Picking winners, getting losers
One of the key tenets of the interventionist view of governance (whether socialist, fascist or communist) is the idea that the government can manage the economy better than the free market. While extreme views (NB: Cuba, Venezuela, China) make an argument based on naked power — your government will provide for you — the more moderate interventionist arguments are based on the concept of “market failure.”
Of course, the idea that the government can correct for the errors of the market assumes that the government is more intelligent and foresighted than the market, and also is not susceptible to capture, cronyism or other bias. This week provides a classic counter-example.
In between baseball and a clean sweep by Bay Area liberals to the major statewide offices, one of the big Bay Area stories this week was the announcement that one of the biggest solar companies is struggling financially, raising questions about its ability to repay its federal loan.
The latest installment in the company‘s troubles broke Wednesday in the New York Times:
Solyndra, a Silicon Valley solar-panel maker that won half a billion dollars in federal aid to build a state-of-the-art robotic factory, plans to announce on Wednesday that it will shut down an older plant and lay off workers.A report by Michael Kanellos of GreenTech Media suggested that the news was held until after the election to avoid embarrassing the administration.
Just seven weeks ago, Solyndra opened Fab 2, a $733 million factory in Fremont, Calif., to make its high-tech solar panels. The new plant was supposed to be the first phase of a rapid expansion of the company.
Instead, Solyndra has decided to shutter the old plant and postpone plans to expand Fab 2, which was built with a $535 million federal loan guarantee.
Katie Fehrenbacher of GigaOM was even more skeptical:
Back in May, I raised the question of whether or not Solyndra’s $535 million loan guarantee from the Department of Energy — the DOE’s first and flagship loan guarantee — was a mistake. Despite the fact that Solyndra had raised around a billion dollars of its own private equity, I pointed out the company has one of the highest manufacturing costs of its thin-film solar peers. The economics just didn’t seem to work.Fehrenbacher reminds us of the great symbolism of the factory’s 2009 groundbreaking, which attracted the governor, US energy secretary and a video keynote by the vice president. She leaves out that the president himself showed up to tour the factory last May.
Since I wrote that article, Solyndra ended up ditching its IPO plans, and its founding CEO stepped down. Now this morning, the company announced it will close its first factory and will lay off dozens of workers. Wow. Things could not have turned much worse for the company the DOE held up as an example of a stimulus package that could create green jobs and a good candidate for its long-delayed loan guarantee program.
Like Fehrenbacher, a GTM analyst quoted by the Oakland Trib thinks the investment was questionable to begin with:
"Solyndra is facing the heat," said Shyam Mehta, an analyst with GTM Research, which tracks alternative-energy markets. "Many higher-cost solar manufacturers are doing well. It's alarming for Solyndra to be cutting back when others are expanding."As with any tech company, the loan was risky — the difference is the magnitude of the risk. It’s rare that a single private investor puts up more than $50 million at once, and only someone who can print money will put up a half billion on a risky investment.
…
"The company's problems raise questions about the federal government's wisdom in giving $535 million to a company with an unproven technology," Mehta said.
The chances are not looking good for the government — let alone private investors — to be made whole on their investment. As Kanellos concluded:
What happens next? We know what the solar industry thinks. Solyndra will collapse is the general opinion. But it still has a single factory. In some long-shot scenario, something good could, maybe, one day, come out of this.If the deal fails, the US government owns an unprofitable solar factory and some industrial land in a high-tax state.
It’s clear that the government did inadequate due diligence on a loan guarantee that had a minimal upside and a huge downside. Apparently the assumption was that $1 billion in private money couldn’t be wrong. Has anyone heard of “escalation of commitment”? (Perhaps if they had more MBAs or psych majors they would have.)
What’s the answer? Writing in July, a professor of environmental entrepreneurship argued the answer is avoiding favoring specific individual companies:
The best investments will not come from backing individual companies but come from reshaping the competitive landscape—creating the opportunities for new business models and markets that enable the unique strengths of green technologies to emerge and develop. Consistent regulatory policies and open technology platforms will benefit all ventures and foster collective action to shape emerging market opportunities.Meanwhile, the Heritage Foundation concludes that all the alternative energy industries are failing despite generous subsidies — and the answer is less, not more subsidies.
No comments:
Post a Comment