Building a business model around government loans and incentives has proved to be a risky strategy for micro-OEMs. Here are some tips for getting off the ground from a leading consultant.
The flow of federal dollars for the development of alternative energy vehicles has waned in recent years, leaving small manufacturers in this auto subsector struggling or out of business. But the right combination of innovation, collaboration and cost management can help these startups survive and succeed.
Micro original equipment manufacturers such as Aptera Motors, Bright Automotive, Carbon Motors,and Next Auto were launched in the late 2000s by passionate automotive entrepreneurs looking to offer unique solutions to rising oil prices and expecting buyers to clamor for more fuel-efficiency.
These neo-trailblazers sought to take advantage of federal loans and consumer rebates to rush new alternative-energy vehicles to the market. But many – relying on these financial incentives as core pillars of their business models – were forced to cease operations or make major revisions to their business plans when the funding was no longer available.
Absent billions of federal dollars, the best way forward for micro-OEMs is to develop a robust product concept and commercial strategy, and identify design and manufacturing efficiencies through collaboration, along with diverse funding sources:
- Know how many vehicles will likely sell to determine the size of the opportunity.
- Solve a business problem for a commercial buyer or satisfy a desire for a consumer buyer. “Green” is nice, but often is not enough to close a sale. The niche served should be sufficient in volume potential to make money, but focused enough to avoid notice by high-volume OEMs. Though this may sound obvious, the principle of building what the market will want is often ignored.
- Validate the viability of the product concept with committed sales. A commercial vehicle micro OEM can benefit from including one or more customers as investors to fund a portion of capital expenditure costs. Consider recruiting a retailer as a partner for a consumer product. Grant time-limited product exclusivity for a retail partner. Booked sales and nonrefundable deposits will help raise private capital.
- Collaborate to share parts and assets, and save money.
- Limit new vehicle system designs to key areas of product differentiation. Source as many of the other systems from shared components offered for sale by major OEMs. If the niche product is a natural gas-powered food truck, for example, then perhaps no resources should be allocated to designing an all-new steering system.
- Establish a partnership with a major manufacturer and barter proprietary technology or company assets for access to capital extensive portions of the value chain, such as key common vehicle systems or components, testing facilities and assembly plants. Motors has implemented this strategy with some success. Show partners why it is in their interest to form an alliance.
- Lease existing manufacturing capacity for low-volume products, rather than spending to build new capacity, as another cost-savings measure.
- Pursue private capital sources. Venture capital, private equity, strategic partnerships and commercial debt should all be considered when a micro OEM is raising funds. The added benefit of private capital includes industry relationships, strong management team candidates, and advisers vested in success. And, again, committed sales will help make the case to investors.
- Reduce and optimize capital expenditure requirements through alliances and shared noncore components and resources.
- Manage cash. Develop cash forecasts for the long haul and track rigorously, accounting for potential product launch delays and erratic sales demand in the early phase to stave off cash shortages.
Building the business model around government loans and incentives has proved to be a risky strategy. But micro OEMs can improve their odds of success by testing the commercial viability of their products, collaborating with major OEMs, and utilizing private markets as sources of capital.
The author, founder and managing director of Motoring Ventures, is an automotive entrepreneur, business leader, brand builder and consumer-focused engineer. Motoring Ventures is an independent private-equity investment and management-consulting firm focused on acquiring, operating and growing the value of middle-market companies in the automobile and powersports industries. Hightower previously served as a director at consulting firm AlixPartners, where he helped large and midsize automotive, consumer and manufacturing companies around the world improve operations, launch new products, grow revenue, reduce costs and increase operating profits. Before consulting, Hightower held several significant P&L, product design engineering and marketing leadership roles in the hyper-competitive global automobile industry, including positionas at, and .