Fisker Automotive may be going the way of Solyndra

Posted by PITHOCRATES - April 28th, 2013

Week in Review

The Obama administration bet big on Fisker.  Sure that they could make the green car the Obama administration envisioned.  An upscale sportier version of Government Motors’ (GM) Chevrolet Volt.  Which isn’t selling well.  But it is selling better than the Fisker Karma.  But that isn’t saying much (see Floundering Fisker faces grilling over U.S. government loan by Deepa Seetharaman and Ayesha Rascoe posted 4/24/2013 on Reuters).

Fisker Automotive Inc, which has not built a vehicle since July, has the potential to succeed and repay nearly $200 million in government loans if the “green” car maker is able to find the right “financial and strategic resources,” according to former CEO Henrik Fisker.

Problems with the parts suppliers, delays in regulatory approval and recalls of its flagship Karma plug-in hybrid sports car were among the issues that dogged the automaker over the last few years, Fisker plans to tell lawmakers during a congressional committee hearing later on Wednesday…

The hearing comes as the automaker verges on collapse. Among the key questions is whether Fisker’s prospects were strong enough at the start to warrant the DOE’s backing, which helped trigger a flood of private financing for Fisker.

Fisker’s failure to make a payment on the DOE loan on Monday is the latest of its troubles. In recent weeks, Fisker has fired 75 percent of its workforce and hired bankruptcy advisers…

The DOE’s early public support helped open doors for Fisker, which sells the $100,000-plus Karma plug-in hybrid sports car. Fisker has raised $1.2 billion in private funds to date, according to SEC filings…

Fisker never received the full $529 million loan. It tapped $192 million before the DOE quietly decided to freeze Fisker’s credit line in June 2011 when it became clear that Fisker would not meet performance milestones as part of the loan agreement…

In the confidential “information statement” sent to shareholders in December 2011 and obtained by Reuters, Fisker said it “will not meet certain financial covenants and project milestones” required in the DOE agreement, including earnings, net worth and certain financial ratio targets.

Fisker’s troubles come after a string of green technology flops, including last year’s bankruptcy of Fisker’s lithium-ion battery supplier, A123 Systems.

Forecasts in 2009 for the sale of hybrid and electric vehicles far outstripped subsequent demand.

Forecasts outstripped subsequent demand?  Hmmm.  Let’s see if we can figure out why demand is weak for the Fisker Karma plug-in hybrid sports car.

The Fisker Karma is a luxury sports sedan.  A 4-door.  With room for 4.  Because of the large battery that runs down the middle of the car providing room only for 4 bucket seats.  Making this a subcompact.  And what range does that massive battery give you?  About 32 miles.  After that you’re running on gasoline.  Which can take you to a top speed of 125 mph.  And can go from 0 to 60 mph in 6.3 seconds.  This is what you get for $100,000-plus.

Now compare that with a Chevrolet Corvette.  A 2-door, 2-seat sports car.  With a top speed of 190 mph.  And can go from 0 to 60 mph in 4.2 seconds.  So if you’re going through a mid-life crisis and want something to impress the ladies with you can get all of this for about $50,000.  And they can’t understand why actual demand outstripped their forecasts.  Here’s a guess.  You can get a lot more car for less elsewhere.  If driving electric is more important you’ll probably buy one of the tinier hybrids and save yourself about $50,000.  If speed and power is more important to you you’ll probably buy something like a Chevrolet Corvette.  And save yourself about $50,000.

This is the problem with electric cars.  You get so little car for what you have to pay that only the most wealthy and diehard environmentalists are going to shell out that kind of money.  And there just aren’t a lot of those out there.  Which is why private investors didn’t invest.  Until, that, is, the federal government invested.

Once the government chose to subsidize Fisker then private investors found their courage to invest, too.  Figuring that with the government assuming some of the risk their investment was now less risky.  As they probably saw the future where a bunch of rich Hollywood types would have a Fisker in the garage.  To take out on special occasions.  To show that they cared.  But there were so many problems bringing this car to market that even the government bailed on it.  And for them to do that you know that there must be problems at Fisker.  Making these private investors rue the day they followed the government into this company.  Instead of staying out of it based on their original analysis.

Any company that has something to sell that the people want doesn’t need government money.  For if private investors see a good thing they will invest.  But when they don’t the government does.  Because no wise investor will.

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China Spending less on Unprofitable High-Speed Trains, wants Private Investors to Lose Money Instead

Posted by PITHOCRATES - May 26th, 2012

Week in Review

Governments everywhere want to build high-speed trains.  They like them because they’re very high profile and can stand as memorials to the politicians that gave them to us.  They like them because they are so costly, both to run and to operate.  Requiring higher taxes and lots of government borrowing.  They like them because they are so labor intensive.  Both to build and to operate.  This creates a lot of jobs.  Yes, they are all of these things.  But one thing they are not is profitable (see Railways try to get investors on track by Wei Tian and Xin Dingding posted 5/21/2012 on China Daily).

Experts predict lukewarm response as sector seeks private capital…

Zhou, who is chairman of the Wenzhou Small and Medium-sized Enterprises Development Association, represents a group of wealthy industrialists in East China’s Zhejiang province.

The railway authority in Wenzhou, he said, has been negotiating with entrepreneurs but so far the government is offering just 8 percent of the profits.

“Eight percent is not attractive,” he said. Railway programs require huge investment, the sector has suffered losses and entrepreneurs are cautious, he said.

According to data released by the ministry, its debt reached 2.43 trillion yuan ($384 billion) by the end of March, with a debt ratio of 60.6 percent.

The ministry also reported a loss of 6.98 billion yuan in the first quarter.

Meanwhile, fixed investment in railways was 89.6 billion yuan, 48.3 percent less than the same period last year…

…private capital is already involved in railway construction, he said, explaining that a 624-kilometer coal transport line, partially funded by the privately owned Xinjiang Guanghui Industry Investment Group, had begun construction in late March.

However, he warned that it will not be easy to attract private investors into industries that are no longer profitable.

Building these railways gave the government a huge debt.  That debt ratio (total liabilities divided by total assets) means lenders are not all that happy.  With over half the total assets of the railway programs paid for by debt and an annualized loss of 27.9 billion Yuan (4 X 6.98 billion Yuan) investors see these railway programs for what they are.  Investment losers.  They rack up debt and can’t operate at a profit.  Even the government doesn’t want to pay for them anymore and is trying to find private investors to throw away their money.

Railroads are so costly because there is infrastructure everywhere a train travels.  And the revenue from the train has to pay for this infrastructure.  From the first survey to the first grading to the first ballast to the first track to the first switch to the first signal there are nothing but high capital costs.  Followed by high operating costs to make everything work.  From maintenance crews to engineers to conductors to train crews to dispatch centers to ticket sellers.  High-speed passenger rail is the most expensive rail of all.  Because they’re typically electric which requires even more infrastructure wherever that train travels.  And no grade crossings.  So that’s more tunnels and bridges.

Only two high-speed lines earn enough revenue to pay both their capital and operating costs.  One in Japan.  And one in France.  Governments subsidize all other passenger rail.  Only the freight railroads are profitable.  Which is why companies in the private sector still own the freight railroads.   Why freight?  Because there is no more cost effective way to move containers or bulk freight.  Like coal.  Which is where private capital is currently going to in China.  Because coal is never an investment loser.  And there is no better way to move coal overland than by train.

The bidding process has come in for harsh criticism by the public after a crash involving two high-speed trains in Zhejiang province killed at least 40 people and injured more than 200 others in July.

According to the findings of an investigation announced last December, malpractice and illegal contracts were found in the bidding process administered by the Ministry of Railways and its subordinate bureaus, which resulted in the failure of a train control system that had never undergone field tests before launch, Xinhua reported.

The national auditor said in March that it had uncovered evidence of fraud, waste, mismanagement and irregular accounting and procurement totaling billions of yuan at the ministry’s flagship high-speed Beijing-Shanghai railway.

And here’s the other reason why politicians love high-speed rail.  It is so much easier to conceal fraud, waste and irregular accounting and procurement practices when the money amounts are so large.  It’s a sad thing that government is not very good at building and running trains but is very good at the fraud.  We should remember this the next time government wants to spend a fortune on high-speed rail.

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FT118: ” It’s better to have rich investors risk their wealth than having the government risk our taxes.” -Old Pithy

Posted by PITHOCRATES - May 18th, 2012

Fundamental Truth

It wasn’t the Private Investors who lost Half a Billion Dollars on Solyndra

It takes money to create jobs.  Some conveniently forget this fact when the politicians want to take money away from rich people who got rich by creating jobs.  But the politicians always remember this fact when they want to ‘invest’ our tax money into projects to create jobs.  When they want to spend our taxes they then fully understand the concept that it takes money to create jobs.  Funny how that works.

Also funny is that the projects the politicians want to invest in are not projects the rich investors want to invest in.  Because it’s their wealth they’re risking they are a little choosier in deciding where to invest it.  So they don’t invest in these losers the politicians champion.  For even though these politicians are Ivy League graduates who are smarter than everyone else they only like to risk other people’s money.  Unless they have inside information.  Such as pending legislation that will affect the market.  Then they’ll invest their own money.  But that’s the only time.  For as smart as these Ivy League graduates are they have little understanding of free market capitalism.  Or what it takes to be an entrepreneur.  And have no idea how to evaluate an investment opportunity without having inside information.

Still, politicians are so arrogant to believe that they are smarter than the market.  And that if they ‘wisely’ invest our tax money that they can do a better job than those who risk their own money.  People the politicians believe aren’t smart enough to make the best and wisest investments.  Despite their having gotten rich doing just that.  Making wise investments.  For example, it wasn’t the private investors who lost half a billion dollars on Solyndra.  For they saw the only thing keeping the solar industry afloat were government subsidies.  And any industry that requires government subsidies is not likely ever to earn a profit.  So they said ‘no’ to Solyndra and put their money in what they deemed wiser investments.  While the government invested in Solyndra.  Because they saw that as the ‘wiser’ investment.  Only to lose a half a billion of our tax dollars in the process.  Yup.  When it comes to making smart investments the politicians are regular ‘geniuses’.  And by that I mean they are actually the opposite of geniuses.  I was using sarcasm.

Politicians lose Hundreds of Billions of our Tax Dollars in Investment after Investment because they Care 

So the politicians are worse than the worst rank amateur investor.  We know it.  They know it.  At least they should know it what with their perfect record of failure.  So why do they do it?  Why do they continually take money away from the people who know how to better invest that money so they can make some of the worst investments of all time?  That’s a good question.  And we really need to think about it. 

To figure this out think about this one word.  Elections.  That’s the key.  You see, a majority of people wouldn’t vote for these politicians.  Because they want to spend our money.  They want to raise our taxes.  So they can spend it on more Solyndras.  How does that help them?  Here’s how.  People at these companies who receive this federal money are very grateful.  And to show their gratitude they make campaign contributions.  Often with some of the very money they received from the government.  Part of that ‘wise’ investment to create the ‘smart jobs’ of the future.  And why not?  There’ll be a little left over after paying some generous executive salaries and bonuses.  Why not give a little back to the people that made all of that possible?  Make a nice campaign contribution to help the politicians convince the people that they are smart and wise and deserve to win the next election.  So they can spend more of the people’s taxes.  Into other wise investments.  Like Solyndra. 

You just need one thing to make this all possible.  A bad investment.  An investment so bad that no rich people will risk their own money.  Because they know what a loser the investment is.  It has to be that bad.  So someone in the government can say rich people are evil and selfish.  That they only care about turning a profit.  That they are not interested in the jobs of the future.  Or high paying jobs with good benefits for the working man.  Like the politicians do.  They care about the people.  Instead of turning a profit.  And are willing to invest taxpayer money in the poorest of investments.  And lose hundreds of billions of our tax dollars in investment after investment.  Because they care.  More for their own self-interests but they care.  Unlike those evil rich people.  Who refuse to waste valuable investment capital.  And won’t let the people they’ve loaned it to waste it either.  Because they only care about the money.  Unlike our government.  Who has no problem throwing away trillions of our tax dollars.

Investors Invest Responsibly and know how to Pick a Winner that will Create Jobs 

Rich investors take risks when they invest their own money.  So they are very careful in how they invest it.  And when they invest it they are very interested in how that money is used.  They don’t need any oversight committees or legislation.  Because they are no one’s fool.  They are not rank amateurs.  And they appreciate the value of hard-earned money.  They have a vested interest to make sure that money is used in the most efficient manner possible.  Because it’s their money.  And they care.

Politicians invest taxpayer money.  They have no vested interest.  So they don’t care.  When they run out of money from all of their bad investments they don’t suffer any consequences.  All they do is malign rich people again to foster a little class warfare to make raising taxes on the ‘evil rich’ easier.  Then they keep on making bad investments.  Mostly to their political cronies.  Who will return some of that public money back to them in the form of a campaign contribution.

That’s why it’s better to have rich investors risk their wealth than having the government risk our taxes.  Investors will invest responsibly.  The politicians will not.  And the investors know how to pick a winner that will create jobs.  The politicians do not.  The only way they know how to make money is with inside information.  Or skimming a little off the top of the public purse.  Which is the only way to explain investments like Solyndra.  It’s either that or our politicians are just really stupid. 

What a choice.  Corrupt or stupid.  Or is it even worse?  Are they corrupt AND stupid?  If so it sure would help explain a lot.

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The Eurozone Contagion Spawned in Spain, Greece and Italy has Infected French Banks

Posted by PITHOCRATES - December 11th, 2011

Week in Review

Here is how a contagion spreads (see Moody’s downgrades top three French banks posted 12/9/2011 on UPI).

Credit rating agency Moody’s Investors Service lowered credit scores for three of the largest banks in France Friday…

The rating service said it was concerned the conditions in Spain, Greece and Italy could deteriorate further, which would mean the French banks would suffer deeper losses on the government bonds they hold.

The whole point of the Eurozone is to replicate the massive free trade economy of the United States.  And it’s been somewhat successful.  The economy of the united states of Europe has matched and even exceeded the economic output of the United States.  But some of the member states cheated to get into the common currency.  The Euro.  By lying about their true debt levels.  And their deficits.  These states are now in trouble.  The costs of their welfare states grow.  Which requires more government borrowing.  And these continuous and growing deficits add to that massive debt.

There comes a point when people doubt whether these states will be able to repay their debt.  And that’s what private investors are now thinking.  So they’re not buying anymore of their debt.  Unless they make it worth their while.  With very high interest rates.  Which increases the cost to service the debt.  In fact their borrowing costs have grown so great that they have to borrow money to pay the interest on the money they borrow.

Of course, this makes it even more doubtful that these countries will be able to repay this debt.  Which scares away more private investors.  Despite those high interest rates.  And threatens the solvency of these countries.  And the common currency itself.  The Euro.  And if the Euro goes so does the Eurozone.  Including the economic powerhouse of the united states of Europe with it.

So other countries of the Eurozone step in and buy these worthless bonds.  To try and save the Euro.  And their own economies.  Now the financial problems of Greece, Spain and Italy are now everyone’s financial problems.  Because of those worthless bonds sitting on the balance sheets of healthier banks.  Which are not quite so healthy anymore.  Because of their exposure to this contagion.

It’s a dangerous game they play.  To save the Eurozone they have to infect themselves with the contagion.  And hope that they are financially immune enough to live through this sickness.  But they are teetering on the brink with their own massive debt.  Their own massive welfare states growing their deficits.  Which will be a problem.  For they refuse to take the same medicine Greece, Spain and Italy are refusing to take.  Austerity.  So the chances are pretty good that they will fall to the contagion, too.  As it continues to spread and infect everyone in the Eurozone.  Until there will be no Eurozone.  Or a united states of Europe.

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Private Investors passed on Solyndra, so why didn’t the Smart People in Government pass, too?

Posted by PITHOCRATES - September 14th, 2011

The High Cost of Solar Power makes Reliable Fossil Fuel-Produced Electricity even more Attractive

Solar panels. One of the darlings of green energy. And a favorite of the Obama administration. Especially Solyndra. Where Vice President Biden made a personal appearance to showcase the government’s half billion dollar investment into the economy of the future. A future, albeit, that will not include Solyndra. Why? Sales of solar panels are down. Way down (see Opposing view: ‘Perfect storm’ sank Solyndra by Daniel Poneman, Deputy Secretary of Energy, posted 9/14/2011 on USA Today).

Unfortunately, expanding production has coincided with short-term softening demand, a product of the banking crisis in Europe and its wider economic effects. The combination has had a dramatic effect on the price of solar cells, which has plummeted 42% in the past nine months. This has taken a serious toll on solar manufacturers everywhere, including the U.S.

Actually, what made Solyndra’s solar panels unsellable was something else. They didn’t use silicon. Like everyone else. They used another material. And a different technology. This cost more. But the installation was cheaper. So the total package was competitive. Until the price of silicon fell, that is. Which priced them right out of the market.

Solyndra needed silicon to remain expensive to remain competitive. Much like E85. That really only sold well when gas peaked over $4/gallon. And people didn’t realize that they had to buy more of it to go as far as gasoline would take them. Which meant a lot of people bought E85 only once. But government still subsidizes it. To make it cheap enough to get people to buy it. Even though they don’t want it.

Which is why solar panels aren’t selling. Governments everywhere are implementing austerity measures to reduce record debts. Which means they can’t subsidize these solar panels anymore. Which makes their high prices even higher. Making that sweet reliable fossil fuel-produced electricity all the more attractive. So bye bye Solyndra.

This month, Solyndra , a California-based company, filed for bankruptcy. Solyndra had been named one of the world’s 50 most innovative companies and reported sales growth of 40% to $140 million last year. In 2006, the company applied for a federal loan guarantee. It underwent years of rigorous internal and external review before being approved — before the perfect storm of deteriorating market conditions.

This year is 2011. So they reported sales of $140 million in 2010. And if you do some math, this means they reported sales of $100 million in 2009. Sounds impressive. But numbers are relative. We have to put them into some kind of context for a true understanding.

Government Investment into Solar Energy is Politics over Substance or just Plain Cronyism

So let’s find a little context (see White House ignored red flags in loan to failed solar company by Martin Wolk posted 9/14/2011 on MSNBC).

The FBI raided the Silicon Valley headquarters of the company, Solyndra, last week, investigating whether the government was misled when it loaned the company $535 million in taxpayer funds…

Solyndra received the loan guarantees in 2009 as part of President Barack Obama’s promise to create millions of so-called “green” jobs. But last month, Solyndra declared bankruptcy, laying off all 1,100 workers.

Hmm, let’s see. That was $535 million to produce $100 million in sales. Now that’s putting things into context. In other words, $100 million in sales is not impressive. In fact, it is downright abysmal. Only about 19% of the federal loan produced sales in 2009. For the last two full years of their existence, about 45% of the federal loan produced sales.

Worse, by the time you subtract the cost of sales from these sales and calculate the return on this government investment, there is none. Even before the bankruptcy. This was a horrible investment. This is a lot like all of those dot-com startups. Companies that were flooded with investment capital. As people were anxious to find the next Microsoft. Pouring money into companies that never produced anything to sell. And when the investment capital dried up, the dot-com bubble burst.

At least with the dot-com economic destruction, private investors lost. The green energy bubble, on the other hand, it’s the taxpayer losing. Because we’re subsidizing so much of this green energy. Why? Because private investors see it for what it is. A bad investment. There isn’t a market for this stuff. So they’re not throwing good money at bad investments. Unlike Uncle Sam.

House Republican investigators have unearthed emails — reviewed by NBC — which reveal repeated warnings by government staffers about the loan. Days before final approval there was a warning that one model showed the project would run out of cash in September 2011, which it did.

Another memo from the White House Office of Management and Budget, also cited by The Washington Post, questioned the model the government was using, but said “[g]iven the time pressure we are under to sign-off on Solyndra, we don’t have time to change the model.”

Why the rush? The White House appeared to be pushing to meet political deadlines so Vice President Joe Biden could announce final approval when he spoke at the groundbreaking for the new plant.

A key question is whether Solyndra’s political connections were a factor. A big Obama donor associated with the venture, identified by the Post as Tulsa billionaire George Kaiser, repeatedly visited the White House. He has denied using his influence to win approval of the loan.

This explains a lot. Staffers warned against the loan. Some even did math. Probably recognizing that there were no sales. And with no revenue coming in it was a simple matter of dividing investment capital by their monthly costs. Which proved very accurate. The staffers were smart. The policy was just bad. But, alas, staffers don’t make policy.

This is politics over substance. Or just plain cronyism. Which means one of two things. Government is incompetent. Or corrupt. Take your pick. Whichever one makes you feel better.

If Private Investors won’t Invest it has to be a Bad Investment

Solyndra is just one example of bad government policy. The whole ‘green energy is our future’ is a pipe dream. An excuse for the government to spend money. And to pay back campaign donors.

If this was our future, private investors would be pumping investment capital into green energy like there was no tomorrow. Like they did with all of those dot-coms. Those didn’t need any government investment, did they? And you know why? Because the private sector is full of greedy bastards looking to get richer. That’s why. And they will bury someone with investment capital if that someone has a good idea.

Anything the government ‘invests’ in, then, is a bad idea. Why? Because private investors say so.

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