The Fall of Fisker Automotive: A $35,000 Loss on Each Karma, Lavish Spending and Misinformation
June 17, 2013 5:03 PM
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Fisker spent $1.4 billion on the production of one car, and is now broke
Fisker Automotive is in a financial crisis with
talks of a bankruptcy filing
and huge employee layoffs. But what exactly caused the fall of Fisker?
dug deep to find out what went wrong at every corner. It interviewed more than 30 people close to the company (not including co-founders Henrik Fisker and Bernhard Koehler) and referred to a review of five years worth of confidential investor presentations. It even read internal Department of Energy (DOE) emails and briefings from a congressional hearing in April.
What Reuters found is that Fisker spent $1.4 billion on the production of one car, and is now broke.
found that there were many reasons that led to Fisker's demise. For starters, Fisker built about 2,450 Karmas (its plug-in hybrid luxury sports sedan, which was the company's only production vehicle) from 2011 to 2012, but internal financial statements show that the automaker lost at least $35,000 on each car.
That wasn't the Karma's only issue. Delays in the start of Karma production and a huge reduction in volume meant forced Fisker to pay much higher prices for many components and sub-systems. It was also stuck paying penalties to suppliers and to Valmet, which built the Karma in Finland. In fact, Fisker racked up $200 million in bills to suppliers by late 2011 because the automaker asked them to meet challenging deadlines, yet was slow in giving suppliers technical information and punctual payments.
Fisker only delivered 200 Karmas to customers in 2011 and another 1,600 in 2012, which was a huge disappointment compared to its original plans to sell 15,000 Karmas a year starting in 2009.
The Karma's design was another huge problem that cost Fisker millions of dollars. Engineers were pressured to stick with Henrik Fisker's original design, even when they discovered performance flaws that would later need last-minute fixes and tweaks. These last minute fixes made between $50 million and $100 million of Fisker's parts inventory obsolete.
These design changes also led to cost overruns and late shipments of components while Fisker over-ordered other parts.
One of the fixes was the front-end exhaust design, which was noisy and reduced horsepower. Instead of just putting the exhaust pipe in the back ahead of time, a thin, steel box was designed later to enclose the exhaust system. But engineers said this last-minute fix cost the company millions of dollars.
Henrik Fisker and the Karma
Aside from Karma issues, the company had
a spending problem
. Henrik Fisker and Koehler had salaries of $600,000-$700,000 a year -- even after the automaker laid off hundreds of employees in 2011 and 2012.
In May 2011, Fisker co-sponsored a pre-race grand prix party on a 146-foot yacht in the Monte Carlo harbor. The party, which featured champagne with flecks of gold and an appearance by Prince Albert of Monaco, cost Fisker between $80,000 and $100,000.
The DOE also caught some heat for the way the Fisker loan was handled. Many wondered whether the DOE offered acceptable oversight, and if Fisker's board of directors (mainly large investors) guided the company correctly.
But according to DOE, it was receiving mixed stories from Fisker about production milestones and spending, and did what it could with the misinformation. For example, Fisker told DOE on November 1, 2011 that it needed additional private equity or loan money, or else it would run out of cash completely in just three days. But at the end of the month, it said that a mid-month investment of $37 million bumped it up to $20 million in cash.
In the December 14, 2011 letter to shareholders, Fisker said it had a capitalization of nearly $2 billion. But that included $720 million in private equity that had nearly been spent; the $529 million in DOE loans, which Fisker only had access to $192 million of at that point, and $700 million for the Delaware plant (which was inflated at 30 times the actual purchase price).
An internal DOE briefing from December 19, 2011 explained a plan to keep an eye on Fisker's progress regarding the Delaware plant. The briefing mentioned that it could be ready to build cars "by the end of 2013," but a separate email in late December 2011 between DOE officials predicted that the Atlantic (Fisker's second model) would not be ready for production in the Delaware plant until mid-2014.
However, investors got the wrong information in the December 14 shareholder letter, which stated that Fisker would continue with a 2013 launch time frame for the Atlantic. But in February 2012, all 26 workers were laid off at the Delaware plant.
Private-sector investors had put $525 million into the company from May 2011 to August 2012 due to Fisker's bending of the truth in some instances, such as the $2 billion company value.
To make matters worse,
DOE cut off Fisker's loans
in June 2011, and Fisker didn't make any mention of it for nine months. An anonymous Fisker executive told
that the DOE never told Fisker that it was cutting off access to the loan; the company just stopped seeking the funds during that period of time. He also said that Fisker told investors in the December 2011 letter that there wasn't a good chance that the automaker would meet the financial agreements as part of the DOE loan.
Fisker received $529 million in
in April 2010 for the development of high-tech vehicles. But
DOE froze the loans due to "unmet milestones"
in June 2011 with only $192 million drawn at that point.
Fisker's situation crumbled further this year when Henrik Fisker
stepped down as executive chairman
citing "several major disagreements" with "Fisker Automotive executive management on the business strategy."
That same month, the company was forced to
put its U.S. workers on furlough
laid off 75 percent of its workforce
(or about 160 employees). Fisker even faced a federal lawsuit that accuses the company of not giving employees advanced notice of the mass layoffs. Under the U.S. Worker Adjustment and Retraining Notification Act, workers are supposed to have 60 days notice before being laid off.
The cherry on the cake was Fisker's missed DOE payment at the end of April.
Fisker is looking for a buyer, and last month, VL Automotive (a venture between former General Motors Co executive Bob Lutz and industrialist Gilbert Villarreal) and China parts maker Wanxiang Group submitted a proposal to
buy Fisker Automotive for $20 million
in a prepackaged bankruptcy deal.
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6/17/2013 10:35:46 PM
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