Bail Out Entrepreneurs, Not Big Auto

So, the Auto Bailout bombed in the Senate. Good. (Never thought I’d be writing about it in Venture Files . . . but then, I never imagined it might affect entrepreneurs — including me — directly.) It’s an intriguing tale of desperation, fear tactics, and ironyLa-192-car-pileup2003.jpg.

Desperation because the auto industry leaders are out of options, and doing everything they can to avoid the only solution that makes sense: filing for Chapter 11 protection. (I used the word “˜protection,’ rather than “˜bankruptcy’ because it’s exactly that — a means of legally keeping at bay those who might otherwise come after you for moneys owed.) I’ve been through it with one of my startups, and I’ve written about it here.

Fear tactics because the auto industry leaders would have us believe that the world will end if they file for Ch. 11. In fact, it makes survival possible. It enabled the airline industry to survive. So why would the industry leaders oppose it? It wipes all the existing stakeholders clean — all stockholders, creditors, pension plans, and — most important of all, the unions. And it will wipe out industry leaders’ individual stockholdings . . . and probably cost many of them their jobs.

But it’s the only solution. Lending the big automakers money to make payrolls is a short-term fix at best. There’s nothing they can do in the next six or even 12 months to turn their battleships around. I get as sentimental as anyone about GTOs of the past, but the model is broken, and dead. It’s time to clean house, start over. I feel for the folks who will lose jobs, but sorry — your management screwed up . . . and they’ve been doing it for decades. Instead of spending on R&D for new technologies, Big Auto spent on lobbyists to get relaxed efficiency and emissions standards.

It’s not about casting blame, or punishing anyone. It’s about survival. The crushing debt burden, inflated wages, and inefficient manufacturing infrastructure will never enable a US auto maker to return to profitability, even if it had a next-generation car ready to go. Unions are an antiquated and unnecessary burden, a throwback to times when bosses literally beat employees to make them more productive. The tech industry works fine without them (although there were several attempts to unionize them over the decades). More to the point: Foreign automakers have set up shop in the US without them.

I wonder if auto workers were given a choice of losing their jobs or taking a comparable job at two-thirds of their current salary at an electric-vehicle plant, which would they choose?

Ironic. Because there’s already a fully approved $25,000,000,000 in loans available to car makers. That’s right — $25B in direct low-interest loans (the Federal Funds Target Rate, currently at 1.0%). It’s the Department of Energy’s ATVM Loan Program (for Advanced Technology Vehicle Manufacturing), and it’s fully approved by Congress, under Section 136 of the Energy Independence and Security Act of 2007. So why aren’t they taking advantage of it?

Because they’d rather keep operating as they’ve been for the past 50 years, than do what they should be doing. And they’re woefully unprepared to shift manufacturing to projects that meet the ATVM criteria.

So, despite the fact that, it’s all there, fully approved by the House and the Senate, with applications due by the end of this month, and decisions to be rendered by March 31, 2009, there’s that hitch: applicants have to have bona fide projects that meet the criteria of an Advanced Technology Vehicle. That could be anything from new high-efficiency gas-sippers to plug-in electrics. (You can read all about it in the Interim Final Rule.) The funding is not designed to resurrect Oldsmobiles.

For decades, Big Auto chose to avoid the transition to alternatives. Not that they didn’t do some work on them. (If you haven’t already, be sure and rent the documentary, “˜Who Killed the Electric Car?’ GM built one — the EV1 — people loved it, and every last one of them was destroyed . . . by GM.)

The automakers should be forced into bankruptcy. And rebuilt. Federal funding should be provided — but only to fund the new businesses emerging from Ch. 11.

If I seem personally peeved, I am. On behalf of my new company, I attended the DOE public meeting for the ATVM Loan Program in Washington DC last week. See, the loans are also available to makers of components for ATVs, which is what we are. I’m fairly confident we’d qualify for the program (although not in time for the year-end deadline, but no problem — there will be rolling application deadlines — and 90-day decisions — every quarter.)

But there are a couple of gotchas: 1) the bailout that just failed (thank God) was going to “˜steal’ $15B from the program (since the money was already approved); and 2) even though it will go forward, a subtle point came up in the DOE public meeting — once a ‘magic number’ of $7.5B targeted for bad debt (based on the committee’s analysis of aggregate applicants), after which the loan program is ended. That means, say, GM receives a $4B loan to set up a plug-in hybrid plant, but the committee calculates a 50% probability that GM won’t be able to repay the loan. Then $5.5B is left for the others. You get the picture: the DOE might only end up lending a total of $15B — mostly to the big guys — based on a 50/50 chance that they won’t make good on the loans.

And us little guys — the entrepreneurs who should be getting the money for new technology — will be squeezed out. We were all there (at two separate meetings) at the DOE meeting last week — lots of technology companies developing radical new engine designs, patent-pending alloys with greater strength at a fraction of the weight, energy-efficient components, electric alternatives (including Tesla Motors). Oh, and a few representatives of Ford, GM, and Daimler, and the Japanese car contingent.

And although the Interim Final Rule makes no provision for ensuring that small companies get a piece of the pie, there is still hope: Section 136 also provides for grants, but the lawmakers haven’t gotten around to defining that part. Let’s hope the new Administration sees the wisdom in targeting that money for those who will put it to best use — the entrepreneurs. (They’re ahead of us in the UK on this one.)

Still, the (sitting) President is pushing the rescue, this time from the bank bailout fund. I reiterate: ‘Oh, Thank Heaven . . . for Chapter 11!’

Aaron Brazell

Aaron Brazell is a Baltimore, MD-based WordPress developer, a co-founder at WP Engine, WordPress core contributor and author. He wrote the book WordPress Bible and has been publishing on the web since 2000. You can follow him on Twitter, on his personal blog and view his photography at The Aperture Filter.

10 thoughts on “Bail Out Entrepreneurs, Not Big Auto

  1. I have to disagree with you a bit here, Ray – though I see your thinking. I certainly don’t want to get too heavily into an auto bailout discussion, because clearly your point is the effect the bailout would have on entrepreneurs.

    My view, tho, is that the bailout does need to happen in some form with heavy contingencies. I do think it should probably happen under the auspices of a reorg, but that’s not likely to happen.

    I’d also note that Ford is doing moderately well but even at moderately well, failure of GM and/or Chrysler would send strong aftershocks thru the ecosystem.

    Again, I feel we’re dealing with a “too big to fail” scenario here, unfortunately.

  2. I’m glad I discovered technosailor — very intriguing and engaging disucssion here. For the record, I’d like to amplify Ray’s comments on Tesla Motors just to make perfectly clear that the Silicon Valley electric car maker is NOT applying to be part of a “bailout.” I also want to short-circuit any discussion about whether the company is applying for loans that would go toward the $109,000 Roadster sports car.

    Tesla is NOT applying for a loan from the Department of Energy to fund anything having to do with the $109,000 Roadster sports car pictured here but rather future generations of more affordable sedans and a powertrain facility to make battery packs and other components for other automakers, which could also use them for affordable sedans and subcompacts.

    To be sure, the Roadster is an important, paradigm-shifting product. Tesla has delivered more than 100 to customers already and is increasing production starts to 30 per week in 2009. The all-electric, zero-emission Roadster is a viable production vehicle that also serves as an innovative precursor to other, less expensive products in Tesla’s pipeline. It’s a real car with amazing fit and finish, performance and handling to rival much more expensive cars. (And Ray, I’m happy to give you a test-drive next time you’re in Silicon Valley.)

    On that note, it’s obvious but critical to emphasize that R&D and early-adopter technology is relatively expensive. Whether it’s the iPhone or photovoltaic panels or GPS units, the first owners pay the most. But the technology inevitably becomes affordable within several product cycles, whether on the timeframe of Moore’s law or (in the case of battery capacity) at the fair clip of 8 percent per year. Given the Tesla Model S five-passenger sedan (base price expected at $57,500) and the Bluestar project (all-electric, zero-emission subcompact for $30,000), a government loan to Tesla would inevitably help speed delivery of more affordable vehicles that eliminate dependence on foreign oil and reduce drivers’ carbon footprint.

    Thanks.

    Rachel Konrad
    Senior Communications Manager
    Tesla Motors Inc.

  3. Thanks for bringing this up. It would be good to hear a detailed analysis of what incentives are out there for mega companies vs. entrepreneurs. It would also be interesting to hear about the effects of both scenarios, but with more regard to how money directed at the two contrast vs. stink.

  4. Rachel –

    Thanks for the clarifications on Tesla Motors — of course I didn’t mean to suggest that Tesla (or any other early-stage companies for that matter) should literally ask for part of the bailout funds. But I do believe taxpayer dollars (like the DOE loan program) should be put to best use — for job creation, return on investment, and alternative/sustainable technologies — for which Tesla and a number of other companies qualify . . . and the [unrestructured] auto industry clearly does not.

    Oh, and I so will take you up on that offer of a test drive! /Ray

  5. ” But I do believe taxpayer dollars (like the DOE loan program) should be put to best use — for job creation, return on investment, and alternative/sustainable technologies ” Certainly agree with that assessment.

  6. They do not have the required debt ratio. They owe too much to customers and past investors. The NEPA will take them two years because they are building a structure. They must have hard UNENCUMBERED assets equal to the amount requested, they don’t. They CANNOT pay the City of San Jose ANY money per Federal Law. The cost of their factory is way higher than Pheonix, Zap, Bright or other applicants and DOE will use the other companies to validate them.

  7. Interesting points. I think the underlying issue is that traditionally America has been a country where entrepreneurs have brought technologies that have benefited the mass, even if it was swallowed up later by big corporations. Our economic backbone rests on small and medium sized businesses. It is more of a blow for entrepreneurs and small business owners to see taxes that can go to companies that have made mistakes most entrepreneurs have avoid. It’s tricky to keep moral and help some corporations, but eventually you need to set the priorities. In the meantime, the rest of the world is moving on.

  8. Great to see these [my] ideas here, I have a list of EV Angels who have persevered to create excellent components for us impatient EV builders already, or nearly ready, on the road. These guys should be given the equivilent of motive MacArthur grants.. Its a good gift/investment because the money would go right back into improving the technology, in the USA, and if anyone gets a paycheck, some of it goes back to the govt in the form of taxes. But what NO ONE has brought up is the possibility of the Detroit auto workers buying out their floundering companies…HeY! It worked for BMW! It’s the workers who will re-stage the factories to install EV powertrains, redesign rolling living rooms into cars again, and shape new-tech materiel into new millenium transportation. At the VERY LEAST end OEM and allow any builder access to exisiting technology and end patent sequestration. LIBERATE the Nickel – Metal Hydride battery!!!

  9. This is to the point — not throwing good money after bad, but rather apply it to radical new programs, within or without the auto industry. Don’t let us be seduced once again by low-priced gas. Now is the time to raise the tax at the pump and use those funds for alternative energy.

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