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HIVE TOPIC OPEN: Sept. 16, 2012 - Oct. 16, 2012

How can American manufacturing be reinvented to thrive in an era of globalization?


The Next Detroit

Why Mitt Romney is wrong to give up on electric cars.

The Tesla Roadster
The Tesla Roadster

Photo by Joe Corrigan/Getty Images for AOL

In the first presidential debate, Mitt Romney ridiculed President Obama for backing “loser” companies like electric-car makers Tesla and Fisker, which both received low-interest loans from the Department of Energy in the first year of the Obama administration. The loan program for alternative-energy vehicles was actually created by the Bush administration, but never mind that. And Romney was wrong to tag the companies as “losers” when they are both solvent and growing, but never mind that either. The interesting question is whether he will be proven right in the long run. Will the U.S. government’s investments in electric cars jumpstart an industry and power a renaissance in the nation’s auto manufacturing sector? Or will those investments go to waste, as the cars of the future are built overseas?

In theory, electric cars offer a rare opportunity for the United States to reassert its place at the center of the auto-manufacturing world. The technology is still in its infancy, and so far the companies at the forefront of electric-car innovation are startups like Tesla rather than established players like Ford, Honda, or Mercedes. Because electric vehicles have a fundamentally different powertrain than gas guzzlers, a young electric-car company needn’t necessarily set up shop near existing automotive hubs such as Detroit, Stuttgart, or Nagoya. The field is open.

In many other industries, globalization has rendered American manufacturing uncompetitive, because it’s cheaper to build things elsewhere and import them. But unlike clothing or iPhone components, vehicles tend to be produced in high-income countries with expensive labor. That’s because labor isn’t the most important input in vehicle manufacturing, especially on today’s highly automated assembly lines.

The costliest and most crucial inputs are the thousands of parts needed to build the cars, from fuel injectors and brakes to metal tools and dies. And proximity is important when you’re developing a new vehicle, because if a part is faulty or doesn’t fit, it can set back the entire production schedule. Auto manufacturers also like to build their cars near their customer base, both to reduce shipping costs and to be able to sense and respond to shifts in demand. And in the case of electric vehicles, new infrastructure networks will play a major role too: You’re not going to sell mass quantities of all-electric cars until you have a grid of charging stations to make sure they don’t run out of juice on the freeway.

In short, the countries most likely to lead the electric-car industry in the future are those that get a head start today. If a company like Tesla succeeds in the United States, companies that want to get involved in the electric-vehicle supply chain will gravitate toward it. That was part of the reason the Bush and Obama administrations invested in it.

So far, Romney’s dismissals aside, the bet seems to be paying off. As Tesla was ramping up to develop the Model S, which began shipping this summer, the Department of Energy’s $465 million low-interest loan gave it an added incentive to bring production onshore. (Its first car, the Roadster, was built partly by Lotus in Europe, though Tesla is headquartered in Silicon Valley.) A year later, Tesla lucked into the former NUMMI auto factory in Fremont, Calif., which was being sold at a huge discount by Toyota and GM. The company now employs 1,500 workers at its Fremont plant and plans to deliver 20,000 of its Model S sedans in 2013. (They’re a dream to drive, by the way, though still too pricey for the masses. Tesla's plan all along has been to start out building luxury cars and work its way down the price scale with each successive model.) Meanwhile, it does much of its research and development at its headquarters in nearby Palo Alto.

Last month, the company doubled down on its investment in the domestic market, unveiling a California-wide network of state-of-the-art “supercharger” charging stations, which promise to provide three hours’ worth of power in a 30-minute fill-up. Tesla plans to start rolling out stations across the nation next year before moving on to Europe and Asia. This may be the world’s most ambitious wager yet on the future of plug-in electric vehicles. Elon Musk’s company is either going to lose big, leaving abandoned supercharger stations strewn across the landscape, or it’s going to win big. And if it wins big, look out: The next Detroit just might be Silicon Valley.

Then there’s Fisker. Legendary automotive designer Henrik Fisker founded the company in Anaheim in 2007, four years after Martin Eberhard, et al., launched Tesla, and quickly began playing catch-up. Rather than build an all-electric drivetrain from scratch, it went with a plug-in hybrid-electric model to get around the road-trip problem. It purchased batteries for its Karma sports sedan—Justin Bieber’s favorite ride—from a Massachusetts startup called A123 Systems. It contracted with a Norwegian firm to build the frame, and it outsourced the manufacturing to Finland. This is an alternative model of electric-car development, one that taps into the global supply chain in pursuit of the most efficient way to build each element.

Unfortunately, it hasn’t worked very smoothly so far. Production has been beset by delays, and the price has risen to six figures. (To be fair, Tesla’s Roadster suffered delays too.) A123’s batteries proved defective, leading to a humiliating recall in March, and A123 appeared in danger of bankruptcy before a Chinese billionaire bought it last week.(Update, Oct. 16, 1:55 p.m.: A123 announced on Tuesday that it had abandoned its plans to sell a majority share to China’s Wanxiang Group and would instead file for bankruptcy protection and sell its assets to Milwaukee-based Johnson Controls Inc.) That was just one of the problems that led Consumer Reports to give the Karma a failing grade in a scathing review last month.

Setbacks are to be expected when building a mass-production auto manufacturer from the ground up. There’s a reason no one has done it successfully in the United States in 80 years. And in any case, Fisker had plans to build its next car, the more affordable Atlantic, at a former GM plant in Delaware beginning late this year. But perhaps the biggest blow to the company’s future came not from any of its suppliers but from the Obama administration. Under political pressure to limit its exposure in the wake of Solyndra’s bankruptcy, the Department of Energy froze the bulk of its $529 million loan to Fisker in February when it failed to meet delivery milestones. That has, of course, compounded the delays and forced the company to put production of the Atlantic on hold.

Does that make it a loser? Obviously not everyone thinks so, since the company just raised another $100 million from private investors. Meanwhile, the DoE’s austere stance has raised the possibility that this U.S.-backed startup will end up building future models abroad. Fisker spokesman Roger Ormisher tells me that’s not the goal. “Our mind-set is very much to be an American company,” he says, especially since it already owns the Delaware plant. “But there are a lot of competitive forces at work.” For instance, Europe offers better tax breaks, and its higher gas prices and genuine efforts to reduce carbon emissions could translate a lot of potential demand for plug-in hybrids there. And with U.S. politicians squabbling over alternative-energy subsidies, China sees an opportunity to capture a slice of what could be one of the great manufacturing industries of the future.

Romney was premature when he wrote off Tesla and Fisker losers, but there are still two ways that he could be proved right. One is that electric cars could turn out not to be the cars of the future, whether because some other technology comes along and renders them obsolete, or because the world gives up on fighting climate change and continues powering vehicles with fossil fuels indefinitely. The other is that electric cars could be the cars of the future, but the companies that build them elect to do so elsewhere than the United States.

Thanks to programs such as the Bush/Obama DoE loan program, the United States has a head start on some other countries in that race. Besides Tesla, GM is already building its plug-in hybrid Chevrolet Volt in Michigan, and Nissan is scheduled to start producing its all-electric Leaf in Tennessee later this year, both with government support. But it’s a long haul, and maintaining that edge will require some political will, especially in the face of ceaseless cries of “Solyndra” from the right. Whether Obama has that will is unclear: He remained silent in the face of Romney’s attacks on green-energy spending in the first debate. As for Romney, the only hope is that he doesn’t really believe his own zingers.

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