Case Study #34: Local Motors Takes a Different Spin to Sustainably Design, Produce and Sell Cars

The global automotive and light duty truck industry fundamentally suffers from two things: Contracting demand and production overcapacity. It will take some time for product demand to be in equilibrium with production rates: “The sector as a whole is still way too big and is being protected from the market forces that should bring it back into line. Capacity in the global auto industry was 20% more than demand during the good times, when sales were rising year after year. Sales have slumped during the credit crisis and the resulting economic downturn, and yet most plants remain open, if partly idled.” (McGrath, Steve. “Large Parts of Auto Industry Should be Scrapped”. Wall Street Journal, November 25, 2009). McGrath wants manufacturers to stop building new automobiles and light duty trucks in the plants and consumers to start buying existing automobiles and light duty trucks on the lots. A demand-driven model for plant operations can optimize efficiencies. But, if the global demand for automobiles and light trucks are down, why are niche automotive brands, such as Tesla Motors, Fisker Karma and Local Motors, entering such a contracted, saturated marketplace?

Tesla Motors and Fisker Karma are differentiated from the major automotive and lighty duty truck manufacturers in terms of the core product offering. However, Local Motors is differentiated from the major automotive and light duty truck manufacturers in terms of the core service offering. John B. Rogers, Jr., President, CEO and Co-Founder of Local Motors, takes a different spin to automotive design, production and distribution:

• Crowdsourcing: Market research is a critical due diligence activity in the front-end of the product development process. The sample sizes vary by research design, but they cannot account for the full market size because of market study limitations. Rogers does not limit his scope to his target audiences. Instead, he calls for designers to submit sketches of their dream cars. There are currently 4,000 active contributors to the site, uploading drawings, commenting on each others' work, and voting on designs (Jana, Reena. “Local Motors: A New Kind of Car Company”. Businessweek, November 3, 2009). A sample size of 4,000 contributors is very robust to make product determinations. Based on the analysis of design contributions, Rogers learns that off-road vehicles present an underserved niche market (Jana). Check out the final result of the design contributions: Rally Fighter.

However, do all 4,000 contributors represent the underserved needs and wants of car buyers? Are they speaking from the voice of the car buyer or their own voice? The off-road, body-on-frame sport utility industry has been shrinking since 2005 as once SUV loyal customers migrate to more fuel-efficient vehicle, uni-body crossover vehicles. SUV loyal customers like the duality of on-road and off-road performance. For example, the Toyota FJ Cruiser, Nissan X-terra and the Jeep Grand Cherokee can perform well in off-road and on-road environments. I love the Rally Fighter, but if that high ground clearance is standard, some target customers may not trade-off on-road functionality for off-road performance. Local Motors may want to size the demand of the Rally Fighter through formal, quantitative studies that are targeted to owners of FJ Cruisers, X-terras and Cherokees. The results may help refine the micro-production forecasts.

• Micro-production: According to Jana, interested buyers can pay $99 for a place in line to purchase it. When production starts in June 2010, buyers will be invited to the company's headquarters in Wareham, Massachusetts to help build the car. The price tag is $50,000. A single Local Motors micro-factory has the capacity to sell 2,000 units per year at an average price of $40,000. Since production starts in June 2010, the micro-factory will have the ability to do 50% of the total build potential, 1,000 units, for the remainder of 2010. Let’s say Local Motors hits 100% of the total build potential. Assuming that one customer saves a build spot for one Rally Fighter, Local Motors immediately recognizes $99,000. Once the customer confirms the order, they will NOT be refunded the $99 for the place in line. When the customer’s number is called, they have to pay a $5,000 deposit to secure a build-date. Local Motors generates $5 million through the deposits. Then the customers are invited to Local Motor’s headquarters to participate in the build of their Rally Fighter. Local Motors generates $40 million through the delivery of the units. Between June 2010 and December 2010, Local Motors can generate $45 million through three revenue streams: line reservation, build date security deposit and vehicle price. Through this entire process, customers are engaged in an integrated vehicle purchase experience that is differentiated from prior vehicle purchase experiences.

While the micro-factory, collaborative build process is very unique, it is fundamentally inefficient. Local Motors can raise the price point to capture the “premium on production experience” and offset inefficiencies with the build process, however it is challenging to command anything higher given that the company is a new entrant to a highly competitive space. Local Motors must review the submitted renderings, study target markets and think about other demand-based models it can introduce to the market on its own OR with a partner. This will help justify an uptick in its production forecast without fully sacrificing the micro-factory, collaborative build process. In the interim, Local Motors must make sure every, single detail of the micro-factory, collaborative build process is aligned with their brand image. The company must immediately think about service model configuration. Customer expectations rise when they are allowed to be part of a product build. They will expect the same treatment when their product needs servicing. Will the customers return to the micro-factory to get servicing done? Or will they have to a Local Motors service partner that has to be trained on the Local Motors customer experience?

No start-up will have all of the answers right away. Local Motors is on a very exciting path to revolutionize the way people experience vehicle purchasing. A formal market research study on the Rally Fighter and the alignment of the micro-factory, collaborative build process with aftermarket services will be immediate priorities for Local Motors as it roars its engines to life in 2010.