbs. Amid much jocular yukking, the Volt was depicted as a typical federal failure. In attempting to explain why Chevy has sold fewer than 8,000 Volts, Dobbs states, flatly, “It doesn’t work.” He elaborates, “It doesn’t go fast and go far on electricity. What happens is it catches fire,” adding that Chevy has recalled some 8,000 Volts. Bill O’Reilly, nodding approvingly, helpfully interjects: “So they’ve recalled cars that haven’t been sold.” Boiled down to the subtext, Dobbs’ message was this: “All Volts catch fire, and therefore all Volts have been recalled.” That simply isn’t the case.

Much air time was spent on the $50 billion-plus bailout, which, the audience was left to assume, “funded” the Volt, doubtlessly at the whim of Obama’s known army of evil enviro-Nazis, intent on forcing vehicle electrification on a good-ole’-boy, V8-lovin’ populace. To top it off, these two media pros lamented the fact that the same government that had forced GM to produce the Volt was now extending $7,500 tax credits towards its purchase, thus squandering even more of “our taxpayer” dollars on this failed Socialist-collectivist flop. Truth? The $7,500 tax credit was enacted under the Bush administration!

But who the hell cares about facts when you’re in O’Reilly’s self-described “No Spin Zone?” (The fine print might as well read, “We said ‘no spin,’ not ‘no deliberate misstatement of facts.’ ”) What on Earth is wrong with the conservative media movement that it feels it’s OK to spread false information, OK to damage the reputation of perhaps the finest piece of mechanical technology our country has produced since the space shuttle, OK to hurt an iconic American company that is roaring back to global pre-eminence, OK to hurt American employment in Hamtramck, Mich., as long as it damages the Obama administration’s reputation?

While as a conservative Republican I may well share the goal, I deplore the means employed to attain it. The conservative cause damages itself, destroys its credibility through the expedient spreading of untruths. The public will figure it out. The right-wing “talking heads”, O’Reilly and Limbaugh at the forefront, have managed to make me embarrassed to describe myself as a conservative.

Come on, you guys. Shape up! There’s plenty of legitimate fodder out there. Let’s leave the “invention of facts” to the left-wing climate-change alarmists.

Published in Forbes