(FORTUNE Magazine) – When entrepreneurs brainstorm new business ideas, they should put auto manufacturing smack down at the bottom of the list. The last successful startup was Chrysler in 1925. Since then, a number of potential auto moguls have tried to get a foothold in the auto industry--and failed. Preston Tucker and Henry Kaiser flamed out in the years after World War II, while Malcolm Bricklin and John DeLorean collapsed in the '70s and '80s. Except for Tucker's, the cars they named after themselves aren't even in big demand among collectors. It's no secret why they couldn't get any traction. Making autos requires the ability to raise gobs of capital, manage thousands of details, navigate a thicket of government regulations, and fend off ferocious competitors. The odds against success are huge.

Yet DeLorean-like spinouts haven't stopped new generations of car buffs from dreaming of putting their own name on the nose of an automobile. The latest is Dan Panoz, a 39-year-old Atlanta businessman who has been operating around the fringes of auto manufacturing for a decade. This year he took a bold leap by launching a hand-built sports car, the Panoz Esperante, that will be sold at 50 dealerships nationwide. The $80,000 Esperante went on the market in January, and its classic styling and classy handling are already getting a thumbs-up from aficionados. Car and Driver, the well-known enthusiast's magazine, recently tested the Esperante against a $98,000 Jaguar XKR and an $86,000 Porsche 911 Carrera, and declared that, for the money, the Esperante is "quite probably the world's best-engineered, best-built low-volume car."

Eye-catching lines and love letters from critics are all well and good, but as the little history lesson above tells us, they don't necessarily translate into a successful auto company. So what makes this guy so different? Panoz (pronounced PAY-nose) has found an inexpensive solution to developing a high-performance sports car. He's also building a damn good brand through word of mouth, without spending a nickel on advertising. In other words: What Panoz has figured out is how to reach and impress important opinion makers in the car world--like the aforementioned Car and Driver editors and other automotive journalists--on the cheap.

Of course, it hasn't hurt that his father, Don Panoz, ponied up cash from the fortune he'd made in the pharmaceuticals business (developing time-release medications like the nicotine patch). He's not only funding his son's company through a family foundation but also boosting the Panoz name in racing circles by entering cars in events like France's Le Mans. Says the senior Panoz: "My first words were 'Don't you remember Tucker and DeLorean?' But Danny had a dream, and I believe you should chase your dream."

Having an open checkbook helps, but getting a project like this off the ground takes a lot more than money. The younger Panoz combines the charm of a born salesman with the grit that allows him to spend up to 80 hours a week in the plant ironing out production wrinkles. Although not an engineer, he knows every weld and washer on his cars and sells potential buyers with a soft-spoken pitch about the joys of open-top motoring. Panoz, who never finished college, flirted with a career in aviation before going to work at his father's Georgia winery. After seven years he decided to indulge his passion for cars and looked for a job as a designer. Instead he wound up buying the rights to a sports-car chassis from a bankrupt Irish company and opened Panoz Auto Development in 1989.

One year later Dan introduced his first car, the Roadster, a bare-bones speedster that wannabe racers could drive on local roads but that lacked creature comforts like side windows. Over the next ten years he sold about 300 of them. Car buffs loved the Roadster's raw power and nimble handling, but its lack of refinements limited its sales potential. Panoz temporarily stopped making the car last year when he could no longer meet federal standards for gasoline vapor emissions.

At first, Don Panoz tried to stay out of his son's business. But he eventually decided the Panoz name needed broader exposure, so he got involved in an unusual way. Says Don: "Like any father, I'm free with advice, and I told Danny he needed some racing heritage to establish the Panoz name. He told me, 'You do the racing, and I'll keep building the cars.'"

Panoz senior decided half-measures would not do, and despite having no previous racing experience, he plunged in bigtime. He hired famous drivers, such as Mario Andretti, and developed cars to race under the Panoz name at the famous 24 Hours of Le Mans race in France. He also organized his own races in the U.S., called the American Le Mans Series, and attracted European factory teams like Audi and Porsche.

Along the way Don Panoz took over three racetracks, including Florida's famous Sebring International Raceway, and acquired several engineering companies that build racing cars. "Our racing has taken on a life of its own and has established the Panoz name for Danny," says Don.

While Don was inhaling gasoline fumes, Dan was finishing out the production run of the Roadsters and making plans for the Esperante. Making money in the car-building operation is a lot more difficult. Designing and manufacturing an auto requires a huge up-front investment in engineering and machinery that requires years to amortize. Once fixed costs are recovered, however, each additional car can be very profitable. Dan is currently struggling to untangle the kinks that exist in any new enterprise but seem to be greater in the auto business. Since selling his first car in February, Panoz has produced 47 more and is gradually building up speed. In July alone, he finished 14 cars--but he's a long way from his goal of 30 a month.

Keeping the car affordable has been a major preoccupation. His penny-pinching shows at the headquarters of Panoz Auto Development (an hour's drive from Atlanta), which consists of five metal-sided buildings covering about 100,000 square feet. Behind the walls are a small suite of offices and one of the world's least automated assembly lines: 20 unfinished cars parked around the facility, where they are worked over by a handful of technicians. Road tests are carried out on local roads and a nearby interstate.

Panoz has engineered the Esperante with practicality in mind. He started with mass-produced components manufactured by Ford Motor for its SVT Mustang Cobra: V-8 engine, five-speed transmission, brakes, and other key systems. By using off-the-shelf parts, Panoz ensured that the components had been thoroughly tested and had met government regulations. Designing parts and then getting federal certification can add up to 25% to the cost of a low-volume car like the Esperante.

"Keep it simple, stupid" is the underlying principle for the Panoz assembly operation. The Esperante's frame is designed in five modular sections, beginning with the bumper and front end, so that it can be easily repaired or modified for design changes. The section pieces are bolted and bonded together by a subcontractor in Atlanta, which also attaches the powertrain, suspension, and wheels. Wrapped around the mechanical bits is a lithe sports-car body that Panoz conceived and then handed off to a professional design shop for the detail work. The finished product is sort of trompe l'oeil: An Esperante owner sees and touches a one-of-a-kind sports car, but what he gets under the skin are production-proved components.

Panoz has been spending extra hours in the factory lately, trying to get the last bugs out of the manufacturing process. Assembling the metal frame and canvas covering for the convertible top has been a major bottleneck, but he says he's making progress: "The current top is five times cheaper and ten times simpler than the first prototype."

Ease of assembly is the dividing line between profit and loss for Panoz. Each Esperante currently takes about 200 hours to assemble. Since his workers make $10 to $20 an hour, labor costs represent a big chunk of the car's wholesale price. The slow pace of production also means Panoz is paying to store dozens of fully built-up chassis at the plant, awaiting final assembly. He hopes to eventually reduce the hours per car to 150. That's about seven times longer than Toyota takes to assemble a Camry, but very respectable for a small operation with no automated processes.

Even the sexiest car in the world would fail if nobody knew of its existence. With its long hood, road-hugging stance, and purposeful cockpit, the Esperante appeals to wealthy enthusiasts looking for that special something they can't get in higher-volume vehicles. But since there is no budget for advertising, the company must reach them with the most efficient means possible. Auto shows are expensive--big ones cost about $50,000 each--but they attract lots of potential customers. And Panoz displays the car at outdoor classic-car competitions, known as concours. Showing the car in public is also a cheap way to get customer feedback. Panoz redesigned the snorkel-like air intake under the front bumper of the car after showgoers in New York complained about its appearance.

Another way Panoz has generated buzz about the car is by creating an aura of exclusivity. Given the car's Mustang heritage, lots of Ford dealers were interested in distributing the Esperante, but sales director Jack Bair enlisted Porsche, Bentley, and Lamborghini outlets, which are more accustomed to handling upscale customers. Since nobody needs an Esperante, potential buyers first have to be convinced that the car is special, then persuaded to put their name on a lengthy waiting list. "The Esperante is an egotistical purchase," says Bair. "Our customers typically own two or three other cars...they like the attention." Some travel to the factory so that they can pick out special leather and wood trim, and see their car being built.

So far, corporate layoffs and the tepid stock market haven't dampened demand for the Esperante. "Our buyers are a little insulated from the economy," says Bair. Panoz has a backlog of some 400 orders, including one from actor and car collector Nicolas Cage, which have come mostly from men in their 40s and 50s with an average income of over $150,000. That's not that much of a stretch for a car that can also make daily trips to the office.

With the U.S. economy heading down, Panoz may have to delay his goal of turning profitable in a few years. But since demand is running ahead of supply, his biggest challenge is maintaining the positive press reports about the car while he ramps up production. He figures he can recover his development costs and start to make a profit after he has built 200 cars. Meanwhile, he's planning to develop model variations, such as a hardtop Esperante, so that he can attain his goal of selling 1,000 cars a year.

That's small change compared with Porsche, which sold nearly 50,000 cars last year. But it would vault Panoz past Tucker and put him within striking distance of Bricklin in number of cars sold. For now, however, father and son have to be satisfied with creating cars that look cool, drive great, and always have a waiting list.

E-mail FSB at fsb_mail@timeinc.com.

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