3 Lessons From Fisker's Flameout

US News

The story of Fisker, the electric-car startup, is sure to be dominated by political rhetoric about the folly of the government "picking winners and losers" in the private sector. But with the controversial company poised to declare bankruptcy, there are a few other insights that might be more useful.

Fisker got its start in 2007 with plans to build a single luxury plug-in hybrid sedan, the Karma. At first, the timing of the company - named after Henrik Fisker, the Danish car designer who founded it - seemed propitious. Gas prices spiked to record highs in 2008, spurring new interest in alternative powertrains. That same year, the U.S. government began doling out low-cost loans meant to fund high-mileage automobile technology.

[READ: Fisker Drama Could Overshadow Electric Vehicle Industry]

In 2009, Fisker secured a four-stage, $529 million government loan as part of a newer and grander strategy. In addition to the Karma - manufactured in Finland - Fisker would build a second, less-expensive model at an old General Motors facility in Delaware. Fisker estimated it would be building 75,000 to 100,000 vehicles in Delaware by the end of 2012, with the company as a whole generating "thousands of jobs" in the United States.

Instead, Fisker built only about 2,000 Karmas and never opened the Delaware assembly line. Quality-control problems caused long delays and embarrassing snafus, such as when a Karma being tested by Consumer Reports conked out on the test track. Lavish funding eventually dried up, forcing the company to lay off most of its workers. It recently missed a a large loan payment, leaving bankruptcy the likely outcome.

The government recently seized $21 million worth of Fisker assets, part of an effort to recoup $192 million the company had borrowed midway through its buildout plan. Like most creditors in bankruptcy proceedings, Uncle Sam seems likely to lose money, which has already prompted contentious Congressional hearings into the loans. While politicians fulminate, however, there may be different lessons for students of strategy, business and cars themselves. Here are three:

Good cars are really hard to build. We've gotten used to the idea that determined upstarts can disrupt just about any big company with cool new products that grab consumers' attention. The car industry may be one exception. Cars are far more complex than most people realize, with thousands of moving parts and millions of lines of software code in the typical new vehicle. They must endure extreme weather, abusive drivers and rotten roads. Toyota and Honda may be the best automakers in the world, and even they recall many thousands of vehicles every year for quality problems or other flaws.

[PHOTOS: 2013 New York International Auto Show]

Fisker began selling cars even though major quality problems were apparent. That might be okay for software that can be updated online, but it's a huge mistake to sell a beta version of a car costing more than $100,000. For that kind of money, nobody is likely to accept good-enough technology, especially when top competitors such as Porsche, Lexus, BMW and Mercedes are fanatical about every tiny detail.

Scale is crucially important. Fisker's investors - which included top Silicon Valley venture capitalists from the storied firm Kleiner Perkins--obviously thought the company could succeed as a small-batch automaker competing against giants. Fat chance. Nearly all successful automakers combine high-volume, mass-market products with lower-volume, higher-margin ones, because that's the optimal way to achieve efficiency. And most automakers strive to use a single chassis and a set of common parts across as many different models as possible, since that allows them to squeeze the most marginal dollars from high-cost investments. As one example, BMW, which owns Mini, plans to use a common chassis for forthcoming models of both brands, even though they will look nothing alike.

One exception is Tesla, the California electric-car maker that has much in common with Fisker. But Tesla, started in 2003, didn't turn a quarterly profit until this year. Plus, it also received low-cost government loans - $465 million worth - and has had plenty of its own ups and downs. If Tesla ultimately survives, it will be a notable exception to the usual rules of scale.

[VIDEO: 2013 Washington Auto Show]

Neither the government nor corporations can tell consumers what to drive. The Obama administration has made no secret of its desire to promote electric vehicles and other types of gasoline alternatives. Administration officials often point to loans granted to Ford and Nissan as evidence that some government-backed energy programs have worked. But EV sales remain a tiny portion of overall vehicle sales and they'd be even lower without federal subsidies at every turn.

In addition to helping fund EV technology, the government also offers tax credits of up to $7,500 for people who buy plug-ins such as the Chevrolet Volt, Nissan Leaf, Ford Focus Electric and Tesla Model S. Additional state-level incentives may lower the price even more in some areas. Even so, for most consumers, the price is still too high and the tradeoffs - including limited range in some EVs and reduced cargo area, due to the bulky batteries - aren't worth the improved fuel economy. Even big automakers don't make money on their EVs yet. It's hardly a surprise that Fisker couldn't either.

Rick Newman's latest book is Rebounders: How Winners Pivot From Setback to Success. Follow him on Twitter: @rickjnewman.

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