Think cars are too expensive? Want to get better mileage on the gas you buy at the pump?
There's a potentially disruptive company that plans to make a seemingly impossible dream reality: A $6,800 84 MPG car.
In the video below, Motley Fool analyst Buck Hartzell interviews Elio Motors Founder and CEO Paul Elio at Motley Fool headquarters in Alexandria, Virginia. They discuss major issues with the car market and how Elio plans to make a cheap car with great gas mileage possible.
Buck Hartzell: First of all, I'd like to thank Paul Elio for coming by today. He's a car guy. We're going to lean a lot more about Paul as we get into the discussion here. He's someone that's applying an entrepreneurial approach and innovative way of thinking to really change how we get around our planet. It's pretty impressive.
I've followed Paul and what they've done at Elio for the last couple years and been really impressed with how much they've done on a bootstrap budget. I've actually signed up. I'm all in to get one of the new vehicles, so I'm looking forward to that coming.
But first of all, welcome Paul. Thanks for stopping by.
Paul Elio: Thanks for having me.
Hartzell: Can you tell us a little bit about your background, what you did before Elio, and what got you interested in coming up with this idea?
Elio: I got my engineering degree at General Motors Institute in Flint, Michigan. Going back further, when I was eight years old I was dreaming about a company called Elio Motors. As I matured, I realized that was about as likely as playing in the NFL, so I decided I would get my engineering degree, and at least I could work in the industry.
After college, I started a consultancy in Phoenix that did new product development in automotive. By 2008 I had grown into 46 guys. If you remember then, oil was going through the roof.
I would watch the news every night, and just get frustrated seeing all this wealth pour out of our country. One day I decided, instead of getting mad about it, I would go do something about it. I went in to work the next day, and I kicked the product off.
Hartzell: That's awesome. That's a start.
We want to hear a lot about what Elio is, but first I want to start a little bit with your purpose. I think this gets at what you were just saying.
The Motley Fool's purpose is to help the world invest better. We go around the globe, trying to help and educate people on how to do that and make better decisions with their money. What's the purpose of Elio?
Elio: There are several. This is a really meaningful project in a lot of different areas. First and foremost, our trade deficit really bothers me. We have bought more from the rest of the world than we've sold, for 20 years; 240 consecutive months, we've gotten poorer as a nation because we keep buying more than we sell.
We have to build things in this country, and we have to build and export things from this country. This vehicle will be globally competitive, at $6800 and 84 miles per gallon. We can build this in Shreveport, Louisiana, with 90% North American content, and create an exportable product -- create jobs.
Also, after five years of sales, we can reduce total U.S. gas consumption by nearly half a percent. That's a meaningful number.
Whether your big concern is carbon footprint, or trade deficit due to foreign oil, the answer is the same; use less oil! I think everyone can agree, let's use less oil. We can do that in a meaningful way.
Then the last one, that doesn't immediately jump out at you, is if you're struggling in this country, your biggest issue is mobility.
There's a Harvard economist who just released a study. It was in The New York Times a couple months ago. The single biggest predictor of you getting out of poverty is mobility. It is better-correlating than crime rate in your community, test scores in your grade school, and the number of two-family households in your community. Mobility is the number one predictor.
New Jersey did a study, that 60% of the chronically unemployed have turned down jobs because they had no way to get to the job. If you're struggling, mobility is critical. At $6,800 and 84 miles per gallon, it solves it for a lot of folks.
Hartzell: Yes. That's an amazing number; 84 miles to a gallon, $6,800. I want to hear about how you did that, but first of all, what exactly is it? We have pictures up here, which is great.
Elio: That is what we call P4. It's the fourth prototype. We're not real creative on our naming. The car is creative, naming not so much!
That's the one that's been (unclear). Then we just kicked off ... guess what we're going to call it? P5. That should be done soon. If you notice, it's real true to the P4. All the changes were driven by aerodynamics at 84 miles per gallon.
Hartzell: We've got a lot of cars parked down in the garage. I parked down there today. I have a Mini Cooper. It doesn't get 84 miles to the gallon. How do you accomplish it? How do you do it?
Elio: That part's pretty easy to explain. At highway speeds, most of your fuel goes to moving air. By sitting two people front to back instead of side by side, we're half as wide. We move half as much air, we get double the mileage. It just falls out.
The premise is that most households have at least one vehicle that's primarily single-occupant. This is an "and" vehicle for the upper half or upper two-thirds of incomes.
Americans aren't foolish. We buy big vehicles for a reason. We want to take plywood home from Home Depot. We want to tow a boat. We want to take the whole family to church on Sunday.
But there's not a vehicle with a good enough business case that it makes sense to buy a small vehicle too. They're too expensive, and they don't get enough mileage, so then we end up driving this vehicle, that we legitimately use 5% of its miles, back and forth to work. So, this becomes an "and" vehicle for a whole lot of folks.
Hartzell: I'll be the first one to attest, in our garage when I bring the minivan in, I'm driving around, looking for a space that's big enough that I won't whack my side mirrors off when I pull in between the two cement columns that are there.
So, 84 miles a gallon, we're half as wide. That's the big driver of the fuel economy that we see. Can you talk a little bit about the money -- $6,800? We have a few Tesla owners here in the building. They've created a great car, that's beautiful. It costs almost $100,000, and they're still losing money. They have good margins on each car they sell.
I'm just wondering, how can you possibly sell a car for $6,800 and make money?
Elio: Right. I wish I had an answer to that! No, seriously, there are eight or nine things that add up. It's not all in one place. Mileage is real easy; front-to-back seating. Cost is a whole discussion, but I'll try to be brief.
One is, we abandoned the package system. A Toyota Yaris, they can build 10 million unique Yarises, if they wanted to; 9,900,000 changes. We calculated it, fog light, no fog light, tan interior, gray interior ...
Now, they don't, because that would cripple their inventory system, so they've created the package system; LX, SX, and DX. The problem with that is, if you want the leather seats, you have to buy the fancy wheels and the fancy radio, whether you want to or not -- because it's good for the OEM, not because it's good for you.
We're doing that differently. We're only going to build our vehicle two ways; a standard and an automatic. That's it. Every vehicle comes with air conditioning, power windows, power door locks, and a stereo.
All of the upscale content you're used to seeing on a vehicle, you can get on your Elio, but we add it post-manufacture.
If you want a power leather seat, Lear is our seating supplier; they make a bajillion of those. We can get you that. If you want the blind spot-detecting mirrors, Continental is our electronics supplier; they make those. We can get you that.
The process is, you walk into our showroom and you say, "I want the orange automatic with the leather seat and the blind spot-detecting mirrors. That goes to one of seven marshaling centers, where that content gets added to the already-manufactured vehicle.
We close our stores at 9:00 p.m. and we build out vehicles until midnight, so we have three hours to clear the system. At midnight the vehicles go on trucks and, with seven marshaling centers we're within nine hours of all of our stores, so at 10:00 a.m. the next day, you get the vehicle exactly the way you wanted it the day before, no matter what time you walked in.
When you look around your vehicle, you've literally spent thousands of dollars on stuff you neither need nor want.
I like to pick on the lighted vanity mirror. Those are $20 each, that's $40 a car. I've spent several hundred dollars on those in my lifetime, and I don't put makeup on. I don't care if it's there or not, but half the population does, so it makes every single package. You get more of what you want for less, through this process.
Direct to consumer sales, like Tesla, that saves a lot of money for the consumer. We've partnered with Pep Boys for our service, so we don't have to go build service centers and vehicle lifts and train people; all that infrastructure is already there and available with that partnership. That saves money for us, and for our customers.
Also, day one, we have 800 authorized service locations, which is a huge win for a start-up. That's a big problem; month one, you have 5,000 vehicles in 50 states, and you need to service them. How do you cost-effectively service 5,000 vehicles in 50 states as you're growing your install base?
With 800 service centers, we have more locations than Volkswagen and Audi and Subaru. We have really nice coverage.
Our relationships with the supplier; we've changed the business.
Hartzell: Yes, and I want to talk about that. We talked a little bit last night about some buyers, and some of the things that are broken in that system. You've worked in automobile manufacturing and design, and you've seen this firsthand. First of all, what's broken about the system, and then what's different about Elio?
Elio: How it works today is, it's a very confrontational relationship between the suppliers and the OEM. They do a cost-plus setup. The OEMs insist on single-digit margins, and the suppliers can't survive on that, but they have to accept it because there's only nine customers, so you don't have a lot of leverage.
Then they wait for an engineering change, and they jack them on the engineering change to get the margin up to where it needs to be, and millions of dollars get spent on both sides of the negotiating table, working this out over the course of the three-year or five-year design cycle.
We went in and we said, "Okay, we're going to do cost-plus, but we're going to do cost plus 20%, so you get double-digit margins on Elio if your SG&A is in line."
How we get the price right, is through proper specification and engineering. On the specification side, my VP of Supply Chain supplies a lighted cup holder for a particular vehicle. They ran the EMF testing on it, and it interfered with the ham radio band.
They said, "You need to redesign this."
He said, "When was the last time someone put a ham radio in one of your products?"
The guy goes, "I don't care. It doesn't meet spec. Redesign it," so he charged them for a redesign, and he's charging more for every single part delivered so it meets that spec.
In fairness to that design engineer, he had two choices. He could spend the next 90 days of his career redeveloping that spec, and if he made a mistake, quite possibly lose his job ... or hand the part back to Steve and say, "It doesn't work."
I have that speech with every single one of our suppliers when they first get onboard and, to a man, they all sigh and off the top of their head list off four things that they're forced to do, that the customer just doesn't care about, that costs them anguish and money.
We're specifying all the parts with the suppliers. We don't want to lose anything with regards to safety or quality, and we want to get rid of all the "lighted cup holder" specs. It saves us a tremendous amount of money.
The other thing is, the big OEMs try to commoditize everything, so there are very rigid lines on where things start and stop. They optimize on the component, and not on the vehicle.
As a budding engineer, I was designing a seat bracket, and I showed an OEM that they could save -- I don't remember the numbers, it was a long time ago, but it was big -- like $1.50 a pound if they moved their bolt hole on their floor pan by one inch. They said, "No, make it work."
I'm like, "Well, I can make it work. It's just going to cost you $1.50 a pound."
At the end of the day, my customer doesn't care what the floor pan costs or what the seat costs. They care what the vehicle costs. That would have driven a quarter to the floor pan, but they could have saved a buck -- but they're not changing, so they can switch from one seat supplier to another, by keeping that rigid.
We've developed our vehicle through a series of what we call Supplier Summits, where all 34 of our suppliers get together and we work on the vehicle as a group. When we have these interaction issues, we have breakout sessions and we negotiate, and figure out what optimizes the vehicle, rather than the component.
Hartzell: That's awesome. Can you give us an example of a give and take from one of those breakout sessions, where somebody said, "If we change this, it's going to cost a little bit more, maybe, but it will save us some money somewhere else," as an example?
Elio: Nothing is leaping to mind. As you asked that question I was like, "Man, I know that happens ..."
Hartzell: How often do you get together for this Supplier Summit?
Elio: Every four to six weeks.
Hartzell: That's awesome.
Elio: Again, that's unique. These suppliers have never been allowed to talk to each other before. Normally, if there's a problem, Supplier A tells the OEM, he goes and talks to Supplier B about potential solutions, then he goes back and talks ... it's this ping pong ball of inefficiency, so getting this direct communication has huge gains for the product.
Hartzell: When we look at the marketplace here in the U.S., about 16-17 million new cars sold a year. Who's your target? You mentioned about the third car, commuter option. I think probably half of the folks here commute a lot.
Elio: I have a slide for that one!
Hartzell: You have a slide, that's great.
Elio: I think the best analogy for Elio is a Sony Walkman. The Sony Walkman was a radio, but it was different enough, it had its own unique use and volume curve. People didn't stop buying home stereos or car stereos. They just went and bought Walkmans. It was personal music, and this is personal transportation.
Like you said, the new car market's traditionally 16 million. It looks like it will be 17 this year. It's very well developed, heavily segmented, with 100-year-old players with great reputations.
Quite honestly, we're going to get our hats handed to us there. I'm not going to go in and take 100,000 GM customers, or Ford customers, or Toyota customers away. It's not happening. We'll pick up a couple, but we're not going to be a meaningful entrant there.
Now, the used car market is typically three times larger than the new car market, and I think we play very well there. If your alternate is a 120,000-mile Civic for $7 grand, or a brand new Elio under warranty for $7 grand, I think we win a substantial number of those decisions.
Then we create two brand new segments that nobody else has access to. The first is the clunker market. Of the 234 million vehicles on the road, 95 million of them are 11 years old, or older. There's a tremendous number of old cars out there.
We're going to run a program aimed at those folks, called "Let your gas savings make your payments." The way it works is, you walk into your showroom, sign your name, we give you a brand-new vehicle, and a credit card with a $300 limit on it, and we let you walk back out the door.
The deal is, you have to charge all your fuel with that credit card. Every time you buy gas, we're going to charge you triple, so if you buy $10 worth of gas, it shows up as a $30 charge on your credit card statement. That $20 extra is your car payment. It goes to paying down your loan.
As long as you drove into the dealership with something that gets 27 miles to the gallon or less -- and all 95 million of those old cars do -- your monthly fuel bill will go down; 3 times 27 is 81, and we get 84.
From the consumer's perspective, a brand new vehicle, under warranty, that's fun to drive. They don't have a car payment, and they are guaranteed to spend less on gas in their Elio at triple amount, than they did at single amount on their clunker last month. We can literally give cars away to the 95 million old car drivers.
Then the third vehicle, that we already talked about. We're creating the third vehicle at the upper end of the economic spectrum, the "Let your gas savings make your payment" at the lower end, so we cover everybody. It's just different.
Hartzell: That's crazy. When we look at car companies, they require a ton of capital. You mentioned Shreveport, Louisiana. I'm interested in how you ended up in Shreveport, why there?
Tesla, for those folks who follow here, they got their plant up and operational for probably around $750 million or more. Tell us about your plant. I think it's pretty amazing, for a start-up. How much does it cost? How much capital do you actually need, to get this thing going?
Elio: I think both Tesla and Fisker have spent over $1 billion to produce the first vehicle. We're going to take about $300 million. $300 million is a hell of a lot of money, but it's a bargain in car company terms!
That's a top view of the site. It's 4 million square feet. To put that number in perspective, the Empire State Building is 2.8 million square feet, so it's almost 1.5 Empire State buildings, all one floor. Not quite as cool, but just as big!
This went into a trust called Racers Trust, that was funded by the U.S. government, through the GM bankruptcy. They had a mandate that they had to sell it to somebody that could create jobs.
The day I bought, it was worth more torn down than it was standing. Luckily, they had the vision to say, "No, we're not going to allow that. It has to go to somebody who can create jobs." They left behind everything you can possibly imagine, to build a vehicle with. I have everything you can possible imagine, in place.
I got a loan on the equipment there, and I got dinged on the value of the robots, because if I sold all the robots at once, I will change the price of used robots, globally. That's how many robots fit in 4 million square feet!
It saves a tremendous amount of capital as we get started. It saves a lot on the timeline, and it saves a lot on the risk. These lines are one-off organisms. They're incredibly complex, and there's a lot of debugging. To have this line in operation, working, is a huge win.
Hartzell: Yes, that's huge. I think that plant, we've mentioned GM has spent, I think, $1.5 billion.
Elio: Just on the update.
Hartzell: Just on the update in 2002, so this is not a decrepit old plant. This is one of the most high-tech plants that we have here in the United States.
Elio: Yes, it's either the second- or third-most modern plant in the U.S.
Hartzell: Yes. It's pretty incredible. Of that 4 million square feet, how much are you going to use, and how many cars can you make?
Elio: We're going to use 1.5 million square feet of the 4 million.
Hartzell: Only 1.5 million!
Elio: Stu Lichter, who's on my board and a significant Elio shareholder, is America's second largest industrial real estate owner. His claim to fame is he buys empty buildings like this and figures out a way to fill them up with jobs.
There's a real skill set to running a site this large. I've got a lot to learn, quite honestly! He bought the real estate, and he's going to lease the space out around us. I think a tenant just got announced last week. We're leasing from him, and then Elio owns all the equipment inside.
Hartzell: With prototypes, you talked about P5. We'll talk a little bit about that. On the P5, what's different from the P4? We saw a picture there. It looks a little bit different. You need to make 25 prototypes here?
Hartzell: I wanted to talk about, what are those 25 prototypes for?
Elio: P5, the big difference is the engine. We started the first Elio Motor engine, March 6. That's the first time a new American car company started its own engine since Nash in 1951. This is not a trivial milestone; it doesn't happen often! We're real proud of that.
IAV is our engine development partner. They have 65% of the engineering services business in Germany. They do all the engine development for Mercedes Benz, BMW, Bentley, Bugatti, and Elio, among others, so it's a top-shelf design.
Hartzell: They know what they're doing.
Elio: Yes. Then Comau is our manufacturing partner. They're wholly owned by Fiat Chrysler. They just did the three cylinder line for Ford in Europe, and they're doing our three cylinder line.
So although it sound scary, a new car company doing its own engine, when you've got IAV doing the design and Comau doing the manufacturing, a little less scary! The right partners are the key.
The P5 will have the right engine and transmission, much more accurate interior, updated styling. It's really the last one before we kick off the 25. What we're going to do with the 25 is this: The big spend is on the hard tooling. It's about $100 million. Before you write that check, you want to make sure you've found all the mistakes in the design. You don't want to kick that off and go, "Oops, we need to change that. Let's rebuy that $25 million tool!"
We're going to build 25 of them, and then sadly, destroy them all. Front, side, rear, and back; durability, hot and cold testing, etc. That's the process.
Hartzell: You aren't going to have any extras that you're not going to destroy ...?
Elio: Well, there's going to be kind of the "golden" car. As you find things that need to be worked out, you fix the golden car so it ends up being perfect at the end. Then there will be a couple of show cars, so instead of just having one traveling around the country, we'll have a couple marketing cars. I think we'll destroy 22 of the 25.
Hartzell: You mentioned the engine, an all-new engine here, the first since 1951. Can you tell us a little bit more about the actual engine? I imagine that's a pretty big component in you getting the 84 miles to the gallon that you do.
Elio: It's critical for both the cost and the mileage. When the big guys do a new drive train, they're aiming at six platforms, so it's good for all but best for none.
If you want to get 84 miles per gallon, you need to be a point design. This thing is designed for this vehicle, and no other. We couldn't hit it without it.
We started out with the 1990 Geo Metro. We were just going to reproduce that. Then we started doing the math, and we could only get about 66 miles per gallon, so we started working the problem.
I think the only thing we have in common now with the Geo Metro motor is three cylinders. I don't think there's a single dimension that we have in common! It went from a 1.0 liter to a 0.9 liter because it was too much. It's got variable valve lift, which obviously the Geo Metro didn't.
Hartzell: Variable valve lift, for those of us who are not car geeks ...?
Elio: Gives you better acceleration and better mileage at high speed. The timing of your valve is different at different speeds: variable valve lift. It changes the valve timing, because there's a trade-off.
All these components exist today, like Bosch is our fuel injection supplier. It's already in other vehicles. Schaeffler is the valve train supplier. That valve train is in other vehicles.
There's a mandate of no new technology. I believe technical risk is the death knell of pre-revenue start-ups. Even if you bet on the right technology, if it takes you six or nine months longer to work out than you thought, and you're working off of other people's money, bad things happen.
By using all known stuff, and people who are already producing it, we substantially mitigate that risk.
Hartzell: That's great. You've been innovative on design and manufacturing and engineering. I want to talk a little bit about the financing here, because as we know, the amount of capital -- you're talking $300 million to get this thing off the ground and producing -- is not easy to come by, in any type of environment.
You guys are on the cutting edge, on some of the new ways of financing this company. Can you talk about where you come from, where you are now, and where you're going next in order to get your financing needs met?
Elio: Sure. We've raised $70 million so far. We're doing a $30 million round, and then we have $200 million to find at the end.
On the $70 million, part of it came through taking a loan out on those assets in Shreveport, Stu's investment, and ESG's investment. Then $18 million of the $70 came from reservations.
We have the second-most successful crowd funding campaign ever. The first Pebble watch raised $10 million, the second Pebble watch raised $20. We're at $18. By product reserved, we're hands-down number one. We have almost $300 million in product reserved, which we're very proud of, and we did it without a crowd funding website. We did it on our own.
The reason is, Kickstarter wouldn't have us.
Elio: They have a policy of no automotive products, so I called them up and I said, "We're actually a motorcycle, because we've got three wheels."
They looked at our product and they were like, "Yeah, no. No, you're not. You're a car."
I said to myself, "This is a high-profile enough, sexy enough product, I think we can do this on our own," so we did, and it's worked -- but that was not our first choice.
Then, most recently, I don't know if you are up to speed on the Reg A stuff, but as of June 19, Reg A+ became available, so you can raise up to $50 million from non-accredited investors. It's a mini IPO.
On June 19, you could do what the SEC calls "test the waters." You can let people know, "We're interested in doing this. Would you be interested in investing in us?" In less than a month, we have 5,700 people who have said they're interested with non-binding commitments of over $22 million, so it seems to be working for us.
Honestly, this round has delayed the project for almost a year. We're a very tough company to fund. We're an oddball. We were talking about that at dinner last night.
VCs, they want to spend a couple million dollars and recreate Facebook. You show them a $300 million budget, and their heads pop off. You go to private equity guys, they're comfortable with that number, but they hate pre-revenue start-ups.
Both of them, because of concentration of capital, like to specialize. They get good in an area. "We invest in cell towers." "We invest in biotech." New car companies don't come along enough. There's nobody who specializes in new car companies.
Then $30 million is an oddball. It's too big for the little guys, and not big enough for Goldman. Everything about us is oddball, and we just don't fit. The general public kind of gets it, and it's working.
Hartzell: That's the great thing about community, and crowd sourcing. You have a great idea, let the idea speak for itself. There will be people that want to put capital behind it.
Elio: I think this Reg A+ is going to work out well for the investor, and for the companies. I go to a lot of places where there are a lot of start-ups, and always the biggest issue is raising capital. I think this is going to be a great avenue for us and a lot of other companies.
From the investor side, you couldn't invest in Uber or Facebook or Elio if you weren't accredited, before June 19. It gives the average guy in the street the ability to say, "I like this idea. I realize it's a risk. It's an all-or-nothing bet, but I'm willing to bet on this." It lets them do that. I think it's going to be good for the investor, I think it's going to be good for small businesses.
Hartzell: That's great. I had a couple questions here. You mentioned about the U.S. market in used. What about international markets? That's something we haven't heard. You make them here in Louisiana. Have you had any interest there? Is that a plan, down the line?
Elio: I claim it's an aspiration, not a plan. The reason is, until we launch this flawlessly in the U.S., there's no sense in working out distribution and everything else across the globe. As soon as I say I plan to go global, you'll say, "How are you going to distribute in Uruguay?" I don't know, and I'm not distracting resources to figure that out.
We've had incoming interest from every major continent. I'm convinced this is a global vehicle. I'm committed to making it in the U.S. and exporting, rather than localizing, because I think at this price point and this mileage, we can be competitive anywhere. We don't have to localize
But until we have the first vehicle launched, it's going to remain an aspiration, not a plan.
Hartzell: That's fair. I talked to a Fool employee yesterday, and they were interested in your talk. They're a Tesla owner, and the first question that came out of his mouth was, "Are they going to make an EV version of this car?" I haven't heard anything about that, but is that something that you aspire to?
Elio: Act 1 is getting it launched in the U.S. Act 2 is going global, rather than deep. Act 3, I think alternate drive trains will make some sense.
I don't think they will make a business case sense. We have a video on our website called, "The Perpetual Motion Machine." It goes like this. If you could buy a $15,000 perpetual motion machine; you buy it, and you never, ever have to put fuel in it again, that would be a compelling product, would it not?
Elio: It doesn't make sense in light of an Elio. You've spent $8,000 more for your perpetual motion machine, and if you drive 15,000 miles a year at $4 a gallon gas, you spend less than $800 on fuel on your Elio, so it takes you 10 years and 150,000 miles to break even with a $15,000 perpetual motion machine -- so, from a business case, it just doesn't make sense.
But if you look at the Prius, the business case doesn't make sense on it, and it's the fourth-best selling (unclear) on the planet. So, I am open to alternate drive trains once we get through this, because there are other reasons to do it, other than just pure business case. But there's not the compelling reason of, "We've got to get the mileage."
This is a very efficient power plant for us.
Hartzell: I have a couple more questions, then I'll open it up to anybody else who has something they want to jump in with.
I've heard whispers on one of your Q&As that I read through recently. You said somebody expressed an interest in a turbo version of the Elio. Is that something we could see down the line?
Elio: Yes. I think it has to happen. I know for a fact that there are guys at IAV who are working on a turbo version, and it's not authorized by IAV or Elio!
Comau, when they were presenting the engine machining line, they said, "We left this hole here, in case you ever want to put a turbo. It doesn't cost you anything to leave a hole!"
Then Precision Turbo, we met at (unclear). They're one of the premier aftermarket turbo guys, and they attended the last Supplier Summit. They're real interested in working with us to create a turbo that we could productionize.
I think it's destiny that there will be a turbo version.
Hartzell: That's great. One more question I had on the top, here; Elio's three wheels. We talked about that helping, as we see the 84 miles to the gallon, and the amount of air that you push. Do you see, with this brand, would there ever be a four-wheeled Elio, down the line?
Elio: Who knows where it will go from there? I think we've got Act 1, 2, and 3 worked out. I think you've got to get there, and then view the landscape. I think this is a compelling architecture. I think it will be around the (unclear) for a long time.
Jim: A couple of questions. You mentioned that it's a motorcycle. Is it technically a motorcycle, and would drivers have to get a motorcycle license to be able to drive this?
Hartzell: I want to repeat that, since we have the mic up here, and it might not pick up. He asked, is this a motorcycle? So that's what is it, the first question. The second question is, do you need a helmet to drive this?
Jim: Driver's license.
Elio: The federal government says if you have three wheels or less on the ground, you're a motorcycle, not a car, so this is a motorcycle, per the federal government. It's got three airbags, two seatbelts, a full roll cage, air conditioning, power windows, power door locks, anti-lock brakes, and stability control. But it's still a motorcycle!
What we've done at the state level ... we did triage. We don't need to do this all at once, because we've got plenty of time. There's no sense in hiring an army of guys to get it done all at once.
We triaged it, and we went after "helmet and license" states first, and now we're going after "license only" states. In each state, we are creating a new category called an "autocycle." An autocycle, coincidentally, looks a lot like an Elio!
It's a closed, three-wheeled vehicle with airbags, seatbelts, etc. If you're an autocycle, you don't need a helmet or a motorcycle license. We've been 100% successful in that effort. We're down to three states that still require helmets.
Two of them, we have legislation running. One is West Virginia. Their legislature only works 45 days a year, and we missed the window so we've got to wait until next year, when they come back to work
Hartzell: I'm sorry, what do they do the other ...?
Elio: I'm guessing it's a part time job, or it's just a great vacation package!
Now we're going to go after the "license only" states, but there's no real pushback. You don't need the same skills to drive this, as you do a Harley. You've got a steering wheel, you've got gas pedals.
It's real hard for a state legislature to say, "No, I want to make it difficult for my constituents to drive this high-mileage, low-cost, American-made vehicle." There's no real contention.
My VP of Government Affairs was a legislator in Michigan, and now he's doing this for us. More often than not, he ends up taking four or five reservations from the legislature that he's presenting to, is how it typically goes.
The answer is, in most states we're already successful, and the answer is no. There are some states we still have to get it changed, but by the time we go to production, I don't think you'll need it anywhere.
Audience Member: When is launch date?
Hartzell: The question was, when is the first production vehicle going to roll off line?
Elio: Right. Everybody wants to know that, and it's a legitimate question. The truth is, we had hit the pause button, looking for funding. I have to keep looking at the crystal ball, "When is the funding going to drop?" Then I can tell you the production date.
We had published, most recently, mid-2016. Now that the funding picture is becoming much clearer, we're going to have a Supplier Summit in early August to roll up the timeline and come up with, "This is when we really think we can hit it."
I'm not clear yet. I think it's 2016. I don't know what month.
Hartzell: Sarah had a question.
Sarah: Who does your drive train, or is that IAV as well?
Elio: IAV does the engine. The transmission is from Aisin. They're the world's largest transmission manufacturer, and part of Toyota (unclear), so it's an existing Aisin transmission that we're using. We're going to change a couple of gear ratios, but other than that it's the same transmission.
Fred: You're doing a lot of government work to get the autocycle over various (... helmet regulations for drivers).
Not that long ago, maybe six months ago, I saw that the Slingshot just got released, which is a very similar category, although significantly more expensive. Do you see any other companies trying to get in on that, like Polaris has?
Elio: No. The Slingshot doesn't qualify as an autocycle, as we've defined it. It's a fully enclosed vehicle; we have a full roll cage, where the Slingshot does not. We have airbags, the Slingshot does not. We have seatbelts, the Slingshot does not.
I think the Slingshot's a cool product, and I think they're selling well -- as they should, because it's a fun thing -- but it truly is a motorcycle with three wheels, and we're really more of a car on three wheels.
We're both kind of a blend. It's this new area. Did that answer your question?
Fred: I was just wondering more, other companies looking into things like that. Do you expect that? Do you suspect that?
Elio: Once we're successful, I can almost guarantee it. You can't create something this fast, and run alone. McDonald's has got Burger King, Coke's got Pepsi. Elio will have a competitor. I don't know whether it will be from the existing guys or a start-up like myself, but we're not going to get to create these segments, and then just own them forever.
We will have competition. I don't believe anybody's working on it yet, to my knowledge.
Audience Member: The autocycle designation, will that still allow folks in the HOV and express lanes, which it seems would be a nice segment, for people who have to wait in the regular lanes?
Hartzell: Spoken from somebody who just got a motorcycle, so he can go in the HOV lanes!
Elio: At the state level, because the autocycle is a subset of motorcycles, it's still a motorcycle, so it will have a motorcycle plate and insurance. I believe that it will continue to get the HOV exemption.
We also have legislation running federally, to create the category of autocycle. Senator Vitter of Louisiana introduced it into the U.S. Senate, and Representative Moolenaar of Michigan introduced it into the House.
If it gets changed federally, then I don't know how the states will handle the HOV issue. One would think that the HOV lane was created to reduce overall fuel consumption, and given that we get 84 miles per gallon, we could certainly make an argument that we should be allowed.
Audience Member: They legislated out my Prius, though, which gets better mileage than my motorcycle.
Max: I recently read an article about a company in India making low-cost vehicles -- I can't remember the name -- for the market in India.
Hartzell: Tata? Was it Tata Motors?
Max: I think so, yes. Are you familiar with that company? I was just wondering, what are your thoughts on that?
Elio: Yes. That car is $2,500, but you have to assemble it yourself, in your garage. It's called the Nano, the Tata Nano. They are targeting one for Europe. It will be like $9,000 by the time they've made it Euro-compliant, and if they brought it to the U.S. it would be more like $10-11,000, so I don't think that is a real competitor to this.
Rob: Paul, (unclear), can you talk about any conversations you have, looking into the future about ride sharing -- like Uber or Lyft -- their objectives, and what that means overall for the automotive sector, churns in automotive purchasing?
Elio: I don't really get those, to be honest with you! I live in a huge suburb. Phoenix, there is no city. It's just a suburb. The distances are great, and if you don't have your own car, you're pretty much out of luck, so the whole ride sharing and not having your own car, I don't get it.
I see it being very popular. I understand it's happening, but I'm the wrong guy to give you insight on that phenomenon.
Audience Member: What's the driving experience like? It's three wheels. (unclear) three wheels.
Elio: It's front engine and front-wheel drive, so all of your traction and all of your handling action, and 70% of your mass, are all over your front two wheels. Unless you stick your head out the window, you have no idea you're missing a wheel.
We had it at the Insurance Institute, and they drove it, and they said it was the most naturally driving vehicle they've ever experienced. By definition, everything else they drive is more expensive. They drive every new car that comes on the market, and they're all more expensive, and they said, "Wow."
There's something that feels right about being right in between the wheels. You don't realize how awkward it is, being off center, until you get to be right in the middle. It's fun to drive.
Audience Member: Two quick questions. You mentioned insurance. If it qualifies as a motorcycle, is insurance more expensive, as a function of that, so the total cost of the car might be more expensive?
Elio: No. Motorcycle insurance is usually much less than car insurance, but what drives that is usage. There are very few motorcycles with 200,000 miles on them, and there are a whole lot of cars with 200,000. People just don't drive motorcycles as often, so their insurance is less.
I think we're going to be car insurance-minus on cost. There are four things insurance companies care about, and we're advantaged on all of them:
- What damage does the vehicle do to something it hits? We weigh 1,200 pounds, we do less damage.
- What happens to the occupant? We are engineering to the highest automotive standard, so we're advantaged there.
- What's my exposure if I have to total this out? Well, we're $6,800, so we're advantaged there.
- What's the cost of service parts? Because of our service parts model, we're wildly cheaper than everybody else in service parts, so we're advantaged there.
Everything they care about, we do better than the other guy, so I think it will be car insurance, minus something. But it will be more expensive than traditional motorcycle insurance, because of the usage.
Audience Member: Thanks. Then, with the JOBS Act, I don't think I've seen many successful -- or at least I haven't been able to, in my research, find any successful offerings. What brought the (unclear)? How do you (unclear)?
Elio: The reason you haven't, it hasn't even been available for a month yet. We're the first ones.
We thought there was going to be a whole bunch of portals opening, and hundreds of companies. It turns out, there's only a handful of portals and maybe a couple dozen companies that are doing it. We're having a really good experience.
I don't know why more people didn't jump on the bandwagon right away, but I've got a feeling, as people figure this out, more companies will take advantage of it. Like I said, I think access to capital is the hardest part of starting a company, and this is a really good, viable way for both investor and company to match up.
Hartzell: Yes. We talked about private equity and venture capitalists. I love the idea of getting capital from your customers, who love your product and (unclear) want to do. Usually, their goals and aspirations and timelines are different than a private equity company or a venture capital company.
We talked about getting a chance at Facebook or Uber or something, at an earlier stage from your die-hard customers, is a pretty nice opportunity.
Elio: Here's a sentiment from the Elio Motors Owners Association -- I shouldn't have used the acronym on the title, there.
Obviously, this is the most friendly website for Elio Motors. It's people who have reservations, who are passionate about Elio. This is the day after we announced that we were testing the water. They all use faux names, so this is Art Vandelay, of Seinfeld fame:
"I'm in. This is not just about money. This is about changing the game. If you want to change the world, you have to start somewhere. This is about more than making a few bucks on an investment. This is about launching a company that can change the way the entire world looks at personal transportation.
"It's about saving energy, saving the environment, bringing mobility to those who could not otherwise afford it, creating jobs that matter, making our country safer and more prosperous. This is not without risk, but nothing worth doing is without risk. There is a time for discussion, and a time for action. We've been discussing this long enough. Let's do this." Then a link to the website.
Then a response from Fairlane58, "Well said. I'm in for $50,000. This shows how much I believe in Elio."
There are a lot of comments like that; not nearly as well-written. I need to hire this guy for my marketing department! It's just a really well-written statement.
That's why people are investing. They see the financial upside, but there's also a passion about what we're trying to accomplish.
Simon: A lot of companies are bringing technology into the car, whether it's collision avoidance, or navigation, or a whole bunch of other stuff, referring to cars as "data factories" now. Do you see that as a way to bring, long term, the cost down for vehicles? Or it's just more excess for bells and whistles you don't really need?
Elio: We're going the other way. We're going to have no electronics in the car. Here's my shtick on electronics. The cycle time for electronics is so much faster than the useful life of a vehicle.
I know a guy who's got a three year old Maserati, and his son is badgering him to trade it in because the nav system sucks. It's three years old, it's out of date. He's got a $90,000 car he's dissatisfied with, because they integrated it and you can't pull it out.
We are partnering with a company called Infinite Skyz. We'll have a couple of partners doing similar things, and let the market decide what's the best. You mount an iPad in there, and if you do the full Infinite Skyz package, it's Internet-enabled.
You can start your car with your iPhone, it's got accelerometers on it, so if somebody bumps your car, your phone vibrates. Then it's got 360 degree cameras, you can look and see, "That was a shopping cart. I'm going to finish my dinner," or "That's a Suburban. Maybe I should go out to the parking lot."
Or, if you're a nurse working late, you can turn those cameras on and say, "There's a creepy guy out there," and go to Security, "Do you mind walking me to my car tonight? I don't like the looks of that." There's all sorts of stuff they can do.
But because we didn't integrate it, when the iPad 19 comes out, you can swap out your 18 for your 19, and your Elio stays relevant.
We look at our vehicle as an operating system. We want to build a rock-solid operating system, then all the options, including the electronics, are apps. We're encouraging folks to do that.
On the vehicle, on the upper frame rails and the lower frame rails, it alternates -- power point, blind structural nut, power point, blind structural nut -- every four inches, on all four rails. What all these blind structural nuts and power points for? We have no earthly idea, but the American entrepreneur will figure it out. They'll create all sorts of stuff that we can't imagine.
Did that answer your question?
Lee: It just seems like, with every question, there's innovation and you're pushing out on the edge. You have some unique relationships with your partners, with the investors, and so forth. I'm wondering about the auto worker, and the culture inside of your company. Are you thinking in terms of innovation there? Will you be a forward-thinking cultural company as well?
Elio: I sure hope so!
I think, although we've innovated, all the stuff we do is low-risk and common sense. There's no flux capacitor. It's all just common-sense stuff, strung together. One of the big benefits to Shreveport, that we didn't talk about, is the human factor.
At its peak, that factory had 3,000 workers going to work there every day. Now there's zero. Some of those folks left the community. Some have found meaningful work. The large majority are either unemployed or underemployed, and they know how to build cars.
If you plop that identical site in the middle of Phoenix, where nobody's ever built a car before, it would not be nearly as valuable as where it's at, because of that human factor.
In our business model we have American Axle UAW labor rate. If we wanted to create crappy jobs, we may as well create crappy Chinese jobs. The point is to create good-paying American job. That's our thrust.
My plant manager, he's a 35-year Chrysler veteran. He personally launched the original minivan, the LH, the Dodge Viper ... he's a launch guru, and he's really good at personnel stuff. I've got to tell you one Gino story.
He took over Windsor Assembly. I don't remember the numbers, so I'm going to make them up. There was $30,000 a week of shrinkage -- stuff getting stolen out of the plant -- so he went to the head of the CAW and he said, "Okay, when somebody gets caught stealing, I leave it to your sole decision whether they get fired or not."
The guy's like, "Really?"
He's like, "Yeah, one condition."
The guy's like, "Okay, here we go."
He's like, "If they're married, I want to have a meeting with the employee and their wife, and if they're not married I want to have a meeting with the employee and their parents."
The guy's like, "Okay."
The notice went up that in three weeks this is going to go into effect. The first few people get caught. This husband and wife comes in, and he offers them coffee. They've got their arms folded, and wouldn't take it.
He was like, "All right. Well, do we all know why we're here?"
The wife's like, "Yeah, you laid my husband off."
He's like, "No, ma'am. We're running at full capacity. He stole a roll of duct tape," and he slams it down on the table, and she shoots him a dirty look.
He's like, "Do you have kids, ma'am?"
She's like, "Yes, we've got three."
He's like, "How do you feel about your husband putting the security of your kids in jeopardy" -- and he shows his salary, and the cost of the duct tape -- "over a $3 roll of duct tape?"
She's like "You son of a bitch ..."
Then the next one was a mother/son, and within weeks it went from $30,000 a week, to like $2,000 a week in shrinkage. It eradicated the problem.
Gino's a creative guy on how to deal with folks, and that's really what you've got to know, is how do you deal with folks? Did that answer your question?
Audience Member: That was great. We have (unclear) here ...
Hartzell: We have a good selection of Fool Caps in our house. You can attest to that. We'll take one or two more questions, then finish up.
Audience Member: I've got to ask, what's the top speed on the car?
Elio: 107. Zero to 60 in 9.6 seconds. We're faster than Yaris and Versa, and the little guys. We lose to Ferraris and Corvettes, as we should.
Audience Member: Fair enough.
Audience Member: What's the storage capacity? Truck size? I'm assuming it's just a back trunk?
Elio: With the rear seat up, you can fit an airline-compliant bag in the trunk ... right back here. Then without a rear occupant, that seat folds down so you can fit golf clubs or a snowboard, or other long items.
Audience Member: A very practical question; on your payment plan, how do you make sure that people buy gas on your credit card?
Elio: If they don't charge enough fuel, a minimum charge gets moved over to their credit card every month, to make sure it gets paid down in a reasonable amount of time, and if they don't make that payment, you go pick the car up.
Fred: Actually, the thing that popped to mind when you did mention that credit card thing is, is that going to be all self-backed, or are you working with another bank?
Elio: No, we will partner with somebody. I think that particular piece is very valuable. The closer we are to production, the more value that has, so I'm waiting for that negotiation, but we've spoken to some big banks, and there's an interest there.
It's an interesting product, because auto loans have the lowest default rates. It's an order of magnitude lower than credit card rates, so by having a credit card that's asset-backed, it makes for a very interesting product for folks.
Hartzell: One more. I think maybe I had more from this side of the room, so I'll make sure I get anybody that's over on this side, if anybody had a question? Last question, anyone? Aaron.
Aaron: You guys have seemed really clever, just with the engineering, the financing, and in terms of scalability. But I assume, going into this, you didn't know all of that stuff. What have you done to accelerate your learning curve, in order to manage all of these things, to execute on all the plans?
Elio: It's about the right partners. We were talking about it earlier. When I kicked it off, I said, "We're going to build a $5,000/66 mile per gallon car" -- having no information on what was possible. You've got to start somewhere. You've got to start with a target.
We literally had tape on the floor of our office, figuring out the size. You just work the problem and, like you said, each time the problem comes up ... like the distribution model. The first time I pitched for money, they said, "How are you going to distribute?"
I'm like, "Look, it's a $6,800/84 mile per gallon car. Any idiot can sell this thing." That didn't fly well, so you go back to the office, you're like, "Okay, how are we going to distribute? Because we're going to have to answer that question."
It was really getting grilled, and getting stumped. Every time you get stumped, you go back and you figure it out. Then it's attracting the right partners. We have the Who's Who of the global supply base working with us.
The knowledge base there is incredible on the engineering side, and I think on the business side we've also attracted really incredible partners, and our board.
For a new company, we have Jim Holden, the former CEO of Chrysler, Ken Way, who was the Chairman and CEO of Lear Seating for 25 years, which is the 13th largest auto supplier in the world. Dave Schembri, who was the President of smart USA for Roger Penske, and before that Senior Executive at Mercedes Benz USA, and then Stu, who I mentioned was the second largest industrial real estate owner in the country.
For a young company, we have a very powerful board, with great advice. I talk to all those guys at least once a week. You go to meetings, you get stumped, and you go back home and figure it out.
Hartzell: Great. I'd like to thank Paul for educating us all on the car market. I want to have one last opportunity for you to say, in case any of these commuter Fools would like to get more information on an Elio, or perhaps make a reservation, is there someplace they can go? Insert plug!
Elio: Yes, ElioMotors.com. Right now, we redirect you to the StartEngine site, the Reg A+ portal, and there's a button there to take you to ElioMotors.com. That's going to change in about a week, but for this first month we're directing all the traffic to StartEngine.
Hartzell: Great. Thanks very much, Paul. Appreciate it.
Buck Hartzell has a position in Tesla Motors. The Motley Fool recommends Coca-Cola, Facebook, General Motors, PepsiCo, and Tesla Motors. The Motley Fool owns shares of Facebook, PepsiCo, and Tesla Motors and has the following options: long January 2016 $37 calls on Coca-Cola, short January 2016 $43 calls on Coca-Cola, and short January 2016 $37 puts on Coca-Cola. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.