Losing money on each bike sold: The “cost of goods sold” is the expense a company pays in order to sell their product. Vectrix had about $6 million revenue in 2008 (unaudited) but that revenue cost them over $25 million, meaning each bike was sold at a steep loss. The majority of that cost is attributed to “costs related to sales of scooters to end customers, unabsorbed manufacturing costs, warranty costs, freight and other various production costs.” It’s known from message board discussions about Vectrix that there were some quality problems, and that the customers received a high level of service. Normally high costs require either a high price or enough sales volume to cover the cost, but as one of their filings said “current production levels continue to result in a lower absorption of fixed overheads than desired.”
2008 sales growth attributable partly to high oil prices: Vectrix had a 675% sales increase between 2007 to 2008. This tremendous sales volume growth is common among new companies, but it was also a year with worldwide record high oil and fuel prices and many people were looking for alternatives to gasoline vehicles. It’s thought 2008’s high U.S. gasoline prices caused them to switch focus to build a big dealer network in North America at great cost. That was last year, and this year is a very different environment. Sources say that inside the company Vectrix management knew if oil prices were low this year would spell trouble.
Changing strategic direction: The filings tell that early on Vectrix had an Italy-centric sales strategy, had opened a few Vectrix stores in Italy, and then later backed out of that arrangement for a different sales strategy. Additionally in September 2007 the San Francisco luxury car dealer British Motor Cars announced an intention to order 700 Vectrix’s over the next 13 months, a deal which was quietly dropped later. This change in direction cost at least $1.5 million dollars and meant restructuring their European business structure.
Expenses due to CEO and CFO changes: Near the time of the strategic direction change both the CEO and CFO left for unexplained reasons. This resulted in over $5 million of extra expenses (a.k.a. “golden parachute”). Sources say both were very good during the startup period before the 2007 product launch but not so good at the business building skills required after the 2007 launch.
Lithium battery R&D led to huge expenses: Vectrix is using NiMH batteries supplied by GP Batteries. NiMH batteries have higher energy density than lead acid but less energy density than lithium batteries. Many are working on lithium battery packs because of energy density, and Vectrix has long been criticized for not using that chemistry. Additionally simultaneously with Vectrix’s 2007 IPO the price of Nickel peaked causing a pricing concern. It turns out Vectrix and GP conducted a joint research project to develop lithium batteries for the Vectrix, but that the project failed. This failure cost them nearly $5 million.
In short there are many sides to the story of Vectrix’s fall. A core lesson to learn is it doesn’t matter how green your product is, nor how much your customers love you, the landlord wants their rent, the suppliers want to be paid, employees need money to feed their families, in general it has to be a stable business bringing in the money required to keep the business afloat.
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