By Melissa Anderson,
Vice President, IRN Inc.
The end of 2008 was a period of heightened drama for the auto industry, as some automakers pursued emergency loans from the lame-duck government and vehicle sales fell to unfamiliar depths. The scale of the crisis overshadowed individual stories that were being played out as suppliers and the supporting financial community also tried to maneuver their way through the obstacles at hand-principally falling production, disappearing cash flow, and sometimes more unique circumstances. One announcement that caught our eye involved a company that we featured in our June 2004 column "The Challenge of Intensified Innovation," Microheat, Inc. The experience of the company since the article was published illustrates even more vividly the challenges of commercializing innovation in the auto industry.
Microheat bills itself as "the world leader in automotive hot washer fluid cleaning and deicing systems." Its HotShot® technology dispenses heated washer fluid in a specific amount at designated intervals to clear windshields of ice, insects, etc. The company was founded in 1997 to develop and commercialize this product and obtained funding from private investors to finance its efforts. Microheat came to our attention in the first place because of its unusually sophisticated marketing, but that was just one part of a multi-year, multi-pronged campaign of getting to "yes" with the automakers. At the beginning of 2008, Microheat appeared to have a good foothold in the winter windshield clearing market. GM had made HotShot available on a number of Cadillacs, the Buick Lucerne, Hummer H2, Saturn Outlook, and-what has often been a prized placement for suppliers-the major pickup and SUV programs on the GMT 900 platform. The company's website also listed the Toyota Corolla in its product portfolio and said that other OEMs in North America and Japan were considering the product. Experienced executives from other automotive suppliers filled senior leadership positions. Product line extensions were in the works for rear windows, headlights, and sensors. But by November 2008, the company had filed for Chapter 11 reorganization, stopped production, and let most of its employees go.
Like many suppliers, Microheat was hit hard by the dramatic softening of the light truck market. Its risk level was compounded by its status as a one-product, one-customer company, with no diversification to offset the weakness of the truck segment. This is always a risk to niche-oriented specialists, whether they hold that positioning by specific intent or because they have not had time to develop more than one leg for their stool. There will likely be a number of suppliers this year that fail for reasons of the depth and duration of the soft market alone. The crowning blow in this case, however, was a more unusual circumstance-GM's recall of approximately 900,000 vehicles with HotShot installation for a potential fire hazard situation. Media reports claimed that GM blamed a short in the fluid heater circuit board as a causal factor behind a few instances of under-hood fires, requiring dealer installation of a wire harness with a fuse to prevent the malfunction. Microheat said it was unable to replicate the fire failure mode and that its product was not the source of the problem. In the wake of the recall, the haggling over liability for the projected $20- to 25-million recall cost began, and Microheat said GM withheld payment for three months' of product shipments, leading to the bankruptcy filing.
There are many ways to come up short when you are a start-up with an innovative idea. As the sad story of Microheat indicates, you can do many, many things right, and still encounter an apparent death blow. Microheat is not the first company to dispute a customer's recall-related conclusions. The available data is often open to interpretation, and a diagnosis is difficult to arrive at. Having strong testing capabilities and product design resources at the front end is a must for introducing a new product, but it cannot completely protect you from being collateral damage in the event of a problem with diffuse symptoms. We have no independent knowledge of the truth in the Microheat-GM dispute, but regardless of the facts, a recall taints the product and necessitates a response (the Johnson & Johnson Tylenol case being the classic example of how to address an externally caused product failure to minimize damage while remaining distinct from blame).
Microheat was not in a position to be able to pay the full recall costs, but it was unique in its patent-protected product offering. Even for an innovator, though, if there is no external factor, e.g., safety regulations or overwhelming end user demand, driving the OEM to make the feature available, it can be relatively straightforward to drop the supplier and its system. In the end, Microheat can hope to recoup the value in its technology and patents as a basis for further development by a new incarnation or another company, but this will take considerable time and new sources of money. Meanwhile, for the other players that we referenced in our June 2004 column who were pursuing the cold weather window clearing opportunity with different approaches, opportunity is knocking.