Hitting the Books: The spectacular financial failures of Fisker Automobiles

Being the trailblazer of a new industry is rarely the enviable position many expect it to be. Not only must you create products, techniques and strategies from scratch, your competition is free to simply observe your failures and improve improve upon your process at a fraction of the cost to leapfrog your position within the market. So in some instances, firms in emerging industries are afforded financial backing by the US government to jumpstart their efforts, such as what we saw with Fisker Automobiles. However, as author Dan K Eberhart explains in Switching Gears: The Petroleum-Powered Electric Car, which explores our slow but sure adoption of EVs, not every startup is destined for success — even with federal support.

Copyright ©2018 Dan K. Eberhart All rights reserved. The following excerpt is reprinted from Switching Gears: The Petroleum-Powered Electric Car by Dan K. Eberhart, available now everywhere books are sold. Reprinted with permission of Greenleaf Book Group.

Bad Karma: Fisker’s Government-Funded Failure

Elon Musk says Tesla’s success is due to the quality of its cars, not government funding— but whether you believe him or not, it’s impossible to separate the success from the subsidies. We can’t know if Tesla would have skyrocketed to the top without assistance, and, for now, it’s too early to tell if the company’s current success is sustainable without government funds.

But we can learn something from the spectacular failure of Fisker Automobiles. The Fisker failure is a perfect example of how government-funded innovation can go terribly wrong.

In January 2008, Fisker rolled out the sleek, sporty Karma at the North American Auto Show in Detroit, Michigan. Leonardo DiCaprio was an early fan of the Karma, so were Al Gore and Carlos Santana. Comparisons to Tesla were automatic , and, depending on who you believe, not a coincidence: Just a few months after the Karma made its debut, Tesla filed a lawsuit claiming Fisker had stolen their designs and trade secrets. The suit was settled in Fisker’s favor. A year later, Fisker made headlines when it became one of five vehicle manufacturers 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 poetic about the future: “Imagine when this factory, when the floor we’re standing on right now is making 100,000 plug-in hybrid sedans, coupes, and crossovers every single year,” he said.

And then , in 2011, news outlets began to tell a different story: Those hybrid sedans, coupes, and crossovers wouldn’t be manufactured in Delaware— or anywhere in the United States, for that matter. Although the design work would be completed in the States, the assembly would take place in Finland . This meant that the American people lost approximately 500 assembly jobs— jobs that, to some degree, they had paid for.

Company CEO Henrik Fisker’s explanation? We didn’t have the manufacturing capabilities.

“There was no contract manufacturer in the United States that could actually produce our vehicle,” he told ABC. “We’re not in the business of failing; we’re in the business of winning. So we make the right decision for our business.”

Unfortunately for Fisker, assembling its vehicles in Finland wasn’t enough to keep the company in the business of winning—or in business at all, for that matter: In December 2011—just one month after Fisker began delivering its first vehicles to customers—the company issued a recall of all vehicles manufactured between July 1, 2011, and November 3, 2011.14 The reason: A faulty battery (a problem with the hose clamps made the lithium-ion battery prone to both short circuits and fires). The recall affected 239 vehicles, which comprised nearly all the vehicles shipped to customers, plus most of the vehicles sitting on dealership lots.

In March 2012, Consumer Reports published a scathing review of the Fisker Karma. In addition to smaller issues—from design flaws to engine noise to battery recharge times—the vehicle actually failed during routine testing. “While doing speedometer calibration runs on our test track (a procedure we do for every test car before putting it in service by driving the car at a constant 65 mph between two measured points), the dashboard flashed a message and sounded a ‘bing’ showing a major fault,” the review detailed. “Our technician got the car off the track and put it into Park to go through the owner’s manual to interpret the warning. At that point, the transmission went into Neutral and wouldn’t engage any gear through its electronic shifter except Park and Neutral.”

It went on to remark that the vehicle’s failure was something of a milestone: “We buy about 80 cars a year and this is the first time in memory that it is undriveable before it has finished our check-in process.”

From there, things just got worse: In October 2012, Fisker halted vehicle production after A123 Systems, the company that manufactured the Karma’s (faulty, fire-prone) batteries, went bankrupt. (It’s worth mentioning that A123 had also benefited from government help: In 2009, A123 received a $ 249 million grant from the Department of Energy as part of its Electric Drive Vehicle Battery and Component Manufacturing Initiative. 16) A year later, Fisker was purchased at auction by the U.S. unit of the Wanxiang Group.

On September 13, 2013, the Department of Energy posted a lengthy update on its website, outlining Fisker’s failures and the status of the loans.

“Unfortunately, as has been widely reported, Fisker Automotive has experienced major setbacks in their production schedules and delayed sales that caused them to miss critical milestones laid out in their loan agreement with the Energy Department,”the report stated. “After exhausting any realistic possibility for a sale that might have protected our entire investment, the Department announced today that we are auctioning the remainder of Fisker’s loan obligation, offering the best possible recovery for the taxpayer.”

The update also noted that of the $528 million it had earmarked for Fisker, the U.S. government had only disbursed $192 million by the time the company went under.

But of that $192 million, only a small amount was recouped, leaving U.S. taxpayers $139 million short, with nothing to show for it but an abandoned plant in Delaware and a few hundred fire-prone EVs destined for the junkyard. While government-funded research can, as Steven Chu said, “jumpstart”important discoveries and innovations, it also hinders competition between the technologies and prevents the market from accurately dictating which technologies thrive.

What’s more, subsidizing one innovation over another can discourage the development of a potentially superior technology. More promising companies that could have received funding in the private sector may not get the chance if the government is backing their competitors.

This occurs because the backing lowers the perceived risk of government-favored companies, causing them to appear more attractive to investors. Government funding distorts the investment risk to such a degree that even companies that are commercially inviable—such as Fisker—can appear almost irresistible. Case in point, after announcing the support of Energy Department funding, Fisker saw a flood of private investment, raising $600 million before it even sold a car.

Worse, government funding of private companies encourages corruption, and may even make corruption unavoidable. The funding creates a symbiotic—or perhaps parasitic—relationship between the government and its private partners, making it very difficult to avoid providing mutual favors. While companies with strong government connections will receive funding, companies without political connections— innovative companies that may be equally or even more deserving—won’t get the support they need.

It’s impossible to know what would have happened if Fisker had not received its federal funding. One thing that is clear, though: The U.S. taxpayers wouldn’t have footed the bill for the failure.

Perhaps Nicolas Loris, an energy analyst who provided congressional testimony in the Fisker case, best summed up the situation: “Having the federal government provide the loan privatizes the benefits and distributes any potential losses among the taxpayers.” If the company is a success, the taxpayers see no financial reward for their investment . If the company is a failure, the taxpayers suffer 100 percent of the loss.