The Lure Of The Pre-production Deposit

I have always been baffled by the psychology of paying a company a tidy of sum of money to assure that I get one of the first new-and-improved widgets it proposes to make: the pre-production deposit or, as it's popularly known, a "position." This is quite common in the aircraft business as most recently demonstrated by Icon. But others have done it, too, including Cirrus and Cessna.

The boilerplate reason for pre-production deposits is to validate the very idea of the product and generate excitement around its impending release. It's also a tidy way for the company to get an interest-free loan from its customers who then take on a share of the business risk of bringing the new product to market. In aviation, it's technically not always interest-free, since companies sometimes offer a discount to deposit holders. But the risk of losing the deposit, even if escrowed, is always real, which is why I've never been impressed with the idea. I don't think it's a great business practice.

For big-ticket items, I thought this practice was limited to airplane companies but now Tesla, the electric carmaker, has adopted it as well. In late March, it starting taking orders for its new Model 3 electric vehicle, the $35,000 sedan priced to be the mass-market game changer. By contemporary standards, that's not an expensive car, but it's not particularly cheap, either. A 35K car wouldn't be on my shopping list because I am unapologetically cheap and a car costing that much doesn't meet my occasional need to drive 750-mile trips. The Model 3 will have a projected range of just over 200 miles.

As an illustration of the lure of pre-deposits, nearly 400,000 buyers have written Tesla a check for $1000 to reserve a slot. The deposit is refundable, but buyers get no promise of delivery date nor even a fixed price for the new vehicle. Meanwhile, Tesla scoops up an interest-free $400 million to fund the industrial effort to make that many electric cars. To date, they've built a little over 100,000 vehicles, while losing more than $700 million doing it. Quadrupling that output, as any manufacturing engineer will tell you, is a challenge every bit as enormous as Eclipse faced with its jet and Icon is now facing with its A5 LSA, a vehicle that's far less complex and sophisticated than an electric car.

You don't have to be clairvoyant to posit that we'll be reading stories about how the Model 3 will be delayed because production challenges were underestimated. I'd never assume that buyers who place pre-production deposits don't understand this. Probably they do and are willing to accept the risk, delay and uncertainty. I'm just not one of them, which is why I'm never one of the cool kids on my block to have the first anything. I'll buy it later. Probably used.

Following last week's discussions about Icon, I found myself wondering why the company showed up at Sun 'n Fun. Icon has made it quite clear through its marketing materials and company philosophy that it's not aiming for sales to the traditional aviation markets; that is, people who like airplanes and flying. The A5 is incidental to flying; the appeal is to the motorsport, extreme sport and lifestyle crowd. And that's not who comes to Sun 'n Fun, or at least not in great numbers.

Icon has implied that the traditional general aviation industry has been doing things all wrong and it intends to disrupt it with a new way of doing business and with products with fresh market appeal and manufacturing methods. And, well, bully for them. General aviation is long past due for new ideas on fundamental market direction. As indicated by its eye-watering buyer agreement which, in my view, attempts to insulate the company from the slightest liability or responsibility for its products, Icon wants to instantly reset the toxic aviation tort environment. Again, cheers for them. Everyone in aviation decries the destructive impact of large-dollar lawsuits that threaten the industry's vitality. It's time to do something about it.

I think most of us agree that Icon just went about this in the wrong way, proposing an onerous agreement that appears to strip the customer of even basic rights under accepted commercial practices. But its idea to build in limited liability for the manufacturer has merit and if they tried, they'd find broad support among both buyers and manufacturers for some form of it. As far as I can tell, they didn't try, preferring instead to present the buyer agreement as a diktat.

In round two of its arm's-length relationship with the rest of general aviation, I'd propose Icon enlist the support of other companies to help advance the desirable underlying intent of their liability limitation. One way of doing this is by exploring buyer agreements that split the difference, offering some protection for companies while still preserving basic customer rights, such as unencumbered resale. A second way, as one lawyer I spoke to recommended, is to approach Congress with Icon's original agreement as a cudgel, showing how desperate one company is to limit its exposure and how badly tort reform aimed specifically at aviation is needed. I asked AOPA's Mark Baker about this and he said the association is examining the idea. They need to do more than examine, however. While this kind of fundamental reform is a tall order, GA currently enjoys a historically large caucus in congress and there may be no better time to try such a thing.

In the meantime, this thought occurred to me: If Icon wants to reset the industry on its own terms, it will in fact need the support of the rest of the industry. Is that another way of saying they need us more than we need them? Read it any way you like.

Fresh from Sun 'n Fun, I'll be attending Aero in Friedrichshafen, Germany, next week. Look for regular reports on what's happening across the pond. After that, it's on to the drone show in New Orleans and the electric aircraft symposium in California.