By on October 29, 2011

The Detroit News reports that the White House has ordered a review of the Department of Energy’s various loan programs in the wake of the Solyndra scandal, noting

White House Chief of Staff William Daley ordered an independent analysis on the state of the Department of Energy’s loan portfolio — including loans to solar, nuclear and auto companies.

“The president is committed to investing in clean energy because he understands that the jobs developing and manufacturing these technologies will either be created here or in other countries,” Daley said.

One of those programs is the so-called “Advanced Technology Vehicle Manufacturing” loan program, which was nearly used to fund the Detroit bailout and has since come under fire from various quarters. Twice already the Government Accountability Office has questioned the ATVM loan program for its lax oversight, weak goals, lack of technical support, inconsistency in awarding loans and the undetermined impact of funded vehicles. And those internal issues could help explain why the Center For Public Integrity has accused the ATVM program of operating a patronage scheme, alleging that major Obama donor and Tesla board member Steve Westly personally benefitted from loans made to the company. And on the Fisker side of things, backer John Doerr of the VC firm KleinerPerkins is another major Obama donor, suggesting a pattern of politically-motivated loan awards to well-connected EV firms that carry high risks. With government intervention in the auto industry still a hot-button issue in the wake of the bailout, this scandal has huge implications for the legitimacy of America’s emerging “industrial policy.”

Meanwhile the real victim here could be Chrysler, which desperately needs to develop vehicles with higher fuel efficiency and yet has not received any loans that it applied for in the pre-bailout period. Not only could this put Chrysler’s finances under pressure, but it also shows a distinct lack of focus or strategy in the White House’s industrial policy. The bailout era was rife with justifications of the rescue of GM and Chrysler on the basis that the firms would build a new generation of green vehicles. And yet GM has withdrawn from the loan program, and Chrysler is being strung along… while both (but Chrysler in particular) struggle to bring up their average fuel economy which are two of the lowest in the industry. Having rescued these two firms, why would the government choose to send available loans to firms like Tesla and Fisker, which are aiming for the luxury segments and thus have less chance of creating significant impacts on both jobs and the US’s status as a green economy leader? The answer may prove to be found in the relationships between Fisker and Tesla’s well-connected backers.

The fact that Fisker is building its first car in Finland has dominated the political outrage over the ATVM loan program, but the real issue is the opportunity cost. If there is proof that Fisker and Tesla received loans because of political donations made by their backers, it will have diverted money from more effective opportunities, proving that government intervention in the economy is fundamentally fraught with inefficiency. Though Republicans and others have purely political motivations for trying to give the Obama Administration grief ahead of an election, there is a real principle at stake here. If the government is going to play a role in guiding industry towards more sustainable strategies, it needs to take the utmost care to optimize that aid in terms of both market and jobs impacts. The nature of the auto industry is such that start-ups face incredible challenges, and as luxury manufacturers, Tesla and Fisker will neither sell many cars nor employ many Americans. The resources, experience and infrastructure already in place at major manufacturers make them the logical place to invest “green” loans… especially because the bailout did not, in fact, prepare them especially well to compete in the green car space.

Ultimately, governments need to face a fundamental choice:  either allow the market to drive innovation at the risk of losing jobs to other countries, or intervene with programs like this one on a purely utilitarian basis. There is some evidence that government incentives for future technology development can help lumbering auto firms prepare for unexpected energy shocks in ways that the market might not always be able to do, with its relatively short-term incentives. But if there’s not a utilitarian strategy underpinning these government interventions, the effort will inevitably fall victim to political patronage, and all of the inefficiency (not to mention blowback against all forms of government intervention in the economy) that comes with it. By giving hefty loans to two unproven but well-connected startups, the Obama Administration has run the risk of fostering a backlash against all forms of green  incentives… and the result could be merciless market pressure on lagging firms like Chrysler should another oil price spike come. In that scenario, Chrysler could find itself in serious trouble again, and be forced back to Washington for its third bailout… further driving the inefficiencies of the apparently politically-motivated loans to Fisker and Tesla.


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20 Comments on “Why The Government Should Have Stayed Away From Fisker And Tesla...”

  • avatar

    why would the government choose to send available loans to firms like Tesla and Fisker, which are aiming for the luxury segments and thus have less chance of creating significant impacts on both jobs and the US’s status as a green economy leader?

    Because they want American companies to control the intellectual property.

    backer John Doerr of the VC firm KleinerPerkins is another major Obama donor

    Kleiner Perkins is also highly effective at raising money and at identifying high-risk startups that have decent odds of succeeding. If you’ve heard of companies called Google and Facebook, then you may be familiar with some of what Kleiner Perkins has done.

    This reminds me of the fuss about Haliburton. While the relationships undoubtedly play some role, the ability of these firms to execute predictably is a lot of what gets them the business. Companies like this are known quantities; they predictably get things done, which provides a comfort level to those who work with them.

    If government is going to be providing loans to green startups, then it would behoove the government to find private sector partners that can consistently raise the other chunk of the money and that can perform decent due diligence. It’s much safer to go to a blue chip VC firm than to somebody who nobody knows.

    But start ups are risky. A lot of them are going to fail. The taxpayer (and the bloggers, it seems) need to have the stomach for it that the investors of firms such as Kleiner Perkins already have if they want to play in that arena.

    If you want a sure thing, stick to treasury bonds. If you can’t stand to see how sausage is made but want to eat it with your breakfast, then don’t take a tour of the meatpacking plant.

    • 0 avatar

      «The taxpayer (and the bloggers, it seems) need to have the stomach for it.»

      It is absurd to forcibly collect tax and then to use it for $500 million speculative ventures such as building cars in Finland.

      It’s abuse of the power of taxation, plain and simple.

      • 0 avatar

        It is absurd to forcibly collect tax and then to use it for $500 million speculative ventures such as building cars in Finland.

        It didn’t. Some of the federal loan went toward R&D of the Karma. The rest of it is slated to be used to build the Nina in Delaware.

        Fisker has raised other funds, such as its first round with Kleiner Perkins of $115 million. (The federal loan was contingent on the equity raise.) Those funds could have been used to sort out the Valmet deal.

      • 0 avatar

        >>>It is absurd to forcibly collect tax and then to use it for $500 million speculative ventures such as building cars in Finland.<<<

        While Fisker is making their first vehicles in Finland, it is using the money from the US loan to gear up the Delaware plant for production of the Nina. There was no American manufacturer that came forward to build the Karma in America, or I'm sure this California company would have done so.

      • 0 avatar

        Don’t hold your breath on the Delaware plant. Since gaining control of the building nothing but crickets. They had a big press conference after the announcement and then nothing. The state is about to call them on it and the UAW wolves are waiting to pounce.

      • 0 avatar

        $500m didn’t go to Finland, not by a long shot. Valmet is all about low-volume production at minimal investment. It’s what they do. Clearly Fisker realizes that the Karma isn’t going to sell in significant numbers.

  • avatar

    The Obama presidency…public money for pals, incompetence for the public. November 2012 cannot come too soon.

  • avatar
    John Horner

    The US’ lack of a coherent industrial policy, energy policy or any other basic strategic policies is one of the reasons we are loosing so much competitive ground to China.

    Oddly enough, it was the US government’s “meddling in the free markets” which provided the foundation for the very internet we are having this discussion on :).

    • 0 avatar

      Besides you and internet inventor Al Gore, internet inventor, what is your basis for the US government providing the “foundation” of the internet?

      • 0 avatar

        what is your basis for the US government providing the “foundation” of the internet?

        ARPANET was invented by a joint effort between the US military (DARPA) and several US universities. That became the basis for the internet. So you can thank the federal government for spearheading the creation of the technology that allows websites such as this one to complain about how the government shouldn’t do anything.

        A lot of medical research is also supported by the federal government. Without taxpayer money feeding the research and providing R&D support to the pharma companies, a lot of us would be dead or in worse shape than we’d otherwise be.

        Just because you don’t know that it’s happening doesn’t mean that it isn’t happening. You can either keep your heads in the sand or learn about this stuff, it’s your choice.

      • 0 avatar

        Pch101, thanks for being the voice of reason. +1

  • avatar

    That’s because industrial policy has become second/third/fourth fiddle to partisan nonsense and the re-election sickness that pervades gov’t.

    These investments are exactly ones that gov’t needs to lose money on, occasionally. From the looks of the S or Karma, I’d say we could’ve thrown our money away on worse….and have.

  • avatar
    Chicago Dude

    Both of these guys show up in the donor database, but neither would be called “major” anything. I must be missing something.

    Anyway, if Bill Daley is calling for an independent investigation, you can take it as fact that the Republicans aren’t going to like the outcome. The White House has a list of Republicans that are going to sound like hypocrites but they don’t want it to come from the White House.

    Every once in a while, the people need to be reminded that both sides of the aisle are corrupt.

  • avatar

    Uh…don’t companies donate to pretty much everyone anyways? Of course they all do so to get attention for things that would benefit them but that doesn’t mean that we shouldn’t invest in it. What do you think those lobbyists are there for?

    • 0 avatar

      Uh…don’t companies donate to pretty much everyone anyways?

      Nearly. There are a few exceptions—energy and “single-issue” (which amount to morality groups) tend to spend Republican, organized labour goes Democrat—but for the most part bigger organizations give the most likely winner the bulk of the funds in any given cycle.

      That financial and banking interests tend to give much, much more than organized labour should tell you a lot about government priorities. And “green”? Green donations amount to a rounding error, which is why it’s safe to pick on Solyndra but no one is asking serious questions of Goldman Sachs.

  • avatar

    Let the Italians bail out Chrysler, after all it’s theirs now. And the UAW can help, it’s theirs too.

  • avatar

    No bank, auto company, or any other business entity has the right to collect money from the government when lacking funds. There may be a certain element of nobility in government intervention of green enterprises, but as recent events have showed, it is best that the private sector handles these issues- assuming they aren’t bailed out if things go awry. What incentive does the government have, especially if they’re not held accountable? None. They can always claim they need more time, they’re making progress, etc. But with whose money? The private sector- if in a purely capitalist society- is much more well equipped because its lively hood depends on it. And you know what, as long as there are winners there will be losers. But that doesn’t necessarily mean that those losers can’t become successful without bailout money, they’ll just have to think of a new idea.

    • 0 avatar

      “The private sector- if in a purely capitalist society- is much more well equipped because its lively hood depends on it”

      Sometimes it can. Sometimes it leads to greed and corruption of a different level such as monopolies, price fixing, and trusts. Take a look at the recent Qantas airline labor debacle for a good look at how a private company can go against it’s own livelihood.

      • 0 avatar

        Greed is a constant across all political platforms. Companies who take government money to do their biding (GE) are as greedy as some claim Wall St. bankers to be. It would be convenient to separate greed for “good causes” vs. greed for one’s bank account, but greed is really just greed…There are laws against monopolies, price fixing etc, but I don’t see any repercussions for those involved in the Solyndra debacle. If it were left to the market, Solyndra would go out of business and someone else with “greed” would step up to the plate and engineer a green company. Government does not win or lose with the success or failure of a company, people do.

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