10 October 2014

Investing in Tesla? History suggests it could be a bumpy ride

For most observers, it seems as if Elon Musk, the CEO of electric automaker Tesla, can simultaneously drum up billions of dollars in government subsidies for his company while wooing investors at the drop of a hat. But history reminds us that there’s nothing new in this. It’s happened repeatedly in America and most of the time, the story has the same ending.

Exhibit A: the Fox Motor Car Co.

Like Musk, Ansley Fox had overseen other businesses before manufacturing cars. Most famously, his company produced Fox shotguns, considered by many to be the finest American shotguns ever built. Fans included President Theodore Roosevelt. But high quality and high price do not always mean high profit. The company failed when Ansley didn’t keep costs under control.

After establishing several more businesses, he formed the Fox Motor Car Co. with the intention of building cars that were as good as his namesake guns.

Much like modern-day app developers, the former shotgun manufacturer easily lured financiers with the promise of a ground floor opportunity and future wealth. The automobile business was booming in August 1920 when Ansley promised in a letter to investors that "this corporation will put the new Fox Air Cooled Car on the market in the near future."

Given the success of many automobile companies that had sprouted, investors had little reason to doubt him. Ansely’s experience as a gun maker ensured that people knew his name.

Ansley was able to generate more than $1 million from eager investors who didn’t seem to notice that while his business may have changed, his habit of lavish spending had not. He used a lion’s share of the proceeds to build a 100,000-square-foot factory with railroad siding in Philadelphia, Pa. Devoting that much capital to build a plant would have been fine if a prototype was ready.

It wasn’t.

Believe it or not, irrationally exuberant investors had poured money into an untried automaker that could only offer promises — not a running prototype — of the car the company hoped to build.

Whatever anxiety this caused investors was erased when the prototype of the luxury car debuted. An air-cooled, overhead-cam six-cylinder engine that produced 50 horsepower powered the Fox, double that of its air-cooled rival, Franklin. Sheathed in aluminum body panels, the car was lighter as well, allowing for speedy performance and fuel economy of 20 mpg. It was an impressive product; getting it built would be the catch.

March 1921, four months after the Fox’s unveiling had cheered investors: Production had still not gotten under way as glitches arose trying to correctly cast the car’s aluminum engine block. Ansley had spent $1.5 million to get to this point, the equivalent of $19.9 million today. He needed another $1.5 million and thought that the money could be raised quickly. But while he wasn’t looking, a recession had hit and with it came a business slowdown. Investors were hard to come by.

By December 1921, in order to boost interest, Ansley announced pricing. The Fox sedan and coupe, built by Derham Body Co. of nearby Rosemont, Pa., would cost $4,900. A cheaper touring car, built by the Fleetwood Metal Body Co. of Fleetwood, Pa., was priced at $1,000 less. Fox displayed his car at auto shows in New York, Philadelphia, Chicago, Atlanta and Boston, and offered test-drives to shareholders.

Ansley’s plan worked, albeit briefly.

By April 1922, the company’s board of directors approved the start of production and it was anticipated that cars would be shipping by August. But top executives were overconfident.

Production had barely begun by November "on a comparatively small basis," according to shareholder reports. Actual production figures were never given, but Ansley stated in that missive that a minimum production level of three vehicles a day was needed to be profitable and return an 8 percent dividend.

Not surprisingly, as manufacturing struggled to get under way, cash flow remained a problem. A $925 price cut did not prove to be a panacea. "We are now at a turning point in our business,” Ansley reported on Jan. 23, 1923. “And whatever we do will probably determine definitely whether this company shall be a big success that we all hoped for, or whether it shall fail."

By now, the company owed $166,000 to suppliers, the equivalent of $2.2 million today. Fleetwood extended credit, Derham did not. Without bodies, production ceased.

Two weeks later, the board anticipated that $500,000 — $7 million in 2014 dollars — was needed to resume production within 60 days. "We would be fools to quit now, for success is within our grasp,” an anxious Ansley wrote to potential backers. “I am willing to do my part and I must depend on you to do yours.”

Just before April Fool’s Day, the company issued a $1 million bond to pay for debts. Investors kept their hands in their pockets. Five months later, creditors closed in and the Fox Motor Car Co. was finished.

Of the 24 Fox cars built, only one survives: a 1923 Derham-bodied sedan owned by Tom Kidd of Zionsville, Pa., near Allentown. Originally owned by a creditor of the Fox Motor Car Co., it passed through a handful of owners before landing in the Harrah’s Automobile Collection in the 1970s. Kidd bought the car from Harrah's in 1984. Aside from a mid-1950s repaint, the car is original.

While the Fox may seem like little more than another square-bodied sedan from 1923, a little-remembered footnote in American automotive history, it represents an essential truth. Investor optimism is the essential element in wealth creation in the United States. And it’s relevant today whether talking about GM, Chrysler, Fisker, Tucker, DeLorean or, for that matter, Fox.

And if not for billions of dollars in government handouts, Tesla might have already gone the way of Fox. Whether it does or not remains to be seen.

Stay tuned; history can be a cruel mistress.

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