Bad Karma: How Fisker failed
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Fisker
BIG DREAMS: Fisker’s goal was to build a beautiful, “green” car that could rival exclusive European brands like Maserati and Aston Martin.
REUTERS/Allison Joyce
The company raised $1.4 billion in private and public funds since its
founding in 2007, but most of the money is gone. Where did it go?
Bad Karma:
How Fisker failed
By Deepa Seetharaman and Paul Lienert
DETROIT, June 17, 2013
D
anish designer Henrik Fisker knows how to style a sexy car. Among
his works is the BMW Z8, driven by James Bond in “The World Is
Not Enough,” where the sleek roadster gets sliced in two by a heli-
copter armed with giant saws.
Fisker’s latest piece of rolling sculpture is the comely Fisker Karma hybrid
sports sedan — and it may meet an equally ugly end.
SPECIAL REPORT 1
FISKER A CAUTIONARY TALE
ON THE OUTSIDE: Co-
founder Henrik Fisker
resigned from the company
in mid-March in a dispute
with some of the directors.
REUTERS/Phil McCarten
The Dane’s startup, Fisker Automotive, into the company from May 2011 through executive who spoke on the condition of
hasn’t built a car in nearly a year. It fired most August 2012, attracted by rosy sales forecasts anonymity said the company accurately pre-
of its workforce, hired bankruptcy advisers and assurances the company valued itself at sented its finances to both investors and the
and is seeking a buyer. Co-founder Henrik nearly $2 billion. government. The executive said Fisker dis-
Fisker resigned in mid-March in a dispute “One characteristic of businesses that are in closed to investors in a December 2011 let-
with some of the directors. And despite rais- trouble like this is, as the desperation increas- ter that it was unlikely to meet the financial
ing $1.4 billion in private and public funds es, they tend to bend the story a little,” said covenants under the government loan.
since its founding in 2007, the company is David Cole, a longtime auto consultant and “Whatever the Energy Department’s in-
out of cash. For months, key investors have former head of the Center for Automotive ternal assessment or view might have been,
been footing the car maker’s day-to-day ex- Research in Ann Arbor, Michigan. we certainly weren’t giving them different
penses to keep it alive in diminished form. Fisker declined to comment. A Fisker information or different forecasts than we
An examination of the company’s rise were providing to our own investors,” the
$35,000
and fall reveals Fisker’s finances started to executive told Reuters in late May.
unravel as early as June 2011, when the U.S. Fisker’s undoing had numerous causes.
Department of Energy cut off access to tax- Fundamentally, say suppliers and some in-
payer-funded loans — a fact that wasn’t pub- siders, executives simply couldn’t orchestrate
licly acknowledged by Fisker for nine months.
The amount that Fisker lost on the complex dance that leads from a design
That and other troubling information each car it built sketch to the production and sale of a prof-
remained unknown by many of Fisker’s pri- Source: Internal financial statements and itable car. Spending was lavish; engineer-
vate-sector investors, who put $525 million interviews with former executives ing blunders rife. The company also faced
SPECIAL REPORT 2
FISKER A CAUTIONARY TALE
Fisker breaks down
Over five years, Fisker Automotive EQUITY AND DEBT FINANCING
$500 million
raised more than $1.4 billion in
equity and debt financing, from 400 13.9%
DOE loans
private investors and the
300 Total
U.S. government.
Venture capital $1.4 bln
200
Most of the money is gone.
100 86.1%
0
2007 '08 '09 '10 '11 '12
TIMELINE
Sep 2007 Jul 2008 Oct 2009 Nov 2011 Jul 2012 Aug 2012 Jan 2013 Mar 2013
Fisker Contracts Karma Agrees to acquire Karma goes Valmet quits Posawatz replaces Fisker seeks Henrik Fisker
founded assembly to Valmet GM plant in DE on sale building Karma LaSorda as CEO buyers in China resigns
Dec 2007 Sep 2009 Dec 2009 May 2010 May 2011 Feb 2012 Dec 2012 Apr 2013
First $5 mln Energy Dept Initial target Draws first Draws final LaSorda replaces Hires investment Fisker fires
in venture approves on-sale date DOE funds DOE funds Fisker as CEO bank Evercore 75% of
capital funding $529 mln loan for Karma to find partners remaining
staff
Sources: Fisker Automotive; U.S. Securities and Exchange Commission; U.S. Department of Energy
S. Culp, 10/06/2013
pressure from both its investors and its chief condition of anonymity. Henrik Fisker, his senior partner at venture-capital firm Kleiner
creditor, the Energy Department, to meet partner Barny Koehler and other executives Perkins Caufield & Byers, was developing
ambitious goals set by Fisker executives. at Fisker declined to comment. a portfolio centered on clean technology.
The findings raise questions about wheth- The Energy Department has repeatedly Lane, a onetime IBM executive, made his
er the Energy Department provided suffi- defended its handling of the Fisker loan. reputation as president of software giant
cient oversight and whether Fisker’s board of Nicholas Whitcombe, who previously led the Oracle. Kleiner Perkins had bankrolled the
directors, comprised mainly of large investors, DOE loan program, told lawmakers in April likes of Google and Amazon. Their backing
afforded proper corporate governance. that the DOE “acted decisively to protect the was a coup for any startup.
A detailed portrait of Fisker Automotive taxpayers’ interest since it became evident that Lane threw his support behind Henrik
and its finances emerges from interviews Fisker faced financial difficulties.” Fisker in early 2008, joined Fisker’s board
with more than 30 people close to the of directors and ultimately went on to serve
company, as well as a review of five years of FISKER’S ORIGINS as the startup’s lead investor, board chair-
confidential investor presentations seen by Fisker Automotive was founded in August man and chief cheerleader. Two people close
Reuters, and internal Energy Department 2007 with the goal of building a beautiful, to Lane said he was impressed by Henrik
emails and briefings released during a con- “green” car that could rival exclusive European Fisker’s design chops.
gressional hearing in late April. brands like Maserati and Aston Martin. Fisker landed an even bigger backer
Most of those interviewed spoke on the Around the same time, Ray Lane, then a the next year. In September 2009, Fisker
SPECIAL REPORT 3
FISKER A CAUTIONARY TALE
won a $529 million loan from the Energy
Department to develop the Karma and build
a second model in the United States. The fi-
nancing came as part of a broader Obama
administration effort to shore up employ-
ment in the recession-ravaged auto industry
and improve the fuel efficiency of the U.S.
auto fleet by extending government loans to
so-called green-energy initiatives.
A month later, Fisker agreed to buy an
idle General Motors factory in Delaware for
about $20 million. The government loan ap-
proval was a welcome relief for Fisker, which
was hurting for cash by late that summer
and eager to raise more money from inves-
tors, according to an email from Koehler.
“We are oversubscribed in this equity
round with the Energy Department sup- MASS PRODUCTION: There were repeated delays in the start of Karma production and a drastic
port — and nowhere without it,” Koehler curtailment in volume meant that Fisker was paying higher-than-budgeted prices for many
said in an August 2009 email to Energy components. REUTERS/Allison Joyce
Department officials.
The announcement triggered a flood of in-
vestor interest in Fisker. The company raised it originally planned to sell 15,000 Karmas a design, even when flaws emerged that un-
some $600 million before it ever sold a car. year, starting in late 2009. dercut the Karma’s performance and poten-
Some of the production delays were tial fixes would add millions in cost.
PRODUCTION PROBLEMS caused by last-minute design changes and In mid-2011, engineers found that
Despite this influx of cash, Fisker never engineering fixes, insiders said, resulting in Fisker’s unusual front-end exhaust design was
turned a profit. From 2008 to 2012, the additional cost overruns and late shipments of too noisy and hurt the Karma’s horsepower.
carmaker lost an estimated $1 billion, ac- critical components. Fisker also over-ordered This could have been headed off years earlier
cording to internal financial statements and and stockpiled other parts. There was no sales by putting the exhaust pipe in the back, as is
confidential presentations made to pro- revenue to help offset some of those costs un- standard, but the idea was struck down.
spective investors. til late 2011. A person close to the company’s What emerged was a solution dubbed
Fisker built an estimated 2,450 Karmas finances estimated that last-minute tweaks the “pizza box” that kept the exhaust sys-
from 2011 to 2012, but lost at least $35,000 rendered between $50 million and $100 mil- tem in front, but encased it in a very thin
on each car, according to internal finan- lion of Fisker’s parts inventory obsolete. steel box. The idea emerged after engineers
cial statements and interviews with former Another hitch: Pressure on engineers ordered pizza for lunch one afternoon. The
Fisker executives. One former executive said to stay faithful to Henrik Fisker’s original solution addressed some concerns about the
the Karma “cost far more to produce than sound of the vehicle, as well as CEO Fisker’s
we could ever charge for it.” aesthetic sensibility — but at an extra cost
Repeated delays in the start of Karma Beneath the world-class of millions of dollars, according to two engi-
production and a drastic curtailment in vol- skin was a rudimentary machine neers who worked on the redesign program.
ume meant that Fisker was paying higher- The company also pressured its suppliers
that needed several years of
than-budgeted prices for many components to meet ambitious deadlines, but was slow to
and sub-systems, as well as contractual pen-
engineering refinement and provide the necessary technical information
alties to suppliers and to Valmet, which built testing before it could be ready to and, in some cases, timely payment. On more
the Karma under contract in Finland. Fisker be released. than one occasion, Fisker asked suppliers to
eventually delivered about 200 cars to cus- Maurice Gunderson hand-build certain components for the Karma,
tomers in 2011 and another 1,600 in 2012; a managing partner at Runway Capital Partners which increased the cost as much as threefold.
SPECIAL REPORT 4FISKER A CAUTIONARY TALE
“Beneath the world-class skin was a rudi- the Energy Department it was nearly broke in mid-month had nudged its cash pile to a
mentary machine that needed several years of October and December of 2011 and August still-thin $20 million.
engineering refinement and testing before it 2012. Investors in late 2011 heard a different Just weeks later, in a Dec. 14 letter to share-
could be ready to be released,” said Maurice spin — that Fisker pegged its value at nearly holders, Fisker told investors that the company
Gunderson, a managing partner at Runway $2 billion and envisioned annual sales of more had a capitalization “approaching $2 billion.”
Capital Partners who had an opportunity to than $12 billion within five years. That included $720 million in private equity,
invest in Fisker in early 2010 and passed. In the run-up to the Karma’s launch, the almost all of which had been spent.
The frayed relations with suppliers didn’t company battled constantly with the Energy The total also included the full $529
help. By late 2011, Fisker had amassed $200 Department to renegotiate the terms of its million in loans approved by the Energy
million in unpaid bills, according to the loan agreement, as it regularly missed dead- Department — even though Fisker was
Energy Department. Fisker acknowledged, in lines, constantly revised downward its pro- able to tap only $192 million before being
a December 2011 letter to shareholders, that jections for production and sales, and suf- cut off six months earlier — and an inflated
it faced $168 million in “claims arising from fered from chronic cash shortfalls. value of up to $700 million for the still-idle
liabilities to suppliers and other creditors.” The Energy Department, in a December Delaware plant, more than 30 times the
Henrik Fisker and co-founder Koehler 2011 internal briefing, said it “halted further purchase price. The Energy Department
were pulling down handsome salaries — funding of the loan” in June 2011 after it re- described the plant, in a December 2011
$600,000-$700,000 a year, according to sev- ceived “varied and incomplete explanations” memo, as “just a shell.”
eral sources familiar with Fisker’s executive In an internal Energy Department brief-
$2 billion
compensation — even after the company ing dated Dec. 19, 2011, officials discussed
began laying off hundreds of employees in a plan to monitor Fisker’s progress in get-
late 2011 and early 2012. ting the Delaware plant ready to build cars
Considerable sums were used to burnish the “by the end of 2013.” In a separate email
image of the company as well as Henrik himself. exchange in late December 2011, Energy
In May 2011, the company co-spon- Fisker’s own estimate of the value Department officials and consultants fore-
sored a pre-race grand prix party aboard a of the company in late 2011. cast that Fisker’s second model, the Atlantic,
146-foot yacht moored in the Monte Carlo would not be ready for production in
harbor. Guests drank glasses of champagne SOURCE: A Dec. 14 letter to shareholders. Delaware until mid-2014.
served with flecks of gold. Clad in a dark In the Dec. 14, 2011, shareholder letter,
pinstripe suit and open-neck white shirt, from Fisker about persistent delays in produc- CEO Henrik Fisker assured investors that
Henrik Fisker navigated a crowd that in- ing and selling the Karma. In a separate inter- the company “will maintain the 2013 launch
cluded Prince Albert of Monaco, whom he nal briefing in December 2011, the Energy timing” for the Atlantic. Seven weeks later,
described as the inspiration for the Karma. Department said it had stopped disbursing on Feb. 7, 2012, the company shut down
The next day, Fisker took the prince for a loan funds to Fisker after the company had work at the Delaware plant and laid off all
ride on the race course in a prototype Karma. “missed production milestones” while experi- 26 workers there.
The Monaco weekend, according to encing “performance and execution problems.” As for the critical government loan,
several sources familiar with the event, cost Neither the Energy Department nor Fisker Fisker did not tell investors in the December
Fisker between $80,000 and $100,000. That made that news public until February 2012, letter that it hadn’t been able to tap the
wasn’t lavish by auto-marketing standards, when Fisker told reporters that it was “renego- Energy Department funds for six months.
but by this point every penny mattered. tiating” terms of the loan. The department that The company said the remaining $336 mil-
Within weeks, the Energy Department same month said that it “only allows the loan lion of the loan “remained available” to help
stopped payments on its loan. to be disbursed as the company meets certain fund the Atlantic and that it had “elected”
The 15-month period from the time the milestones and demonstrates results.” not to request any further draws while it re-
Energy Department held up the loan in Before then, Fisker told the government negotiated terms with the government.
June 2011 was critical. As the first Karmas on Nov. 1, 2011, that it would run out of It admitted missing “certain financial cov-
began to arrive at U.S. dealers in late 2011, cash within three days without additional enants and project milestones,” but said the
investors and government representatives government loan money or an injection of Energy Department had agreed to delay the
weren’t always hearing the same story. private equity; on Nov. 30, it said a mod- effective dates of the covenants for one year.
Fisker faced a series of cash crises, telling est investment increase of $37 million at The Fisker executive told Reuters that
SPECIAL REPORT 5FISKER A CAUTIONARY TALE
the government didn’t notify the company “emergency sale,” according to an internal familiar with the matter said. Neither Lane
in 2011 it was going to cut off access to the Energy Department briefing dated Aug. 2, nor Kleiner Perkins would comment.
loan, but rather the company had stopped 2012. Lane’s willingness to invest personally in
seeking the funds: “They weren’t funding Fisker made no mention of the Energy the company is an unusual step in venture
during that time because we weren’t submit- Department’s recommendation or the com- capital. It also comes at a time when Lane has
ting advance requests.” pany’s precarious cash position in an Aug. been beset by other issues, including settle-
Privately, the company was trying to re- 22, 2012 investor presentation aimed at rais- ment of a long-running, multimillion-dollar
negotiate the loan terms, telling Energy ing $150 million in equity by September and tax dispute with the Internal Revenue Service
Department overseers in fall 2011 that it another $275 million in mid-2013. and resigning the chairmanship of Hewlett-
needed to raise additional private equity. The In that August presentation, Fisker noted Packard in April under investor pressure for
Energy Department, in internal briefings, not- that the DOE loan remained “an attractive, low- his role in the acquisition of Autonomy Plc.
ed that it had granted Fisker a one-year waiver cost source of funding” for the company, but ob- Some Fisker investors also are embold-
in early December 2011 on meeting certain served that “no future advances are expected.” ened by the success of green-car rival Tesla
unspecified milestones and covenants - but it Motors Co, whose stock has more than tri-
had not restored access to the loan funds. CASH DRAINED AGAIN pled this year and whose market capitaliza-
Fisker told the Energy Department in By spring 2013, with Fisker’s cash drained tion briefly topped $12 billion in late May.
early 2012 that its dire financial circumstances yet again, Energy officials were pushing for For some smaller investors, however, it’s
might force a sale of the company or a move a bankruptcy restructuring, a move that too late to recoup their losses.
to China or Russia. Fisker also considered a continues to be opposed by several of the “My money is gone forever,” one investor
high-yield debt offering of up to $400 million company’s largest investors. said. “Somebody will have to explain to me
in mid-2012 and an initial public offering in To be sure, Fisker still has its back- why that happened. I still have questions.”
mid-2013. Neither one materialized. ers. Lane, now partner emeritus at Kleiner
By August 2012, Fisker’s cash was down Perkins Caufield & Byers and a Fisker di- Additional reporting by Ayesha Rascoe in
to $12 million, and the Energy Department rector until late May, has personally pro- Washington and Norihiko Shirouzu in Beijing;
recommended to Fisker that it consider an vided funding to the company, a person Editing by Claudia Parsons and Leslie Gevirtz
Fisker’s China (dis)connections bid for survival has been just as messy as the
mismanagement that led the company to
burn through more than $1.4 billion in public
By Norihiko Shirouzu people who attended the meeting. and private funds in less than six years.
BEIJING, June 16, 2013 The deal ultimately fell apart for many Now five months later, Fisker continues to
reasons, including hard-to-meet terms of stave off bankruptcy, but it is fielding bids a
In late January, consultant Joel Ewanick arrived Fisker’s U.S. government loan. But the outcome tenth the size of Ewanick’s proposal to Geely.
at Geely’s headquarters in eastern China to was also the result of missteps by Fisker’s top The company also risks making the same errors
deliver an impassioned pitch on behalf of Fisker managers, including openly appearing to favor in judgment and derailing even those smaller
Automotive, the California-based boutique a rival Chinese automaker early on, according offers, people close to the company said.
green-car maker that was running out of cash to eight individuals with direct knowledge of the Fisker’s suitor search began in earnest
and sliding toward bankruptcy. effort over the past year. last August when Joseph Chao was named
Ewanick, a former General Motors Co By betting on the wrong company as the head of operations in China, the world’s
and Hyundai marketing executive, walked its potential white knight, Fisker may have biggest auto market. One of his main
Geely Chairman Li Shufu through the pros bungled an opportunity to raise hundreds tasks was to lead the search there for new
and cons of taking a majority stake in Fisker. of millions of dollars. Fisker’s board sent out strategic investors — and a potential buyer.
He suggested Geely could take control for at least two search teams, but proceeded Chinese companies had begun buying up
as little as $250 million, about an eighth of without a clear roadmap or coordination the troubled assets of Western automakers
Fisker’s self-estimated value in late 2011. between the teams, those knowledgeable to expand their presence on the global
“Chairman Li’s eyes got big, and it was individuals told Reuters. stage and gain access to more advanced
as if, ‘that’s all!?’” according to one of the The events show how Fisker’s last-ditch technology. In 2010, Zhejiang Geely Holding
SPECIAL REPORT 6FISKER A CAUTIONARY TALE
Group acquired Sweden’s Volvo Car from
Ford Motor Co. Wanxiang Group bought
Fisker’s battery maker, A123, in 2012.
Chao wasn’t the only one looking for
a partner or buyer. Fisker also had hired
Ewanick as interim chief commercial officer
and tasked him with finding a potential suitor,
a quest that took him to China and Korea.
While Chao focused on China’s state-
owned Dongfeng Motor Group, one of
China’s four largest vehicle manufacturers
and a partner of Nissan Motor, Honda
Motor, Kia Motors and Peugeot-Citroen,
Ewanick concentrated on Geely and Beijing
Automotive Industry Holding Co.
Joining Chao in pursuing Dongfeng was
former General Motors engineer Tony Posawatz,
who was named Fisker CEO in August.
Posawatz did not return calls seeking comment.
At Geely headquarters in Hangzhou, SUITOR: Geely Chairman Li Shufu met a Fisker consultant in January to discuss the possibility of
Ewanick’s meeting segued into a multi- taking a majority stake in the company, and Geely sent a due diligence team to Fisker’s Anaheim
course lunch with bottles of French wine in headquarters in February. The deal ultimately fell apart. REUTERS/Jason Lee
the company’s executive dining room. Over
lunch, Li agreed to consider the deal and
promised to move quickly. By the end of March, it was clear that neither allow Fisker to avoid bankruptcy, an outcome
Li assembled a team of Chinese executives Chinese company would bid. Within weeks, favored by other investors. As a result, Fisker
from Geely, Volvo China and Geely’s main Fisker fired 75 percent of its U.S. workforce in has still not acted on a competing offer from
investment bank, who put together a two-fold a last-ditch effort to save cash. Chinese auto parts supplier Wanxiang and
turnaround plan: Use a former GM plant in The Chinese government told state- VL Automotive, a joint venture between
Delaware, now owned by Fisker, to produce owned Dongfeng not to go alone on former General Motors executive Bob Lutz
Volvo and Geely cars, as well as the long- the deal, according to a source close to and Michigan industrialist Gilbert Villarreal.
gestating Fisker Atlantic sedan, and use Dongfeng. It also preferred Dongfeng bid Meanwhile, the company’s value is
Fisker’s engineering and design expertise to jointly with Geely, this person said. dropping by the day.
develop plug-in hybrids for Geely and Volvo. The Chinese government also wanted
At Fisker’s Anaheim headquarters in production of Fisker cars moved to China, but Reporting by Norihiko Shirouzu in Beijing;
February, Geely’s due diligence team was concluded that wouldn’t be possible because Additional reporting by Deepa Seetharaman
“serious” and “asked smart questions,” people of the terms of Fisker’s U.S. Department in Detroit; Editing by Claudia Parsons and
familiar with the matter said. Dongfeng’s due of Energy loan. The restrictive terms of the Leslie Gevirtz
diligence team, in contrast, moved slowly. A DOE loan and the amount of work needed
Fisker employee in Anaheim who helped host to overhaul the Delaware plant also helped FOR MORE INFORMATION
the Dongfeng team said the Chinese didn’t convince Geely not to submit a final offer. Paul Lienert, Detroit Bureau Chief
ask many questions: “It felt more like those People close to Fisker worry the company paul.lienert@thomsonreuters.com
guys were there on holiday.” is about to repeat the same errors. Investors, Claudia Parsons, Editor, Top News
On March 13, Henrik Fisker resigned from led by Hong Kong billionaire Richard Li, are claudia.parsons@thomsonreuters.com
the company, citing major disagreements looking to buy out the DOE’s loan for pennies Michael Williams, Global Enterprise Editor
with other executives and board members. on the dollar. The unusual strategy would michael.j.williams@thomsonreuters.com
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