How Fisker burned through $1B to create a car that didn’t work

If you ever get a chance to look at the front grill of a Fisker Karma, the first model luxury electric car made by Fisker Automotive, you will notice that it seems to be laughing as if it were saying, “Ha, ha, I got your money!” Despite that, the Fisker Karma is a beautiful looking hybrid sports sedan, which is about to meet a very ugly end.

The company received a major part of its funding from the pockets of U.S. taxpayers. According to documents unearthed by the Associated Press, the White House continued to play Sugar Daddy to Fisker even though it knew the company was in trouble. Fisker Karma also burned private investors.

Fisker Automotive hasn’t built a car in nearly a year. It fired most of its workforce, hired bankruptcy advisers and is seeking a buyer. Co-founder Henrik Fisker resigned in mid-March in a dispute with some of the directors. And despite raising $1.4 billion in private and public funds since it’s founding in 2007, the company is out of cash. Key investors have been throwing good money after bad, paying the carmaker’s day-to-day expenses to keep it alive in diminished form.

Fisker’s finances started to unravel as early as June 2011, when the U.S. Department of Energy cut off access to taxpayer-funded loans, a full year after the Administration knew the company was in trouble and nine months before the company acknowledged its troubles to its investors.

An Energy Department official said in a June 2010 email that Fisker’s bid to draw on the federal loan may be jeopardized for failure to meet goals established by the department.

Despite that warning, Fisker continued to receive money until June 2011, when the DOE halted further funding. The agency did so after Fisker presented new information that called into question whether key milestones -- including the launch of the company’s signature, $100,000 Karma hybrid -- had been achieved, according to a credit report prepared by the Energy Department.

The December 2011 credit report said “DOE staff asked questions about the delays” in the launch of the Karma “and received varied and incomplete explanations,” leading to the suspension of the loan.

Fisker had received a total of $192 million of the $529 million loan before it was suspended. But the Karma’s introduction was doomed from the start.

On March 7, 2012, a Fisker Karma purchased for $107,850 by Consumer Reports magazine was taken out for a test drive at the 327-acre CR test track facility in Connecticut. The Karma had fewer than 200 miles on its odometer. While performing a routine speedometer calibration check prior to actual road testing, the car broke down and could not be restarted.

“We buy about 80 cars a year and this is the first time in memory that we have had a car that is undriveable before it has finished our check-in process,” CR reported.

In August 2012, the Karma was recalled because of a faulty fan. And then there were the news reports that the car began to spontaneously ignite.

That the government had “cut the company off” was unknown by many of Fisker’s private-sector investors, who put $525 million into the company from May 2011 through August 2012, attracted by rosy sales forecasts and assurances the company valued itself at nearly $2 billion.

“One characteristic of businesses that are in trouble like this is, as the desperation increases, they tend to bend the story a little,” Reuters quoted David Cole, a longtime auto consultant and former head of the Center for Automotive Research in Ann Arbor.

A Fisker executive who spoke on condition of anonymity said the company accurately presented its finances to both investors and the government. The executive said Fisker disclosed to investors in a December 2011 letter that it was unlikely to meet the financial covenants under the government loan.

“Whatever the Energy Department’s internal assessment or view might have been, we certainly weren’t giving them different information or different forecasts than we were providing to our own investors,” the executive told Reuters in late May.

The reasons Fisker turned out to be a turkey are numerous.

Fundamentally, say suppliers and some insiders, executives simply couldn’t orchestrate the complex dance that leads from a design sketch to the production and sale of a profitable car. Spending was lavish; engineering blunders rife. The company also faced pressure from both its investors and its chief creditor, the Energy Department, to meet ambitious goals set by Fisker executives.

Perhaps things would have been different if anybody bothered to see if there was a marketplace for such a car.

According to the University of Cal-Davis, there are four major kinds of electric and/or hybrid car buyers:

•Early Adopters: Those who need to be the first to own the latest technology.

•Uber-Greens: Members of the Church of Al Gore.

•Energy Security Hawks: They don’t want to give more money to the repressive oil-producing regimes.

•Cheapos: They’ve calculated that even though electric cars cost more up front, they’ll more than make up the difference if they drive X miles a year for Y years

The luxury car buyer is looking for luxury, to show it off and skews older. “Green car” is more middle aged and of average income.

According to Reuters, Fisker built 2,450 Karmas from 2011 to 2012, and lost $35,000 on each car, according to internal financial statements and interviews with former Fisker executives. One former executive said the Karma “cost far more to produce than we could ever charge for it.” No one bothered to find a way to produce the car at a reasonable price.

“In mid-2011, engineers found that Fisker’s unusual front-end exhaust design was too noisy and hurt the Karma’s horsepower. This could have been headed off years earlier by putting the exhaust pipe in the back, as is standard, but the idea was struck down.

“What emerged was a solution dubbed the ‘pizza box’ that [addressed] CEO Fisker’s aesthetic sensibility — but at an extra cost of millions of dollars, according to two engineers who worked on the redesign program.”

In short, the market place was not yet ready for a luxury green car such as the Fisker Karma, thus the company is failing after burning through $1.4 billion of other people’s money (including almost $200 million of taxpayers dollars).

Jeff Dunetz is the Editor/Publisher of the political blog “The Lid” (www.jeffdunetz.com).