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Fisker Automotive: A Beautiful Mess

This article originally appeared in Business Insider

How can anybody learn anything from an artwork when the piece of art only reflects the vanity of the artist and not reality?

― Lou Reed

Fisker Automotive recently filed for chapter 11 bankruptcy protection and announced plans to sell itself to recently formed holding company Hybrid Technology, following that company’s purchase of a defaulted Fisker loan from the U.S. Energy Department.  Of the startup automakers granted loans by the Energy Department, Fisker Automotive was approved for the largest amount ($529 million).  Tesla Automotive has repaid the $465 million in loans it received.  Though it received approval for a $529 million loan, Fisker received only $192 million (the company repaid only $53 million of that total).

Co-founded by Ashton Martin designer Henrik Fisker, Fisker Automotive set out to create something beautiful and lucrative.  By all accounts the company was wildly successful at the former, and shockingly unsuccessful at the latter.

Privco Chief Executive Sam Hamadeh summed up the challenges of an aesthetically driven company with too much capital and too little discipline when he noted the Fisker was at one point spending $900,000 per vehicle produced, and then selling those vehicles for $70,000.

Hamadeh went on to note:

Fisker Automotive may well go down as the most tragic venture capital-backed debacle in recent history,” Hamadeh said in a statement. “The sheer scale of investment capital and government loan money — over $1.3 billion in all — was squandered so rapidly and with so little to show for it that the wreckage is breathtaking. Bankruptcy will be the end of Fisker, but for the taxpayers, venture capital firms, individual investors, and Fisker’s suppliers, it will all be too little too late.

The writing has been on the wall for some time regarding Fisker.  The company laid off 75% of its staff in April as it sought to preserve its dwindling cash and assess its options.  At the time of its announcement, Fisker, which had raised an estimated $1.3 billion from investors, had cash on hand of less than $30 million.

In the end, the company failed to produce the most beautiful of all outcomes for investors: a return.

About the Author

David Johnson (@TurnaroundDavid) is Founder and Managing Partner of Abraxas Group, a boutique advisory firm focused on providing transformational leadership to middle market companies in transition.  Over the course of his career David has served as financial advisor and interim executive to dozens of middle market companies.  David is also a recognized thought leader on the topics of business transformation, change management, interim leadership, restructuring, turnaround, and value creation.  He can be contacted at: david@abraxasgp.com.

Challenges Facing Midsize Manufacturing Companies

This article originally appeared in Business Insider

As we review the landscape for small and midsize manufacturing companies, we see considerable challenges.  A review of some items in the February 2013 ISM Report on Business® is instructive (see report here).

Gross Margins

Gross Margins have been an issue that we have focused on extensively at ACM Partners.  The operating expenses of a company are certainly important, but in our experience understanding where gross margins might be headed and why is often a useful exercise in predicting pockets of distress in the broader economy.

The gross margin picture suggests that challenges lay ahead.  In February the index of prices paid by manufacturers increased by 5 percentage points.  As companies lose the ability to protect gross margins, management teams often panic and seek to address the problem by increasing sales.  The pursuit of higher sales at declining margins and with less discipline over the costs of servicing new clients is a long-established recipe for taking a company from mild under-performance to deep distress.

Inventories: Up at Producers, Down Among Customers

Among small and midsize industrial companies we anticipate demand shocks as customers, now comfortable with a historically low level of inventory, respond more quickly to changes in end-market demand.  The disconnect between customer inventories having been below 50 (the point at which they are considered too low) for nearly 4 years and producer inventories increasing suggests that producers are increasingly ill-equipped to address fluctuations in demand, and may be making the implicit choice to tie up cash in increased working capital rather than in capital expenditures.

These diverging trends in inventories present two serious challenges to small and midsize manufacturers:

1.      From a pricing standpoint the existence of slow-moving inventory will provide for some companies a temptation to sell at reduced prices, further eating into gross margins.

2.      From a financing standpoint this approach is a recipe for trouble, as asset based lenders will advance considerably less on inventory than on accounts receivable.  Additionally, for troubled small and midsize industrial companies there are fewer options to get any availability on inventory, further heightening the risk of this approach.  

Changing Power Dynamics

Power flows up and down the supply chain, depending on industry, quality of management, availability of financing and a multiplicity of other factors.  At the moment large national and multi-national customers control the fates of their suppliers, both the small and midsize manufacturers making the products, and the similarly sized distribution companies that store those products and handle order fulfillment.  As these dominant customers seek to maximize profitability and optimize their working capital, they are causing ripple effects throughout their supply chains.  The dominant strategy for the small and midsize industrial companies seeking to adjust is to become indispensable by occupying high value niches or gaining scale.  

Conclusion

Companies will continue to make and ship things, and so manufacturers and distributors will continue to have a role in the economy. But there is not guarantee that their role will be a profitable one.

 

About the Author

David Johnson (@TurnaroundDavid) is Founder and Managing Partner of Abraxas Group, a boutique advisory firm focused on providing transformational leadership to middle market companies in transition.  Over the course of his career David has served as financial advisor and interim executive to dozens of middle market companies.  David is also a recognized thought leader on the topics of business transformation, change management, interim leadership, restructuring, turnaround, and value creation.  He can be contacted at: david@abraxasgp.com.