Are Tesla and Fisker Too Small to Succeed?

(MoneyWatch)  Is the Obama Administration misspending the government's money on startups such as Tesla Motors and Fisker Automotive? That's the contention of an October 12 BusinessWeek article, which quotes longtime analyst Maryann Keller as saying, "We're pouring $1 billion into two companies without a future. The economics of the industry favors large companies."

Of $8.5 billion in Department of Energy loans to automakers so far to build new green-themed plants, $465 million went to Tesla for work on its Model S sedan and, more recently, $528 million to Fisker Automotive for final design work on its $89,000 Karma luxury plug-in hybrid and for its more affordable Project Nina car. The total Advanced Technology Vehicles Manufacturing Loan fund is $25 billion, so much of the money remains to be spent.

BusinessWeek says this view is also held by "other critics," but only quotes Keller. "Critics" in the article say that Fisker is an "integrator" rather than an innovator, buying the motor and battery technology for its Karma (due to roll off Finnish assembly lines starting in November) from other companies.

Fisker responds that it built the Karma's chassis. When I talked to an Energy Department spokeswoman last month, she told me that Fisker's "two projects seemed to be worth the risk of the loan," and would create "a large number of jobs in America." She also said the loan, which will be paid in stages, would not "go out the door" until conditions were met.

She later said there was no deadline for the conditions to be met. Mr. Fisker said that those conditions were worked out in months of discussions with the agency. "It's similar to a loan we might get from a bank and it's not a problem," he said. "The D.O.E. wants us to be successful."

In any case, when it comes to EVs, even many established brands are on a learning curve. General Motors does not make its own batteries (though it just opened a battery testing lab in Michigan), and Ford retained the Canadian company Magna International (now also the purchaser of Opel) as its partner in building a Focus-based electric sedan for 2011.

Tesla, the article says, "has more credibility as an innovator," since it makes its own battery packs and Daimler invested $50 million to buy a tenth of the company. "But it will be a huge challenge for either Fisker or Tesla to achieve sufficient scale," BusinessWeek says. "Selling 100,000-plus cars a year requires a large network of dealers." Tesla has seven dealerships now but is building more, and Fisker expects to have 100.

Tesla is perhaps the most fiscally successful of the startups, but the government money still dwarfs the $300 million the company has raised privately. But both Fisker and Tesla point out that the DOE funding is not in the form of a grant: It's a loan, which has to meet some basic conditions and be paid back with interest.

DOE funding also takes the form of matching grants from stimulus funds, and in August the agency named 48 recipients of that largesse, totaling $2.4 billion. The perception was that this funding favored Detroit and Big Three-connected suppliers. Start-ups, especially California-based ones, felt left out in the cold.

There's also the argument, made by Darryl Siry on his blog, that startups are critically dependent on the success of suppliers that would likely go bust if major automakers were out of the picture.

So there's at least two sides to the big company/startup divide.