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Monday, June 27, 2011

Diesel and gasoline mix just fine.

The debate over the diesel vs. gasoline Smyth G3F is starting to get underway if my inbox is any indication of the next few months of conversation.  As the first 1.8T car goes under the knife in July we will have the opportunity to watch Clint's gasoline Smyth car and John's diesel G3F being built at the same time.  My driving impressions so far have reminded me how important this 800 pound steel cut diet is making to the performance of the car.   I am still sold on the seat of the pants feeling of the TDI of course, but the 250hp gasoline crowd is coming on strong.

For those of you who don't know VW's like us fervent followers of the brand, both the 1.9 liter turbo TDI and the 1.8 liter turbo gas engine found in the mark 4 jetta/golf respond incredibly well to computer chipping upgrades.  The electronically controlled turbos in both engines are transformed by nozzles and a chip to the tune of about 30 or 40 horsepower added.  In the 1.8T or the TDI the difference in performance will blow you away for a few hundred bucks.  In the TDI the 130 horsepower and huge 220 plus lb feet of torque let you peel rubber for a block if you wish...who knew that the lowly 90 hp stock diesel could be slapped into shape so easily.  Chipped 1.8T's are equally if not more impressive as they routinely get 205-210 horse at the wheels with nothing but a chip...remember these are at the wheel horsepower numbers...a mustang 5.0 from the late 80's was running silmilar v-8 level power for comparison. Talk about cheap performance.

When I enter an exit ramp in the stock 90hp TDI without the chip and injector upgrade I am driving an econo-dog...nothing really fun.  The car feels like it handles great of course since all cars with no power feel like they handle.  Put the chip in and the car blasts out of the apex at 1600 rpm with almost full torque available.  It is this low end grunt that I am now officially addicted to.  As fun as the turbo gasser will be for many G3F customers it is the unique feel of that diesel pull that has me in a trance.  I have said it before but it bears repeating, in the rpm range that you use 90% of the time the diesel feels faster and pulls harder.  I can't keep up with a full howl 1.8T once it gets going...that 210 hp is too much and pulls away, but around town and on the ramps of life I play racer all day long at 2500 rpm.

The rear drive configuration of the Smyth car is proving very kind to the diesel version of the car as well.  With the weight now transferring to the rear wheels when you launch, the diesel torque does not have to be wasted in wheel digs in and goes.  I am balancing the fun of the firm shocks and springs vs the ride of the factory struts and the firmer car is just superior when matched with a tuned engine.  The lower weight of the 1.8T unit is the wild card here as it will be almost perfectly balanced with a savings of 100 lbs in the rear...we will see fairly soon as Kim is considering a 1.8T G3F for her ride this summer that I build next.  When you combine the agility of the lower weight car with the traction of the rear drive layout either version is a joy to toss around.   So the question remains for all you potential builders...rubber band acceleration of the 1.8T or instant stump pulling speed from low rpm in the TDI.  Decisions, decisions...and if I can keep the price under nine grand like it appears we can...even more fun for everyone.

Mark Smith

Saturday, June 25, 2011

Obama and Local Motors

I watched a live feed yesterday of Jay Rogers the CEO of our home team Local Motors talking to President Obama about the LM Darpa project vehicle, the  XC2V.  As I texted Jay a congratulatory word it was a moment of real awareness for me about what Jay has accomplished with the Local Motors team.  Jay has always been an enthusiastic proponent of his new company(at 4 years old though they are starting to look like veteran car guys now).  He has faced the challenges of starting a car based company in the midst of the chaos that we call the modern business climate.  He has managed to raise millions in investor money with a clear and compelling value story.  If I showed you the list of investors in LM you would be impressed not by their big names(there are a few) but by the sheer bulk of business experience he has been able to "rally" for the Local Motors launch.

Photo ops are just that...opportunities to shine.  And both Jay and the LM  Darpa vehicle did a great job highlighting what a nimble and talented team in a small manufacturing company can do for this country.  To recap,  DARPA approached LM to test the crowd sourcing methods and concept development  in vehicle manufacture that Jay and Local Motors invented.  They gave LM 6 months to design and build the army's next fast extract vehicle...Jay showed up early in Washington to meet Obama after the prototype car drove to DC from Phoenix. On time, under budget and ready to pull our troops out of a bad place at 120mph safely.  Well done.

When I posted the picture and video of Obama on facebook I also had a few critics....hey, its the wild west when you communicate publicly after all, and I am now very used to it...but I was surprised at one of my friends' tough take on Obama and Local Motors.   Look, I voted for the other guy last election, no hard feelings here, the people have spoken.  But even a republican like me thinks it is not just a little kind of cool when the company you helped co-found, and your good friend and CEO of that company, is held forth as everything right in American innovation.  My facebook pal couldn't see past the millions it took to launch a class company...go figure.  Now this guy has built a bunch of factory five cars over the years and is the definition of a passionate and loyal customer of why the anti Obama/LM vibe?  I will chalk it up to the difference between the frugal Smyth/FFR business model and the more expensive and sophisticated business model at Local Motors. Jay spends real money going after aggressive business goals, and that makes some people nervous when you compare the cash burn to a cash based mature company like FFR.   Growing with cash and retained earnings won't let you explode in growth...only relatively large cash infusions will let you do that.

In my personal world of new products I work as the R&D guy with budgets under a million per project...most often funded by yours truly.  It is what I know, I have a bit of a following in people who respect my machine making abilities and creativity, and I am rewarded with being able to sell a few interesting projects to the marketplace in the form of car kits.  I am one step above a back yard hot rod builder...a few more tools and resources in the way of computers and design capabilities....but still fairly dependent on my own skills.  That is what started FFR and it is what started Smyth is definitely not what started Local Motors.

Jay started by raising money and forming strategic partnerships into what is becoming a world beating organization.  At least that is the goal.  After meeting with Jay for a feverish few months while he was finishing Harvard business school, I worked with the last of my influence and whatever informal clout I had left to convince Factory Five to invest our valuable car design expertise in Jay and  Local Motors four years ago.  It was worth it to push very hard for the deal.  Guys like Jay just don't arrive at your doorstep that often, if ever.  I believed in Jay and wanted two of our young engineers to help him next door and take the company wherever he wanted to go.  The talent that Jay assembled and the team of investors was amazing.  His ability to refine the LM story over the first years combined with a skilled car and web team has delivered real results creating both a vehicle and a community of designers.   This allows Jay to continue to raise millions in capital as he needs it.

To Dave's credit, he finally went along with the deal and Local Motors was born.  Jay quickly raised a million or two in that first round and he was off and running with a little building and two talented engineers that had cut their teeth in the FFR kit car design he went at a rate that we could never envision since we just never had access to that kind of investor base.

This is not how we do things at Smyth Performance or Factory Five.  You either want a big piece of a small company(the driving force behind FFR and Smyth) or you want a smaller piece of a big company(LM high growth strategy).  LM has a chance to be a scalable and significant company that can make a difference in the world of product development.  Will they make it?  Maybe my pessimistic friend on facebook is right and it will fail in a few years and the millions invested will be lost.....but a fairly large group of sophisticated investors are voting with their money on the opposite of real and sustainable growth.  Time will tell of course, but I have learned that you never bet against smart guys like Jay that are executing to a plan...ever.  I know where I have placed my bet and participating in this fun and serious game is more rewarding than the financial or business risk.

So when I look at the founder page in the Local Motors corporate documents,  I can't help but smile at the story behind the three names.  Jay Rogers,  Jeff Jones(his HBS  class project partner)  and Factory Five Racing.  The story of the start-up I will write with Jay's blessing someday since it is mostly his story to tell,  but for now....congratulations on a very public small business victory Jay,  and great work Local Motors.  We all  share President Obama's view that you are leading a terrific effort to change the way products are designed and made.

Mark Smith

Friday, June 24, 2011

Moving on Without Moving Out

Well it is true.  There is no realistic way to sell a company in this credit environment unless the buyer has cash.  It makes sense really...if people can't buy houses in this restrictive money climate why would you be able to finance a company acquisition?  As I had mentioned a few months ago,  Dave and I have been working on a way to get me out of my ownership of FFR so that I can move on and continue to make my way in the car world with my new venture, Smyth Performance.  As I finish up the move into our new building I am reminded that it sounds easy to step out in theory...I have shared much of my experience on these pages...but in practice it is really hard.  The 50/50 closely held company structure that so many company founders start with may work to make everybody feel "in" and vested in the early days but makes it nearly impossible to sell the company.  In the end Dave and I will figure something out and see if I remain a passive 50% stockholder or if there can be a purchase of my half. If I had to buy a company right now I sure couldn't do it.  The good thing for you the small business owner is that I will share the experience so that any of you on the same path can learn from it.

This really is not about good guys or bad guys in the buy sell stage Dave and I are probably in for the next year or is about the 50/50 structure and the lawyers that allow their clients to enter into a  business marriage in the early days without an adequate framework for the sale of the company later.  A little effort on your lawyers' part in the writing of the corporate documents to allow for clear conflict resolution methods and a formula for a buyout and you can save a lot of grief later.  Dave and I will work out my exit over the next year but having a better set of corporate docs would have been so much easier.  This is really the most important thing you can do before incorporating.  Conflict and spirited discussion are good things and useful if resolved,  but you need a mechanism to break a  deadlock if you happen to have one.  Dave and I are both good guys.  We are part of a great family and each have enormous talent, energy and business strengths.  We each want the best for our families as well as our extended network of stakeholders at Factory Five Racing.  We have argued, discussed and gone through many business struggles together over the years and built a great little company in FFR.  Now I find it time to move why is the buyout so hard?  I want to sell and Dave wants the company....perfect.

Its about Valuation:

The quick review.  Without talking about FFR I will speak about generalities that we all are faced with in the 50/50 business world.  All of us closely held company owners face an interesting valuation dilemma when we want to sell and that general concept is what this note is about. So how to begin?  Start with each person stating what they want.  The value of the company has to be said out loud by the buyer and seller to get started in my opinion.  Easy right?  Wait till you hear what each of the owners think the company is worth and why.  A fascinating and eye opening discussion.   If there is logic behind your pitch it will lead to a discussion where the two(or more) of you are within a few million.  Time to stop and regroup since you are close.  So let's look at how you can get close.

We will assume you have a generic 10 million annual sales company with a generic 10% net income that we have talked about before.  When I say generic I really mean just that, it amazes me how different companies of the same general size, have almost identical financial statements.  I will bet almost every 10 million dollar manufacturing company can relate to these ratios we use here.  So am I talking about FFR...of course not, but these round numbers give you a rough idea about small business realities that we as owners face every time the topic of value comes up.  So back to the math.  As one of the thousands of closely held subchapter  S corporations in the country you sell $10 million of widgets or services a year and you split the 1 million(10% net for discussion) in net  income between the shareholders while holding some percentage of the cash for investment back into the business over the years as retained earnings.  This formula is key.  How much of the net income goes to new products?  How much of the million goes to facilities or new productivity enhancing equipment?  Valuation has to take into account the profits and the future...that's why you see huge valuations over the 5X number for real growth companies and 3 X or less for flat or shrinking margin/sales firms.

The goal in the business world(not the lifestyle business world but real business) is the growing company.  A company that grows steadily at any rate is valued at future earnings instead of historical earnings.  A big deal.  If you see a company sell for 5 years of earnings and they are looking forward the total starts looking brighter.  This is where the sweet spot is.   Show no growth or small growth below 5% a year and you are relegated to the 3-5 X historical earnings rule...bummer.  I will take the 5 X future earnings please:)  So grow your business.  It makes a dramatic difference.

For discussion purposes let's stick with the rule of thumb for a flat/no growth business.  3 to 5 years of earnings and the assets that are in the company are used to value for the "average" business.  If you are like me, you are a bit of a heady entrepreneur though, "average" is not you.  You are a maverick, a risk taker, you have worked harder and for longer hours than anyone can imagine building this company.  No one understands but you about the blood sweat and tears it takes to start a small guys like me the company is like a child.  Well wake up all you owners and captains of small industry.  Your company is worth 3 to 5 times profits if you stop growing, and you may get some of the cash from those assets only if you are lucky.  Madly in love with your accomplishment? Don't sell...seriously...don't.  I am in the end phase of asking myself these questions too.  I love FFR.  Can I really sell it?  If you want to move on and chase the new company drug again...then yes should be the answer.  So let's talk turkey and see what things sell for in the real world.  You can do it too.

Once you find out what other people sold their companies for you will either feel better or worse about your exit.  So in our pretend generic company "z, inc."  we have a 3 to 5 million dollar income side of the deal(3-5 X 1 million) and lets say that there is a million in assets and retained earnings over the years that have been invested in the company.  4 to 6 million for a typical company that is not growing much but has some good will and the a reputation thrown in to close the deal. You didn't borrow over the years because you made money.  Not bad.  Now you are not even valued at 1x sales or even close to the 10 to 15X sales and valuations you hear about on the stock market....but those companies are growing fast supposedly and have a market for their stock with transparency in their don' are a generic 50/50 closely held small company.   80% of the small company equity sales that closed before the financial melt down probably followed this path.   Summing it up:  You pay the 20% capital gains on your half of the total and retire or move on with some kind of deal worth half of 5 million bucks minus a half million in taxes.  At the end of the process in the sale of 50% of a 10 million dollar company you get 2 million in your bank account if it was an all cash deal.

But it is rarely an all cash deal:

If your partner that wants to buy you out doesn't have 2.5 million in cash.....and they rarely do....hey, we started the American dream to live the American dream.  We didn't sock away all our money under the mattress, we raised families, took vacations, bought houses(yes, maybe a bit more on the toy side if you are nuts about machines like me) happened to you, the small business owner.   A million....sure...we can probably get our hands on that if pressed so lets start there.  Heck, start with whatever cash you can reasonably raise for the buy out whatever the number is.  If I was buying out my partner I would go to the table and talk framework possibilities again with the million bucks in hand and a firm grip on reality with regard to what is possible.   I need 2.5 million to fairly reward my 50% partner and we have a million bucks.  Let's say the company makes a million a year if all the earnings are taken out...but the company has to invest something over the next years, so lets say half of the million a year in income is available for me to buy out the other holder of stock.  I can probably get some kind of loan and lever myself up a bit and the possibility of a deal starts getting closer.  I give her a million up front, a half a million in payout for 3 years and an extra year of payout to reward her for taking risk on the payout(a cash deal is 2.5 million remember...a deal involving risk we will call 3 million).   The company pays me a salary after I buy it of a nice 250k a year, I can retain 250k in earnings to grow, and there is a half million a year left to pay off the debt.  Done.

Before the world financial mess a few years ago you could have probably financed the whole 2.5 million total...but not anymore.  It took us eight months to sell a 150k condo, what are the odds with a softer asset like a be the judge.  Future payouts are tough because anytime a closing is held without wrapping up payment, there is an increased chance for conflict...what do you do as the seller if I have a couple bad years and can't pay you the half million next year?  Yikes.  So be careful with future payouts.  Word them well for both parties.  Set a minimum payment and a bonus for me if I pay you early.  Keep me excited to be on my own rather than a prison sentence where I feel I will never pay it down.

The best examples of a fair buy/sell that I have seen revolve around an offer for the company that goes both ways.   If I offer my partner 2.5 million for his/her half of our generic 10 million company then he/she has the option of buying ME out for the same amount.  This only works if both of you actually want to run the place...but talk about getting on the same page quickly...that works!  It really skips all the bologna when you know that your offer can be turned around and used to buy you out...nice.  This is my favorite way to enter into a buy sell and the way lawyers should word corporate partnerships and the bylaws/documents in my opinion  I love it.

Bad times and value shift:

If times get tough in the future or have been tough for a few years in our fictitious company(lord knows it has been hard at FFR) it changes everything.  Even a single year of poor profit performance before the sale ruins the 3 to 5 times earnings rule as you are valuing earnings going rearward remember?  Lets say we are just like every other company that got hit hard with the economy and made it through the last few years with 200k of profit per year instead of the usual million.   3-5X this new rate is now 600k to 1 million and the assets are still worth a million.  Now we are talking about TOTAL company value of 1.8 million.  Your half is now supposed to sell for 900 grand if a cash deal.  20% capital gains comes off to the tune of 180k so you are left with 700 grand for your half of your American dream....right.

A half a million bucks is not going to buy a ten million dollar company that will probably make a million a year again when things pick up in the overall the deal is dead and no one is to blame. This is why poison pills and a few years of poor financials don't realistically reduce the value of the company as much as you would think...just like my situation after a few hard years at FFR,  I will wait the bad times out since I see such incredible potential going forward that really can't be valued accurately right now.  As I have said before...wait a year or two and try again.  So if you may not be able to sell yet, what do you do?  You move on without moving out. 

Here are a few tips as you try to move on while still owning the company.  Unlike company "z, inc." I have plenty of real world decisions I have made in the past few years(some good ones, some not so good) that I can share from my own experience with the Smyth, FFR and Local Motors threesome.

1.Be honest and open about what you are moving on to next:  The Power of going public.

In my case two years ago I went onto a big forum and announced my next project...the diesel sports car.  No secret behind doors r&d work this time.  Wide open and take your hits.  You better have a thick skin because people say what they think these days on the net.  During these last two years anyone who has followed my public Smyth facebook page or has been privy to an exciting launch of a new vw based kit car that uses the vw jetta almost in its entirety as the base for a re-bodied and reused green sports car concept.  The use of a modern economy car with a stamped steel body and no frame was unique.  Adding a partial frame to a frameless design(modern compact cars are a shell and have no frame) was a different and a really new idea.  You can determine how novel your idea is by how many people criticize or don't understand what you are doing...we had lots of this in the beginning.  VW beetles in the old days had a solid frame underneath that made the dune buggy kits easy to make since the major structure was there in the Bug floor and frame.  In the Smyth car we added a frame to a car that had no frame...and it worked out fabulously and it worked out publicly.

By keeping the project open and public I avoided(or rather faced head on) the potential conflict that could have arisen over any overlaps between my new company Smyth performance and the companies I share ownership in FFR and LM.  Jay and Dave have and had access to every detail of the Smyth project live as it was being built.  All three companies have strategies and products that they hold as valuable.  Publicly talking about the positioning of the new company has allowed candid feedback and processing between us.  There may not be agreement but there is discourse.   When a Boston Globe article came out on Smyth Performance a year ago, Dave did not pull any punches...he told the reporter of his concerns.   This is a perfect example of the benefits of this open and public communication:  Dave was openly and publicly upset with a car that was "GTM like".

In the early days of the Smyth diesel sports car project I used a mold from the trash at FFR to lay up parts of the GTM.  These pieces were then cut up and placed in some areas of the car to see what a cut jetta could look like with a low sporty body on it.  At the time the idea of the "mini me" GTM was a fun way to describe a new smaller sports car being built down the street.  When the conflict became real, I was able to change the project scope by designing a new body without GTM shapes.  I even put the Jetta trunk on the back of the car with the huge VW emblem in the middle.  By the time the car was done we had a Toyota inspired front end, a Dodge Neon windshield and  a Nissan/Cobalt/VW rear end.  Without a public outlet to identify this conflict early it could have been a disaster.  Stay open and stay honest(public if you are able) in your new venture if you are keeping the old company.  Now we have three companies doing executing three very different product strategies and though there may be some bruised feelings about how we arrived here, we all can get along since that will be good for business.

2. Don't take employees from the other company you own:

When starting a new company it is tempting to surround yourself with people you trust.  Those people usually have worked with you in the past and you are familiar with them and how good they are...that's why you hired them at the other company after all.  Even if you don't actively recruit the people from your other company, many will seek you out for a job in the new place.  If they seek you out I am sure you are ethically OK...but don't do it.  If you value the other company you own you should keep them there.  In my case I want FFR to succeed wildly and grow...FFR and LM are my two biggest assets.  Now if someone gets laid off I think you actually have a moral duty to keep them gainfully employed, but if the original employer wants them back and ends the layoff you should honor that.  Resist the urge to get competitive, it is about supporting all your assets...not one over the other.

I put a survey up on the Smyth Facebook page a while ago and I asked Smyth fans if they were doing an FFR after the Smyth car.   Almost half of the respondents are planning on a factory five build after cutting their teeth on the simpler Smyth Jetta kit.  15% are VW all the way and will never do anything but VW/Audi.  around 35% say the FFR kit is too rich for their blood.  By appealing to a new base of customers in the VW segment of the market I am able to grow FFR, LM and Smyth at the same time.  Synergy is real.  You have to have the discipline to make products that complement the other companies.  It is a fine line but one that will pay huge dividends when you go to harvest your companies in a sale.  When I go to sell Smyth performance the product line will have a vw sports car,  a super high mpg pick up kit and another high mpg aero van or car someday.  Why launch a v8 powered hyper car when FFR already has the positioning in the market?  If you find yourself tempted to go after your other company you have personal issues that you must own the other it succeed.

3. Don't use your assets from the other company unless you pay for them.

This one is easy to say but hard to do.  Look, if your company has a corporate truck and you need to bring a new washer home go ahead...I have done it myself.  I have moved boats with company trucks.  Dave drives a company leased Honda or a Factory Five car home every night.  Owning a company has great perks.  Owning a car company is a great lifestyle for a car guy...half of the things you do for fun as a real car guy are done at work...the perfect day job.  But don't take the company truck when the guys need it.  Use it on the weekends or off hours.  It is yours after still own the other company and it is still a closely held firm...but don't get in their way.  Your employees have a job to do and you don't want to put them on the spot.  You are the owner but you are the one that has to be respectful.

In my case I can still use the trash...the trash?  Yep.  The trash.  The guys laugh at me as I crawl through the bins in the reject pile.  In the manufacture of heavy machinery there is an amazing amount thrown away.  Use it if you want.  When welders, broken compressors or other machines are no longer usable in a company they are usually perfectly suitable for home use. Document the things that go home of course for tax reasons(hard to do trust me)...but most of the stuff is junk that is fully depreciated and has to be repaired  before you can use it anyway.  I grab metal scrap and laser pieces all the time.  The reject pile at FFR has had some great parts in it over the years.  I may not use them as they are but I sure might use the stuff in mock ups or test parts like I used the gtm parts.  Tubing, plates,body parts you name it.  If it is valuable it is not thrown away in my opinion.  So to me it is perfectly ok to grab and go to town with it.  Have fun dumpster diving.

The other big asset is usually customer lists and data.  Though there are many cases legally about employees in an investment or insurance company taking unprotected data and starting a competitive investment firm, I believe you are in a different category as the owner.  Sure you have a right to move on....heck  you have a right to move on and compete outright with the other company if you want...but don't take the customer lists or hard earned prospect databases etc.  In starting Smyth performance it would have been easy to send a mailing out to all the prospects on the FFR mail list.  I think we must have a half million names and addresses from 15 years in business.  Don't use it unless you do it above board.  By above board I mean paying for it.  Lists are sold every day.  If you use it without paying the owner I don't think you are being fair.  If I want to use the list I will ask FF licensing(our company that owns all the IP for FFR) for a price and I will pay it.

4. Embrace ownership not management.

If you are moving on without moving out you need to get one thing through your head.  Though you can try to run both(or more) of your companies, it is best to run one.  Steve Jobs might be able to be CEO of a few companies at the same time but you are not Steve.  Run one place and run it well.  I own half of Factory Five Racing and I currently can't take 20 bucks out of an FFR account.  That is called letting go.  I don't recommend going that far as every officer should have signing authority, but you see my point.  I have no say in the day to day operations of the company other than my informal observations and criticisms you see here on these pages, if the management of a company can't take a bit of constructive advice from an old pro like me then they shouldn't be running anything.  A great example is FFR pricing.  My view for years(well publicized)has been that FFR is giving away their cars and not keeping up with the real costs of doing business.  I push hard for these price increases because I want the best for FFR and all of its stakeholders.  But that is all I can do and it is by choice.  If you excuse yourself from running the business like I did in 2001 or 2002, you can move on....if you control the business you may be opening yourself up to conflict.  If Dave makes an extra million this year and has happy employees and customers with good benefits and a bonus...well,  he gets an A plus  from me as an owner.  He will have done it on his own and he should be rightfully proud.  If FFR struggles and the opposite path occurs he owns that too.  By backing out of the managing of the business you are free to move on without moving is your company...but let it live or die on its own.

5. Offer your existing business the chance to invest in the new business....and do it again every year or two.

I know I said I was moving on, so why offer ownership to the old company?  As famously documented last year in Scott Kirstner's Boston Globe article, Dave is not the biggest fan of my new diesel car project.  I have been public with this Jetta kit idea for years, rejection is nothing new to anybody who has tried to explain a new approach to any business.  But Dave's rejection over the years of Smyth Performance is a big deal, not because I take it personally, but because with rejection comes the freedom to do what I want to do.   After I ship the first cars this summer and things get going and are a bit easier to see, I will offer a stake to Jay and to Local Motors as well.  Since I own a part of Factory Five, Local Motors and Smyth Performance , it is a natural thing to do...offer them again a piece of the opportunity.  If they bite and go along this time(it will be LM's first shot)you can probably cut a deal and get to the state of active synergy rather than the passive synergy you get without cooperation.  Three companies working together with mailing lists and other overlapping hard and soft assets is a much more effective way for small companies to go out into the world's car market.  Small firms excel when they focus on a niche and dominate it.  If Smyth performance tries to be everything to every car enthusiast we will fail miserably.  If I stick to the Jetta platform and the cars that are derivitives of that platform I will experience the wild success that comes from simplicity of message, simplicity of design, and simplicity of operations...and that is the plan.

Go ahead and make your offer directly or indirectly but then let them decide.  In my case I was free to move on after the rejection of the idea from Dave a few years ago...but I will offer again.  I will be meeting with Dave in August to go over a few FFR and FFL  related issues(like when I might see a buck or two to feed the kiddos and send them to college...this "taxes only" level of FFR profit is not really sustainable...after 3 years of the "recession" 8-10 cars a week is our reality at FFR...restructure and get profitable in THIS business environment is my consistent advice)  Either way Dave gets another crack at participating in Smyth Performance then I can call Jay and Sergio right after to give them a shot...all good either way.

So now the crystal ball.

In closing I will predict some fun tidbits.

Factory Five Racing:  I will be keeping my half of FFR while finally being able to step down as an officer and maybe even as a director now that I am convinced they are paying Licensing and their quarterly taxes.  I think FFR will have success with a small car project but will continue to struggle making money with the complexity of a product line that will have five platforms.   I would have never gone with such a wide line and believe it or not I would raise prices at least 5 grand on the Coupe, GTM and Spec car.  I am proud of the fact that the success of the Smyth concept/diesel on facebook and helped pave the way for FFR to start their own version of a small 4 cyl subaru kit car.   Jim is a talented R&D guy with a budget and is a real Subaru fan.  Don't be surprised if the Subie powered car is faster than the high line GTM.  I will continue to press for a Chevy(ls engines are the bomb) powered 33 kit from FFR and I think they will see huge success there since the hot rod market is 80% Chevy guys...maybe making the 33 a ten a week or more kit for FFR.  Replica Cobras are always a great project and will continue to be the ultimate toy for big boys.  FFR is about 33's and Mark IV's with regard to profitability...focus on those two cars, raise prices to keep up with the consumer price index(see "the price is right") and enjoy your success guys.  Laser wins, shotgun loses in this business climate that is our new reality.

Smyth Performance:  I will do well in the sporty diesel/1.8T/VR6 VW commuter car that we invented with the mixed frame technology(unibody plus a frame add on), and I think that the VW Jetta sport truck kit will take off and make Smyth Performance a 5 million dollar company within 18 months...and that is just the pilot launch.  Since it is a titled car the talks I am having with potential investors revolve around the manufacture of the Smyth car in a new company with all remanufactured parts as a completed car in 2013.  Local motors and their microfactories may play a nice role in this or if the fit is not right we can begin making limited test batches of finished rebuilt cars/trucks.  Jetta four door cars at the end of life come in, and a  "new" G3F or Jetta truck comes out for 20 grand.  The greenest car manufactured in 2013 is really to be a Smyth remanufactured car that has enough added value to justify the money.  I can smell another few hits here as well as the real opportunity to expand into car manufacturing instead of just building kits....and we don't need to hold our breath and wait for the laws to change.  Kim and I are investing all the available assets we have to capitalize on this opportunity that will need all the money and more to grow quickly(goodbye Ferrari collection). Once the proof of concept is accomplished through the execution of the Smyth kits we move to making finished cars.  Since we are using the Jetta as the base and not manufacturing a new car frame we are drastically adding value,but it remains a VW titled vehicle.   I will wait till I am at that point later in the year to ask for the help but that is the plan for real growth.  I want to make a difference by re using all these old cars...the aircraft guys do it all the time...why not cars?

Local Motors:  After seeing Jay and the DARPA car with Obama it is clear that Jay has the ear of  some really smart investors and supporters.  They will be a driving force in the co-creation of new car/truck related product and concepts and Jay Rogers will continue growing the valuation of Local Motors beyond the 30 to 60 million dollar mark within the same time frame.  This is Jay's exciting story to tell so I will end it there.  What a great triple play.

Moving on without moving out indeed.  Sounds like a plan.

Mark Smith

Thursday, June 23, 2011

Victoria's not so secret

It was not long ago that when you wanted to talk to your customer base you sent a letter in the mail.  It still works.  Judging by the sheer mass of Victorias Secret catalogs that arrive daily it still really works.  I trust these folks that send dollar catalogs daily to sell $50 items to have their marketing and sales team running at peak performance.  Metrics run that business of mail order.  But there is a not so secret change underway.  The facebook revolution(and it is a revolution of the highest level) has turned things upside down for most marketers.

Struggling with where to spend your precious ad money is nothing new...what is new is the lack of real knowledge out there on what works.  Our experts at Victorias's Secret are moving fast on all fronts...they are seeing the real results of a huge increase in reach.   Closer to our level you can see all of us small company folks trying to tell their company stories on facebook too...with some pretty wild results, not all of them good.  It sure is working as far as brand awareness goes...but is it replacing print and mail?

Only a moron abandons the old methods of communication that work to chase the next new thing right?  I am not so sure now.  I still think humans like to read and digest information from paper and something tangible in their hands, but what do you do when the effectiveness of the new medium such as facebook is so good that it starts gobbling up all your ad budget dollars?  It is not that the old mediums don't work, magazines are incredibly efficient at communicating a message to a target demographic, it is rather that facebook works
better still.

The answer to the sales budgeting dilemma is not what you think.  If you have a compelling story for your product then sure, facebook is a the golden goose.   People "like" your business because it is interesting...good for you...make the most of your brand and story and connect away.  Smyth Performance is proof that if you are working on a cool project or company launch people will watch for fun...and then buy in because of the tight facebook bond...we are "friends" after all.  So for some companies, Smyth in this example, you may just be intriguing enough to pull off  firing the mail man.  But it is a gamble.  With massive budgets like those at a retail giant like Victorias Secret they are expanding the budgets for ads since all avenues are leading to sales...the pie is getting bigger and they can take advantage of scale in advertising.   If you have an ordinary product the challenges you have always had to stand out are still there, facebook can't make you something you are will probably even be a complete waste of resources. People don't "like" ball bearing companies.  If you have a restaurant  Local targeting with filters for demographics and gende, you bet.  It is not cheap,every other company is now trying to figure out how to use it too,  but it is an amazing way to stay in front of your customers every time they log on and all withouit a single piece of paper.

In my case it is an easy move since I have the "go Green, Go Fast" mantra to live up to.  Cutting trees to contact my customer base would work like it has for years...but kind of flies against the core strategy we are launching here.  If I am trying to get car guys to justify re-using and re-building old cars by making the redone ride interesting enough when they are done with the can I use the mail to preach the Smyth way.  So for us here it becomes a multi sided e-media campaign/blitz to tell the Smyth story via twitter, facebook, blogs and the various powerful discussion forums.  A perfect fit for now as the guys building the cars are very educated in the way of car building and they seek us out because the crazy r7d guy in the warehouse made for an interesting read.

Committing to this path is tough since you are writing off a solid half if not more of your potential customers that are not super active on the net...but that penalty will lessen over time as almost everybody joins the facebook tea party.  The uptake of facebook  with the over 60 crowd is explosive...a sure sign we in for some changes.  There are still a few people that won't use facebook,  there are those that still have dial up modems too I'll bet...but my guess is that the tool is now a long term  part of our culture that 90% of the public will use effectively to improve their lives and stay in touch. Not so for twitter and the rest of "social media", I think they will just get swept in or away with the tide, but I am a car guy not a web guru...we will see.

If I am wrong and the U.S. mail has a resurgence,  or magazines start growing sales exponentially, I lose quite a bit of opportunity for my business.  But if I am right by letting all my chips ride on facebook for this launch the rewards are enormous.  The sheer power of  focus means we can do our work and not worry so much about ad materials and structure in these early pre-production days.  Oh that will come eventually, but in the launch phase of a new product we can substitute our day to day struggles and turn those efforts into story based "reality tv grade" advertising.  The investment in a web site and the formalities of running the business can be delayed until after we are already up and running with the early product.

No mail, no printed product information or catalogs...the paperless launch.  Let's watch live.  Facebook for the interaction and conversation, a web site for reference and relatively stable information and a blog to see how the guy running the place thinks.  Between the three you the customer will get a great picture of who you are sending your money to and what they can provide you.  Posers and fakes in this new candid world are ferreted out quickly and simply fade away over the next years.  People and companies with a real value story that are not afraid to share the good and the bad in their business experience the velveteen rabbit moment of becoming "real" in the eyes of their customers.  And "real" translates directly into sales success.

So ditch your futile efforts to control all this wild west marketing change and focus instead on the basic message of who you are as a brand or company...and let everyone who is interested inside the place for a look at who you really are.  They will probably like what they see if you are good at what you do.


Wednesday, June 22, 2011

Made in America*

As we approach the launch of the Smyth G3F to the first customers we are hard at work tidying up all the loose ends in the bill of materials for the kit.  The bill of materials is the master list of every piece on the kit whether it be raw material like steel tubing or parts we buy such as coil over shocks pictured here.  This is where the  rubber meets the much is it all going to cost.  Labor we can engineer into the process and by being clever we can keep the total hours spent organizationally per kit to a minimum.  The parts we buy and raw materials have to be purchased from the outside... and this is the show when we talk manufacturing in the U.S. If the car is great but ends up costing 30 grand to make, all ten guys who buy it will love it....if we can keep the retail price of this kit near or beolw ten grand then the volume likely goes into the thousands.   Like most companies making goods for sale we are faced with the inevitable dilemma of choosing the best and most reasonable suppliers based on cost/service/quality.  Unfortunately for some U.S. suppliers it appears that the Chinese are beating them up pretty badly and yes, guys like me running companies that actually want to turn a profit are part of the problem.  How we balance this reality of China in the supply chain affects everything we do these days. 

In my smaller world manufacturing cars in new england it works like this.  We give the domestic supplier a solid chance to compete by establishing a framework for their success before we even start.   All these guys selling more than a few parts to companies like mine are fixated on china as the price floor. The quality coming from the non japanese far east( China and India) used to take massive amounts of time and energy to it is one email and specs followed by a sample.  The time it takes is the penalty.  Getting a sample is fast but getting that shipment landed in boston takes 6 weeks.  

Lets take the part above that sells for about 150 bucks like the single coil over shock pictured. If the part at the same quality is delivered here for 100 bucks by the Chinese vendor, and the Detroit crowd can do  it for 150% of that 100...they get the gig.  I will spend 150% of the landed cost of the Chinese part to stay local... but that is it.  If you are more than this in the U.S. you lose.  This is neither blind patriotism nor undue harshness on my part.  I have a better line of communication with the vendor in Detroit.  It is just easier to do business here in this country.  In the car world I probably went to school at Michigan with the lead engineer or the owner of the supply firm etc....just easier relationships.  But the rub is that I can't stick with companies that are more than 150% of the  cost from China.  I cann be nice but I can't ignore the price point pressure we are under.

So coil overs....lets look closer. We are selling a kit for 10 you think we have room for the $1500 coil over setups from way.  I am sure the "quality" is first rate....but please...almost 2000 bucks for a set of coil over shock fifth the price of our car...we will let the elite 1% of the market buy that stuff.  Remember the selling to ten guys or selling to a the Euro/U.S. guys don't get the nod,..not this time.  

The guy in china has a rep that speaks broken english in a few emails...they will send you the samples..nine misunderstood communications later.   Compare the samples you get air shipped to the parts you have purchased from all the major coil over houses....and low and behold you see the same markings etc on the valve bodies and shock is the same manufacturer...the Chinese guy is making them for everybody...even the high end shock guy from Europe.... and yes they are about 50 bucks a piece in large closed.  When it comes to shocks it is china 1 U.S./ E.U. 0.  I am using China as the foil to the story but it used to be Mexico, India, you name the emerging supplier base of the day.  China is different.  They are making things better and less expensive than anyone on earth and if you are in the business of making things you should take a good look and plan for this amazing worldwide shift in manufacturing power. 

Now this is not the case with laser cutting, steel tubing, or many of the other fine vendors that supply the Smyth G3F with parts...but the far east suppliers do much of the work for almost any car company large or small like it or not.  50% on top of prices from a company that has to ship stuff halfway around the world is a good rule and works really well for me...if our guys in the U.S. can't compete when they have that much of a leg up...then it is the business climate in this country that has to change.  My bet is that it is not the small companies to blame for this lack of is structural such as the legal environment in the U.S.   The legal system in our country is enemy number one and the topic of the next note.  For now don't blame the Chinese for making parts for a third of what you can make them for...find out how they are beating you(no it is not slave labor) and compete with your strengths and ingenuity.  Raw materials are made into products in much the same way all around the your best to keep making things here...I will give you a 150% head start while I weld up the rest of the car here in Wareham, Mass.  I look forward to shipping Smyth kits to the huge emerging hot rod VW market in China.


Monday, June 20, 2011

The First Cut is the Deepest

Saturday morning after Kim and I dropped off the older boys at a Boston College football camp, we headed to Jupiter Florida to attend John P.'s beheading party for his Jetta.  Jupiter is a beautiful city on the east coast of Florida just north of Lauderdale and this time of year it is hot...

Had a nice dinner, crashed hard, then woke up and off to the early morning saws all event.  This is a day of note since John is the first guy other than me to actually cut his own jetta tdi in half for the smyth diesel kit car project.  When you cut a running car up you are officially committed(there is a great play on words there that definitely applies to both John and I) to the new life the jetta will lead as a sports car.  At over 250k miles on the clock, John's car is the perfect candidate for a reboot.  I have talked before about the core strategy that drives Smyth Performance...we create a product that allows people to justify rebuilding these old "end of life" cars.  Cars that would normally be winding down and headed for the scrapyard(who spends 7 grand rebuilding a 300,000 mile car?) are given a kit makeover and are worth it to rebuild since the new transformed car has enough panache to justify the rebuild. 

The basic environmental and fun factor in these transformations are not lost on my customers.  An incredible statement from gearhead straight to the so called greenies thinking they saving the world with production of new products....rebuild the old diesel, run it on biodiesel maybe, get 60 miles per gallon...and most importantly have a bloody ball building and driving a rippin fast sports car.  A magical story that is just now real since John cut his car...Kim and I wouldnt miss it.

The car is cut,  I didnt pick up a saw, and the learnings I took away were perfect...I was too close to the project and had to see a smart guy like John do the cuts on his own.  As all firsts go there are surprises.  I thought the front where the windshield was would be was not...plenty of stamped holes and guide points for the laser/scribe lines to follow.  I thought the rear would be was not...I am home as I write working on more detailed drawings for the rear cut under the car.  All around education for the win.  John has put a bunch of pics up from the event here

So a quick mod of the rear directions and a few more sections typed in the build manual and we are good for Clint to do his car in Ohio.  John has plenty of clean up and prep to do as I make his frame out here out of the first production batch of laser cut steel.  I have plenty to do finalizing the new tube steel cutting station in the new building here...and we all will be building our cars together in july as Kim wants to be driving hers in short order...hey its summer after all.  Good times around here indeed.


Saturday, June 18, 2011

A sports car and a truck? Really.

As I prepare to head off to Florida to witness the beheading of the first customer jetta as it begins the transformation into a Smyth G3F mid engine car, I took a look at the survey results from the other day on the page.  Are you building the G3F at 11 grand, or the truck bed kit for the jetta at 3 grand?  Sure we will execute fully on the mid engine project before work even starts on the truck...but wow...a truck without any promotional help is pretty popular...and I don't think it is just the price point.

The popularity of a cut up jetta tdi truck kit should not take you by surprise. We love trucks in the u.s. Because we all have so much stuff. A tdi 45 mpg truck kit that is made from a 4 door jetta for 3 grand? I am in. Trucks are about getting yourself and your goods around town, across town, or from one state to another. The realities faced by people that drive over 100 miles a day are revealed in the visa bill every month for fuel...face it...we are now Europe when it comes to fuel. In this country we always thought we were immune from the high fuel prices we saw in the e.u., they were the ones trapped in their mini cars and tiny taxis...we had cheap gas and drove suv's.

My son drives my old navigator to school and it keeps his miles driven to a minimum...a parental win/win of the highest order. He is safe in a 6500 lb truck with 32 airbags and he can't go far since at 12 mpg he is broke. And trust me...when I am done with a car after using it for work for ten years, nobody wants to be in the back seat. Which brings us to the jetta truck and the g3f comparo. John P. said it best when I talked about the idea with him on facebook a few months ago..."I want one of those too!". So why do rational guys in the second half of life like John and I want a cut jetta truck?

It's about hauling our stuff without hauling 5000 extra pounds of truck with us. Why does it take a 6000 lb truck to haul maybe 400 lbs of windsurf or bike bulk? It doesn't. I will not be towing a mobile home with this thing..I will be driving my work bulk around or driving empty just as I do in my big trucks....perfect.

And of course for you guys that are true project get to justify another car project..sweet.  And like the G3F that we are finishing can actually use the machine because it is stock factory reliable.  We have to widen the scope of what we mean by "performance" around my factory as it appears the truck may outsell the sports car.


Friday, June 10, 2011

Missing Deadlines is Good for Business

"Missing Deadlines is Good for Business"

by Smyth Performance on Friday, June 10, 2011 at 1:09pm
draft 1

2 years ago around this time in June I went public with the Smyth car project that I had been working on for about a year.  The Smyth car was nothing more than an idea with a  hint of testing on a diesel wagon and a big diesel speedboat.  I was stuck with the jetta since it was the only reasonable diesel sold in the U.S. in any volume for 20 years.  I went to all of you with the plan and decided to share my work.  Now we are on the eve of launching the car and I must say it has been an amazing product development ride.

I bring this up not because of the two year anniversary ...but because I was looking back on what I thought at the time would be a 6 to 12 month project.  Two years is not a year and I started looking inward and reviewing my notes as I prepare to write the story of the Smyth car in a book.  I had a great boss in my early management career at Avery Dennison up in framingham, Ma named Lee Carlson.  A veteran of managing a big R&D budget he always was helpful with me as a young upstart in a big company.  His rule of thumb like many others in R&D is to just double what the director of the project says.  You will still be off by a bit, but at least you won't cost the company tons of money with false expectations.  As I moved into more of a new product manger role  at Avery after getting my MBA, my mentor Craig Donaldson who was director of the office products group maintained my learning curve by putting me in front of the higher ups and allowing the young hot shot a bit of exposure.  After showing him the first Cobra replica in 1993 (I rented the back of a transmission shop to build the first prototype after work)he said to me "I will hold your office for you in Pasadena for a while".  The delays hold true  even when the head of the company is in charge of the just get so excited that it feels like you can hit your ambitious targets.

I am not counting scope or major project configuration changes in these dates...just the time for the idea to flow into something that can be shipped.

Delays and new products go hand in hand.  Creativity has a schedule and it really can't be written by guys in starched white shirts that have never built can only be guided.  No mater the budget R&D guys will always run a little late and your company is the better for it.  Ideas are never perfect, it takes time to refine even a great idea.  Timelines set by management(even in the car business most higher ups have very clean hands and have never actually built what they make) don't fly.  Time lines set by the R&D staff don't fly either.  One party is too disconnected to what it actually takes to get the job done, and the other is too close and emotional to avoid the inevitable excitement driven optimism.

So back to the G3F and the Smyth performance timeline.  Six months would have been doable in a perfect world and a simple design without all the extras for five of my friends.  As the project scope changed into a daily driver to avoid any potential overlap with the FFR line, it also made for a reboot of the body/frame design.  If FFR was to do a "mini me" I did not want to compete against a company that I still own...I am in this for the real synergy and income from three completely complementary companies that can move along with customers as their tastes and budgets change. LM, Smyth and Factory Five do this perfectly in my mind.  I wanted fertile ground where the NEXT car my customers built was an FFR or a Local motors project.

This change of scope and FFR entry into the small displacement market was a challenge but ended up working out really well.  I was able to informally contribute to the marketing study that showed a real need for an affordable open track car and FFR was able to use the real time feedback thru the "time to talk" thread and justify the smaller "non V8" entry.  FFR was also able to informally learn from Local Motors's new business model and run a competition for the new car's body(I still would have used the LM web site for this contest...but Grassroots motorsports is a solid FFR supporting bunch too).  Jay saw early on the power of the FFR community,  so you can see the very real cross pollination here working below the radar that most companies can only dream of.  In the end all three companies are in high gear.  FFR applies their vast knowledge of complete frame design on an ultra light subaru sport racer, I have the sporty commuter nailed with the G3F and the jetta based truck concept, and LM continues to be the ultimate worldwide car designer destination.

Meanwhile the customers that came in with the smyth concept were speaking loudly about the diesel commuter as a true daily driver.  Sure it could be sporty...but I have to be able to drive it ...a lot.  Many still wanted an ultra light track car and said so on the forums.  I went full on daily driver and comfort while directing these "track guys" over to FFR.  It works well still....true synergy.  The pure sport open track car is FFR territory and the daily driver was my target.  Can you imagine an FFR which is titled on the road as a VW offense to the VW guys but FFR is a bit on the super special side with the whole 200 mph thing going on.  By keeping to the VW weighted crowd I keep a loyal Audi/VW fan base and bring new people into the Smyth/FFR/Local Motors mix or great car projects.

I started looking around at other start ups since my only experience has been taking Factory Five from zero to ten million and helping Jay with the growth of Local motors as I sit on the small borad of directors.  Jay is the man in charge at LM...this is his show and he is the majority holder...FFR and I are helping as we can but in a relatively passive role.  It took me six years to get to 10 million in sales as the head of FFR...Jay took LM to multi millions in valuation within a year of starting and continues to multiply LM value every year.

In the world of product development as opposed to business development we are all in the same boat though.  The Factory Five transaxle project for the GTM is a classic example of a great idea that has had huge delays but is just simply really worth it for the customers.  Look, the ffr guys designed a performnce leading car around a donor transmission from a porsche long before FFR shipping 100 GTM's a year blanked every porsche box in the U.S.... ,yep about 2 years....we were a victim of our own success.  The trannys are out there but FFR was spot on in developing their own box with mendeola...great decision since many porsche units are over 8 grand now..  Since guys that own 911's tend to take care of them, it follows that we ran out of cheap trannys...and the mendeola looks like a winner.  Late, like all R&D projects, but a real winner and a better product for it.  LM was late with the rally fighter,  I was late with the Smyth car...I bring it up to showcase that as long as you finish with real customer wants addressed, you win the new product prize.

What if you are too late and delay too many times?

Ask Tesla.  Ask Fisker.

Tesla and  Fisker are in the middle of discovering the down side of too many delays.  Sometimes no matter how much money is thrown at the new project it....just....never....happens....or thats how it feels.  How many hundreds of millions will Tesla and Fisker spend before the companies are simply purchased by a big name to incorporate an electric vehicle in their lineup.  We will see.  But after over 8 years the crowd that expressed interest in these cars gets restless.  Just a guess but I will bet the talks are underway now.  The cars look amazing, should drive great, and we will all see if they can make a financial story that makes sense.  A little late is OK..a lot late is maddening.  Even more so with a product like a sports car that is a product of passion.

So as the FFR open house is tomorrow,  let's watch LM, FFR and Smyth together as  they launch these terrific new products.  We may always be bit tardy on the launch pad but we always will aim high by delivering dreams that work.

Mark Smith

Full disclosure so you know where everybody sits in the three companies that make the best component cars in the world.

                         Smyth Performance, Inc. is
                         100% owned by Mark and Kim Smith

                         Factory Five Racing, Inc. is
                         owned 50/50 by brothers Mark and Dave Smith

                         Local Motors, inc. is
                         owned by many..Factory Five Holdings, Inc. is one,
                         Mark Smith serves on the board of directors

                         Factory Five Licensing, Inc. is
                         owned 50/50 by brothers Mark and Dave Smith

                        Factory Five Holdings, Inc. is
                        owned 50/50 by brothers Mark and Dave Smith

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Thursday, June 9, 2011

Secrets in the Boardroom...

by Smyth Performance on Friday, May 13, 2011 at 10:22am

Open the Books for the win.

In the early part of the 90's when I was finishing up my MBA at Bentley College there was talk of the "open Books" movement.  The not so new idea was to show your employees the books freely in your privately held company so that they could see the real successes and the challenges of what it takes to run a company profitably.  There is a reason that public companies have to disclose their financials every is good when you have many stakeholders and/or stockholders.  No secrets means no surprises.  Steady growth is what we all want in our companies.(I am excluding lifestyle folks here as I don't consider that a pure business).  The open and free access to a companies information enables the raising of capital since it reduces risk.  Secrets are risky.  Closed means no capital possibilities other than a line of credit...and even that requires you top open up to the bank.

The story and the reality.

The critics of open book management have a few points.  The first is always that if you are a small privately held firm you don't want the competition seeing how you are doing. Right.  Your super secret income statement and finances in your 1-50 million dollar company will make people change their business and hurt you in the market.  You are serious when you say that?  Why do you think you are a small company?  You are small because you serve a small market. No one really pays attention to you other than your small niche and customer base.  Your company enjoys success in that market because you serve it well...not because you are keeping your books private.   The other issue raised is that the employees will not understand.  They don't see the complexities of the margins and costs.  All they will see is the sales number which is in the millions and they will not be able to handle it.  Like many politicians that get voted out of office by assuming the electorate can't "understand" you are not quite right here.  People love this stuff.  Employees are incredibly loyal because you are giving them a good job and a good environment to learn and grow in their careers.  Now if you are not treating your employees with respect and not allowing them room to grow in their skills and careers then you don't deserve their loyalty anyway.  They really will understand....which maybe, just maybe,  is what scares you...

So here may be the real secret if we are honest as small businessmen and women.  You are keeping your books private because you are making tons of money or not making any at all.  If you are making millions you don't want these people working for you seeing it since you are not sharing...if you are not making money you are embarrassed because you are acting like the almighty entrepeneur but are really not all that great as a businessperson.  I have a friend who runs a nice 10 million dollar manufacturing company in Southern California.  He is so secret I don't think even he knows how much he is making.  You can see the detachment in the employees.  My guess is that when times were good the millions were worth it since he didn't have anybody asking him to justify not sharing...but now that the chopper business is slow and the margins tight...he could really use the help of a loyal involved workforce.  But it is not there for him.  Simple reality of his choice of investment.  He might not make it out of the slump but his odds would be better if the employees were "all in".  If you are messing up and losing the business...don't you want some help from those that know you and your customers?  My guess is that way before you implode you will have some warning signs brought to your attention by the very people that are able to fix them.  A true small business win.  Anything you can do to foster that trust and loyalty will be paid back both in the good times and the bad.

The standard way that small firms get advice and handle the serious issues of capital and investment are with a smart and involved board of directors/advisors.  Directors take this strategic advice role very seriously.  I relish the opportunity to serve on the Local Motors Board of Directors with Jay and Tom.  In the start up phase of a company that has raised millions from knowledgeable investors it is never boring.  It is the reason we start companies in the first add real value to a firm and create something real.  As valuable as a board is...I am thinking it is not enough for Smyth Performance.  For me I think that opening the books creates an environment that shatters barriers of class and privilege in a company.  The pecking order and status that an "insider" or "higher up"  in the organization enjoys because of access to information is done away with.  It may not be corporate socialism since skills and talent still get you to the top...but it definitely gets rid of the totalitarian manager when the shop floor has real access.

Secrets in business should be for new discoveries in R&D or a huge promotional plan that is targeting a competitor aggressively.  Small companies need to take a cue from wall street and share their plans for the next year with the people that are doing the work...and that means looking at the results of the company financially as well.

So why not open up folks.  If it works for the huge public companies it can work for you.  Get over your grandiose CEO view of yourself.  Admit it.  You run a small company...embrace the smallness by sharing the struggles and wins with your people not just in words but in actions.  Start with a profit share/stock ownership program today...and watch the reaction change the culture of your company for the better.  Underneath it all you know this is the right thing to do it.  If they see the millions and you are not sharing they will get upset...rightfully.  If they see your miserable margins after all the hard work you all put in they will start helping you change the way you make money...they may even see the need for a biut of trimming here and there.  Either way you all are stakeholders with your livelihoods on the line.  Most importantly the change to open books will prepare the company for a sale where all the employees get to see that when it is sold they will get a piece of the value that they helped create.  You don't have to go public to make money with stock...but you do have to have a sale able company.  Let your employees help you get to your harvest by including them.  That is how real wealth is generated in this country.  There are no secrets in is one of the purest forms of work and reward.  Open up and prosper.

Mark Smith

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Build at your own Risk(or joy) draft

by Smyth Performance on Thursday, May 12, 2011 at 2:14pm
This section is still raw in draft form...

Modifying a factory car is a time honored tradition in this country and most others.  Automobiles have always been big purchases whatever your budget...and always will be. It is also true that unless you have no sou, the decision about your ride is a pretty emotional one too. The purchase says much about you and your life.  Like a home or apartment we spend an enormous amount of time and money in these cars.  The car was an incredible invention that continues after a hundred years to allow practically anyone to work, travel and enjoy their world without geographical limits.  A 16 year old newly minted adult(yes a 16 year old is an adult in the car space) from the midwest with 500 dollars in his/her pocket can buy a used car from ebay, fix it, and be 1500 miles away with their buddies on the beach for the price of a night out on the town.  If you were not a gearhead in some way that trip cost you over a grand...if you were, that kid wanting to make the impossible road trip you always will be. The dream of the open road and freedom may start at 15 but lasts a life time for some of us.  Later in life it just takes the form of Bikes, Planes, Boats AND cars.  Even years later with all the successes and failures that a life of learning gives remains there as part of who you are.  You still have the power and satisfaction of being the one that can fix things and get where you are going.  At 15 it was a 1968 baja bug(which explains my JC whitney product knowledge to this day) for others like my cousin a v8 transplant in a v6 nova...but all of us got our "car start" with a story that still elicits a smile that comes straight from a youthful heart.

With five kids my dad was always doing a flipping brake job.  Every time the family was set to take a trip to Michigan or any other kind of significant car travel we would all wait for the inevitable last minute brakes off the car... literally packed up and otherwise ready to go.  The dog, the kids, the stuff, everything.   He was good at it too.  Dad may not have liked cars...but he was not going to pay some guy 500 bucks for something that took him an hour to do.  The brown Chysler Town and country station wagon was gonna stop well with his family in it.  Being a man of ritual(he is now a deacon) I really do get it now.  The trip needed that brake job just as it needed the late night playing of "mystery theater" on the car radio as we drove through Chicago late that same friday night.

But to do the work it took tools...and tools he loved...not  When my grandfather Ted Smith died in 1972 the professional tools of a lifetime refrigerator man went from the basement of his Michigan home to my dad's in our suburb of Chicago.  I was 10.   With all those kids my dad had to go one of two paths....fixing things...or paying other people to fix things.  If you want to use your cash for trips and adventure with the family as a true fix things...and that meant brake jobs and rebuilding carburetors.

The smell of carb cleaner...not the gumout stuff in the can..but the 5 gallon pail of etcher/solvent you bought at NAPA in the days when we were just thinking up the idea of catalytic converters.... that stuff meant cars to me.  Bad I am sure....corrosive....death in a pail.  But a carb that come out of that basket was new again.  The DDT of solvents I am sure.  Dirt and mosquitoes were not a problem back then.  I don't want to glam up the old days... but man that stuff worked. Now like most things that cleaned/did anything with this kind of vigor, it was probably just plain toxic and has no place in our modern world.  We are better off without all the chemicals that were probably just dumped somewhere when you were done...they didn't have recycle days at the dump back then...the pails just sat somewhere.  So good riddance of course...but the smell is fixed in my memory.

So here lies the rub.  As any of us who have made the transition and become a "car guy(gal)" can tell you, working on these machines can be a risk.  I am here to remind even the most experienced of you in this hobby of the obvious...that even the simplest project such as changing the rims and tires on a Jetta can be turned into a life and death situation down the road. Messing with these machines since I was 15, designing and making fast cars, boats, bikes and planes for close to 35 years, and I still  make mistakes that can cost me my life.

An example of this occurred last week.  Look, I can change a tire....first thing most people should learn after filling the car with gas, right?  Well I did the quick front brake job on the jetta since like most car guys I let the brakes go a bit and just started to feel a bit of metal to metal wear....I even showed Rob at work the pad with maybe a shaving of material left....bragging about how close I came to the edge of nothing left.  Pads and new rotors went on, wheels and tires back I went home.  A few days later I realized a bit of vibration on the highway.....then it got worse...bummer...more front end work I thought(this old car may prove my enviro slant but I have my limits...enough already).  I went to check the front, ready for some new work to do, and the wheel studs were not tightened all the way.  Rookie move that could have cost me a wheel flying into the woods and an accident.  Not tightening wheel lugs! A lifetime car pro and race car guy.  Nice. And I was going to fly my home built p-51....right.

Slow down.Be careful.  Especially if you are a pro.  The fear that a first time car builder has is the reason they do such a good job.  The fact that modern cars are engineered so robustly with so many fail safe scenarios taken care of at the factory is a blessing that we all take for granted,  and is the single biggest reason I am enamored with the one donor concept in kit car building.  Even before there was a factory Five I loved using everything I could out of a donor car not just for the economy of the build...but for safety.  The factory production car is a wonder of durability and low cost...and we want to use all we can in our projects.  The hot rod and custom car market disagrees since they want beauty and function.  The factory part are rarely pretty...function and cost control is death to car art.  Smyth Performance says ok to this trade...we will sacrifice the elegance of the aftermarket part for the factory reliability and safety in  a lower cost package by design.

At the end of the day it is about staying connected with the hands on side of the car business for me.  To be in tune with your customers that build cars you have to build the carr just like they will.  And the pure fact is that unlike my Dad,  I have always enjoyed working on machines in my free time.  If you always have someone doing the work for you the brain starts to forget and you make mistakes in design.  We think through these designs with amazing detail and when you do the assembly yourself it is like an architect that builds a house with her own hands...I will bet the plumbing lines up a little better when the mistake in design costs you the builder a few extra days to fix.

New world of projects.

These days you can download a free CAD program from google and have a complete Harbor freight sourced shop in a week.  Plasma cutters, welders, drill presses and bending brakes are half the cost they used to be if you only need limited use out of the tools.   As we design and build hot rod cars, each change to a system is scrutinized with 100 variables and outcomes since we are professionals.  The home builder sometimes spends even more time online making sure guys like me do a good job.  Whole discussion threads are out there analyzing the decisions of designers and how they could have done a better job.  The internet and the various discussion forums have created  "experts" out of windbags and litigation over everything in our society often keeps true experts silent.   I think the power of the car enthusiast crowd through blogs and forums such as makes car projects much easier than years ago.

We had access to a handful of Petersen Publishing books like "How to Hot Rod a Chevy(Ford) engine"  but that was it.  The occasional issue of "Hot VW's" or "Hot Rod" usually had a tip or build section on something interesting while the JC Whitney catalog and classifieds in Hemmings  taught us what cheap stuff was junk and what parts were worth it.  All fun memories... but when you need information to fix a car....the forums are immediate and helpful in the extreme.  You have access to a thousand people working on something just like yours every minute of the day.  It is simply incredible.  We all have a thousand wingmen ready to help at a moments' notice.  A true game changer and a force that is driving the growth in the car mod business.

When talking about the kit car business model over the years I always mention the cul de sac rule.  In every neighborhood/group of houses there is "the one" car guy.  His  garage door is up every now and then, and as you drive by you can't help but look at what the heck is in there.  Sometimes a couple guys hanging out/ hanging in.  But THE car house.  In this life that is the person I serve.  The forums have made us all able to talk to each other which just means that all the cul de scas are now connected.  There are a few more of us project guys out there because of it.  Smyth Performance is more than a cool sports car you make from a Jetta.  We are quietly going to institutionalize the home built/rebuilt car as a viable option to buying a new car and these "car guys" are the ones who will lead the way if we succeed.  You don't have to be 15 to start either...the chat rooms are full of new(at 50 years old) blood that always wanted to do this kind of project but went to grad school instead.  Having kids and working for a living takes a bite out of your day after all.  If you are late to the party, welcome.

So back to the projects and risk.  If the design change from stock is drastic, such as a completely new suspension design, we think it through, we test and we usually strap our own fannies into the machine and test it.  In the homebuilt plane business all home built machines that you can fly legally are labeled "experimental" by the FAA.  When you get into a plane that reads"experimental" it reminds you every time you use it how serious an experiment you are conducting that day on flies and you really want to be a good builder since you are the one strapping into what you created with your hands.  Ultimate freedom and ultimate risk.  The fact that you can still do this in America reminds me how valuable we all treat basic freedoms.  A great example of an extreme form of freedom.  Even though there is social risk we allow people to build and fly airplanes and cars that they built with their own hands and skills.  Amazing really.

The tests and inspections that are supposed to keep unsafe cars and plane off the road and out of the sky are pretty good.  Any local inspection station(most states have them) does basic visual and sometimes actual inspection of the cars that are registered in that state.  If you live in a state where safety inspections are not done routinely in order to register a car you are living in the U.S. the way it used to be as a completely free car enthusiast.  It probably won't last since regulation and legal action against this kind of freedom is everywhere.  The same country that allows someone to sue a ladder manufacturer after falling off a ladder still allows us the freedom to make a car from scratch and drive it...contradictions abound.

The truth behind home built machines is that the risks are real but the actual claims are low since in general the type of people that build and strap themselves into something they created with their own hard work and money tend to really take care of the machine they made.  It makes sense that the person who built a kit car or kit bike/plane spent an incredible amount of treasure time and love on the project.  Then when it is done you find that you know more about that type of machine than anyone who just drives built one after all....a different level.  You are going to enjoy it, but more than anything I have found that you have a respect for machinery joys and perils like only a wrencher can have.

Lets go through some of the things that can go wrong so that I can remind you how dangerous the hobby can be.  This section is a part of  the build manual for the Smyth kit and will be written to remind you as you build the smyth car of some of the areas that can hurt or kill you while working on machines.

Wheels and tires lugs

Brakes pads/lines/leaks

Ball joints/tie rod ends

Steering linkages


Explosion/fire from fuel or heat

Arms legs fingers toes


ears/hearing..grinding, exhaust bang,

Air Bags

Batteries...electric shock/heat/fire/fumes charging

seat mounts



Suspension settings


Eye protection

cuts/bruises wrenches

to be continued...

Working on cars has come a long way but is still full of jacking heavy stuff up in the air and running high horsepower engines on gasoline or diesel.  Have fun. Be careful.  Save some money. Spend lots of money on those special projects. Share with the kids however old they are.  After all, my Dad may not have liked working on cars,  but I sure loved working with him.

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Necessity is the Mother of Invention

by Smyth Performance on Thursday, May 5, 2011 at 10:44am
It has been a velveteen rabbit kind of month here at Smyth Performance.  I say this because a prototype is a test mule and a nice reduction to practice but the "becoming real" moment is when you have a prototype AND you have the means to manufacture it.  This means drawings, a bill of materials, a factory , a good network of suppliers and of course a solid and experienced team.  As I call the vendors  to get quotes for the various parts and raw material for the Smyth car, I am reminded of the basic discussion any student of business has regarding horizontal and vertical integration.

In a nutshell, vertical integration is when you are making cars and you bring steel making in house.  In a vertically integrated company you follow the raw materials up the supply chain  to your operation and you own the companies or process in the supply chain.  Horizontal integration is when a company expands by buying a competitor in the same kind of business...Fiat buying Chrysler.

Most modern business schools are long on supply chain management and focus on the advantages of outsourcing and the concept of letting your suppliers do what they do best...which allows you to focus on those areas of your business that add the most value.  Vertically integrated companies never get too much respect since they are viewed as old school turn of the century(19th to 20th) control freaks.

While watching and taking part in the raising of capital for several companies these last two years it is very clear that this anti vertical sentiment is not only still in place, but getting even more powerful.  Manufacturing as a category is being viewed as a losing environment for venture capital.  This has had some interesting effects on small growth firms in the U.S..

Back to my search for vendors.  Let's look at steel.

There are a handful of steel cutting and plenty of steel fabricating companies in New England and any area of the world that has a manufacturing base.  Metal is a wonder of a material since it is readily available, strong, and form able.  Most of these suppliers are medium to small service companies that started out family owned.  The competition is pretty intense at this level since anybody with a saw can start cutting steel tubes.  The tubes for any car part tend to be cut at different angles and shapes and there are  a hundred different tubes sometimes in  a design.  The fewer the better of course.  The quotes you get when you send in the drawings of the tubes to a vendor come in two forms,.  The first is the company who sees a high margin opportunity and quotes high because they don't know the car business and the tight margins we operate under.  These guys are the ones that the Chinese are feasting on right now.  You can see who they are at a glance...or after a quick phone call.  There is no such thing in 2011 as high margin work that uses standard machinery....period.  If you own a cnc band saw or mill and you are cutting steel for a living you are competing with 5 other guys(20?) within miles that are hungry....quote high and the email wont even be returned...the key is for you to stick with customers that will sell your service for you since you are doing a great job...without that, that credit line gets pretty hard to service doesn't it?  Good know where I will be....buying a band saw.

The other guys are the suppliers that get it.  These guys are working hard AND smart.  They know you can get your stuff anywhere and they are candidly talking margins and what they can do for you.  Unfortunately this country is running out of these guys.  For now they are still out there, but it is getting harder to find them as they are getting destroyed along with the rest of the manufacturing base in this country.  In Detroit as in many heavy manufacturing regions around the U.S. the real loss these last years was the closing of so many of these mid level suppliers that the rest of us in manufacturing depended on. A real shift in strategy is needed if you are to succeed here in smaller scale manufacturing.  Enter the possible return of a vertically integrated company...Smyth Performance.

I went to a previously reliable vendor the other day and got a little push back.  Interesting in this economy...something else must be going on.  How much time do you think I spent worrying about it.  Exactly the time it took to pick up the phone.  Another vendor said "sure, I will do it" within the same day.  I will still give the first guy a look if the price is right...but he has been relegated to a secondary supplier.  In the end it dawned on me that it may not be that hard to cut some tubes in my new place...and I was honest with supplier number 2 in saying that I was looking into it.  His response was great..."well if we weld up the sub assemblies for you then we will keep that business"  ...the perfect professional opportunistic reply.  Good business indeed.

But taking a look at the production efficiencies of an in line steel cutting operation has taken hold here. Lower inventory carried buy putting the cnc cutting operation just before the frame welding line should be fun to analyze after the launch of the Smyth G3F sports car.  My Dad will have a ball with it if I can get a share of his brain. The reason Tom Smith Sr. will like the project is more than just an operations gift for him.  In the eighties he was interviewed for the book "Re-engineering the Corporation".  A great read that talks about designing the whole corporation by the real flow of information and materials inside the firm.  I think of the book often as I set up the Smyth production line and decide how much to keep in house vs what to outsource.

By getting the cold shoulder from the steel cutter it forced me to think about cutting myself...which leads to other re evaluations of the value chain.  Steel cutting is a good example of fertile ground since joining steel with fire is what we do...and I realized it wasn't that hard.  Sure I have to go to band saw cutting school now(not really but there are plenty of cutting tricks of the trade I am sure) but we only cut one size of tubing and don't have to be a general cutting knowledge base...just 1" tubing experts.

The flexibility to control part of the very complicated process of manufacturing an automobile kit car will pay huge dividends in the end I think and makes for a nice old school vertically integrated operation.  I had already designed the tubes with maximum 60 degree cuts(limit of most cnc band saws).   Instead of 50 different bundles of steel tube coming in the front door that lay around waiting to be joined...we will have 1" tubing bulk 24 foot lengths that gets cut to order next to the welding/positioning station.  We the employees of Smyth Performance add the value to the steel and capture the quality control that Henry Ford did.  Not all things from the 1920's are bad.  We can learn some lessons from the old guys...they vertically integrated by necessity since the supplier network didn't exist or wasn't good enough...same here in 2011 as the suppliers move overseas.  This comes at a pretty good time since the machinery is getting less expensive.  We will set up an inexpensive band saw and test the flow of material...if it looks good we buy the high quality machines and we are in business.  So if you find yourself spending too much time describing what you want a vendor to do for you or fighting for a share of their time...think about doing it yourself and explaining the opportunity to your own people first...they already know how you think...give them a shot.