Analysis

What Went Wrong at Fisker Automotive?

We also talk about what’s going on with Wells Fargo and answer some retirement questions.

In this podcast, Motley Fool analyst Asit Sharma and host Mary Long discuss Fisker‘s bankruptcy filing and Wells Fargo‘s latest credit card bet.

Then, Motley Fool host Alison Southwick and retirement expert Robert Brokamp tackle the listener mailbag, answering questions about retirement distributions, target date funds, and commodities. Got a question for Alison and Robert? Email it to [email protected]

To catch full episodes of all The Motley Fool’s free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on June 18, 2024.

Mary Long: The big dogs are big for a reason. You’re listening to Motley Fool Money. I’m Mary Long, joined today by Asit Sharma. Asit, thank you for spending a part of your day with us on Motley Fool Money.

Asit Sharma: Mary, it’s always the best part of the day. Thanks for having me.

Mary Long: Good part of the day for us, but not so much the case for some other companies. Today we have two stories of unsuccess, I’m going to say. The first is with the electric vehicle company Fisker, they filed for bankruptcy. The pitch with Fisker was that it could emulate Tesla‘s success and have a cheaper, faster entry into the auto industry and that it would do this largely by outsourcing its manufacturing. The first vehicle called the Ocean SUV ran for 360 miles on a single charge, had a sweet design, and a sticker price of under $40,000.

The car’s roll-out was not the smoothest, but we’ll get to that in a bit. Finance is ultimately what hurt Fisker here, the company raised a billion dollars to launch operations, burned through almost all of its cash reserves, defaults on a debt with a key investor. What’s your initial reaction to all this?

Asit Sharma: Mary, for me, this just drives home that in the EV market, either you need scale or you need capital. So either you need a huge amount of production capability in hand with some demand behind that, or you need a lot of money, and you know you need money to get scale.

One billion dollars is my other thought, that’s a lot of money, but it doesn’t go a long way in this very young market, which is extremely complex. Look we have to understand too, Fisker partially they were suffering from industry headwinds. There was this wave of enthusiasm for EVs that’s tapered off some, interest rates have risen so financing is harder for these vehicles, the tax credit picture keeps changing here in the US. I wonder they decided to go sort of up-market with their first vehicle. You rightfully point out, there’s a $40,000 price tag for EVs, that’s maybe not so up-market, but still the presentation of the vehicle, the sophistication of it spoke of that sort of luxury feel to borrow sort of the early iterations that Tesla came to market with.

But it’s just so difficult to do that, insanely difficult, and they rolled the Ocean out really before it was ready for big time. I believe they delivered a batch of Oceans, one of the releases without cruise control, they’re fixing that with some other problems via software and hardware updates. So there’s that and then the other initial reaction I have is just a lot of cellphones when you start looking at the financial side of this company, we’ll talk about those. One being they just couldn’t file SEC documents on a timely basis, and that’s one of the things that hurt them. We can get into the why’s of that again, as we talk about this.

Mary Long: There are not many times in my life where I see dollar sign, 1 billion, and I think, really? That’s it? That was kind of my reaction when reading about this story. As you mentioned, it’s really capital-intensive, and a billion dollars doesn’t seem like enough to really get you going. Say that you had gotten a call from CEO Henrik Fisker earlier this year, and he’s offering you a spot in the C-suite, what would you have done to try and right this sinking ship back then?

Asit Sharma: It’s just so difficult. I’m not sure there’s anything that optimization or cost-cutting could have done in such a short amount of time, so it might have been a case of just telling the truth, saying, you need money, so let’s go find a private investor, maybe take the company private, or maybe let’s go get a relationship with a major manufacturer. But Fisker was already doing this, he was in talks with an unnamed major automaker that fell through, and that’s why we got the news of this bankruptcy this week, that was the last straw and so things broke there. I think that for people who find themselves in this position there are a number of things you try as last gasp efforts. They did try to go to a dealership model, it was sort of direct sales before that, and the sales and marketing line item on their income statement was large, but too little too late.

Mary Long: This is Henrik’s second attempt at building an automotive company. His first also went bankrupt after launching its first model, which was $100,000 hybrid plug in. In that in between, Fisker has said that he tried to learn from the mistakes that he made during that first go. Some of that being that he wanted to raise more money, partner with more reputable suppliers. They say that third times the charm, if Fisker decides to give this business another try, what mistakes do you think he should learn from this go around?

Asit Sharma: So look, I don’t want to sound too harsh here, Mary. It’s so easy to sit here in a chair with a podcast mic in front of you, and make it sound as if someone who’s gone out and built an electric vehicle doesn’t understand business dynamics, but I would walk him through that. Basically, the company thought it was creating a licensing of IP model, they had the designs for the car, they had a lot of R&D and tech, and they went to an amazing contract manufacturer, whose subsidiary is based in Austria’s Magna International.

This company also makes those big, boxy, beautiful, iconic Mercedes G SUVs, and a ton of other cars on lines that can go either conventional or electric. A fascinating company, but they didn’t have enough volume going through their contract manufacturers line. So when you don’t do that, the agreements you have in place with such manufacturers leaves you on the hook for money, so your cost of goods sold line on your income statement looks almost as bad as it would if you would produce the stuff yourself. So I might have said, ”Look, for a third time around, consider raising enough money and going to Tesla route, just making your own production facilities”. At the same time I think this idea of volume, how to hit the right break even points is extremely important in the EV industry. So understanding where your true break even point is going to be and engineering a vehicle behind that. Don’t come to either a contract manufacturer or your own manufacturing people if you decide to build a house and say, ”I want to build this car, it has got all these great features”, figure out where you can find that break even, and then design a really great car backwards.

One last thing I’ll say on advice next time around, and look this is luminary in the car business. Fisker maybe he wants to resurface a third time, I would not be someone to say, ”Don’t give this guy another chance”. I would say this, though, it is a basic principle of manufacturing Finance. If you are in a highly technical industry, let’s say aerospace or this EV manufacturing, but it’s an incipient industry, and it’s got wavering demand states, if you think you’ll need 1 billion bucks, raise $3 billion. This is an underappreciated strength of Elon Musk, he is a master showman, he’s never had trouble raising capital, convincing private and public investors to back his ideas. I mean maybe now Tesla is facing industry headwinds, there’s more pessimism about the company, but in the early days, this was a skill and a talent of entrepreneurialism that he had in spaces, and it helped him weather those really tough times and get to the volume states that I’ve been talking about to make a profit.

Mary Long: We were talking in the pre-record about I’m going to say one of the quirks of this company, too, and that is a relational quirk. One of the co-founders, but also the spouse of Henrik Fisker is the Chief Financial Officer and the Chief Operating Officer. I don’t want to say that that’s a red flag off the bat, but how does that maybe complicate the situation here a bit?

Asit Sharma: Mary, we were trying to remember, not just in a publicly traded company when we had both seen a married couple in the C-suite, but also a married couple in which one of them held more than two C positions. I’m going to read you what Dr Geeta Gupta-Fisker was tasked with the Chief Operating Officer and Chief Financial Officer. Well let’s put this in a present tense, it’s still a company even though it’s declared bankruptcy. She is responsible for operations, Finance and planning, purchasing and supply chain management, insurance, treasury, tax, intellectual property management, and preparing the company for GAP compliance, and public market readiness. So that is a red flag, let’s call this for what it is.

Here I’m going to fault one of my heroes, which is Bill McDermott, well known entrepreneur, leader of ServiceNow, who’s on the board. I would have sat these two down and told them that, ”Look, you can’t possibly have one person in the electrical vehicle market who’s going to be responsible for all the financial stuff and also the supply chain management, that’s bonkers, that’s nuts”. You see the sad end of this is that she couldn’t do all of this, she couldn’t keep all these plates spinning, in fact Fisker filed several statements late. I think at least two statements, I shouldn’t say several. But one of those was pretty important because in filing one statement, I believe it’s their 10K for last year, late, they triggered a clause with some convertible note holders, which allowed a partial conversion feature to take place. So that had some downstream consequences, I believe they fixed it, but you just get a sense of a company that didn’t understand some basic business principles. As you said, Mary, when we were chatting beforehand, ”There must be some other talented people out there in the big wide business world that you can hire for these functions that normally have more than one person behind them”.

Mary Long: Yeah, and as we’ve said throughout this whole discussion, this is a tough industry, right? It’s exciting technology, but it’s still pretty new. Are there any non-Tesla EV start-ups that you see out there that actually stand a chance of succeeding in this tough environment, that have a chance of getting this right?

Asit Sharma: Yeah, I’ m just not going to go on much of a limb here. I’ll say BYD, which is not really that much of a start up anymore in China. I think they have everything that it takes, plus they have a favorable environment in some subsidies in China, so I’ll stick with them. It’s just I know I’ll name one, and next week we’ll be talking about it, ”Asit, that company you named went bankrupt”.

Mary Long: This is not the first electric vehicle company that has gone bankrupt. Fisker also went public via SPAC in 2020, and there have been a few other EV companies, Lordstown and Proterra being two others that also went public via this route and have already filed for bankruptcy, so this is not an unfamiliar story.

We’re going to pivot, kind of stick in this realm of unsuccess. The Wall Street Journal published a story on Sunday about the seemingly strained relationship between Wells Fargo and BILT, which is a FinTech start-up that’s backed by Blackstone and Mastercard. So, you might say decently big names. Together Wells Fargo and BILT put out a credit card that lets its users earn rewards points on rent without incurring any additional fees from landlords. Because of that BILT is a buzzy name, but according to the journal, Wells is losing as much as $10 million every month on this program. Asit, what went wrong here? Where did the formula break?

Asit Sharma: Well, the formula is such an interesting one because Wells Fargo as a bank conceivably was going to make money on all the balances that were on these cards and all the usage of the cards, and they were so eager to do this that they assumed the interchange fees that normally you pay in a transaction. So meaning thereby, one reason we don’t see this in widespread use, if you’re my landlord, you don’t want to take my credit card because you’ll have to pay, like 2-3% to process that transaction, you want to check. So Wells mechanistically sort of took that on by themselves, and I won’t get to the details here, but made it so that you could use your credit card to pay your landlord, they would eat those fees, and they were going to make money on the card relationship. Now it’s just a really hard industry to do this. Banks do well when they stick with proven models, they have big time brands they team up with with huge followings, like, I’m the bank with the card, you’re the airline that everyone knows, let’s get together, let’s make some money out off of points. Whenever you stray from those tried and true formulas, it entails a lot of risk, and innovation is hard in this industry, it’s brutal. So you can tie up with the most valuable brand on the planet and still lose money. Just look at Goldman Sachs losing billions with the Apple card, I think they’re finally on their way out of that business.

Mary Long: We were going back and forth about this over Slack last night, and I asked you if you had any spicy takes, and you said, ”I’ve got something” and then said, ”Well, we can take this in a longer direction, too”, let’s get to that longer direction. What was Wells thinking about this one when they dove into it in the first place?

Asit Sharma: That’s a great way to phrase it, Mary. What were you thinking? I don’t want to be too hard on Wells Fargo here, I really think they’re past their worst problems of years ago, they no longer have this toxic culture at the top that led to so many fraud scandals of the past. But they had some assumptions that were way off base, let’s talk about some. I’m quoting here from the Wall Street Journal, ”Few projections that Wells had for the card have panned out. The bank assumed around 65% of card purchase volume would be non-rent generating interchange fee revenue, the reality is inverted”. So if you do the math on that, you could use figures for average rent, 1,500 bucks, according to several services across the country, or the median point of rent monthly rent in the US of $2,400. If that’s 35% of card purchasing in a month, the bank is assuming that the card holder has maybe another $4,500 in monthly credit card spending up for grabs. So we’re talking about a person who, after they put away their monthly savings, they paid all their bills, and they paid for housing using this card, is going to outlay another 4,500 in credit card spending. Look in a lot of cases, that’s more likely to be a homeowner, someone who’s more established later in their career earning more. So I’m not sure how they got that assumption on the table, and it passed muster. What were you thinking Wells?

Mary Long: I think a lot of the marketing for this card, too, was targeted toward people who are savvy with credit card rewards points, and I understand that that can be a really high-value customer that banks want to acquire. But if the main selling point of this card is, ”Hey, you’ll earn points from paying off your rent”, people that are pretty savvy with credit card points are paying off their rent first thing, and they’re going to reap the benefits of those points and milk the system for what it’s worth. So it’s not that surprising to me that this happened because it seems like that is the customer they were marketing to in the first place.

Asit Sharma: That is so true, it’s such a great point. Let me quote once more from the Wall Street Journal to prove out your point here, ”Wells expected that around half to three-quarters of dollar charged to the card would carry over from month to month generating interest charges. The reality ranges between 15% and 25%. Many customers would pay their rent off within a few days of charging it to their cards, weeks before their statements arrived, a strategy savvy cardholders use just to earn points”. So Wells is out there co-marketing this card, and at the same time, you’ve got these sites like The Points Guy, like the Ascent who are reviewing these cards, and folks who understand the points business are not the type to keep huge balances month after month.

They’re not people if Wells was expecting this, that are that financially strapped, so this whole assumption that they would be making a lot of the interest, the carry on the balances was totally misguided, as well. Look, it’s a big bank, it’s a huge bank, so this isn’t really going to hurt them that much if you’re a Wells Fargo shareholder. I hope we’re not scaring you away from the proposition, this is more of like a cautionary tale, Though Mary, it just shows you how difficult the two businesses are and how different affinity marketing is from banking, the two have to be in just certain conditions to work right together.

Mary Long: Yeah, I think if there’s a common theme between these two stories today, it’s that disruption is hard.

Asit Sharma: Yeah, totally.

Mary Long: Thanks so much for the times Asit. Always a pleasure to talk to you.

Asit Sharma: I appreciate it, Mary.

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Mary Long: You’ve got questions, they’ve got answers. Up next, Alison Southwick and Robert Brokamp tackle some of the questions you emailed us at [email protected] about retirement distributions, target date funds, and commodities.

Alison Southwick: Our first question comes from Ken, ”I’ve been blessed with some very good luck with my retirement portfolio returns with a big thank you to the Motley Fool for a lot of the ideas, and well ahead of pace for retirement. Given this fortunate circumstance, are there ways to access retirement funds before age fifty nine and a half in case I decide to move on from my profession and start retirement early, while I still have some Kenergy to enjoy it?

Robert Brokamp: Nice. Nice.

Alison Southwick: I want to hang out with Ken. ”A majority, about 85% of our retirement portfolio is in a 401(k), Roth IRA, through backdoor conversion over the years, and HSAs. I’ve read things about SEPs and IRS 72(t) rules, but it’s all very confusing. Any help from the retirement pros?” Should I have said SEPs? Are they called SEPs?

Robert Brokamp: No, it’s different from a SEP. It stands for a Series of Substantially Equal Periodic Payments. What Ken is concerned about is the 10% penalty that applies to withdrawals from retirement accounts before age fifty nine and a half, and he wants to avoided those. You can’t avoid the taxes, but you might be able to avoid the penalties because there are all kinds of ways around it.

Some of them apply to both IRAs and employer plans like 401(k)s, others apply to just one or the other, so you definitely want to know the rules that apply to your particular account. There’s a whole page on irs.gov that lists them just do an online search for exceptions to the tax on early distributions. Now a couple of those exceptions are of particular interest to people like Ken who want to retire early.

First, if your employer plan allows it, so again, this is just like 401(k)s, not IRAs, you can take money out of your account if you stop working at age 55 or later or age 50 or later for some public safety workers, that’s a really broad category, and you don’t have to pay that 10% penalty. But this only applies to the plan you were participating in when you turn those ages, not an old plan that you had with a former employer. Ken highlighted the other exception, which is known as a series of substantially equal periodic payments, otherwise known as 72(t), because that’s the place in the IRS code where it’s explained. He mentioned that these are confusing, and he’s right because they’re particularly complicated, in fact, so complicated that I’m not going to discuss them in detail here. But the bottom line is, you can make this series of, again, substantially equal periodic payments at any age, whether you’re 50 or 30 by agreeing to take out a certain amount each year until you turn fifty nine and a half or for five years, whichever is longer. So it’s a great solution for early retirees.

In fact this is a popular topic with folks in the FIRE Movement, FIRE standing for Financial Independence Retire Early, because this is how many of them tap their retirement accounts without paying penalties. But it’s very important to understand that you absolutely must follow the rules to the letter or you risk paying the 10% penalty on all your previous distributions plus interest. So take the time to understand those, there’s a whole page on irs.gov that covers this topic, but if you’re still confused after reading that, and maybe some articles on the FIRE blogs because you’ll find plenty of those as well, it might be worthwhile to pay an accountant for an hour of her or his time to help you choose the best strategy because you do have options when it comes to these periodic payments.

A couple of other points. Contributions to a Roth IRA can be withdrawn tax and penalty-free at any age, and by contributions, I mean cash that you deposited, not the earnings, and not conversions. It sounds like Ken has conversions because that’s what you have when you’ve done the backdoor Roth. For conversions, you have to wait at least five years before you take out that converted amount or until you turn age fifty nine and a half. If you take it out before those times, you’ll pay a 10% penalty, and each conversion has its own five year clock. Finally, as for the health savings account, the HSA, you can withdraw money from that account at any time, as long as it’s used for qualified medical expenses. However, if the withdrawal isn’t qualified and you’re not yet 65 years old, you pay a 20% penalty, and there aren’t that many ways around that.

Alison Southwick: Our next question comes from Sohan, ”I’ve been listening to your podcast for over a year, thank you for doing such a great job in helping me become a disciplined investor”. You’re welcome. ”I am looking at diversifying my assets in a taxable brokerage account that currently only has stocks by adding a few low-cost ETFs. An index target date fund seems like a great option because it’s easy to use, manages my allocation automatically, and is low-cost. My goal is to use this to supplement my retirement savings. I have already maxed out my retirement accounts. What are your thoughts on this strategy?”

Robert Brokamp: Well, I generally like the idea of target date funds, but not so much for the taxable brokerage accounts, because these funds can be actually pretty tax inefficient. First of all, they do a good bit of portfolio rebalancing, which involves a lot of buying and selling, which has tax consequences. Plus, they usually include a certain amount of cash and bonds that pay interest, which is taxed at ordinary income rates. However, these days, most 401(k)s offer target date funds, so what you might want to do is use that account to buy the target date fund, or in an IRA, if you want to do it there too, and then use your taxable brokerage account to buy low-cost stock index ETFs that will likely be easier on your tax bill. By the way, you can see how much of your return from a fund is lost to taxes by looking it up on morningstar.com, clicking on the ”Price” tab, and then scrolling down to what they call the Tax Cost Ratio.

Alison Southwick: The next question comes from TMF Frugal, ”If I shot a video of myself stating out loud, my Last will and testament that included my full name, date of birth, address, social security number, and today’s date, could that be used as my last will and testament in court or probate or does it have to be in writing? I’ve heard some crazy stories of people’s last wills and testaments. If so, wouldn’t this be a much simpler and cost-effective way to update your will and send it to the people who need copies of it? I live in Texas, by the way. ”

Robert Brokamp: Yes, there are definitely some crazy stories out there, and I’ve told quite a few on previous episodes of this show. I definitely like the idea of saving money on estate planning because hiring a lawyer can be very expensive. However, I have to say that despite the cost hiring a qualified, experienced estate planning attorney is really the best way to go because you’ll get an air-tight estate plan that way, including you’ll get some things that you didn’t even think about, that the lawyer brings up while discussing your situation. As for whether a video can take the place of a written will laws vary from state to state, but generally, the answer is no.

It’s not a format that is accepted by courts in most states, most states do require some sort of a written document, including Texas. I did read a few articles that suggested that there may be cases when it makes sense to have a video of the person signing the will with witnesses present. Perhaps because maybe you’re worried that unhappy relatives who may argue later that the person making the will wasn’t of sound mind, you want to have the proof that the person was of sound mind when they changed the will. But that would just be an addition to having the written document. So the bottom line for me is get the help of an attorney or at the very least get a valid written will from the various services that provide these at lower costs than what you’d pay an attorney, don’t rely on a video.

Alison Southwick: Our next question comes from Thrilock, ”I’m a regular listener of your podcast, and I find them very helpful for my investment choices. Good. I appreciate your focus on long-term investing and finding the best stocks for the future. I want to invest 5-10% of my portfolio in commodities. Would you be able to discuss investment options available for me and also choosing physical gold versus gold ETFs?”

Robert Brokamp: Well, commodities can be a pretty broad category, they cover everything from oil to agricultural products to real estate to precious metals. So the first decision you really need to make is, do you want broad exposure to all commodities or do you just want to focus on one particular type? If you want to look on just one particular type, then you’ll see that there are plenty of options available. The challenges of commodity funds is that they often don’t directly invest in the commodity themselves, but rather than in commodities futures. So in that situation, you have the performance of the commodities and the futures market, which not only makes these funds pricier than most other types of ETFs but also can be a drag on performance depending on what’s going on in the futures market.

All that said, assuming you’re looking for diversified exposure, the two most prominent commodities ETFs are the iShares S&P GSCI Commodity-Indexed Trust, ticker GSG, and the Invesco DB Commodity Index Tracking Fund, ticker DBC. The biggest difference is the weightings of the different types of commodities. The iShares ETF is much more heavily weighted toward energy, whereas the Invesco ETF is more diversified. So if you’re really looking for the diversified exposure, probably the Invesco ETF is the way to go. As for gold versus gold ETFs, it depends on your objective. I own the SPDR Gold Shares ETF, ticker GLD because I hope to benefit from the price growth in gold. I can buy it and sell it with the click of a button, and I don’t have to worry about storing it or haggling with some guy at a gold and silver shop or someone over Craigslist when I want to sell it. Like other commodity ETFs, in this case, this is an example of fund that actually owns the commodity.

On the other hand, if you want to invest in gold because you think society or our banking system is going to collapse, then it probably makes sense to own actual gold and then hide it and then remember where you hide it and make sure your homeowner’s insurance policy will cover it, by the way. The final consideration with investing in commodities is taxes. They often have their own rules. For example, the tax rate on long-term capital gains on some precious metals, including gold and silver is higher than the rate for long-term capital gains on stocks because gold, silver, and some others like platinum and palladium, they’re classified as collectibles, so you’ll pay a higher long term capital gains rate on that. This applies to the ETFs that directly own the metals like the GLT ETF that I personally own, and for many of the commodities futures ETFs the gains are automatically treated as 60% long-term gains, 40% short-term gains, makes them pretty tax inefficient. So if you own some of these funds, it’s probably best to keep them in an IRA or a 401(k).

Mary Long: As always, people on the program may have interests in the stocks they talk about, and the Motley Fool may have formal recommendations for or against, so you don’t buy or sell stocks based solely on what you hear. I’m Mary Long. We’re off tomorrow for Juneteenth, but we’ll be back on Thursday. See you then fools. Thanks for listening.

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