Oct. 18, 2012 at 7:13 AM ET
This week’s second presidential debate focused on a wide variety of issues from the economy to foreign policy, and the health of the auto industry was one of the most significant topics touched on by President Barack Obama and his GOP challenger Mitt Romney.
The two couldn’t be further apart on the subject of the 2008–2009 bailout of General Motors and Chrysler. The Democratic president touted the Treasury-funded rescue of the two automakers, which the Republican challenger has long opposed.
But while he once supported clean energy programs, Romney has also come out against the government-funded, low-interest loan program that has helped fund a number of battery makers, automotive startups and other green firms. In the first presidential debate in Denver, he referred to several firms by name, dubbing California battery-car startups Tesla Motors and Fisker Automotive “losers.”
There’s no doubt that the Department of Energy's loan program has picked some clunkers, notably the solar panel maker Solyndra, which received $527 million before going bankrupt. This week, another firm that was helped out by the Energy Department also filed for Chapter 11. But the results may turn out better when it comes to Massachusetts-based A123 Systems.
A producer of lithium-ion batteries, A123 is one of many once-hopeful suppliers stung by a slower-than-anticipated ramp-up in demand for battery-electric vehicles. Its situation was complicated by manufacturing issues and a costly recall earlier this year. But A123’s doors aren’t closing. After rejecting a potential rescue bid from China, it has instead agreed to sell its auto business to mega-automotive supplier JCI.
“We believe the deal makes very good strategic sense,” writes Rod Lache, senior automotive analyst with Deutsche Bank. If anything, under the new — and well-funded — parent, he contends, that automotive battery operation could now do even better. The purchase by well-run JCI “should likely allay customers’ concerns” about whether A123 would be able to survive an ongoing shake-out in the battery market.
Meanwhile, the sale of A123 comes as good news for one of the companies Romney cited by name: Fisker Automotive. The California plug-in hybrid maker is one of A123’s most visible customers and was hurt by the battery-pack recall. But Fisker was facing the possibility it might run out of batteries by next year if A123 had folded.
Nonetheless, the fate of Fisker remains far from certain. Its first product line, the Karma, got off to a slow start that led the Department of Energy to freeze its $529 million loan after the automaker had drawn only $193 million of that cash.
That has complicated plans to develop a second, lower-cost and higher-volume model, the Fisker Atlantic, that will be much more critical to the automaker’s bottom line. Fisker officials have privately complained that they’re caught in the crossfire due to the politicization of the Department of Energy loan program and have been scrambling to replace that money with private funds. They’ve raised about $300 million this year, but new Fisker CEO Tony Posawatz this week told investors the launch of the Atlantic will be delayed to 2014 or even 2015 — leading some to question the company’s future.
As for Tesla Motors, its outlook is also up in the air, depending upon whom you ask. Founder and CEO Elon Musk — a PayPal pioneer who also runs private space firm SpaceX — has acknowledged production of the new mainstream battery-electric vehicle, the Tesla Model S, is way behind schedule and that is putting a serious strain on the company’s finances with few other sources of revenue to tap.
Up to speed
Nonetheless, Musk and others at Tesla insist they will be up to speed and in the black by next year when a second product line, the Model X crossover, debuts. Tim Draper, a legendary Silicon Valley entrepreneur and early investor in the firm, is so confident he recently told Detroit to “create something different because you’ve lost the electric-car battle.” Asked what they might turn to, he suggested, “flying cars.”
While the Department of Energy loan program might be controversial, the real point of contention between Obama and Romney concerns the bailouts of GM and Chrysler. Both companies were surviving on lifelines thrown to the automakers by President George W. Bush when Obama took office. Obama eventually approved the rest of what turned into an $84 billion rescue.
Romney called for both carmakers to be cut loose, despite his family ties to Michigan. He continues to insist he opposes the bailout, although the former Massachusetts governor has also taken credit for nudging the Obama administration into pushing GM and Chrysler through managed bankruptcies before approving further cash aid.
Bailout proponents insist the rescue effort saved as many as 1 million jobs. And they have some significant momentum on their side as the auto industry gains credit as one of the leading factors in the revival of the U.S. economy. Between them, Chrysler and GM have also added tens of thousands of new direct and indirect jobs since their rescues as their sales increase.
Chrysler, the smaller of the two automakers, has shown a 24 percent sales gain this year — about 10 points ahead of the overall automotive recovery. It's doing so well that Chrysler could be the financial foundation for its Italian partner Fiat SpA, which is struggling during the collapse of the European car market. That’s doubly ironic considering that Obama approved a rescue of Chrysler only after Fiat agreed to take it over.
General Motors' story is a mixed one, though investors have given the maker an increased vote of support despite some serious, ongoing issues.
GM sales are up this year, though not quite keeping up with the overall market revival. But it is the powerhouse in key emerging markets such as China. Its biggest issue is Europe: GM's Opel subsidiary will post its 14th year of red ink in 2012 with no clear turnaround in sight.
That was a key reason for the sharp downturn in GM stock following its November 2010 IPO. But over the last three months it has staged one of the market’s stronger rallies, rebounding from barely $18 a share to nearly $25 a share. Upcoming third-quarter earnings could determine whether it maintains that momentum.
And the pre-election announcement will likely only add to the sniping between Obama and Romney. The latter has insisted he would have immediately sold the Treasury’s remaining shares over the summer, which would have meant billions of dollars more losses than if the White House walked away today.
Nonetheless, GM would have to climb all the way to $54 a share for taxpayers to break even on the bailout, so the president seems in no rush to sell those shares despite the ongoing debate.
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