The week of June 17, 2024: An EV saga, tax, space, spending, and much, much more.
The week of June 17, 2024: An EV saga, tax, space, spending, and much, much more.
Early-stage electric vehicle (EV) manufacturer Fisker, Inc. has filed for Chapter 11 bankruptcy. Of itself, that’s no scandal. Early-stage companies fail all the time. But the rise and fall of Fisker (and that of its predecessor) is a story of our times, and worth a closer look. Fisker’s predecessor, Fisker Automotive,was founded in 2007 by, to quote his X header, a “risk taker, innovation loving, protocol challenging designer and entrepreneur who turns dreams to reality & never gives up.” This modest fellow is a Danish designer well-known for his work with Aston-Martin and BMW. His name — guess — is Fisker, Henrik Fisker.
Fisker Automotive’s one and only line was based on a plug-in hybrid called the Karma, priced at over $100,000 when it came to market in 2011, two years later and about 20 percent costlier than planned when first unveiled in 2008. The Karma looked good but had its flaws. Some were rooted in design. The interior was so small that the EPA labeled it a subcompact. To pay $100,000 and get a sub-compact in return is underwhelming, but it was good enough for famed environmentalist Al Gore and another famed environmentalist, Leonardo DiCaprio, too. DiCaprio received the first Karma, was an investor in the company, and became a brand ambassador.
Fisker Automotive attracted some impressive venture capital funding, but also (in 2009) a federal loan of $529 million. Commenting on that loan at the time, then-Vice President Joe Biden said that “the story of Fisker is a story of ingenuity of an American company, a commitment to innovation by the U.S. government and the perseverance of the American auto industry.”
The company filed for Chapter 11 in November 2013. Its scraps were sold to a Chinese buyer. Of that $529 million, $192 million was eventually drawn down. In a 2013 New York Times story, Bill Vlasic noted that the feds had taken “the unusually aggressive step of seizing $21 million from the company’s cash reserves to begin recouping the $192 million in taxpayer dollars spent on the company’s flawed strategy.” More was recouped later. By this time, however, the government funding had acted as a magnet for equity investors. During a detailed (and revealing) examination of Fisker Automotive’s fall published in 2013, Reuters quoted from an email from the company’s then COO:
“We are oversubscribed in this equity round with the Energy Department support — and nowhere without it,” Koehler said in an August 2009 email to Energy Department officials.
The announcement triggered a flood of investor interest in Fisker. The company raised some $600 million before it ever sold a car.
According to Reuters, Fisker had “burn[ed] through “$1.4 billion in private investments and taxpayer-funded loans.”
Not all the problems that beset the company were its fault. Two hundred new Karmas were submerged in a flood. Batteries supplied by a company named A123 Systems were defective, and others caught fire. A123 Systems, which was also an investor in Fisker Automotive, was also a recipient of taxpayer dollars. Business Week reported in 2012 that it had received “a $249.1 million grant from the Energy Department from a program started in February 2009 that supports the construction of U.S. plants to make batteries for hybrid and electric vehicles [the company ended up drawing down about half of it].” In addition, it received $135 million in tax breaks from Michigan.
All this is a reminder that the government has been in the EV business for a long time now, as is a visit to A123’s Wikipedia page, and, for that matter, its footnotes, which yielded this:
Chrysler has disbanded a team of engineers dedicated to rushing a range of electric vehicles to showrooms and dropped ambitious sales targets for battery-powered cars set as it was sliding toward bankruptcy and seeking government aid. The move by Fiat SpA marks a major reversal for Chrysler, which had used its electric car program as part of the case for a $12.5 billion federal aid package…
And then there was this “historic announcement” from Barack Obama’s White House from earlier in the same year:
Further accelerating the manufacturing and deployment of electric vehicles, batteries, and components here in America, and creating tens of thousands of new jobs, President Obama today announced 48 new advanced battery and electric drive projects that will receive $2.4 billion in funding under the American Recovery and Reinvestment Act. These projects…will accelerate the development of U.S. manufacturing capacity for batteries and electric drive components as well as the deployment of electric drive vehicles, helping to establish American leadership in creating the next generation of advanced vehicles…
A123 went public in September 2009, amid considerable investor excitement, and filed for Chapter 11 in October 2012. CNN noted that “demand for electric vehicles has not materialized as fast as some had hoped.” Say it ain’t so.
Bill Vlasic:
An Energy Department spokeswoman, Aoife McCarthy, said the loan to Fisker was one of only a handful of 33 clean-energy loans that did not prove successful. She asserted that its problems should not be considered representative of the Obama administration’s broader efforts to promote cleaner cars…
“There will always be an element of risk with investments in the most innovative companies,” she said. Major automakers like Ford and Nissan received billions of dollars in federal loans to produce electric cars and, so far, have succeeded. A smaller manufacturer, Tesla, has also been able to meet the conditions of its government loans while producing an electric model.
Say what you will, that “smaller manufacturer” did well.
The federal government should help fund research with strategic and/or scientific value, but no obvious (at the time) commercial value. Beyond that, it’s less straightforward. Worries about the government being in the business of picking winners and losers are familiar — and justified — enough. To read in an article published in 2013 that “Ford and Nissan received billions of dollars in federal loans to produce electric cars” was not reassuring.
Ford’s loan went toward upgrading plants, helping advances in traditional engines, and assisting financing the Ford Focus Electric, which was on the market between 2011-18. A few thousand were sold. Nissan’s helped fund U.S. production of the first generation Leaf. There were plans of an annual production run of 150,000. Unfortunately, in its best year (2014) it could only manage 30,200.
Then again, there’s Tesla, which unlike Fisker Automotive, had a proven track record. It received a ten-year federal loan of around $400 million. In a 2013 press release announcing that it had repaid the loan (years early) Tesla noted that:
For the first seven years since its founding in 2003, Tesla was funded entirely with private funds, led by Elon Musk. Tesla brought its Roadster sports car to market with a 30% gross margin, designed electric powertrains for Daimler (Mercedes) and had done preliminary design of the Model S all before receiving a government loan.
That is impressive, but it raises the question of why the company needed a government loan in the first place. Perhaps it didn’t, but if the money was there…
The loans to Ford, Nissan, Tesla, and Fisker were all paid under the Advanced Technology Vehicles Manufacturing Program, which was set up under former President George W. Bush in 2007, and made more enticing still in 2009, when Congress approved an extra $7.5 billion to subsidize borrowing costs. Nothing was lent under this program for years, but in 2022 it sprung back into life, and there have been new loans to finance various EV battery facilities. The numbers run into the billions of dollars. The largest to be announced (in June 2023) has been a $9.2 billion loan to a joint venture between Ford and a South Korean partner for the construction of three battery factories. The full cost of the project is about $11.4 billion, with most of the balance being financed by loans from state governments.
The new factories that will eventually supply Ford’s expansion into electric vehicles are already under construction in Kentucky and Tennessee through a joint venture…owned by the Michigan automaker and South Korean battery giant SK On Co. Ford plans to make as many as 2 million EVs by 2026, a huge increase from the roughly 132,000 it produced last year.
If there ever was a division between the notion of the ATVM program as a sort of tech incubator (questionable) and old-fashioned industrial policy, it has gone now, and no attempt is being made to conceal it.
Since then, however, the second battery factory in Kentucky has been put on hold. Ford has noticed that demand for EVs is falling behind expectations and, as I mentioned in May, has been cutting back or slowing its investments in the EV sector, including battery plants. The month after the loan was announced, Ford dropped the talk of producing two million cars by 2026. It now doesn’t know when that target will be reached.
But on to Fisker 2.0.
In October 2016, Henrik Fisker announced the launch of Fisker, Inc. Bloomberg reported that “the charismatic Dane said his newly minted Fisker, Inc. will showcase a premium, all-electric vehicle in the second half of 2017.” It would benefit, the company’s chairman said, from new battery technology emanating from “several professors in UCLA”. The new vehicle would have a 400-mile range and its battery would (potentially) last as long as the car. The good news didn’t stop there. Fisker talked about producing a mass-market EV for less than $40,000 in the years after the first car’s launch. In the event the new battery technology didn’t work out. And nor, in the end, did Fisker 2.0.
The fact that Fisker had found fresh backers may be evidence of his talents as a salesman, but they are also a reflection of one of the strengths of this country’s investment community, the willingness to give someone who has failed in one enterprise another chance, ideally if that chance looks good enough and if enough steps are taken to prevent a recurrence of what went wrong on the previous occasion. That doesn’t always work out (and in this case maybe too much of what had gone wrong in Fisker 1.0 was overlooked), but still.
Fisker, Inc.’s only model to make it to the marketplace, the Ocean, became available in 2023. In the meantime, the company had gone public (in October 2020), via, with a certain inevitability, a special purpose acquisition company (SPAC), one of the defining markers of the asset bubble created by ultra-low interest rates. In August 2020, Henrik Fisker had predicted to the Wall Street Journal that, within two years of starting production, the company would have an Earnings Before Interest, Tax, Depreciation, and Amortization (EBITDA) margin of 19 percent on revenues of $10.6 billion. That didn’t work out.
That SPACs, sometimes known, not unreasonably, as blank check companies, were used to raise money for EVs, the poster vehicles of a green bubble that was itself partly fueled by the mispricing of money, was a meeting of madnesses to savor. Quite a few EV companies went public (benefiting also from the search for the next Tesla) using the SPAC route, and they have — how to put this — not flourished. A few have gone under, others limp along.
Fisker’s SPAC deal gave it $1 billion in gross proceeds. According to a Reuters report at the time, this included “$500 million of funds from existing and new investors such as AllianceBernstein and BlackRock Inc.” Fisker’s environmental, social, and governance (ESG)-attuned message (well, at least the E and the S) might have added to the company’s appeal to the ESG boosters at BlackRock, even if the fact that Fisker’s CFO and COO was Henrik Fisker’s wife was a little hard to reconcile with “governance” orthodoxy.
Fisker’s management certainly played the ESG theme hard, perhaps out of conviction. But they would not have been unaware of how this would attract certain types of investors (even more so during a green bubble) — and, indeed, car buyers. Fisker’s “inaugural” (2021) ESG report, released, I note, before the company had sold any cars, chronicles a series of green feats. Local sourcing, recyclable materials, green offices — the sustainability just didn’t stop. And there was more. Fisker had announced “an aspirational goal” (an intriguing choice of wording) to “create a 100 percent carbon neutral vehicle by 2027.” It had signed the UN global compact (a commitment to “implement universal sustainability commitments”).
When Fisker released its 2022 ESG report, its CEO commented that:
“[W]e’re once again emphasizing that we founded the company with environmental, social, and governance values ingrained deep within our culture – and we’ve taken thoughtful steps on all levels to elevate our delivery every year…In an industry riddled with old practices, we’ve made sustainability, a more ethical supply chain, diversity, and more factors clear and tangible priorities across the business. Our board of directors is diverse in ethnicity and gender, and this extends across our rapidly expanding global workforce and operations – with my design team also led by a majority of women of various nationalities. In every respect, we’re proud that we have ‘walked the walk’ at Fisker when it comes to ESG, and we will continue to lead by example.”
Unrelatedly, Fisker auctioned off a series (“Fisker by Hand”) of NFTs of “original pen on paper sketches from the hand of founder and Chief Designer Henrik Fisker.” For Fisker, a company that, in some respects, owed its “reincarnation” to the distortions produced by free money, to sell NFTs, one of the stupidest products of that era, made sense. NFTs, non-fungible tokens for those who don’t know or are fortunate enough to have forgotten, are tokens recorded on a blockchain which guarantees their authenticity. Unlike say a bitcoin, they are not fungible — they are unique. This quality was used to create a nascent art or collectibles market in digitalized copies of, say, some piece of art or item (an X-ray of William Shatner’s teeth, for example). They are unique (or limited edition) copies which come with varying rights. For a brief moment, NFTs were hot, and some sold for extraordinary amounts. Mostof them are now thought to be worthless.
According to Reuters, the SPAC deal valued the company at $2.9 billion. At the stock’s peak ($28.50) in February 2021 the company was valued at nearly $8 billion. This was not the company’s final round of financing. For example, in August 2021, it raised $625 million through an issue of green convertible bonds at an interest rate of 2.5 percent (with a conversion premium of 115 percent). This looks like cheap financing, reflecting continuing high expectations of either the company, the green bubble, or both. The fact that certain investors wanted green bonds either out of conviction or because they had a green bond fund to fill may also have helped.
In June this year, Fisker filed for Chapter 11. According to a Bloomberg report, the company has between $500 million-$1 billion in assets, and liabilities of between $100-$500 million. Some reports suggest that that may be far too optimistic.
What had gone wrong?
The car, to start with. Reading various accounts of the problems that bedeviled the Ocean, it seemed that, once again, Fisker acted as, in part, a microcosm of its sector’s turbulent past and present, in this case by launching an EV that was not ready for the market. Moving a car from prototype to assembly line is rarely easy, but (to speculate) it looks to me as if Fisker, needing the cash flow that sales could bring, released its EV too soon. Software upgrades were not enough to remedy the car’s failings and may even have made them worse. Difficulties included the car just dying along the road, braking issues, being either locked in or locked out of the car, not being allowed to start the car, and the hood flying open.
Software bugs also hit production, and, at times, the company appeared to have been chaotically run, although, at a guess, much of that chaos — and its damaging consequences — may have been a product of the scramble to conserve dwindling cash reserves.
In February 2024, the company warned that there was “substantial doubt” whether it could continue operating. But 2024 is not 2021. Early-stage EV companies have lost much of their investor appeal. Western demand for EVs is falling far short of expectations. Small EV firms have to contend with established carmakers benefiting from billions of dollars in government subsidies. Washington may, directly or indirectly, have helped these companies attract the capital they needed to get going, but Washington’s support for their large rivals may now help destroy them. Moreover, those large rivals can (for now) subsidize their loss-making EV businesses with the profits from their sales of conventional cars. And, of course, money is no longer “free.”
A rescue financing fell through, Fisker did not have the resources to weather its crisis alone, and Chapter 11 was all that remained.
Note: Amended to correct and add to details of A123’s funding.
The Capital Record
We released the latest of our series of podcasts, the Capital Record. Follow the link to see how to subscribe (it’s free!). The Capital Record, which appears weekly, is designed to make use of another medium to deliver Capital Matters’ defense of free markets. Financier and National Review Institute trustee, David L. Bahnsen hosts discussions on economics and finance in this National Review Capital Matters podcast, sponsored by the National Review Institute. Episodes feature interviews with the nation’s top business leaders, entrepreneurs, investment professionals, and financial commentators.
In the 175th episode, David is joined by Darren Doane and David Shannon of the Doane Creative Agency for a lengthy, thorough, and challenging talk. They discuss business, technology, social media, and the tension between conserving the lessons of the past and moving into the opportunities of the future. It is perhaps the most provocative episode of Capital Record ever.
The Capital Matters week that was . . .
Electric Vehicles
North America’s integrated auto sector is in the midst of a significant transformation driven by the United States’ and Canada’s ambitious climate goals. Their decision to go all in on electric vehicles (EVs) risks triggering one of the most significant economic-policy blunders since the Great Depression…
Tax
Donald Trump has made waves by talking about eliminating the individual income tax in favor of a system of tariffs for federal revenue. This proposal — if one can even call it that, as there is no detailed plan of how it would actually happen — is, to use one of politicians’ favorite euphemisms, aspirational…
These comments (reported by Bloomberg’s Nancy Cook) were . . . bold.
“The notion that tariffs are a tax on US consumers is a lie pushed by outsourcers and the Chinese Communist Party,” says Republican National Committee spokesperson Anna Kelly.”
An import tariff is not, of course, a direct tax on U.S. consumers, but when trying to understand a tax (and no one, I hope, denies that tariffs begin life as a tax), it is perfectly normal to look at where the economic burden imposed by a tax ultimately ends up. Critics of corporate-tax increases (rightly) look at their negative effect on wages and prices and so on.
The same is true of tariffs…
Most of the tax cuts expire at the end of 2025 thanks to arcane Senate procedural rules and the unwillingness of a few Republicans to eliminate some of the most politically popular tax loopholes. Beginning in 2026, taxes are set to automatically increase by more than $400 billion a year.
This fiscal cliff represents a once-in-a-generation opportunity to complete the reforms that were started in 2017 and cut tax rates to their lowest level in almost 100 years.
Space
We’re experiencing a clash of political-economic models for space. America favors respect for norms, free enterprise, and open scientific exploration. China, in contrast, promotes the Chinese Communist Party’s (CCP) brand of quasi-fascistic state capitalism, authoritarianism, and raw power projection. For the well-being of our citizens, as well as all mankind, we must ensure America wins the new space race…
Spending
The Affordable Connectivity Program began as an “emergency” program during the pandemic and was transformed by Democrats into “infrastructure“; now many want to turn it into a permanent part of the welfare state. It provides a $30 per month subsidy for internet service to qualifying households.
The ACP is prone to fraud, and the subsidy is prone to industry capture, with internet-service providers spending millions to lobby for more funding. The Biden administration has described the program as a “key component of Bidenomics” and has sought its expansion to cover more households…
Student Loans
I don’t know Kamens’s life story, and there could be some kind of hardship in his life that made that difficult to accomplish. It is nonetheless true that lots of people with their own hardships are able to repay debt of that size according to the agreement that they made when they took it out, because they prioritize paying back their debts.
But Kamens did not, and now his political party has decided to give him taxpayer money instead. As an added bonus, the letter notes that because of the American Rescue Plan Act, the balance of the loans forgiven is not considered taxable income at the federal level. Democrats want to step up tax enforcement with a larger IRS, but they wrote into law that their special one-time income for people who didn’t pay back their student debt, a category that includes White House staff members in addition to their congressional staff, is tax-free…
Net Zero:
One of the advantages enjoyed by those in Europe forcing through the reckless “race” to net zero is the argument that (essentially) resistance is futile. All “respectable” parties were in favor. Polling supported it (although, tellingly, when people were asked how much they, personally, were prepared to sacrifice in the name of the climate, the answer was, well, not very much). And, oh yes, there are the young — Greta’s army…
Climate Policy
Gray is touching on a critical point that is too often brushed aside by today’s climate policy-makers and those who cheer them on. Even if the science is “settled,” the best policy response to it quite clearly is not. For example, it is not inconsistent to believe that man-made climate change is real at the same time as thinking that the “race” to net zero by 2050 is both reckless and counterproductive. Policy-making in this area is, as in so many others, a matter of choices — sometimes hard ones — and in a democracy those should be left to voters to decide, a process, incidentally, in which discussion should be free, not confined within limits that someone somewhere has ruled should apply.
To sign up for The Capital Letter, please follow this link.