Published on July 4th, 2014 | by Jo Borras40
Elio Motors Q+A w/ Paul Elio … the A Part
A few weeks ago, Elio Motors reached out to us to talk about some of the hard questions we’d been asking about their business plan, their motivations, and their chances of going from
pipe dream idea to reality. They agreed to a Q&A, and I opened the floor to you, dear readers, so that you could get some official answers to your Elio questions.
I gave you guys 2 weeks to come up with questions, and now – two weeks later – here are Elio’s answers, free of snarky comment or well-reasoned rebuttal from me (for now, at least) and blessed by Elio Motors and Paul Elio himself. Enjoy!
The Paul Elio, Q+A Style Interview
Q1. The trike has been promoted heavily as having a $6800 MSRP, and being made available with air conditioning, power windows, stereo, two seats, 3 airbags, stability control, and ABS (I’ll assume cruise control is in there, as well). Is all that going to be standard at the $6800 price, or will some of those features be optional?
The above content is standard, except potentially cruise control. The drive train has the “smarts” to include cruise control; but ultimately it comes down to the buttons and if we can squeeze them in at the targeted price. There will be a significant amount of additional content available to the consumer at the point of sale. Elio Motors will build the vehicle two ways – standard and automatic. The vehicles will get shipped from our factory to one of seven planned marshaling centers. When a customer comes in and wants a power leather seat or blind spot detecting mirrors, that order will go to the appropriate marshaling center and will be added to the vehicle. We will close our retail centers at 9 p.m., and we will build vehicles until midnight, giving us three hours to “clear the system.” The vehicles will be placed on trucks, and with seven marshaling centers, we will be roughly nine hours away from our retail locations. So theoretically by the next day, the customer will pick up the vehicle they ordered — exactly the way they wanted it. This is part of the reason we can sell the vehicle for $6,800. The package system other automakers use forces consumers to buy a lot of features they don’t want in order to get the features they do want. By making the upscale content a la carte, the customer gets more for less.
Q2. The latest news out of Shreveport seems to indicate that Elio Motors still needs to raise between $145 and $200 million. Is that accurate and, if so, how do you plan to raise the rest of the money you need?
That is the right range. We are completing a $30 million round, which will be sufficient for us to complete product testing. The remainder will be raised once product testing is complete. We are working on several independent, promising solutions, but for obvious reasons, we cannot be more specific.
Q3. Assuming you’re able to raise the startup money you need by the end of this year, will you then be on track to start hiring the UAW workers in Shreveport who lost their jobs in the GM bankruptcy?
Elio Motors and its suppliers understand the timing required to reactivate the plant and begin production. However, the pace at which funding is committed, influences the production timeline. We are encouraged by the response from the investment community. The reservation volume has been a tremendous boost and has helped attract funding, so thank you to all who have reserved a vehicle.
Regarding hiring, one of the hidden assets to the Caddo Parish/Shreveport facility is its workforce. When we are ready to hire, Elio will be able to staff the plant with local folks who already know how to build vehicles, which is a huge asset.
Q4. Assuming you’re not able to raise the startup money, what happens to the deposits you’ve collected so far? What systems and safeguards are in place to ensure that your depositors get their money back?
First, we feel confident that the investments required to get us to production will be secured.
When we established the reservation business model, we wanted to make sure we did the right thing for everyone involved. A few years ago, we read an article in The Wall Street Journal that talked about the fact that other start-ups took refundable reservations and then spent the money in their business. It turns out that practice is legal, but the article questioned whether it was “right.” We feel strongly that it is not. That is why we created two programs: refundable and non-refundable. If someone makes a refundable reservation with us, the money is segregated and he or she can get it back any time. We use the non-refundable reservations very much like companies found on Kick Starter and other crowdfunding sites. As the name implies, these reservations are non-refundable.
Q5. Why go to the trouble of building your own engine? Why not make a deal with Honda or Suzuki or Polaris to get some Kei car or CARB-approved ATV engines?
The main technical reason for not using an off-the-shelf engine is that the Elio vehicle is much lighter than a standard vehicle. Meaning, the off-the-shelf OEM engine was designed to optimally operate at a different speed and load point than if it were placed into a lighter vehicle. Also, when a large carmaker designs a new engine, it is targeting multiple platforms. That often makes the engine good for all, but best for none. By having IAV design a power plant specifically for our vehicle, we can achieve our goal of 84 mpg. This is going to be a very slick engine.
Q6. Speaking of engines, in the financials that the Caddo Parish made public last year, you showed $150 per vehicle for “Warranty and Liability”. Since $150 won’t get you very far at most repair shops (even PepBoys), how do you see that $150 covering a trike for – let’s say 3 year/36K miles?
We have a different business model with company direct sales and PepBoys service centers. As most consumers already know, there are very large markups in service parts from current automakers. Because of our approach, we can price our service parts lower. For instance, it can cost 5 or nearly 10 times more to replace a dipstick on many cars on the road today than it would for an Elio vehicle. This savings in service parts lowers the warranty budget required on each vehicle.
Q7. In that same document, you say that you anticipate selling 250,000 units annually through just 120 stores with 5 employees each. That’s 35 units received, prepped, inspected, sold, closed, detailed, and delivered per month, per employee, per dealership. How did you come up with that number, and why do you think it’s realistic?
The current process of buying a vehicle is very inefficient. Even if you know exactly the vehicle you want, it takes four or five hours, to negotiate a price and conduct the transaction. At Elio Motors, there will be a single price that everybody pays, and if you know what you want, we want to have a process that can get you in and out the door in a half hour. We believe it is reasonable for an employee to sell about two vehicles a day.
Q8. Assuming all of that stuff gets sorted out and Elio becomes a huge success. How do you see the Elio line expanding down the road? In other words: Where do you go from there, as a brand?
We are completely dedicated to manufacturing our first vehicles in 2015 and delivering the first 84 mpg autocycle in the United States. We are seeing inbound interest from Asia, Europe and South America, so after we begin production, we will consider expansion into international markets as well.
Q9. In the photos Neil took at one of your mall displays two weeks ago, the Elio mule was wearing motorcycle tags. Is it still the case that Elio owners might have to carry motorcycle licenses in order to drive the vehicle on public roads?
The Elio is a motorcycle according to the Federal Government. Elio has been successful in getting state laws changed to create a new sub-category of motorcycles called an autocycle. An autocycle has 3 wheels, roll cage, 3 airbags, and a steering wheel.
Autocycle drivers are not required to wear helmets nor are they required to have a license to operate a motorcycle.
The American Association of Motor Vehicle Administrators has created a document titled “Best Practices for the Regulation of Three Wheeled Vehicles” (http://www.aamva.org/Best-Practices-and- Model-Legislation/) that recommends this approach. We are working through this issue on a state- by-state basis.
One of our readers, Kirk Johansen, pointed out that the “prototype” Elio trikes shown so far were not, in fact, “prototypes”. Rather, they’re “mules”, which lack critical mechanical components like the Elio engine and production spec. transmission. Despite the semantic nature of the argument, the core question (as I read it) remains valid:
Kirk’s Q. Since the Elio has been described as being “80% off the shelf technology”, how soon can we expect to see a production-spec. running prototype?
The orange vehicle is part mule, part prototype. The engine has the longest development time and we are prototyping that now. The next phase of the project is to create 25 prototypes for physical testing to validate the extensive simulations completed so far. As we discussed, the funding process impacts the development timetable, but prototypes will be forthcoming.
Another reader, calling himself “John D“, wants to know a bit about the Elio Motors’ market research and overhead to this point. The second question, as written by John D., reads “What is Paul Elio’s annual salary, and any other compensation?” but I’ve tried to ask it in a more politic fashion, along the lines of “How much of my contribution actually goes to cancer research and how much goes to overhead?”:
A fraction of 1 percent has gone to officers’ salaries to date.
John D’s Q1. (two parts) What kind of market research did you/Elio Motors do to convince yourself that there was such a huge demand for a three-wheeled vehicle? How would that demand change if the starting price was $10K or $15K?
I believe Elio Motors is creating a new product segment like the iPad or Sony Walkman. Initially, you have to go on a hunch and prove to yourself and others that the functional targets can be achieved. Our market research validates our assumed volume. Any business model can be successful if applied well. Gucci and other high end brands make significant profits by maximizing margin. On the other hand, Costco and Wal-Mart do very well keeping margins low and volumes high. Elio’s business model is more akin to Costco’s – make a fair margin on each product.
John D’s Q2. According to some sources, Elio Motors had raised some $45 million (if not more). How much of that money is currently being spent on executive salaries, expense accounts, etc., and how much of it is actually going towards tooling, manufacturing, etc.?
A fraction of 1 percent has gone to officers’ salaries to date.
A reader calling himself “How Much is Enough” wants to know how much skin Elio Motors’ executives and board members have in the game, which seems like a fair question to ask of a company that’s asking people to put their money down without getting to take anything home with them.
How Much’s Q. How many of the persons involved with Elio motors (the corporate board) have invested their own money and how much? A “total amount” for all the personnel would suffice.
The money raised so far is a combination of debt and equity. Elio board members (and companies controlled by them), account for 95% of the equity investment so far.
Similarly, Gary Constantine wants to know what Elio Motors’ current “burn rate” is, and how long the company can keep operating on the $45 million it’s already raised. Since that’s not stated in the form of a question:
Gary’s Q. What is Elio’s burn rate, and how long can the company keep operating with the funds it currently has.
At the current reservation rate, the company is self-sustaining, which is an incredible statement for a pre-revenue start-up and greatly enhances our chance of ultimate success.
Finally, “Bieber Before Hoes” (awesome username) wants to know why Elio Motors can’t “start small”, building the vehicles they’ve already “sold” the way car companies as varied in size and success as Ford, Ferrari, Rolls-Royce, Tesla, Aston Martin, and Smart did. I’ll let him ask the question in his own words:
Bieber Q1. Why do they (Elio Motors) need (the old GM) factory to start production? They’ve only got (20,000) reservations, why can’t they handle those first then expand bigger as income flows?
Our targeted price point depends upon a high volume production strategy. Smart was selling over 100,000 vehicles per year before coming to the United States. The others on the list such as Ferrari, Rolls-Royce, etc. have a very different price point than Elio.