How a natural gas van came to market with a DOE loan (shocking!)

VPG MV-1 diagram

A year after a startup making natural gas vans, called the Vehicle Production Group (VPG), closed a $50 million Department of Energy loan, the company began producing its inaugural van. Today, the Miami startup, which was the most recent beneficiary of the controversial federal program, is seeing hundreds of vehicles on the road, according to Fred Drasner, chairman of the company.

Founded in 2006, VPG is re-entering the spotlight lately partly because it was among the lucky five that were able to clinch loans from the DOE’s Advanced Vehicle Technology Manufacturing program before the bankruptcy of Solyndra last fall led to a political backlash that seems to have made the DOE less willing to approve more loans. Three companies, including startup Bright Automotive, which wanted to build a plug-in hybrid delivery van, withdrew their applications for a vehicle loan recently, citing the changing and increasingly stringent terms demanded from the DOE. Bright Automotive now plans to shut down.

VPG closed the $50 million loan in March 2011 and was required to raise $10 million in equity before it started drawing down the loan and then another $5 million before it took out the last piece of the loan, said Joe Vecchiolla, VPG’s chief financial officer. The company had raised over $205 million by the time it received its first loan installment, he added. Overall, the startup has raised about $300 million since its inception.

VPG — backed by Perseus, Three Seasons Capital (led by Drasner), T. Boone Pickens and Pickens’ Clean Energy Fuel Corp. — is rolling out its inaugural model, called MV-1, at a time when there is a renewed interest in natural gas vehicles. President Obama is keen on promoting natural gas, which the U.S. can produce in abundance domestically, for producing electricity and powering cars. Last week, General Motors and Chrysler said they will roll out heavy-duty pickup trucks that can run on both gasoline and compressed natural gas.

The company is selling a gasoline version and a compressed natural gas version of the MV-1, and the $50 million loan went to create the latter. Like many car startups, such as Tesla Motors and Fisker Automotive, VPG set out to target a niche market initially: it created the MV-1 to be wheel-chair accessible and is targeting fleet managers, such as taxi companies.

The company designed the six-passenger van to comply with the Americans with Disability Act, and its features include a door that can open 36 inches wide and an interior height of nearly 60 inches. VPG can customize the MV-1, and Drasner said one design that is gaining interest in California comes with a bike rack to fit three bicycles.

Finding the right niche market

The aging population of Baby Boomers, a growing interest in adding wheelchair-accessible taxis in places such as New York City, and the federal government’s support for domestic natural gas production will help grow VPG’s business, said Drasner, who noted that natural gas currently retails at about $2 per gallon cheaper than gasoline.

VPG is targeting primarily fleet managers partly because there isn’t an extensive natural gas fueling network in the country just yet. Fleet operators often set up their own fueling stations. VPG is offering any customer who buys a minimum of 25 vehicles an installation of fueling stations at no upfront cost. Clean Energy, a California-based natural gas supplier and fuel station builder, will do the work.

Natural gas vehicles aren’t new to the market, but many of them are created in after-market conversion shops. Only Honda is selling a factory-built natural gas passenger car that is a version of its Civic. VPG contracts with AM General to assemble MV-1 in Mishawaka, Ind.

VPG is using a Ford 4.6L V8 engine and installing three compressed natural gas tanks that collectively can last 290 miles per fueling, VPG said. The base model that runs on gasoline starts at $39,000, and the natural gas version is around $48,000, Drasner said.

The natural gas version is more expensive primarily because of its heavy fuel tank, Drasner said. Unlike a gasoline car tank, which Drasner referred to as a “tin can,” a natural gas car tank needs to be extra beefy to hold the highly pressurized fuel. Prices also will be higher for the Chrysler Ram that will launch in July and be able to run on both gasoline and natural gas. This new Ram will start at $47,500, which is about a third more than the gasoline-only model.

The DOE recently called for research-and-development proposals that would lead to lighter and cheaper tanks for compressed natural gas passenger cars.

Scale up production

VPG has sold about 1,100 MV-1s (for both types of fuels) in 30 states since last fall, when it started to roll them out of the factory, and about 35 percent of them are the natural gas version, Drasner said. The company plans to deliver around 6,800 cars in 2012 and 18,000 in 2013, and it expects the natural gas version to make up 40-50 percent of the total delivered, he added.

The startup has no plan to roll out passenger cars such as a four-door sedan soon, however, because it doesn’t see an advantage in competing with the hundreds of available models. Nudging consumers to pay a hefty upfront price in order to reap long-term savings hasn’t worked for electric vehicles so far. “Our focus is on niche markets where we have a unique marketing proposition instead of competing on a broader scale,” Drasner said.

For its next model, VPG is looking at delivery vans that are similar to what cable companies or UPS use now, he said. The model would use the same chassis and be designed for urban use. The company would start to roll out this new model “as soon as I find a big customer,” Drasner said.

That will also be the job of the new CEO, John Walsh, who was CEO of National Bus Sales & Leasing. VPG is moving into the Canadian market and is eying Brazil, Mexico, Saudi Arabia and Abu Dhabi as potential markets.

Photos courtesy of the Vehicle Production Group.

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