Start Your Own Car Company - Brief Article

Automotive Industries, Sept, 2000 by Gerry Kobe

Want to make money the old fashioned way? It may be easier than you think.

So you want to be a millionaire? See your picture on the cover of every business magazine and retire before you're 30? That's the quick route for dot-com dreamers. But wouldn't you really rather produce something that's tangible, stirs emotions -- and has your name on the hood?

Then why not start a car company?

Sure, the road is littered with the faded names of those who failed. And it's not the easiest sell on Wall Street today But, it's not as crazy as it sounds either.

"It could make sense," says Chris Meyer, director of cap Gemini Ernst & Young's center for Business Innovation in Cam bridge, Mass. "The auto industry might be ripe for it, with so much money tied up in low-performing assets and the market's push for mass customization and collaborative capitalism that's going on among OEs."

Historically, auto companies have been started to feed the ego of their namesake. "Many people do this sort of thing because they want to create a legacy," says Michael J. Tracy, founder of the Agile Group, a manufacturing consulting firm based in Howell, Mich. "But that's the wrong reason. You do it because you want to make money. And you better be focused on the business side of it and forget about how good a car will look with your name on it, or you'll never survive." (seepage 49)

While Tracy bluntly states that those who get into automaking do so simply because they are emotionally misguided enough to want to get into this industry, he also sees the potential.

"I'll be the first one to argue that it is very tough to make money here," he says. "But having said that, if you do it right you don't just make money, you really make money."

Ironically, Tim Leuliette, senior managing partner and CEO of the Bloonifield Hills, Mich.-based investment firm Heartland Industrial Partners, sees philosophical rather than financial incentives for a startup.

"There are two popular schools of thought on why people from the outside would start car companies," Leuliette observes. "One is that they believe the industry is the last one to see opportunity. And second, there is a feeling that a shift to a different business model would be easier to generate from outside the industry as opposed to from the inside."

Leuliette believes that both theories are incorrect, however, and that in reality the industry does amazingly well given its size and complexity. He also says that just because somebody conceives a way to successfully manufacture a few hand-built vehicles, it doesn't mean it can or should become a model for volume automaking.

"If we are just talking niche markets, there will always be some rich guy who can sell 100 cars to his rich friends, but that is not the building blocks of this industry" he lectures. That's a hobby. It's just the noise level."

However, the flip side of the niche-vehicle equation is that low volume is not necessarily a bad place to start. In fact, as in the case of Ford's Think (see page 3?) it proved to be quite profitable even though the business plan went awry.

"If you manage to start a car company and your product is good, you automatically become a candidate to be bought," says Garel Rhys, industry analyst and professor of Motor Industry Economics at the University of Wales. "You would probably be made an offer that when you evaluated it would be net present value, plus 100 years profit. And it would be an offer you could not refuse. But even if that happened, is that all bad? Your efforts were still very worth your while."

What is possible?

The first step to starting a car company is doable and in fact is being done every day. "Find a hole in the market that has not been responded to correctly," says Tracy. "Or better yet, create an emotional need for your car. Chrysler's PT Crusier is a great example of that."

"A car like the PT is an excellent car to pick for a startup," concurs Cynthia Hess, senior managing director at Heartland Industrial Partners and former vice president of quality control at DaimlerChrysler AG. "I worked on that car. If you can come up with one that is super attractive like that the car can market itself."

That said, funding for the right business plan is not as hard as it might seem. "Money is not the issue," assures Leuliette. "From our perspective, for any good idea we can find the money for it. So cash is the least of your problems, if your numbers make sense."

To maximize chances for being funded, the best bet is to outsource as much as possible to established suppliers who are willing to do some risk-sharing on the product. Their capability and willingness to partner will add credibility and investor confidence to the project -- as Danny Panoz knows (seepage 42).

Startup volume of 10,000 to 15,000 units is a good target from an investment and manufacturing standpoint, because it is sufficient to generate substantial revenue. It's also low enough to allow for a design that is more labor intensive. That minimizes investment in automation and allows labor costs to be built into the unit price.