How Fisker fell apart

At last week's politically charged congressional hearing on the troubles of Fisker Automotive, Rep. Jim Jordan, R-Ohio, said that the company had "no business acumen" and that "taxpayers have effectively subsidized luxury novelty vehicles for the likes of Justin Bieber, Leonardo DiCaprio and Al Gore."

Ouch.

Republicans eager to score points against President Obama had a field day last week with Fisker. But politics -- and the perils of taking venture capital from the federal government -- were in retrospect a secondary problem for the startup automaker.

The roots of Fisker Automotive's precarious state go back several years, to a time when the company and the Department of Energy established unrealistic sales goals for an unknown automaker working with tricky hybrid technology.

DOE documents released last week, along with comments from dismissed staffers, paint an ugly portrait of Fisker's flawed efforts to rush not one but two vehicles to market.

The Karma was "one of the most technically complicated vehicles to ever be designed for mass production," said a December 2011 e-mail by Eric Werner, a contractor working in the DOE office that handled Fisker's loan and a former Ford Motor Co. engineer. Its launch timeline was "highly compressed and underresourced," Werner wrote.

The e-mail, written to DOE colleagues as the agency mulled Fisker's challenges with Karma production and suppliers, was released last week by the U.S. House Oversight and Government Reform Committee.

Former staffers and the DOE documents indicate that Fisker relied heavily on subcontractors to engineer and design its cars, and that the company failed to catch flaws before they seriously disrupted production schedules. Late engineering changes and parts shortages hobbled production. And Fisker relied on a relatively new company, A123 Systems, to supply the critical propulsion batteries for the hybrid powertrains.

Founder Henrik Fisker, a former auto designer for Aston Martin and BMW, declined to comment for this story. In his prepared testimony before the committee, Fisker maintained his optimism despite rumors of an imminent filing for bankruptcy reorganization.

"Fisker still has the potential to build on that success if the company can secure financial and strategic resources," he said.

Former Fisker insiders say the company's struggles stem from an optimistic business plan that anticipated rapid sales growth.

Fisker's original plan anticipated annual global sales of 100,000 vehicles in 2013, in just its third year of sales, according to a November 2011 DOE presentation summarizing Fisker's April 2010 business plan.

Compare that with the 143,098 vehicles sold worldwide last year by Porsche -- a revered brand with iconic nameplates that sells through 750 established dealerships worldwide. All told, Fisker only sold about 2,000 of one model, the Karma.

"The business plan that was established and that the DOE signed off on was completely unrealistic in terms of the volumes and the revenues and the profits," said a former Fisker sales operations insider who spoke on condition of anonymity.

The promise of building green vehicles in the United States helped Fisker secure a $529 million credit line from the DOE Energy in April 2010.

The loan agreement set a number of targets, including selling 11,000 Karmas by February 2012 at a sticker price of no less than $87,900, according to documents released by the House committee.

The company also said it would launch not one, but two, vehicles in less than two years -- no small feat for even an established automaker with far more resources.

Fisker's second vehicle was to be the Atlantic, a less expensive sedan powered by an improved second generation of Fisker's plug-in hybrid system. Convertible and wagon variants of the Atlantic were planned for production but never got past the concept stage.

The Atlantic was scheduled to launch in June 2012 -- just 16 months after the Karma's planned launch and a little more than two years after the company secured its DOE credit line. By comparison, launching a new model from start to finish takes two to three years at most major automakers who have thousands of seasoned engineers.

At its peak, Fisker had about 600 employees, said some former staffers.

Fisker repeatedly missed production and sales milestones for the Karma in early 2011. The Energy Department froze Fisker's credit line in June 2011, holding up funds earmarked to help launch the Atlantic.

An Energy Department spokesman maintained that the agency saw promise in Fisker's business plan when the loan was approved.

"There were very sophisticated investors who looked at the company and saw great potential for their product, so I don't think it's fair to say that at the very beginning this was such a risk that it was not a risk worth taking," the DOE official said, noting that the company has raised $1.2 billion in private equity.

"It was a calculated risk, like this program was designed to take," he said.

Fisker started making mistakes as it raced to meet its February 2011 launch target, say the former staffers and the DOE.

The company relied on engineering firms and contract workers, rather than full-time staffers, to develop the Karma, according to Werner, the contractor working in the DOE office.

In a December 2011 e-mail to department officials included in the documents released last week, Werner wrote many of the Karma's quality flaws stemmed from this strategy.

"The early Fisker staffing model leveraged suppliers and engineering services, rather than direct hired staff, to design the Karma," Werner wrote in the e-mail. "A key core competency of an OEM is to act as the engineering integrator insuring the complete vehicle meets the intended function."

In Fisker's defense, many established automakers rely on suppliers for complex parts and systems.

Fixing the quality lapses led to a series of supply chain problems and late engineering changes that began to delay "repeatedly" the Karma's production schedule by February 2011, according to an internal Energy Department presentation of January 2012.

A DOE summary of the Karma delays released last week cited a faulty power inverter -- a critical component in hybrid powertrains -- and shoddy wiring as key holdups.

Engineering changes were made through late September 2011, adding cost and causing suppliers to miss their deadlines. The resulting parts shortages further hampered the Karma's launch, the DOE presentation said.

Even though Fisker engineers fixed many of the Karma's reliability problems by early 2012, the company's fate may already have been sealed.

The DOE froze its loan in June 2011, citing Fisker's missed production Karma production milestones. By early 2012, work on the Atlantic was stopped to conserve cash.

In March 2012, faulty batteries from supplier A123 Systems caused a Karma purchased by Consumer Reports to die on the magazine's vehicle test track, prompting a recall. Later, in two separate incidents, Karmas caught fire while parked. In October, A123 Systems filed for bankruptcy, leaving Fisker without a source of batteries and forcing it to stop Karma production.

This year, starved for cash and not producing cars, Fisker has been unable to strike a rescue deal with multiple suitors, including two Chinese automakers.

A former Fisker employee who was involved in business planning concedes the business plan was too ambitious, but added that at the time it represented the startup's best chance at success.

"There was room for things to go wrong and still have a viable business," the insider said. "It's just that no one could have expected that much to go that wrong that fast."

(Big plans, bad karma: How Fisker fell apart originally appeared on Automotive News, sub. req.)

By Gabe Nelson and Ryan Beene- Automotive News