How to Make it in the Alternative Fuel Vehicle Business – Part 1

dealer financeFor fans of alternative fuel vehicles and technologies, it’s been a dreary time. The A123 Systems and Fisker Automotive dramas have been all over the internet. There have been other time periods where bankruptcies, shut downs, buyouts, closedowns, and other sad tales have sunk promising startups. Lately, it’s been the focal point of political jabs at the Obama administration and symbols of frustration many people have about how extremely difficult it is to move forward in the cleantech business. That applies to solar and wind power, advanced biofuels, fuel cells, biomethane, next-gen lithium batteries, and energy storage. They’re incredibly expensive and need the very best in research and development – and a helluva lot of time. I do sense that many Americans would like to see alternative fuel vehicles and cleantech industries thrive, since we’ve lost so many jobs and opportunities to other global markets, and new technologies have buried several industries that used to be our meat and potatoes.

So, here’s my somewhat wild thinking on how you can make it in the slowly emerging field of green cars, fuels, and technologies. (I’m only going to start with one concept this time, and will come back with a few other crazy ideas later…)

1. Start up your own captive finance company                                                                If you’re Tesla Motors, Wheego, Detroit Electric, Smith Electric Vehicles, Via Motors, an alternative fuel vehicle conversion company (like Quantum, Roush CleanTech, or Venchurs), or Fisker Automotive if it survives a near-death experience – you’d probably better start a captive finance company. This is a financial arm that provides most all of the vehicle loans and leases to your customers. If you have the option, it’s better to have your own bank.

There’s three good reasons for doing it – one is that you could become similar to nearly all your major OEM competitors, and would have a potentially extremely profitable division. For major automakers, building and marketing new vehicles can sometimes be a loss leader (the same being true for dealers on the sales/marketing front). You need to have an impressive lineup of fresh, good looking new cars packed with cool technologies that are well marketed through some kind of dealer network. But you’re going to see capital growth through other business units – pre-owned vehicles, aftermarket products and upgrade packages, service and maintenance extended warranty programs, and financing. Financing could be the best one, once the cash flow is solid and the risk management team has done its homework.

The second reason is that you can float the market a bit with incentives – rebates, cash back, discount financing rates, zero percent loans, etc. Leases have a lot of perks to offer, too, especially for expensive cars like luxury and plug-in models (or better yet – luxury plug-in models). You could be a moderately upper income person who goes and leases a Tesla Model S when purchasing it was out of the question. If you talk to some OEMs, such as Toyota, they will warn you to be very careful about the loans and leases you’re putting out there. Don’t flood the market – you will regret it. There are incentives out there right now for plug-ins such as federal tax incentives and state rebates, but those won’t last forever and have been a bit questionable in being effective in selling new plug-in electric vehicles. The Nissan Leaf and Chevrolet Volt have been sold through incentives and lease deals, and that won’t last forever. But other manufacturer incentives packaged through captive finance arms can make the product competitive and profitable for OEMs. Of course, building them for years and streamlining economies of scale brings down the pricing, but the financing arm closes the deal.

And number three – fleet sales and financing programs. Fleet sales require a delicate balance for OEMs, much like retail leasing. Automakers are selling around 20% of their new vehicles to fleets through corporate, government, delivery, utility, car rental, and other fleet segments. They’ve had to be more conservative about the sales and how they’ve affected used vehicle values and brand image. Some alternative fuel vehicles, such as CNG and LNG mid-size to heavy-duty trucks, are doing well with fleets. For passenger vehicles, it’s still very early in the game. Hybrids are starting to see sales pick up with fleets, but there’s a long way to go.

Fleet managers can be very conservative about risk taking with new technologies, and want to see the safety, reliability, resale value, and charging/fueling infrastructure solidly in place. They like to see incentives out there, and some of the programs, especially in California, have encouraged fleets to replace ICEs with AFVs. OEMs don’t have as much to do with financing fleet acquisitions – companies like GE Capital Fleet Services, ARI, LeasePlan, PHH Arval, Wheels, and Enterprise’s fleet division are going to lease a lot of these vehicles. But automakers do offer fleet incentive programs and usually have fleet sales departments that go direct to clients of all types. The captive finance executives at OEMs are part of these transactions and have their say about what goes into fleet sales volumes, pricing, and funding.

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