Infinite Taxpayer Money Needed for Electric Truck Company's Survival
Despite a new report out of the United Kingdom that says the future of the business is bleak without government subsidies, a three-year-old unprofitable electric truck company that received $32 million in U.S. taxpayer stimulus plans to raise more money via an initial public offering.
Kansas City-based Smith Electric Vehicles was launched in January 2009, and despite its lack of track record and the inexperience of its leadership, the Department of Energy awarded the company $10 million in August 2009, and an additional $22 million in March 2010, for an electric truck demonstration program. The company was little more than a spinoff of a failed U.K. operation with the same name, owned by a troubled parent company called The Tanfield Group. In July 2008 – largely because of Smith-UK’s shortcomings – Tanfield’s stock price “collapsed” (scroll down at link) and was harming other holdings of its founder, Roy Stanley.
Smith-UK’s electric truck venture, part of the “green” energy economy euphoria that swept Europe, once received praise from luminaries such as former Prime Minister Tony Blair, who called Tanfield “UK manufacturing innovation at its best.” But soon afterward media discovered that customers for the electric trucks were sparse, and investors wondered whether the company was “more hype than reality.”
A study commissioned by the U.K. Department of Transport confirms the industry was unworthy of the publicity it received. British consulting firm Element Energy examined the total costs of ownership of low emission vans, in light of the government’s plans (implemented in February) to extend its Plug-In Car Grant program to electric trucks. It found that for electric trucks to make economic sense, government would need to provide grants indefinitely in order to compete with diesel-powered vehicles.
“The report’s authors suggest that cash incentives will need to continue to compensate owners for the higher running costs, as well as non-financial incentives…,” reported England-based Fleet News. John Lewis, CEO of the British Vehicle Renting and Leasing Association, said, “The government has put its money where its mouth is by delivering the Plug-in Van Grant and other tax incentives, but it needs to give operators confidence that these will be more than just short-term measures.”
So unsurprisingly, we have another industry in the clean energy economy that depends on public funding for its survival, rather than the appeal of its products or services. But a study isn’t required to show that’s the case; the Tanfield/Smith Electric-UK experience is proof.
After Tanfield’s stock lost 80 percent of its value in one day, and 97 percent of its value within a year, investors demanded changes in 2008. By January 2009 Smith-U.S. was started, CEO Bryan Hansel planned to raise $15 million, and in August 2009 had its first $10 million commitment from DOE – just eight months after its founding. By the end of the year, however, Smith-U.S. still had no revenues.
In April 2010 Smith-U.S. had raised the $15 million it had sought – on top of another $22 million grant from the Department of Energy – so the company agreed to buy Smith-UK. Tanfield Founder Roy Stanley, and CEO Darren Kell, were added to the board of directors for Smith-U.S. But by late summer the deal had still not been consummated and the British company’s share price again tanked. Liberty, a rival British EV manufacturer, made overtures to Tanfield investors for a buyout, but were rebuffed.
Finally by the end of 2010 the sale was complete, for $15 million in cash, payable in 20 equal installments, plus other financing and ownership considerations. In its annual report Tanfield stated it now owned 32.2 percent of Smith-U.S., while Smith-U.K. was now formally a “discontinued operation.” But Tanfield’s woes may not be over, as the U.K. Accountancy and Actuarial Discipline Board announced a year ago it would investigate the conduct of its accountants in their preparation of the company’s 2007 and 2008 financial statements. The investigation is still ongoing.
It certainly looks like U.S. taxpayers helped bail out troubled British investors in Tanfield. But the government subsidized electric truck scheme, established in England, continues in North America. Smith-U.S. counts Frito-Lay, Coca-Cola, Staples and FedEx among its customers, but only because it is paying those companies to use their vehicles as delivery vans.
Since April 2010 Smith-U.S. has filed seven quarterly reports that are viewable at the Recovery.gov Web site. The company reported that through December 31 it had placed 240 trucks into service under the program, and had received $15 million from Recovery Act funds. Of that, Smith reimbursed its customer companies nearly $13.7 million for taking the ETs off its hands -- an average of just over $57,000 per vehicle. In addition, electric truck owners benefit from an array of other federal and state incentives programs.
With that business model in place, Smith-U.S. now plans an initial public offering, according to a filing earlier this month with the Securities and Exchange Commission. The company has reported net losses of $17.5 million, $30.3 million and $52.5 million in 2009, 2010, and 2011. Besides having to pay for the Tanfield failure, Smith-U.S. needs to continue its program of paying customers to take its electric trucks. It reported to the SEC that it had “sold” 290 trucks in the U.S. and 279 outside the U.S.
Another bad sign for this taxpayer “investment” (and for prospective private investors) is that Smith-U.S. is contracted with floundering battery supplier A123 Systems, which has had at least two recalls of its batteries due to manufacturing flaws and an additional incident in which one of its batteries caused an explosion at a General Motors test facility, sending at least one person to the hospital. A123, which received $249.1 million in Recovery Act funds to produce its EV batteries, is in deep financial trouble and Smith-U.S. is one of its affected customers.
“We believe it is likely that substantially all of the battery modules we have sourced from A123 contain one or more defective cells,” Smith-U.S. reported to the SEC in its IPO prospectus, under “risk factors.” “We expect that A123 will replace all defective battery modules supplied to us beginning in April 2012 at A123’s cost…. At this time, we are unable to predict whether this issue will affect our production or operating results for the second quarter of 2012.”
And to pay for all this incompetence and for customers to buy its trucks, Smith Electric – confirming the findings of the British study – said in its SEC filing that it needs ongoing taxpayer support.
“We believe that the availability of government subsidies and incentives currently is an important factor considered by our customers when purchasing our vehicles,” the filing said, “and that our growth depends in part on the availability and amounts of these subsidies and incentives.”
Smith-U.S. even has “incentives specialists” as part of its sales team to make sure every government dollar is found to pay for its trucks. Aren’t you glad you’re invested?
Paul Chesser is an associate fellow for the National Legal and Policy Center.