Government Should Invest in Tesla and Not the Big 3? Not So Fast...

Innovation plus commercialization - Several journalists have made the claim that the auto industry is stuck in the past and not willing to change... that they are like typewriter manufacturers fearing a shift to computers; that the Government should invest in modern car companies like Tesla Motors (the computers) instead of making loans to the Detroit Big 3 - GM, Ford and Chrysler (the typewriter manufacturers). I’m not sure the typewriters vs. computers analogy fits. A more appropriate analogy might be Cray supercomputers (Tesla Motors) vs. Dell or Compaq PC’s (Detroit Big 3) in the 1990’s. Sure the Cray supercomputer was more advanced, but which had a greater impact on enabling everyone on the planet to own or have access to a computer? Companies like Dell and Compaq effectively commercialized computers and made them available to the masses. True innovation is commercially viable.

Hummer $$$ to 4-cylinders and hybrids - The Detroit auto companies have invested the profits from vehicles like the Cadillac Escalade, Chevrolet Suburban, Hummer H2 and Lincoln Navigator - vehicles that consumers who did not need their utility demanded when gas was cheap - into several fuel saving technologies that are affordable and available to the consumer right now. The Detroit automakers' gasoline engines have become more efficient. For example, the fuel economy of the Ford Focus is equal to that of the Toyota Corolla and the Chevrolet Malibu’s fuel economy on the highway is better than that of a Honda Accord. GM and Ford each offer more hybrid vehicles than Honda and Nissan. GM’s and Ford’s pickup trucks get better fuel economy than the new Toyota Tundra. GM also invested Escalade, Hummer and Corvette profits in the creation of the 2010 Chevy Volt - a plug-in hybrid that will run on electricity-only for 40 miles (no hybrid can do this today, including the Prius), will seat 4-passengers (unlike the Tesla), will do 0-60 in the 8 - 9 sec range, and will likely be priced in the high $30’s vs. the $100K+ Tesla.

US auto market, not just US auto makers, dragged-down by the credit crisis - All companies need working capital to fund their day-to-day operations. There is a lag time between when a car company for example, buys and pays for steel, turns that steel into a car and then gets paid for that car. Working capital funds that lag time. The current financial crisis has made it difficult for all companies in all industries to get access to working capital. Because automobiles are so expensive to design, engineer, produce and buy, their working capital requirements are proportionally higher than other industries. The current financial crisis has also created a crisis in consumer confidence and caused buyers to stop purchasing vehicles, from all manufacturers. For the month of October, GM sales down (45%), Toyota down (23%), Ford down (32%), Honda down (25%), etc., vs. October of 2007. Overall annual vehicle sales in the US market will be down this year from ~16.2M vehicles in 2007 to ~13.5M vehicles. As a result of the current financial crisis - cash is coming in slower and working capital loans are more difficult to come by. The external macro factor of the credit crisis, has resulted in all companies using their cash reserves at a much faster rate. A $25B loan, not a bailout as Friedman and the media positions it, to help the automakers make it through this externally driven working capital / liquidity crisis, avoid putting 3M+ jobs at risk, avoid driving our economy further into recession and keep an American company that is bringing affordable / commercially viable technology that will reduce oil consumption to market, is in all of our best interests.

Strength around the world - In 2007, GM sold more vehicles than anyone else in the world - 9.4M, about 3k more than Toyota. GM also holds the #2 market share in the fastest growing automobile market in the world, China (VW is #1, Honda is #3 and Toyota is #4). GM sells more Buicks in China than in the US. This achievement in China was also funded by Escalade profits. Governments throughout Asia and other parts of the developing world are spending billions to develop an auto industry in their respective countries because of the huge impact it can have on creating jobs and developing their economies. Why would we idly sit by and let the credit crisis destroy ours?