16 Sep 2015
Built for Speed
Jay Rogers set out to start a car company. He may have launched an industrial revolution, too.Re: Jeffrey Jones (MBA 2007); Kristi Jones (MBA 2007); Mark Fields (MBA 1989); Jeff Immelt (MBA 1982); Clayton Christensen; Karim Lakhani; H. Kent Bowen; Nancy Koehn; Youngme Moon; F. Warren McFarlanby Dan MorrellTopics:
Photography by King Lawrence
Jay Rogers (MBA 2007) is holding a manager’s meeting while driving 70 mph up I-75 in Kentucky.
As Rogers pins his phone horizontally against the dashboard, his Local Motors team, gathered around a conference table at the car manufacturer’s headquarters in Chandler, Arizona, give their CEO updates on their respective projects via video chat.
There are more than a dozen reports, covering everything from marketing to engineering to HR. Some are brief, some—a disagreement over a potential drivetrain—require more attention. After a particularly long back-and-forth, Rogers breaks in. “OK, guys, let’s try and keep the rest of these to about a minute.” He has other calls to make.
On the next call, travel options are weighed (Toulouse? Berlin? Paris?) for meetings with a potential European collaborator. Local Motors’ year-old, Louisville-based collaboration with GE’s Appliances division—his destination this morning—has piqued the interest of manufacturers worldwide. There is a long call about a potential new hire. The company, which Rogers cofounded in 2007, has almost doubled in size over the past year, from 70 to 120 people.
Between calls, Rogers deconstructs modern car making. “Look at that van,” he says, pointing to a white delivery vehicle parked near the Starbucks drive-through, where Rogers refuels. “How do you make steel look like that?” His explanations typically begin with this kind of Socratic method. “It doesn’t want to be in that shape. Steel resists the change. You take a 300-ton press, and you have one tool that looks like the back side of that and one tool that looks like the front side, and you go like this—BAM!” he says, pounding his palms together. “And the whole building shakes, and that pops out the other end.”
And that’s the way it’s been for more than 100 years. Cars today, he says, are essentially produced the same way Ford made the Model T.
“But what if we made cars differently?”
Rogers gathers speed. What if we assumed that people didn’t care about steel? What if we assumed that customers cared about cost or fuel efficiency? What if cars weren’t made up of 25,000 different parts? What if, instead of giant factories that operate on economies of scale, forced to produce millions of the same cars to make a profit, we produced cars in small batches, allowing us to be more responsive to a market’s needs? And what if we could tap the wisdom of the crowd to help design them?
When you start thinking about making cars this way, at some point you’ve ceased thinking about cars and started thinking about a modern alternative to mass production. People will start to take notice of things like that—especially people whose jobs rely on getting ideas to market.
All of a sudden, you’re not in the car business. You’re in the business of being fast.
It was 2004, and Marine captain Jay Rogers was on the Al Faw Peninsula in Iraq, in the office of General Joseph Medina to talk about his future.
In addition to leading a multinational unit on everything from reconnaissance to route security, Rogers was serving as a general’s aide, offering the higher-ups a view from the ground. Behind closed doors, the meeting was a bit looser than standard protocol dictated.
“So, Rogers, what are you going to do after this deployment?” asked the general.
“You know, sir, I think I’m going to take a different job.”
Rogers’s route to the military had been circuitous. After entering Princeton as an engineering major with a goal of building cars, he saw a future spent designing door handles in some automaker’s basement and switched to international affairs and foreign policy. After graduation, he spent three years in China helping his father build a medical device company before joining a Dallas investment fund. When the wow of the paycheck wore off, he was unhappy. Whatever Rogers was destined to do, this wasn’t it. His boss suggested business school, and Stanford accepted, but a fortuitous dinner in Dallas found him seated next to an Army general, explaining how a hip injury—a stress fracture suffered during a marathon—had kept him from joining the Marines after Princeton. The next day, a Marine major showed up at his office in dress blues and, over burgers, convinced Rogers that he could get him in the Corps. Now 26, Rogers figured this was his last shot to serve. He enlisted and headed to Officer Candidate School. Two years later, on a 4 a.m. drive to a training exercise while stationed in Hawaii, he clicked on NPR and heard reports of the 9/11 attacks. Soon after, his unit was deployed to the Philippines to fight the Abu Sayyaf guerillas, later joining another unit on assignment in Iraq.
Local Motors currently has three working microfactories, with plans to build a network of 50.
But the pressures of military service weighed on him. He loved the Marines, but he missed his wife and three-year-old son. Two of his best friends—his partner in scout sniper school and his first operations officer—had just been killed.
“What do you want to do?” General Medina asked.
“I’m going to start a car company.”
“What? What do you know about starting a car company?”
Rogers had been obsessively reading the book Winning the Oil Endgame, which laid out how the world could wean itself off oil by 2050. Written by energy analyst and physicist Amory Lovins, the book noted the lack of efficiency of modern auto manufacturing. Rogers saw an opportunity. And after seeing firsthand the political and human consequences of the world’s need for oil, a new kind of car company looked more like a path toward peace and sustainable change than just a good business idea.
“I mean, I almost cried uncle 10 times in the first month.”
“I mean, I almost cried uncle 10 times in the first month.”
Making things that move was in his DNA. His grandfather, Ralph Rogers, followed a similar dream by buying the iconic American Indian Motorcycle Company before going on to head Texas Industries, a cement-and-steel company that was sold last year to Martin Marietta Materials for $2 billion. Rogers showed an early interest in machines, frustrating his family with his penchant for taking things apart and putting them back together and using his nascent engineering skills to turn anything he could find into a rocket launcher.
“I’m ready to do this,” he told General Medina.
He was a CFA with experience in international business, and now he had spent four years in one of the most taxing leadership positions imaginable. But he needed General Medina to support his petition to end active service, and the general was reluctant. Rogers had been leading companies and platoons, General Medina told him. He knew that world now. It’s hard to get out, the general explained. Plus, there were capital considerations.
“How much money do you have in your bank account?”
“You know, sir, I’ve got like $8,000.”
“Last time I checked that wouldn’t work for starting a car company. You need to go to business school.”
In 2006, during his first year at HBS, Rogers sought out sectionmate Jeff Jones (MBA 2007), who had just left a job at Ford. On a run along the Charles one day, Jones laid out the state of the automotive industry for Rogers: Profitability was dropping as fuel costs were rising, pulling down SUV sales. Korean automakers were taking more and more market share, buoyed by government investment. Structural costs—US labor high among them—remained a drag on domestic production. “It’s a really difficult time,” Jones told him. But perfect, they thought, for something completely new.
They returned to campus that fall ready to devote serious time to their nascent idea: a decentralized car company that produced region-specific, small-batch vehicles in microfactories. They enrolled in an entrepreneurship course to build a business plan and sought counsel from faculty advisors Clay Christensen (MBA 1979) and
Karim Lakhani provided insight into crowdsourcing and “innovation engines”;
Nancy Koehn offered leadership advice and inspiration. They pursued every possible funding opportunity, including an HBS pitch contest, where their first-place finish earned $2,000.
A 2006 in-flight conversation between Jones and Rogers that led to the formation of Local Motors.
But after graduation, the reality of starting a car company from scratch—the actual process, the engineering, the electrical, the logistics of production, the insurance issues—quickly seemed insurmountable. “There are so many variables to make these devices tow us around,” says Rogers. “I mean, I almost cried uncle 10 times in the first month.” Chief among the hurdles? Funding. “The VC meetings were really hard,” recalls Jones. “No one wanted to invest in automotive at that point. It was almost as if it was on a blacklist somewhere.”
Yet by the fall of 2007, Local Motors had secured $2 million in funding and formed a partnership with the Massachusetts-based “kit car” company Factory Five, which offered office space, access to a workshop, and a few staff designers in exchange for a portion of Local Motors. But just as things were solidifying toward the end of the year, Jones began to pull away. He had been offered an opportunity to return to Ford in his native Dearborn, where alum (and current president and CEO) Mark Fields (MBA 1989) was on the front line of a turnaround. “It was a chance to contribute to my hometown company, which was in great need of young, innovative leaders,” and offered proximity to family as he and his wife, Kristi Jones MBA 2007, started a family. And though he says he still reflects on the move daily, Jones gradually reduced his role at Local Motors as the Factory Five partnership blossomed and rejoined Ford.
This went against the advice of Professor
Warren McFarlan, an early investor in Local Motors. “Jay is special,” McFarlan told Jones. “If there’s anyone in the world to partner with, it would be this guy.” Jones could see it in class. Rogers would be perched up near the Skydeck, taking in all the information and confidently offering solutions with a radio-quality voice. “He was, as Youngme Moon would define it, a ‘hostile brand’ in class,” Jones says with a laugh. “There’s always been a strong presence to Jay.”
The Rally Fighter, pictured above, is Local Motors’ most well-known vehicle, with appearances in the movie Transformers: Age of Extinction and the racing video game Forza Horizon 2.
Local Motors launched on March 25, 2008. By 2010, the company had a dozen employees, and moved to Arizona to build the first microfactory, where it would also build its first viable production model, the Rally Fighter—an off-road racer perfect for the desert lands of the Southwest. (The mechanics of the thing—the engine, the wiring—were sourced elsewhere; everything else was custom-made onsite.) With that, the company had a proof of concept: It had successfully built and nurtured an online ecosystem of enthusiasts who pushed the idea to the top of the heap, refining it along the way. The design was then produced in its own microfactory, which allowed Local Motors to put together custom designs quickly and without the kind of massive financial investment a major automaker would require. It was nothing less than a complete rethink of how cars are made.
The next year, DARPA called, looking for a way to apply the model to defense vehicles. They gave Local Motors a month to design an armored off-roader and three months to build it. The car came in early and under budget. At a June 2011 event at Carnegie Mellon University announcing a more than $500 million investment in advanced technologies, President Obama highlighted the results of the DARPA/Local Motors partnership, saying the model could not only “change the way the government uses your tax dollars” by increasing the pace of development, but also “get better products and services that we can sell and export around the world.”
Around the same time, Rogers met General Electric’s chief marketing officer Beth Comstock. They began a conversation that would eventually lead to Rogers meeting with Comstock and GE CEO and Chairman Jeff Immelt (MBA 1982) at GE’s headquarters in New York.
In the meeting, Jay recalls Immelt laying out his frustrations with production costs. When he’s told a product will take a year or two to develop, it always takes double, he explained to Rogers. When they say it will cost $30 million, it ends up costing $60 million. “I wish we could be better predictors,” said Immelt. “Could your method apply?” Yes, said Rogers, but when the conversation turned to the possibility of Local Motors being used to aid only in the crowdsourcing of designs, Rogers balked. “We need a microfactory,” he said. Unless GE bought into the whole model, Local Motors wasn’t interested.
Immelt agreed, and Comstock suggested the oil and gas division as a potential partnership. But Rogers found that executives from the division were just looking for ways to build a faster pump. They didn’t want innovation; they wanted incremental improvements. And they didn’t really see the value of Local Motors. They weren’t believers.
For this to work, Rogers needed partners who were interested in building new things and creating real change. He needed makers.
Rogers on the Verrado Drift Trike, a motorized tricycle for adults with back wheels that are designed to lose traction, allowing riders to easily “drift” the back end of the vehicle.
GE had makers. They were working in the company’s massive Appliance Park in Louisville, Kentucky, a set of structures so large they are typically measured in acres—900, all told—not square feet and have their own zip code.
But big can be a downside for GE’s makers. Kevin Nolan, VP of technology at GE Appliances, offers the example of Nest—the digital “learning” thermostat. GE had been working on the exact same concept for years. “Multiple patents had been filed,” says Nolan. And after the Nest launch in 2011, they had to watch as the now-ubiquitous brand somehow got people excited about home heating again, became a tech press darling, sold more than a million units, and was purchased by Google for $3.2 billion in 2014.
Nolan and Natarajan “Venkat” Venkatakrishnan, director of FirstBuild—the GE/Local Motors partnership—are sitting with Rogers in the University of Louisville’s University Club in late April, explaining how GE missed out on one of the most popular home appliances in recent memory.
The first hurdle? “Decision time,” says Nolan. “I have done tons of studies on it, I have got lots of data that says it takes us as long to decide as it does to complete a program.” It’s usually around 18 months. “And it’s torture.”
Once a decision is made, it typically takes another 18 months for a product to get to market. There are parallels here between appliance production and auto production: You find an idea you like, you do a bunch of market research, and then you tool up massive production facilities, essentially making a $20 million bet on the end result. (For auto factories, Rogers adds, the number can be closer to $1 billion.) “What if you put it on the Home Depot floor, and you sell only 3,000?” says Venkat. “So you better be right. You can’t afford many misses,” Nolan adds.
Which might explain some of the bureaucracy. If you were making a $20 million bet every time you put a product in market, you’d probably want a lot of eyes on it, too.
But it also means you don’t get Nest.
Venkat offers the FirstBuild production approach as a counter: To make a device that produces “nugget ice”—a more “chewable” form of ice, popularized by the fast-food restaurant Sonic—FirstBuild spent $600 to do a Google survey to gauge interest and then put out a design challenge to the FirstBuild community, collecting 29 ideas. Eventually, they’ll take the winning model to a crowdfunding platform to gauge consumer interest on a larger scale. “Now I’m going to give you an idea that is validated in the market. I understand the demand. I understand price points. I understand how to communicate and commercialize this with the consumer. And then, oh by the way, if we do things right, that innovation actually got paid for by the community, because they are buying the product.”
And then, if you’re GE, you might feel a whole lot safer making a $20 million bet.
Just as gearhead energy is crucial to propelling Local Motors’ new auto designs, the passion of the FirstBuild makers is key to pushing appliances innovation. The FirstBuild space, built in a former university storage facility, benefits from student energy. They buzz about the expansive lab space, which is stocked with 3D printers, circuit board builders, and a wall full of electronic parts and wires. Two other sections of the facility offer access to heavy tooling and production equipment. “These kids know how to do stuff. I mean, they’re coming from farms. These are kids who are very practical,” says Nolan. In addition to tapping into the student population and hosting a thriving maker space downtown, Louisville has a long industrial history. “We’ve got Ford down the street. We’ve got our factories. There is a whole infrastructure around here that makes things,” says Nolan.
The FirstBuild online community includes about 7,000 registered users globally, adding around 700 more a month. At any given time, community members are discussing and dissecting between 500 and 600 different projects. The online group launched along with the physical space in July 2014, just nine months after the Local Motors and GE partnership began on paper. In addition to any potential royalties or lump sum prizes for winning design challenges, community members get to keep the intellectual property rights. “You can sell it. You can patent it. You can do your business. We don’t restrict it at all. That is unique,” says Nolan. (Does this create competition? “If your clock speed is faster you’re going to build before they build,” says Rogers.)
But you can’t just point the community at anything—that’s not how it works. They have to be invested. “Every so often, GE will say, ‘OK, you’ve got this community. Ask them to do this,’ ” says Venkat. “But the community exists because they want to do what they want.” You can’t ask some college kid who has spent months working on a new guitar amplifier to all of a sudden work on a pizza oven. She doesn’t care about pizza ovens. She cares about her amplifier.
FirstBuild’s goal is turning out 12 new products each year. By May, nine months after the microfactory opened, it had 5 on the market, and one of them—Paragon, an induction cooktop with precise temperature control—had sold 2,200 units and raised more than $300,000 on IndieGoGo. It’s the first time, they believe, that a multinational corporation has crowdfunded from its customers.
Rogers, who has been listening to Nolan and Venkat recount the FirstBuild model while he answers emails on his laptop, pops into the discussion. “You know, the way you could boil that down is to say, ‘Faster time to a better idea with less capital,’ ” he says.
“That’s it. Faster time, better ideas, less capital.”
The Strati is the world’s first 3D-printed car.
This fall, Local Motors will begin its second partnership with GE. Rogers didn’t have to pitch this time. A GE executive who had seen what FirstBuild did in appliances flew to the microfactory in Arizona to check things out and came away ready to partner. (At press time, neither company could reveal the division.)
This kind of “white label” business—serving as an innovation engine for major manufacturers—could be incredibly lucrative. Rogers can’t disclose his arrangement with GE except to say that Local Motors “shares in the success” of FirstBuild products. But if its model eventually becomes GE’s sole method for appliances innovation and it takes something like a 1 percent royalty on GE’s annual $6 billion appliance top line, Local Motors could earn an eight-digit profit.
With several other potential partners in the works, this kind of collaboration could prove to be a steady income source for a company that has already doubled its revenues every year since reporting its first sales in 2010.
“Right now the public is only just beginning to get an idea of what Local Motors can do.”
“Right now the public is only just beginning to get an idea of what Local Motors can do.”
But that’s not enough for Rogers. As gratifying as it is to create a revolutionary innovation engine that can be applied almost universally, he’s still focused on that engine’s original goal: upturning the global auto industry.
“We need to have a breakout success,” Rogers says as he makes the drive back to his home in Knoxville—site of Local Motors’ first storefront and future site of another microfactory. “We’re not going to disrupt the automotive industry without a serious breakout success.”
What does that look like?
“I want to be the first company to put a production autonomous vehicle on the road.” Local Motors is working on it, he says. Rogers spends a few minutes laying out exactly what a driverless car could look like, how it should be engineered, and how it could be produced.
This ability to effectively fluctuate between the idea and particulars of the execution is a rare trait, according to GE’s Kevin Nolan. “Jay has a vision of changing the way the world makes things, but he can also break it down into tangible steps. Most people can’t span that.”
Rogers starts to lay out a future where Local Motors is collaborating with the 12 major automakers. He’s gathering speed again.
“That’s what I’m aiming for—a public market offering where we’ve got 12 microfactories, and we’re delivering cars at a rapid rate. And people say, ‘We want to see these all over the world.’ And we’re able to raise several hundred million dollars or a billion dollars in the public markets. Then we go out and grow with the public stock. We should be owned by the public if the public understands what we do.” A breath. “Right now the public is only just beginning to get an idea of what Local Motors is.”
Ironically, this part of his plan will require real scale.
“I’ve got to make people believe.”
Class of MBA 2007, Section G