manufacturing

Frank Stronach's electric Kool-Aid

Is the Magna founder’s push into electric vehicles foxy, or foolish?

Frank Stronach with a Focus Electric from Ford. (Photo: Chris Wattie/Reuters)

On a warm morning early this fall, a small group gathered at an exclusive club on Toronto’s waterfront to witness the unveiling of an unusual watercraft. The SeaScape 12 is a pedal boat with an electric motor. Entrepreneur Manfred (Fred) Gingl and his adult son, Paul, merely pumped their legs lethargically as the SeaScape’s propeller pushed them briskly past finger piers lining the shore. It’s the latest product from their small private company, BionX, which till now has been selling electric drive systems for bicycles.

With a suggested retail price of $6,500—about 10 times its pedal-only cousins’—SeaScape might be easily dismissed as a novelty were it not for the venture’s silent patron: Frank Stronach, the legendary founder of auto-parts giant Magna International. Stronach and Gingl grew up in the same Austrian town, and worked together for four decades at Magna. (Gingl was CEO between 1988 and 1991.) “It was always a dream between Frank and myself to have our own product line,” Gingl told those gathered on the waterfront. The pair controls BionX, with Magna owning a minority stake. BionX operates out of Magna’s campus in Aurora, Ont. Paul Gingl, who recently departed Magna’s injection-moulding division, betrayed his roots when he boasted to the audience about the SeaScape’s “bumper-to-bumper warranty.”

The SeaScape is the fruit of Stronach’s latest ambition: to electrify everything that moves. As part of the arrangement that saw him relinquish Magna’s reins last year, he insisted on receiving a controlling minority stake in Magna E-Car Systems, a nascent venture that’s co-ordinating Magna’s foray into electric vehicles. (Stronach invested $80 million of his own money; Magna contributed $220 million.) “I said to management, this deal will only pass if I have the right hand to call the shots, get the people I think will lead this,” Stronach declared at the 2010 annual meeting. Last year, he told an Austrian magazine that he believes 10% of new cars will be electric by 2020, and half by 2030—one of the most bullish forecasts for electric vehicles on record. E-Car now operates four facilities in North America and two in Europe, all struggling to fulfil Stronach’s vision of making Magna the leading supplier of electric and hybrid car systems. Yet E-Car’s activities unfold largely unseen. Employees in Aurora and Austria are under strict instructions to remain silent, and Stronach declined an interview request.

What the devil is he building in there? Part of the answer will arrive later this year when Ford unveils a battery-powered version of its popular economy car. The Focus Electric is scheduled for U.S. release by year-end, spreading to other markets (including some Canadian cities) early in 2012. It owes its existence as much to E-Car as it does to Ford. Automakers are eager to build more models like it, and governments eagerly fund their development and pay generous incentives to buyers. Yet electric vehicles remain fearfully expensive and inconvenient to drive. It could take decades for manufacturers to figure out how to make models consumers buy in volume. Stronach, now 79, may not live to see his electric dreams realized. Pursuing them, though, is sure to be costly.

According to the industry’s increasingly complex nomenclature, the new Ford is a battery electric vehicle (BEV), such as Nissan’s Leaf. This means it has a battery and an electric motor; there’s no internal combustion engine, fuel tank or tailpipe. Traditional hybrids like the Toyota Prius have both an internal combustion engine and an electric motor; most of them charge their batteries through braking. Another variety known as plug-in hybrids (like Chevy Volt) also have two engines, but are intended primarily for short commutes and charge their batteries off the power grid.

Ford first decided to build a BEV three years ago. By that time, Magna was already actively buying or partnering with companies working in alternative propulsion. Even as the recession ravaged the industry, Stronach became convinced that demand for BEVs and hybrids would grow rapidly. Ford and Magna teamed up on a small BEV that could be charged in less than six hours. Although Ford says it could have built the car alone, “collaborating with a company like Magna is ideal because they had already been developing some of these technologies,” says Sharif Marakby, Ford’s director of electrification programs and engineering.

 

 

The company predicts that BEVs will comprise less than 10% of the alternative propulsion car market over the next decade, compared with 70% for traditional hybrids. So why did Ford make it? Marakby says it’s partly about offering customers choice. And since the Focus Electric will roll off the same line as its brethren, Ford can adjust production to suit shifting customer tastes.

There are good reasons to be conservative in the expectations for the Focus Electric, starting with the fact that a BEV is nowhere near as versatile as a conventional car. Its already-constricted range (up to 160 km) shrinks further in stop-and-go traffic, and a driver will be hard-pressed to find a high-voltage charging station. Even when he does, he must cool his heels while his vehicle charges. “Consumers must get used to charging whenever the equipment is available, instead of only when the battery life is depleted,” noted Citi analysts in a report.

And BEV owners pay dearly for this inconvenience. Ford has yet to disclose the Focus Electric’s sticker price, but consider the Leaf. It retails for more than $38,000, while the gas-powered Versa (which consumes just 5.7 litres of gasoline for every 100 km) costs less than $15,000. Even after provincial incentives ($8,500 in Ontario), going electric costs about double. And most owners will need a charging station (another $1,500 or more) to juice their batteries faster.

Automotive consultant Dennis DesRosiers concedes that ultimately “all roads lead to electric cars” because fossil-fuel depletion will make them necessary. But he warns that future lies many decades away; he sees more immediate benefits in pursuing efficient gas, diesel, biodiesel, natural gas and propane options. Canadians have bought only 62,000 hybrids, a far more mature technology, since they were first introduced 12 years ago, he points out. “If we don’t buy hybrids, why would we buy electric vehicles when they require even more compromise?”

DesRosiers believes manufacturers’ pursuit of BEVs is motivated by something other than profit. In May 2009, U.S. President Barack Obama announced new fuel economy standards intended to compel manufacturers to achieve an average of 35.5 miles per gallon across their car and light truck models by 2016. The industry would typically contest such a proposal vigorously, but Obama caught manufacturers at a weak moment: most were in turmoil, and GM and Chrysler were wards of the state. Meeting the new standards would require unprecedented changes in the vehicles for sale in North American showrooms. DesRosiers has tracked average fuel economy in Canada for 28 years, during which it has improved a measly 12%. He expects most manufacturers have no hope of meeting the targets. “Electric vehicles right now are a government-relations and public-relations exercise,” he concludes, “to demonstrate they’re doing everything in their power to meet these fuel-efficiency requirements.”

Where does that leave E-Car? According to Citi analyst Itay Michaeli, Magna’s ability to assemble complete vehicles might attract interest from major automakers looking to outsource their electric-car manufacturing. DesRosiers, though, thinks financial returns remain distant. “I personally question their desire to invest in this technology,” he says. “We are three inches into the marathon when it comes to electric powertrains. The Magnas of the world are probably making the right decision if you think long term. If they think they’re going to get a return on their invested capital over the next five years, they’re smoking something.”

Stronach has been puffing on his zero-emission hookah for decades. He “liked to see himself on the cutting edge of technology and social trends,” observed Wayne Lilley in his 2006 book, Magna Cum Laude. In the late 1980s, Magna invested tens of millions in developing a battery for electric vehicles. Stronach convinced Ottawa to chip in additional millions, and threatened to do the work outside Canada if officials failed to hand over $10 million more. Magna collaborated separately with Ford and GM on electrifying vans, ultimately winning a $300-million contract to provide thousands of electric vans and cars to the City of Los Angeles. But these cost twice as much as conventional vehicles, and failed in the marketplace, likely contributing to Magna’s subsequent brush with insolvency and putting further electrification projects on hold.

While electric cars remain prohibitively expensive, this time automakers seem more committed to their development. Research firm Baum and Associates predicts that by 2015 there could be more than 100 models powered by unconventional means in the U.S. alone. Like Ford, many manufacturers will want outside components and know-how. Governments, too, are eager to foster green jobs by subsidizing electric-car ventures. And, as he did in the 1980s, Stronach is expertly twisting arms. In 2009, Magna received US$40 million from the U.S. Department of Energy for research and manufacturing of electric drive components. In August, Ontario chipped in $48 million.

It’s a healthy start, but E-Car will almost certainly require more seed money. (In this year’s first half, the venture had $36 million in revenue but a pre-tax loss of $52 million.) In this era of acute fiscal distress, it’s unclear how much more taxpayer support will be available. More important will be the disposition of Magna shareholders. Prior to his departure, critics opposed Stronach’s frequent, costly side projects—horse racing, restaurants, magazines. He regarded them as “seedlings” that might blossom into vigorous enterprises. Although electric cars lie closer to Magna’s core business, E-Car has all the hallmarks of a classic Stronach seedling. It’s intensely entrepreneurial, his control is disproportionate to his shareholdings, and profitability seems distant.

BionX, another classic seedling, offers opportunities for cross-pollination. “We have an agreement where, if we develop something, [E-Car] can use it for automotive,” says Gingl. “There’s a very aggressive interaction.” BionX plans to make the first 1,000 SeaScapes in Austria, but to shift production to Aurora next year. “I want to create another Magna together with Frank,” Gingl declared at the SeaScape’s launch. Politicians, Magna shareholders, consumers and Stronach’s health will all determine how far they pedal from shore.