Tradition Is Not A Business Model: Zero Motorcycles

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Walking into the office of a company is always an interesting experience. For a company, the work place is the first expression of the company’s culture. Similarly, workspaces are often a reflection of the people that work inside them, an occupational rorschach test if you will. Yet, despite its importance and revealing nature, a company headquarters is rarely experienced by the end-consumer. It is an interesting disparity that occurs in every industry, and the electric motorcycle scene is no different.

Nestled just outside of Santa Cruz, California you’ll find the offices of Zero Motorcycles in a nondescript commercial building. With sales and management offices on top, the ground floor is dedicated to the bevy of engineers who make the magic happen. Humble and to the point, the engineering bay is true to task with its utilitarian layout. Test bikes abound, and are in various stages of build. On one lift, half a Zero DS can be seen, presumably still being tinkered on by the Zero team before it goes into final production.

Compare this scene to the spotless and chicly decorated office of MotoCzysz, where one expects to see Italian fashion models scurrying around the halls of the building, changing the oil of the numerous C1 MotoGP prototypes that decorate the corridors. Conversely the Brammo headquarters, with its green walls and large open warehouse space, mimics the green Ashland hills that provide inspiration for the company’s progressive environmental outlook. Only Mission Motors shares similarities to the Zero workspace, and unsurprisingly is another company whose nucleus is driven and directed by pure-bred engineers, and it is engineers that this article’s premise revolves around.

You can’t talk about engineers at Zero Motorcycles without talking to the company’s founder and CTO, Neal Saiki. Neal doesn’t keep an office on the top floor. Instead, you’ll find him in a cluttered office next to the company’s engineering bay, with drawings from his children decorating his office walls. After talking to Neal, it becomes abundantly clear who provides the driving inspiration for Zero’s decorum. Literally a rocket scientist, Saiki fits your quintessential profile for a Californian entrepreneur: highly educated, passionate, and above all else your prototypical engineer.

Its not uncommon in technology based ventures for the company to revolve around an engineer or group of engineers. Often the driving force of innovation, engineers by their nature question and look to improve upon the established norm. Conversely, left without direction and hard deadlines, a group of engineers can whittle away at the same project, improving it ad nauseum, with no product launch date in sight. Because of these qualities, engineers are both the greatest asset and greatest detriment to a young company. For this reason, at some point early in a tech company’s life there must be some discussion of management succession, and Zero is shining example of a company that has survived its first transition in management gracefully.

The classic story that I usually use to personify this phenomenon occurred while doing I was doing due diligence for the Penn State Nittany Lion Venture Capital fund. An inventor came to our fund with a promising product. An engineer by trade, the inventor spent his free-time working out of a garage based workshop to create a simple product that cured an increasingly common problem. With a simple design, this engineer’s machine had been developed to use only two moving parts, and would likely outlive its owner. It was truly a shining achivement. It was the ever elusive elegant design.

The product had one problem though. Properly patented at its inception, this inventor had spent over 15 years perfecting his product to be as simple and full-proof as possible. Leaving likely only months of patent protection, this engineer’s pursuit of perfection closed any doors of the product coming to production. It is very likely that the product’s second or third revision would have easily satisfied the point-of-pain in the marketplace, but with virtually hundreds of revisions completed, the marginal utility of each improved design delivered ever decreasing amounts of value back.

All too often a company’s founder becomes the company’s worse enemy. For many entrepreneurs, their company is an extension of themselves; but for a company to grow successfully, it must also take on a life of its own, beyond its founder. Consider the analogy of a parent who nurtures their child through life, but then must take a backseat in that journey as they move away to start a life of their own.

For Saiki, Zero’s journey begins with the acknowledgment of where they began.

“We started out as a technology company. We developed a battery pack, which is why we’ve had the two or three years completely out in front of the industry with the smallest and lightest battery pack for the amount of energy it contains in the world. Having said that, there will be bigger companies with bigger resources that will dominate, that’s just the way it is.”

The bigger companies Saiki speaks of, are of course the Japanese Four (Honda, Kawasaki, Suzuki, Yamaha), which have dominated the motorcycle industry to date. With vastly larger resources, the Japanese Four have been able accomplish their domination primarily because of the barriers to entry in the motorcycle industry.

Essentially a motor with wheels attached to it, Neal hits the nail on the head when he describes that the Japanese Four have been able to exert such a large control over the market because of their understanding of the internal combustion motor. “Gasoline engines had a 100 year run, these things don’t change overnight,” says Saiki. “The barriers of entry are steep mainly because of the gas engine. Companies like the Japanese Four that have this incredible amount of resources to make the best engines in the world. You can’t compete against that. The great thing is you have electric vehicle technology, which is relatively simple and is revolutionary.”

There are many ways in which we can talk about how the electric motorcycle industry is a revolutionary (as opposed to evolutionary) step in motorcycling, and its probably best left for another article of its own, but approaching the comment purely from a barrier point of view creates a striking prospect.

As Saiki explained to us, “The thing that’s kept people from making motorcycle companies in the past is that the engine technology is so horrendously hard to master, and this electric technology allows others like Brammo, us (Zero), and Mission to flourish, and provide some choices in the marketplace.” When it comes to electric motors and battery packs, all the players, both big and small, are on an equal playing field. Arguably, this is the last thing the Japanese Four, and the rest of the motorcycle industry wants.

Consider the stake-holders involved with a shift to electric motorcycles. “The Japanese Four don’t want to be the first ones into this, because they have dominance, and  they have a lot invested in gasoline technology. They really are the only ones that can produces a great gasoline engine. It’s going to be hard for them to get away from that technology, and go to another level playing field,” explains Saiki. The resistance goes beyond the major manufacturers though, consider all the parts suppliers whose products will be useless on an electric motorcycle, and the consider the motorcycling gold rush/land grab that will occur as electric motorcycles take off.

No one can make the argument that the industry will be able to avoid this change indefinitely, but we have an interesting phenomenon where the largest players have refrained from showing their hands. “They [the Japanese Four] typically use the fast follower business model. Japanese companies, they never like to take the bleeding edge on this kind of stuff. They want to see the market established, and then come in and take it over…it doesn’t make sense for them to take risks.” Instead, it would appear the major OEM’s are content for now to watch the fledging industry, and its flock of startups, do the heavy lifting in customer education and technical proofs of concept.

As the company’s CTO, the technical aspect is where Saiki’s job focuses now. If you take a quick look at the geographical map of the electric motorcycle industry, it becomes painfully obvious that it skews towards areas that flourish with technically advanced resources. Hoping to capitalize on those resources, Neal explained to us the reasoning behind Zero’s Santa Cruz locale:

“For us it made sense because of the electronics technology. We have three micro-processors on the bike, and getting talent for that type of thing, it helps to be close to Silicon Valley. There are a lot of electronic sub-systems that have to be developed if you want to have a robust system that’s reliable…I know for us Silicon Valley made sense, half our engineering staff is for electronics.”

It also probably doesn’t hurt that the west coast has been a center of the green movement, but talking to all the companies involved with electric motorcycles the first item on the agenda is very clear: price and performance parity with internal combustion engines.

For Saiki, the electric motorcycle in its current state is not too unlike the automobile when it first came out. Originally only for the rich, the automobile didn’t become a mainstay of American culture until Henry Ford came along with an affordable offering. Saiki has been quick to chastise his more expensive competitors, saying that they have missed the mark on what the consumer needs. Instead, Saiki says that he considers Zero to be the Ford of the electric motorcycle scene:

“We’re really into not just building electric vehicles and electric motorcycles, but also trying to make them affordable. We’re trying to bring our prices down, and be more affordable than guys like Brammo and Mission Motors. It’s really going to be who can be the first Henry Ford of this industry. Who can actually produce an electric motorcycle at a reasonable price that everyone can afford. And at that point if you have performance and reasonable price, there’s no reason not to buy an electric motorcycle.”

Unafraid of the looming prospect of the Japanese Four entering the industry with their larger budgets, partnerships, supply chains, and resources, Saiki believes that “there’s a lot of room for us as a company to exist with the Japanese Four.” Funded through private equity investments, Zero motorcycles aims to compete with the Japanese Four as they enter the marketplace, whereas other companies’ business models provide for an acquisition strategy. We might be getting ahead of ourselves with discussions of mergers, acquisitions, and investor exits, but it adds further intrigue to this budding industry, where we see all the major players funded via different methods, and with end goals just as equally diverse.

We may be some time off before an article about such possibilities can occur, until then we’ll agree with Neal’s statement that “we’re really just at the beginning of this technology,” and indeed we’re really just at the beginning of the possibilities.