Triple Lutz - Cunningham Automobile Company - Brief Article

Automotive Industries,  Oct, 2000  by Lindsay Brooke

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The Virtual Car Company

"The barriers to entry have gotten very small," he reasons. Cunningham will be a niche-volume "virtual." But he knows a certain industry outsider who's planning to enter auto manufacturing on a large scale. As Lutz explains it, this very successful entrepreneur (a friend of Lutz's) leaped on the idea with boundless optimism, believing he would put car dealers out of business. But Lutz counseled him otherwise.

"I told him that won't happen, because he'd find it very difficult to add value -- you can't make the dealer go away. You'd need to find a factory that sells you cars directly. Until that happens, you can move cars around but you'll only be a sophisticated on-line brokerage. Your business model is the same as the dealer's, because you're stuck with getting cars from the dealer."

The man believed his company would grow big enough to attract a major OEM that wanted to do business with him. Lutz recalls. "I told him no automaker would do that and take on its dealers. You've got this nationwide dealer-protection legislation in every state -- and the dealers elect the state officials. It's that simple. You'll never get it done."

After more discussion with Lutz and other industry experts, the upstart soon decided that the only thing wrong with his model of selling cars direct is that he needed to be his own automaker. "He's going to go to the market and get the $5 billion he needs, because he doesn't want to start as a small niche player. He wants to start big," says Lutz. "He wants a couple of sedans, a couple of engines and transmissions, a modular truck line to make SUVs and pickups and he's shooting for an initial volume of 250,000 units. It's going to be quirky styling -- very PT Cruiserlike. There won't be a conventional vehicle in the whole lineup. He's got it figured out. He's had major consultants study the whole 'virtual car company' phenomena. And he'll get the 15- or 16-percent margin that normally goes to the dealers. That's what makes his business model work Watch for it -- he's serious."

The operating principals of the virtual car company are to have the right product (see Lutz's Picks, p. 38), keep investment low, but keep track of the variable cost, says Lutz. "You add up all the elements of cost for each car, and since it's all variable cost, it's parts that you buy -- even final assembly," he explains. "If it adds up to $80,000 total cost, and you're selling it downstream to the dealer for $130,000 and the retail is $160,000, you're making money because you don't have to worry about amortizing the investment. The financial model becomes very controllable and nearly impossible to lose money -- if sales go down, you don't have ongoing fixed costs and debt to repay and so forth. If volume goes down, it's one-to-one: one car revenue out, one car cost out."

At least that's the theory. Can anybody do it with zero investment, I ask? Not unless they're a phenomenally wealthy individual, like Briggs Cunningham Jr. was in 1950. "Bill Gates could start a car company tomorrow," says Lutz. "So could 100 other extremely wealthy people. But if you're not in that situation or use a minimum of your own money, you've got to finance the project to the point where it will start attracting serious investors. Then you must keep that money as low as possible, because those investors want a quick return on it. Which means your model is no longer just variable cost, but variable cost plus paying back the investment and generating more debt."