Lessons from Solyndra

There has been a lot of press around Solyndra, most of it has been creating more noise than anything else.  I don’t have time to research the statistics of how many companies fail each day, nor do I know how many alternative energy companies have failed since the initial boom in the mid 2000’s, but there is nothing new about dead bodies on the road to innovation and the creation of new industries.
Of course what is selling this newsprint is that the government was counted as a large investor in the company, and the failure of Solyndra has become a touchstone for failed Keynesian spending.
I take a bit of offense to those seeking click-through for the easy “headline” story here.  True this is a good example of wasteful spending, I will not argue that this was terribly wasteful.  However, I do not think the lesson should be that the government has wasted money on “solar energy”.  I think the lesson should be the government has no business making direct investments in any private corporation.
What the government does need to do, is to appropriate taxpayer money in a manner that is in line with possible public benefits rather than private ones.  Any business student can tell you that among Porter’s Five Forces is a satellite force often noted as missing from Porter’s original approach.  The sixth (or five and a half) “force”, after buyer power, supplier power, barriers to entry, substitution and rivalry is government.  Two of the ways governments exert influence on the competitive dynamics of industries are through regulation, subsidies.  There is plenty of literature to support the thesis that sovereign industry winners (i.e. home country advantages) are often a function of sovereign investment and support for those industries either due to national security concerns, or economic importance.  Consider nuclear energy in Japan, oil in the middle east, automobiles of defense in the United States, airlines in almost every country, etc….  These are all areas where at the end of the day, the sovereign will support (or bail out) an entire industry because of perceived importance to the domestic economy (jobs) or national security.  Anywhere you see close government support or intervention in an industry you generally have competitive advantages.  At its core this is due to lower costs of capital for companies nurtured by sovereign support for their industry.
The boondoggled Solyndra investment is the result of Obama’s “shovel ready” approach which I have commented on before.  Whenever the government makes “shovel ready” a requirement, you are going to see a lot of wasteful spending on every halfwit with a political connection and a shiny new shovel.
Our country does need to make new investments in energy infrastructure.  I am sure someone has done more recent math, but I know that for a fraction of the trillions of dollars we have spent in Afghanistan and Iraq, and even possibly Afghanistan OR Iraq, we would currently be entirely energy independent.  It’s absurd that we have waged two decade long wars over oil which has finite capacity, and which we do not have much jurisdiction over.  Moreover, as has often been said, when we convert US Dollars into Petro Dollars we increase our trade deficit, subsidize directly or indirectly our enemies, export jobs,  and further entrench deteriorating legacy infrastructure.  What the government does need to do is to use money it would have spent on individual projects to support entire new industries, not individual new companies. Rookie mistake I guess.
Government spending in the space program resulted in a proliferation of technological advancement that inspired entirely new industries, including computing and telecommunications.  No one company is large enough to make that kind of investment.  No one company can think big enough to take on that kind of challenge.  Additionally, no one company would probably have turned a profit developing our original space program.  I’m sure the direct accounting resulted in billions of “wasteful” spending.  The endeavor was one of national security and during the cold war the space program was also about national pride.  Nonetheless every American could get their hands around the common benefit (even if they did not conceive of the actual outcomes) of putting a man on the moon.
China just a year ago offered to provide $80 billion dollars to backstop their domestic solar industry.  This lowered the cost of capital for all participants, and helped lead to the massive cost savings that Chinese manufacturers have developed, and which in turn have put companies like Solyndra out of business.  I don’t want to point to China’s model as a best practice, because they still allocate capital along socialist lines, and not by free markets.  However, many advanced economies have created subsidy programs to incentivize alternative energy development, which is what truly catalyzed the industry in the first place.  Europe was on the forefront of solar and wind technologies, and Germany in particular with its large energy intensive manufacturing base heavily subsidized the development of alternative energy.  Q-Cells was the original large solar panel manufacturer, not coincidentally from Germany.  However with the massive sovereign investment from China in domestic solar industries, and the rapid rise in the Euro further exacerbating Q-Cells cost issues for buyers, the company now teeters on the brink of insolvency.   China is well aware that alternative energy is the future for the global economy and China has had both the political authority and capital to see that they “win” the great solar race.  In the future oil will inevitably rise again to levels that make alternatives even more attractive than they are today.  At that time our US Dollars will no longer be converted to Petro Dollars, but will eventually be supporting China’s Red Solar Dollars.
Ironically I am totally for the development of US leadership in alternative energy infrastructure, and while I do think that we should probably siphon big oil support into scalable alternative energy industries (to include natural gas and nuclear to some extent), I am not totally opposed to carbon solutions in the medium term.  We need to take a portfolio approach to domestic energy needs, based on domestic supply considerations and topographical opportunities.  Every part of the US has unique advantages and disadvantages, and the clear winner for domestic energy will be a safer more independent grid and energy network, not an individual company or technology.
It’s not the government’s role in a capitalistic democracy to pick the winners and losers within an industry, but to the extent that new technologies can advance the local economy, aid national security and create spillover benefits to other industries (lower energy costs), it is the government’s role to see that those technologies are incubated and succeed at home.
Article from the New York Times
September 6, 2011

A Third Solar Company Files for Bankruptcy

By REUTERS

WILMINGTON, Del. (Reuters) — Solyndra, a solar panel maker that received $535 million in federal loan guarantees, filed for bankruptcy on Tuesday.

Solyndra, which also received more than $700 million in venture capital financing, said it would try to find a buyer quickly to avoid a fire sale liquidation.

The solar industry has been in turmoil this year as a glut of panels has sent prices plummeting 25 percent. Manufacturing capacity expanded just as government austerity measures in Europe eliminated subsidies and undercut demand.

Solyndra cut prices to try to compete but said in court papers that it had been unable to match the extended payment terms offered by foreign competitors.

The company, based in Fremont, Calif., said last week it had suspended operations and laid off 1,100 workers.

Solyndra’s bankruptcy filing followed similar filings by Evergreen Solar and SpectraWatt, a private company that was backed by the Intel Corporation.

Solyndra said in documents filed in Delaware’s bankruptcy court that it planned to spend the next four weeks trying to drum up interest among potential buyers to avoid shutting down permanently and selling its assets piecemeal to repay its creditors.

If it finds a buyer, it could lead to the rehiring of some of its laid-off workers. One of those workers filed a class-action lawsuit against the company in the bankruptcy court, accusing Solyndra of violating the federal law that requires larger companies to give 60 days’ notice of layoffs.

Solyndra did not return a call seeking comment.

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