Tesla success shows what a bad investment the GM/Chrysler bailout was

Consumer Reports has rated the Tesla sedan the best car that they’ve ever tested (list). Tesla has a market capitalization of about $14 billion (July 22, 2013). According to Wikipedia, Tesla seems to have required about $1 billion in debt and equity funding.

The GM/Chrysler bailout required roughly $85 billion in taxpayer funds (Wikipedia). Instead of preserving these relics we could have instead have had nearly 85 startup automobile manufacturers on the same scale as Tesla. Wouldn’t that have been a lot more interesting and more likely to push forward the automotive state of the art?

Let’s consider the suspension. GM and Chrysler sell vehicles with springs and shock absorbers, more or less the same system that carried Henri Fournier to victory in the 1901 Paris-to-Berlin race in an automobile made by Mors (source). What would nimbler upstart car vendors, forced to compete with each other and unable to tap into the federal river of cash, be likely to do with suspension? One hint is provided by Levant Power. They make an active shock absorber that can push against the spring if necessary to preserve vehicle composure. The shock can also generate electricity from the pounding action of the road on the wheels. See this video for a demonstration of ride over bumps (the company says that more videos are coming soon). I’m not sure how much funding went into Levant, but I am betting that it was less than $85 billion and they are the only company that seems to be doing anything practical to address my main complaint with my 6-year-old sedan (review). Note that Bose has a Web page devoted to its 33-year-old effort to build active suspensions but for whatever reason (maybe because they don’t have to compete too hard!) car makers never bought it (and it does seem a lot more complex than Levant’s idea).

Whenever a company or a government finishes spending a ridiculous amount of money on something the PR folks say “Look at this great thing you got for your money!” Somehow hardly anyone ever asks “What could we have gotten if we’d spent the money on something else instead?”

20 Comments

  1. jerry

    July 28, 2013 @ 4:58 pm

    1

    I think “Too big to fail” should mean, “mandatory breakup within 18 months”.

    Every two years have some group of Fed affiliated economists come out with a list of US Corporations that would be too big to fail and their reasoning. The companies then have 18 months to defend why they are not too big to fail, or to break themselves apart.

    In the case of GM and Chrysler, I would have liked to seen each broken into several different vertical automotive companies based on automotive lines and/or horizontal location in the supply chain.

    Similarly, I think Boeing needs to be broken up. Let the Renton 737 company compete against Bombardier and the Everett 767/777/787 division. Or let Everett compete against South Carolina’s 787.

    I am not aware of anything in our Constitution that protects corporations from mandatory breakups.

    On the other hand, I think measuring companies by “market cap” is often a load of horseshit. It’s how you get comparisons that Facebook (current market cap 82B) is a more valuable company to have stock in than Boeing (current market cap 80B).

    I know I would hugely prefer a company that knows how to bend metal and make, distribute, and support a diverse line of transportation vehicles, than a couple of thousand primadonnas sitting in herman miller chairs in Palo Alto cranking out PHP pages.

    I just have to think that the stock market is completely full of it when Facebook can be measured to be greater than Boeing based on market cap.

    Market cap seems as much a measure of a company’s value as it is a measure of stock market fads, trends, infatuation, and ignorance.

  2. Nick Prudent

    July 28, 2013 @ 5:56 pm

    2

    I’m a Tesla fan & hopefully future owner of their cars. While I agree with you, I’ve always seen the bailout was a way to preserve all the jobs that are dependent on these dinosaurs surviving. Tesla has currently around 3000 employees while GM has 212,000 & Chrysler 65,535. That’s not even counting the jobs at the OEMs. Any government who allows this scale of job loss would commit political suicide. Canadian, French & Japanese governments, past & future are doing the same. So it’s more that than trying to invest wisely.

    Fisker had the same capital as Tesla (around $1B) & totally fell flat on their faces. The reasons are many but the main thing seem to be the prevalence of old Detroit talents as directors. Tesla used Detroit engineers, but most of the leadership is from California &/or the tech industry. They made most of their mistakes (& delays) with the Roadster — their previous model based on a Lotus chassis.

    So Tesla is a rarity, even as tech companies go. They’ve learned to execute flawlessly at many levels while their competitors can’t even do 10% of what they do. I think they’ve learned a lot from Space-X, this other Elon Musk startup.

  3. Dave Winer

    July 28, 2013 @ 5:57 pm

    3

    It’s a great question, really gets you thinking.

    However, we couldn’t let those huge companies go under, because if we did it would create network effects, a super-depression, that we’re trying to put off into the future.

    Our economy is really about keeping the bubble inflated.

    Also I wonder if there is enough brilliance out there to start 85 Teslas.

    We should be happy we have one! :-)

  4. Michael Deis

    July 28, 2013 @ 6:53 pm

    4

    Provocative analysis. It might have been just as worthwhile to provide 24 months of income to the employees of these companies. 85 billion divided by about 280,000 employees is $303,571 per employee. Say every employee received $100,000 per year for 2 years, the government would have saved 100,000 per employee and allowed these employees time to go back to school or invest in themselves and participate in the new economy. While that wouldn’t have provided Union support for President Obama in his run for a second term, it may well have resulted in broader economic gains in the long run.

  5. z

    July 28, 2013 @ 7:22 pm

    5

    A lot of people wonder what we could have done with the money we spent on war in Asia.

  6. philg

    July 28, 2013 @ 9:01 pm

    6

    Z: “a lot of people” included me, back in May 2008. See this May 27, 2008 posting about what it would have looked like if we’d invested money in converting the U.S. to electric cars instead of on the Afghan and Iraq wars.

  7. IT Guy

    July 28, 2013 @ 10:22 pm

    7

    I live in Indiana, and it’s hard to imagine the economic devastation that would have be visited on the Great Lakes states had GM and Chrysler gone down. Much as I admire Tesla and would love to own a Model S, I think the bailouts were an economic bargain that saved the midwest when the entire economy was circling the drain. It’s a little too facile to say the money would have been better invested elsewhere, unless you’re willing to write off an entire region of the country and risk that it would never recover.

  8. CHenry

    July 28, 2013 @ 10:35 pm

    8

    Well . . . CR just gave the highest rating among all sedans tested to the new Chevrolet Impala, a gasoline-powered non-hybrid. So there’s that.

  9. David

    July 28, 2013 @ 10:44 pm

    9

    We own a model S, have another on order, and put $ down for a Model X.

    Yes we LOVE the car… It truly is the best car ever made by far… But we support the company because we know what it’s success will lead to:

    Once the 30k version hits and the American people experience the superior build quality, they are never going to look back… They are going to have a “wow, so this whole time I’ve been paying 30k for a 10k car” moment…and then once they realize they’ll never have to buy gas again, and once it dawns on them the car goes 300+ miles on one charge, and that free charge takes 5 minutes…
    They are going to start questioning every product category…

    Gas in cars is doomed. It’s Kodak 2.0

    Go Tesla.

  10. Danny

    July 28, 2013 @ 10:53 pm

    10

    Maybe one day the politicians, and the people who vote for them, will read Bastiat.

  11. philg

    July 28, 2013 @ 10:59 pm

    11

    CHenry: The Tesla is a sedan and scored 99. The Impala is a sedan and scored 95 (though http://www.usatoday.com/story/money/cars/2013/07/25/2014-chevy-impala-chevrolet-needs-work-htest-drive/2588021/ says that CR overrated the car).

    Anyway, it is not that surprising when an established company stuffed full of federal tax dollars manages to put out a good car.

    IT Guy: “Hard to imagine the economic devastation”? You mean, such as the city of Detroit becoming insolvent? If memory serves, that has actually happened. I’m not sure what you mean by arguing against “the money would have been better invested elsewhere”. I didn’t suggest that the $85 billion be spent in any particular region of the country, only that it would have been better to make it available to new companies, wherever they happened to be. If the Great Lakes states have an educated workforce and a competitive business environment compared to other states there is every reason to think that new companies would have been located in Indiana and neighboring states. If the Great Lakes states are not competitive for whatever reason then an $85 billion Band-aid is not going to be of much long-term value since eventually the federal gravy train runs out and the states will have to compete with their siblings.

  12. Fazal Majid

    July 29, 2013 @ 12:22 am

    12

    “Anyway, it is not that surprising when an established company stuffed full of federal tax dollars manages to put out a good car.”

    No, it’s actually surprising. Governmental mismanagement memes are contagious and companies that cater primarily to government like weapons manufacturers tend to be far more inefficient and corrupt than those that compete in the marketplace. Which is why Boeing’s purchase of McDonnell-Douglas was such a mistake and led to the erosion of their competitiveness vs. Airbus, but I digress.

    Ford was not covered by the bailout, and you’d think they would have cheered for the demise of their 2 domestic competitors, but they actually approved of it. The reason why is that the entire ecosystem of subcontractors and suppliers they depend on would have been decimated by the failure of GM and would have destroyed the viability of Ford as a going concern in the process.

    Of course the real reason for this specific bailout probably has to do with the importance of unions to the Democratic party. Quite a few senators from right-to-work Southern states, mostly Republican, opposed it, as Detroit’s loss would have been the gain of the European, Japanese and Korean owned auto plants in their home states.

  13. J. Peterson

    July 29, 2013 @ 12:23 am

    13

    Serious electric car ventures are batting 1 for 3. Tesla was a win, but both Fisker and A Better Place were pretty large smoking craters. Apparently a non-trivial amount of Tesla’s profit comes from selling carbon credits. It’s not clear how important this extra monopoly-money was to their success.

  14. CHenry

    July 29, 2013 @ 7:55 am

    14

    Detroit becoming insolvent is far less surprising than say, Birmingham, AL becoming insolvent. For this to happen, Detroit first had to shrink by half while retaining its legacy obligations (not like 40 years of local government corruption launched by 10 years of white flight didn’t help). Almost any city would fail under similar conditions. Everyone could see this moment coming and no one who would have cared to could stop it. The city’s government is not untypical of that of many larger cities with skewed demographics and high public benefits costs. Now that it is a fact on the ground. Still, it should give leaders in cities like Chicago, Baltimore and Philadelphia pause. Detroit allowed itself the unaffordable luxury of letting itself go, permitting a declining quality of life that gave those with the means to move out reasons to do so, taking with them their assets, skills and tax payments. Wheedling to state and national government for support while the jobs base was devastated is the object lesson. The state’s assistance will amount to receivership and supervising the necessary physical removal of swaths of the city long abandoned by its residents. The federal government? Nada.

  15. philg

    July 29, 2013 @ 9:20 am

    15

    J. Peterson: So you’re saying that the $85 billion investment would have yielded just 28 Teslas while GM and Chrysler were forced to restructure in Chapter 11 like companies without political connections? That doesn’t seem like a terrible result.

    CHenry: “Detroit first had to shrink by half”? Why did they “have” to shrink by half? Cities all over the world were growing and thriving during the same period. The folks running Detroit had a fantastic stock of physical infrastructure, a great location, the kind of concentration of people that makes everything efficient (since folks can walk places instead of sitting in traffic). There was valuable stuff in Detroit that had been built up since its founding in 1701. It would be like someone giving me the Prudential Center here in downtown Boston for free and me complaining that I was unable to earn enough money from the free fixed asset in order to afford the upkeep. Would I have been better off having been given a corn field in the middle of nowhere? If I followed the reasoning of those who make excuses for Detroit’s city government I would say “It wasn’t my fault that I couldn’t keep the lights on within this centrally located shopping and office complex. The success of the Natick Mall dictated that I must fail.”

    You mention people receiving “public benefits” as though that were a bad thing for a city. To the extent that those benefits are funded by federal and state tax dollars, dispensing them within the city limits should provide a huge boost to the economy. A poor family, after all, gets free unlimited medical care (through Medicaid, funded by federal and state (not city) dollars), free food (USDA food stamps, funded by federal dollars), housing subsidies (mostly from the Feds?), earned income tax credit (federal tax dollar-funded), oftentimes SSDI, etc. So even the poorest families should contribute significantly to a reasonably well managed city’s economy. They are bringing money from elsewhere (taxpayers state- and nation-wide) and spending it inside the city. Plenty of towns in poor regions profit handsomely from running hospitals for Medicaid and Medicare beneficiaries who come in from places outside of the town itself. (See http://www.newyorker.com/reporting/2009/06/01/090601fa_fact_gawande for how profitable it can be to deliver health care to poor and/or old Americans. The town’s doctors and hospitals collected $15,000 per Medicare enrollee at a time when the per-capita income was $12,000 per year.) The state of Kentucky has more medevac helicopters, for example, than all of Canada. Why? Medicare will pay for helicopters to transfer patients from one hospital to another and the helicopter operators can charge more or less whatever they want. So all that Detroit needed to do to keep itself afloat was to import some Eurocopters and then fly all of the over-65 patients from one city-run hospital to the next.

    [Check out http://www.dmc.org/organization-history-and-profile.html

    for example. The largest hospitals in SE Michigan are in Detroit itself. There is literally no limit to what these folks can bill Medicare. This is an asset that was created in 1886 and has 2000 hospital beds now. The U.S. has about 30 beds per 10,000 population. So the 2000 beds should mean a customer base of 666,000 people. Let's assume that they generate revenues of $15,000 per person per year like those folks did in McAllen, Texas back in 2006. That's $10 billion per year in health care revenue from this one hospital network alone, with most of the money coming from federal taxpayers.

    Being the biggest city in a region should be hugely profitable even if the only revenue source were from providing health care services.]

  16. lelnet

    July 29, 2013 @ 11:42 am

    16

    Of course, making good cars wasn’t the point of the bailout, or else you’d be right. The point of the bailout was to reward the labor unions for their long and continuing service in the cause of crushing the American people ever harder under the boot of the state.

    If it was about the cars, you’d be at least partly right.

  17. Andy

    July 29, 2013 @ 1:40 pm

    17

    Phil,

    Maybe if ride comfort is your goal, you should trade in your 6 year old sedan, because while I tend to agree with most on this blog, magnetic suspension has been now available for quite a few years on many GM models and is pretty much a standard on any luxury car these days. Buy yourself the new S-Class and you’ll never feel a bump again. The damn thing uses cameras to look ahead for bumps.

    Andy

  18. tekumse

    July 30, 2013 @ 11:45 am

    18

    From: http://en.wikipedia.org/wiki/Effects_of_the_2008%E2%80%932010_automotive_industry_crisis_on_the_United_States#Amount_of_investment
    “On May 24, 2011, Chrysler repaid the last of the money to the U.S. and Canadian treasuries, several years ahead of schedule.”

    I remember hearing something about GM paying money back as well but can’t find it on wikipedia.

    I think we need to make a difference between investing long term in startups (I think 1/10 success is far more likely than the 1/1 or the 1/3 suggested) and loans.

  19. Matt Fuerst

    August 1, 2013 @ 3:56 pm

    19

    tekumse,

    Don’t fall for that scam. GM borrowed from Peter (the United States Federal government) to pay Paul (the United States Federal government).

    Some quotes from a letter by Senator Charles E Grassley (Iowa, Chairman of the Finance Committee) to Treasury Secretary Geither (http://grassley.senate.gov/about/upload/2010-04-22-Letter-to-Treasury-Department.pdf):

    “GM seems to be using TARP funds from an escrow account at Treasury to make the debt repayments. The most recent quarterly report from the Office of the Special Inspector General for TARP says “The source of funds for these quarterly [debt] payments will be other TARP funds currently held in an escrow account.””

    “The TARP loans were not repaid from money GM is earning selling cars, as GM and the Administration have claimed in their speeches, press releases and television commercials. When these criticisms were put to GM’s Vice Chairman Stephen Girsky in a television interview yesterday, he admitted that the criticisms were valid:
    Question: Are you just paying the government back with government money?
    Mr. Girsky: Well listen, that is in effect true, but a year ago nobody thought we’d
    be able to pay this back.”

  20. mishka

    August 6, 2013 @ 4:45 pm

    20

    Actually, $100k paid for 2y for each employee would have made them much better service. It would have allowed them to cut their ties with the old place and move to where the jobs are. Otherwise, they are stuck right where they were, waiting for the next bankruptcy to crush them for good.

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