KARMA'S A BITCH! How Fisker Burned Through $1.4 Billion to Create A Car That Didn't Work and Didn't Sell

Look at the grill of the of a Fisker Karma above, the first model luxury electric car made by Fisker Automotive , it seems to be laughing. It's as if it were saying "ha, ha, I got your money!" Indeed it did get public money as the company received a major part of its funding from the pockets of U.S. taxpayers. The automaker ceased production this past summer and has fired most of its staff. According to documents the White House continued to play Sugar Daddy to Fisker even though it knew the company was in trouble.

Investors were burned by the Fisker Karma also.

Despite its seemingly mocking smile, the Fisker Karma is a beautiful looking hybrid sports sedan which is about to meet a very ugly end.

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 its founding in 2007, the company is out of cash. Key investors have been throwing good money after bad keeping the car maker'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 which was a full year after the Administration knew the company was in trouble and nine months before the company acknowledged the company was in trouble to its investors.

The Obama administration knew in back in 2010 that Fisker was not meeting the milestones set up for a half-billion dollar loan--way before they froze the loan because of questions regarding the company's reporting.

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.The Karma's introduction was doomed from the start.

On March 7, 2012, a Fisker Karma purchased for US$107,850 by Consumer Reports magazine was taken out for a test drive at the 327-acre (1.32 km2) CR test track facility in Connecticut. The Karma had fewer than 200 miles (320 km) 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."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 (something that tends to suppress demand). 

The fact 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, according to Reuters:

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

Fisker declined to comment. A Fisker executive who spoke on the 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.

Reuters interviewed thirty people close to the Fisker operations to get a picture of what happened.

Fisker Automotive was founded in August 2007 with the goal of building a beautiful, "green" car that could rival exclusive European brands like Maserati and Aston Martin.

Ray Lane, then a senior partner at venture-capital firm Kleiner Perkins Caufield & Byers threw his support behind Henrik Fisker in early 2008, joined Fisker's board of directors and ultimately went on to serve as the startup's lead investor, board chairman and chief cheerleader. Two people close to Lane said he was impressed by Henrik Fisker's design chops. 

Fisker landed an even bigger backer the next year. In September 2009, Fisker won a $529 million loan from the Energy Department to develop the Karma and build a second model in the United States. The financing came as part of a broader Obama administration effort to shore up employment in the recession-ravaged auto industry and improve the fuel efficiency of the U.S. auto fleet by extending government loans to so-called green-energy initiatives.

A month later, Fisker agreed to buy an idle General Motors factory in Delaware for about $20 million. The government loan approval was a welcome relief for Fisker, which was hurting for cash by late that summer and eager to raise more money from investors, according to an email from Koehler.
"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.

This should have been the Fisker Logo

Perhaps things would have been different if anybody bothered to see if there was a marketplace for such a car, the Reuters report doesn't look at that but According to the University of Cal-Davis, there are four major kinds of electric and/or hybrid car buyers (and none of them fit into the profile of the luxury car buyer):

• Early Adopters: The folks who need to be the first on the block 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. 
• Cheap Bastards: 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, including assumptions about future gas and electric prices.

The luxury car buyer is looking for luxury and/or to show off (I have the nicest car on the block).

 Additionally the luxury car market skews older and upscale while the "green car" is more middle aged (18-49ish) and of average income.

According to Reuters, Fisker built an estimated 2,450 Karmas from 2011 to 2012, but lost at least $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." So with all the money in their pockets, no one bothered to find a way to produce the car at a reasonable price.

Then there was the attitude that they were producing "art" rather than an automobile:

Pressure on engineers to stay faithful to Henrik Fisker's original design, even when flaws emerged that undercut the Karma's performance and potential fixes would add millions in cost.

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 kept the exhaust system in front, but encased it in a very thin steel box. The idea emerged after engineers ordered pizza for lunch one afternoon. The solution addressed some concerns about the sound of the vehicle, as well as CEO Fisker's aesthetic sensibility — but at an extra cost of millions of dollars, according to two engineers who worked on the redesign program.

With all that there was the problem of rushing the car to market:

"Beneath the world-class skin was a rudimentary machine that needed several years of engineering refinement and testing before it could be ready to be released," said Maurice Gunderson, a managing partner at Runway Capital Partners who had an opportunity to invest in Fisker in early 2010 and passed.

Despite all of the problems and the loses Ray Lane who is no longer with Kleiner Perkins Caufield & Byers has personally provided funding to the company, a person familiar with the matter said. Neither Lane nor Kleiner Perkins would comment.

Lane's willingness to invest personally in the company is an unusual step in venture capital. It also comes at a time when Lane has been beset by other issues, including settlement of a long-running, multimillion-dollar tax dispute with the Internal Revenue Service and resigning the chairmanship of Hewlett-Packard in April under investor pressure for his role in the acquisition of Autonomy Plc. 

Some Fisker investors also are emboldened by the success of green-car rival Tesla Motors Co, whose stock has more than tripled this year and whose market capitalization briefly topped $12 billion in late May. 

For some smaller investors, however, it's too late to recoup their losses.
"My money is gone forever," one investor said. "Somebody will have to explain to me why that happened. I still have questions."

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 people's money (including the taxpayers).

As the saying goes "Karma's a Bitch!," especially the Fisker Karma as well as any other time the politicians try to pick marketplace winners, designers don't listen to the marketplace and engineers try and create "artwork" rather than something that can be produced at a cost that will work in the marketplace, and a reliability that will attract new buyers.