A Long Bet on Electric Cars

The Obama Administration is eager to establish a green auto industry and is willing to spend money to make it happen. So far the U.S. Energy Dept. has agreed to lend $8.5 billion to help companies large and small retool plants to make more fuel-efficient cars and develop new technologies. On Sept. 22, the Energy Dept. announced the latest such loan: $528 million for a Silicon Valley startup called Fisker Automotive that vows to produce 130,000 plug-in hybrids by 2013.

The U.S. government believes in funding companies outside the established industry because it's important to nurture new ideas. "We're trying to create competition among technologies in the marketplace," says Matt Rogers, an Energy Dept. adviser. Fisker and Tesla Motors, another startup that has received $465 million in federal money, both say their cars are high-tech and have spurred plenty of consumer interest. But some experts believe the upstarts are too small to compete. "We're pouring $1 billion into two companies without a future," says industry watcher Maryann N. Keller. "The economics of the industry favors large companies."

If the aim of industrial policy is to help nations become leaders in promising new areas, then Fisker, say critics, doesn't pass the test. Founded by former Aston Martin designer Henrik Fisker, the company is best described as an integrator—using other people's motor and battery technology, an engine from General Motors, and a Finnish contract manufacturer to build the cars. Fisker says it is more than an integrator, having developed its own chassis.

Tesla has more credibility as an innovator. It has the only true electric car on the road, and it designed the battery pack that provides the juice. Its technological prowess prompted Daimler (DAI) to invest $50 million in Tesla and tap the company to make electric Smart cars.

But it will be a huge challenge for either Fisker or Tesla to achieve sufficient scale. Selling 100,000-plus cars a year requires a large network of dealers. Eventually Fisker will have about 100 stores nationally; Tesla has seven with a few more on the way. By contrast, Nissan (NSANY), Toyota (TM), Ford (F), and General Motors have thousands of dealers in multiple markets that will be able to sell and service electric and plug-in hybrid vehicles. The big players also lease cars, which is vital to reach affluent customers who have the wherewithal to try pricey new technology. Fisker and Tesla have yet to cut deals with banks to offer leases.

Keller and other critics say the U.S. government should put taxpayer money into more established players. Ford got money to retool plants; Nissan to develop an electric car. But the Energy Dept. nixed GM and Chrysler back when they were headed for bankruptcy. Now that they have emerged, is it time to reconsider? Chrysler has an electric car program but would have to prove that the company is viable in the long run. GM, meanwhile, has a cleaned-up balance sheet and the electric Chevrolet Volt on the way. Rogers of the Energy Dept. says both companies will get another look now that they have emerged from bankruptcy. Should Toyota decide to build any of its future hybrid cars in the U.S., it too could be eligible.

Not every government investment is a sure bet. The question is how much risk taxpayers should shoulder. The feds have put $465 million into Tesla, but it has raised only $300 million and change in private capital. And the U.S. has invested five times as much in Fisker as private investors. Rogers says Fisker must raise more money to tap the credit line, but debt will still account for 70% of the company's funding. So the risk, and burden if these companies fail, will mostly rest with U.S. taxpayers.

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