Propane Performance Industries Ltd (PPI) is an early stage company that recently utilised a NZECO short-term trade credit insurance policy to secure bank funding. We interviewed CEO and Director, Andrew Rodwell on Propane's 10 year journey. During this time it has achieved significant milestones, including recently fulfilling the first commercial orders to Holden GM in Australia. What is no different to other firms who have taken a concept and tried to turn this into a viable product and business is the amount of time and capital it has taken to get there.
What does Propane Performance Industries Ltd do?
PPI has developed and sells a revolutionary aluminium propane (LPG) fuel tank designed for use in the transport industry. The solution the product delivers to customers is a lighter tank that is more space-efficient for dedicated LPG powered vehicles. The result is 50% less mass, litre for litre, than traditional steel tank alternatives. The space saving and weight reduction also have other benefits for the car owner, including increased fuel efficiency and improved vehicle handling.
Who is PPI's target market?
Car manufacturers. Car companies throughout the world are continually seeking solutions to increase fuel efficiency. Building dedicated LPG cars is one of the solutions to providing lower cost fuel options to car buyers and PPI provides the tank solution that achieves this without adding cost or compromising handling or cargo space. We also provide aftermarket products for retrofitting into cars.
How old is Propane?
The company was formed in 2001 to commercialise a concept for aluminium LPG tanks. This concept was developed by an American space-technology business from whom PPI obtained exclusive, global rights to the relevant patents. The initial target was the aftermarket (i.e. retrofitting LPG fuel tanks into duel fuel powered vehicles). At that stage OEM's weren't focussed on fuel-efficiency and only the after-market existed. A competitive advantage was evident as the only solutions in the market were manufactured out of steel.
We significantly changed our strategy along the way when GM Holden approached us to see if we could provide a product for a dedicated LPG car they were developing. That led PPI and Holden on a product validation process taking 2.5 years.
What is PPI's business model and how does it execute?
PPI is a lean business consisting of five staff working in different parts of the world - Christchurch, Auckland, Australia and China. The team's expertise is in engineering design and marketing, with the firm outsourcing manufacturing and production engineering to a Chinese supplier. We have secured and are delivering our first sales and continue to chase further sales opportunities. These will require a degree of product customisation which is one of our core skills.
What is your role, how did you get involved and what is your background?
I wear three hats. I am the CEO of the firm plus a Director and investor. I have had varied roles in General Management, including as Executive Vice President of a start-up Telecom NZ subsidiary in the USA, CEO of Arborgen and a Trade Commissioner in Los Angeles for TradeNZ. I picked up a lot of skills and experience in these roles and became involved with PPI in 2008, after being approached by the Chairman. PPI, like many small, entrepreneurial companies, had IP, a product and technical ability but it wasn't operating as a company. I was asked to help bring structure and discipline - to realise the potential of the business.
How has PPI been funded to date?
PPI has been funded mainly by equity, a fair bit of debt and with some specific research and development funding from Holden. In recent months we have been able to access trade finance from our bank with the support of a trade credit insurance policy from your office (the NZ Export Credit Office).
How did you raise the equity and who from?
PPI followed the private equity model with the founders investing their own capital. The next phase brought on board a couple of private investors. The firm continued to develop the technology and when I got involved PPI aggressively sought and raised approximately $2m of new capital from a handful of high net worth individuals who were experienced in investing in early stage companies. This equity and some product development funding from Holden contributed to the development story to get the product to market.
You came into contact with the NZ Export Credit Office via your bank when you requested access to trade finance. From our experience it is rare for a firm with no sales history, little in the way of tangible assets or security to access bank debt. Why did you need trade finance and how did you successfully access this?
The reason for our need for trade finance stems from a mismatch in timing between paying our supplier and getting paid by our customer. Holden requires us to provide them 33 days to pay from receipt of goods in their factory. We have been provided reasonably favourable terms from our Chinese supplier who we pay via a letter of credit with it drawn prior to release of goods in Australia. However, given international shipping time, this still results in a funding gap of 30 – 60 days. Moreover, we have gone from $0 sales turnover to having up to approximately USD $350k of product either in transit or with the customer awaiting repayment. The resulting funding requirement is up to USD $280k at any one time which we could have attempted to fill by raising further equity. However this is an expensive and time consuming process. We thought this trade must be a bankable proposition as we were creating a quality asset (trade receivable) on our balance sheet that was continually turning over. Plus we have worked extensively during the development phase with our customer and they provide us regular purchase orders and 12 month rolling forecasts.
For some time prior, we had developed an excellent working relationship with our bank. They had liked our story from the start and, once we were on the cusp of real sales, they came up with a cost effective trade finance solution. Of course, it had conditions – they required a GSA (security over all assets of the company) and the 33 day credit terms to be credit insured so in the event of our customer defaulting on payment the bank has security (the credit insurance policy) to call upon. That is how we ended up applying for a short term trade credit insurance policy from the NZ Export Credit Office. You accepted the risk, we paid a premium and we have accessed the facility - meaning we have advanced cash-flows and can pay our Chinese supplier and other costs prior to receiving payment from our customer, which repays the trade facility.
You mention that the trade finance was cost effective, what was the total cost?
As our sales and costs are in USD, we were offered a USD denominated lending, which is significantly cheaper in comparison to NZD rates at the moment. On top of this we also paid a premium to the NZECO to cover our expected annual sales with our customer. Combining the lending and insurance premium the total cost to access approximately USD 300k is equivalent to approximately 6% - 7% per annum.
Has the development and business story followed the "normal" course of a new product business to date – i.e. taken twice as long, cost three times as much and required alterations in strategy along the way?
Ha! More like four times as long, six times as much... The development and the eventual sales definitely took a lot longer than we expected and cost a great deal more. The reasons were that there were so many unknowns in launching a new product (aluminium LPG tank) to new market (OEM built, dedicated LPG car), and we are dealing with a very large customer that gets intimately involved in the product development. Additionally when you actually start selling and delivering product to your first customer and they happen to be huge in comparison to PPI the sales ramp up quickly and that puts all sorts of pressure on the business. We are now about to send our 4th container (1,000th tank), so the stakes and exposure rise quickly. You need to maintain a core capability to meet these first sales and that costs money, so you burn cash. Additionally we are bound by financial constraints and outsource work so don't have as much control around delivery of timing of that work.
Do you have advice for other entrepreneurs or firms looking at a similar business model where they develop product, retain IP, outsource manufacture and make sales?
My advice is that the offshore contract manufacturing model is robust and proven, but do not go in undercapitalised and don't underestimate the time it takes to get the product and business in market ready form. With our customer there were many, and often significant, changes to product design and manufacturing aspects of the tank in order to comply with their country and company safety standards. There was 2.5 years of R&D work, done in collaboration with this customer, prior to getting sales.
How do you manage your Chinese suppliers regarding quality supply what is a product that has to meet high safety standards?
One of our staff members is permanently based in China on our supplier's site, quality auditing every unit.
How did you develop and manage your customer relationship?
Our customer approached us after we presented at a trade show. But it also a small world - PPI's solution is so different to the alternative available from steel fuel tank suppliers that the customer was already aware of us prior to the show. We had to demonstrate we had the capability to design a tank specifically for their needs, validate it, manufacture and deliver it. For such a small company, that required a bit of "promise and hope". But we did it. The customer participated in and did fund part of the engineering design and development costs, although that was only a small part of the total cost of getting this development to market.
What are PPI's future ambitions?
Our sales are going as expected. Holden will launch the first cars to market in late February 2012. As this is the first dedicated LPG vehicle Holden has offered to the market we are reliant upon its uptake to drive ongoing sales. We expect the market will take a period of time to get used to a dedicated LPG vehicle so are unsure of what the steady state sales rate will be.
Our medium term ambitions are to expand the product into the customer's global business once the model is successful in Australia. We are also in discussions with other automotive manufacturers and aim to secure more contracts to design and sell to these players.