Much has been written about the potential impact of Big 3 bankruptcies on the hundreds of suppliers that sell parts and assemblies to them. Part of the logic of the auto bailout was that if any one of the Big 3 were to fail, it would bankrupt some of the tier 1 suppliers. This, in turn, could put additional pressure on the auto companies they supply. Hence, if GM were allowed to fail, Ford could be put in danger. The interconnectedness of the automakers, suppliers, dealers meant that any one failure could set off a catastrophic chain reaction, resulting in the loss of millions of jobs.
A separate meme has also emerged, especially as it relates to the allocation of DOE grants and loans. This meme is can be summed up as “Silicon Valley vs. Detroit,” but more broadly, it is a debate as to whether taxpayer money is better used to support the struggling traditional automakers or to support the innovative startups (Tesla, Fisker, Aptera, etc.)
What is becoming clear is that these two ecosystems are more linked then many realise, and that the pressures on the traditional automakers and suppliers threaten the viability of the startups as well. Ironically, if GM fails or causes their suppliers to fail, they may inadvertently kill the electric car again.
In spite of the government support given to GM and Chrysler, the fundamentals of the automobile industry are continuing to weaken. With sales slowing and inventories building, it isn’t clear that “bridge loans” alone will solve the crisis. Suppliers, which have always operated on thin margins and intense pressure, are raising the warning that they too, may need government support or face collapse. One recent example was American Axle, which (according to Reuters) warned that problems at GM and Chrysler may force them out of business.
Many of the startups in the automotive space rely on the same supplier base for key components, such as driveshafts, transmissions, interiors, suspensions and electronics. The failure of these suppliers, or the pressures of near-failure, could easily ripple to the startups, whose small size makes them less equipped to deal with supply chain disruptions.
A case in point can be found in the public filings of Fisker Automotive’s technology partner, Quantum Technologies (QTWW). Quantum is the other side of the joint venture that formed Fisker Automotive in 2007, and is responsible for the development of the drivetrain for the Fisker Karma. Aside from the contract revenues Quantum receives from the Fisker JV for the development of the drivetrain, a significant part of their core business was supplying high pressure hydrogen storage bottles and other related services for GM’s fuel cell vehicles.
In Quantum’s press release on Thursday, March 12, Quantum’s CEO hints at weakness in that line of business:
“Total revenue in the third quarter of fiscal 2009 was $5.9 million compared to $7.1 million in the third quarter of fiscal 2008, a net decrease of 17%. The decrease in consolidated net revenue is primarily related to a decline in product shipments and engineering services provided to General Motors in fiscal 2009 compared to fiscal 2008.”
Later in the release:
“Contract revenue for the Quantum Fuel Systems segment increased $1.1 million, or 24%, from $4.6 million in the third quarter of fiscal 2008 to $5.7 million in the third quarter of fiscal 2009. The increase was primarily due to higher development program revenues related to development of the “Q Drive” propulsion system for the Company’s affiliate – Fisker Automotive. This increase was partially offset by a decline in hydrogen and fuel cell system programs with General Motors.”
What is not stated in the press release, but can be seen in the first line of the income statement on their recent 10Q, is that revenue from “net product sales” has collapsed from $7.2M for the 9 months ending Jan 31, 2008 to only $814,134 for the same period ending Jan 31, 2009.
While I don’t know for sure, I suspect that this collapse in product sales revenues relates to their hydrogen fuel cell business with GM. While contract revenues from affiliates (the Fisker JV), jumped from $1M to $9.3M, more than offsetting the decline in product sales, this revenue is not really customer revenue. The revenues from the Fisker contract is cash from equity investors in the Fisker/Quantum JV that then shows up as revenue for Quantum as they do the work to build the drivetrain for the Karma (It would be interesting to have been a fly on the wall for that contract discussion.)
CEO Alan Niedzwiecki sums up the situation this way:
“The Company’s third quarter operating performance was impacted by the downturn in the economy and especially the challenges faced by our automotive OEM customers. Despite uncertain times, we remain optimistic that the continued focus on hybrid and “green vehicle” technologies will benefit Quantum as dramatic change continues to take place in the automotive industry.”
Which leaves me wondering what risk Fisker Automotive faces as their JV technology partner struggles with pressure in their core business. A possible survival strategy appears to be the same as their competitor, Tesla Motors, and seemingly every automotive company today:
“We continue to advance technologies under funded Department of Energy programs and additionally have applied for a $175 million loan in connection with the Department of Energy’s $25 billion Advanced Technology Vehicles Manufacturing Loan program. …We are also in the process of applying for grants under the 2009 Economic Stimulus Package and other government programs available to the Company.”
This post originally appeared on Darryl Siry’s blog. Darryl is the senior analyst for Cleantech at Peppercom Strategic Communications. He can be reached at [email protected] and blogs regularly on www.darrylsiry.com.
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