Energy’s risky $1 billion bet on two politically-connected electric car builders

Introduction

Standing in a shuttered General Motors plant in Wilmington, Del., Vice President Joe Biden heralded a half-billion-dollar Department of Energy loan that would transform the idled site into a production line for electric cars.

“Folks, we’re making a bet,” Biden said on Oct. 27, 2009. “We’re making a bet in the future, we’re making a bet in the American people, we’re making a bet in the market, we’re making a bet in innovation.”

That loan is part of a $1 billion bet the Energy Department has made on two politically connected California electric carmakers producing sporty — and pricey — cutting-edge autos. One is Fisker Automotive, the project heralded by Biden and backed by a powerhouse venture capital firm whose partners include former Vice President Al Gore and a campaign donor to President Obama. The other is Tesla Motors, whose prime backers include a major fundraiser for Obama and Google co-founders Larry Page and Sergey Brin.

An investigation by iWatch News and ABC News found that the DOE’s bet carries risks for taxpayers, triggering concern from industry observers and government auditors.

Fisker is more than a year behind rolling out its $97,000 luxury vehicle bankrolled in part with DOE money. While more are promised soon, just two of its cars have been delivered, including one to movie star Leonardo DiCaprio. And Tesla’s own SEC filings say it has lost money every quarter and states: “We have a history of losses and we expect significant increases in our costs and expenses to result in continuing losses for at least the foreseeable future.” While Tesla’s major DOE funding is intended to help it mass produce a new $57,400 Model S sedan, the company has no experience in a project so vast.

There is intense scrutiny of the decisions made by the Department of Energy as it invests billions of taxpayer dollars in alternative energy. The questions follow the administration’s failed $535 million investment in solar panel maker Solyndra. The company’s collapse, bankruptcy and raid by FBI agents generated a litany of questions about how the Energy Department doles out billions in highly sought after green energy seed money.

A key question, experts and investigators say, is whether another Solyndra is in the offing.

In interviews, executives with Tesla and Fisker said comparisons to Solyndra are unfounded. Each said the government’s investments will ultimately pay off by supporting a fleet of electric cars that will ease the nation’s dependence on fuel and benefit the environment.

“It’s absolutely a worthwhile risk,” said Diarmuid O’Connell, vice president of corporate and business development for Tesla Motors. “I absolutely believe it was a good bet for American taxpayers.” Tesla has said its mass production of the sedan will ultimately lead to profitability.

Henrik Fisker, the renowned auto designer who founded the car company that carries his name, said his company holds tremendous promise and has accumulated $600 million in private financing.

When asked directly by ABC News if taxpayers should worry about the more than $500 million in federal funds on the line, he was emphatic:

“No, I don’t think they need to worry about it,” Fisker said.

When asked if Fisker might be the next Solyndra, he said, “Absolutely not.”

On Wednesday, the company disclosed that production of the sedan has been pushed to 2013.

By some key measures, Tesla is ahead of Fisker. More than 2,000 of its first electric cars are on the road, while Fisker is just starting to get its first cars into showrooms. Tesla is further along in advancing a second, lower cost model. While both firms boast of big dollar private investments, Tesla’s vulnerabilities are more publicly visible through its SEC filings, in contrast to the privately held Fisker. Fisker is considering going public.

Energy Department officials said such loans, by their nature, are risky because the department is financing innovative, potentially game-changing technologies that could deliver long-term benefits. They said neither firm has missed a loan payment, or sought help from the department to restructure their lending agreements.

Energy officials told iWatch News and ABC News they are closely monitoring the progress of the companies, and despite some concern about delays, they remain optimistic that the two companies can succeed.

“From well established names like Ford to innovative startups like Tesla and Fisker, America’s auto industry is being reinvented,” LaVera Damien of Energy said in a statement. “While supporting innovative technologies always carries a degree of risk, these investments deliver long-term benefits.”

Yet an audit this year by the Government Accountability Office, the investigative arm of Congress, criticized the Energy Department for not keeping close enough tabs on its fleet of auto loans — including those to Fisker and Tesla — to ensure they meet benchmarks. The funding was issued under the $25 billion Advanced Technology Vehicles Manufacturing loan program, one piece of a giant umbrella of DOE loans and loan guarantees going out the door.

“DOE cannot be assured that the projects are on track to deliver the vehicles as agreed,” said the GAO report examining the department’s ATVM program. “It also means that U.S. taxpayers do not know whether they are getting what they paid for through the loans.”

Tesla and Fisker stand in rare company in securing the ATVM loans. To date, records show, more than 95 percent of applicants are still awaiting approval or have been rejected.

Between them, Fisker, at $529 million, and Tesla, at $465 million, have secured nearly $1 billion to jump-start production of their cars. Combined, the companies have already drawn down more than $300 million—Fisker at $192 million and Tesla $110 million, Federal Financing Bank records show.

Such funding delivers cachet to upstart companies like Tesla and Fisker, helping them secure even more private money. And they benefit from a cut-rate government interest loan that for each company has fluctuated from 1 percent to 3 percent.

Industry watchers question whether the Department of Energy had the auto industry know-how to make an informed decision, and they worry that another government-backed failure could damage the very industry the program intended to help.

“I think we’ll absolutely end up having our version of Solyndra in the transport world based on the way the DOE has, and seems to still be executing its loan program without enough veteran diligence in the process,” said Chelsea Sexton, an industry expert and advocate for alternative fuel vehicles.

The majority of the DOE funding for Fisker is earmarked for the company to develop a less costly, mass market sedan, the Nina. The car is to be produced at the shuttered GM plant in Delaware. The Energy Department approved the loans for an auto that, even two years later, has not been publicly revealed.

Fisker said the Nina has been designed and built, but it remains under wraps to maintain a competitive edge.

While Tesla is ahead of Fisker — its $109,000 Roadster is already on the road — Sexton also has questions about its prospects even though her husband works for the company. Tesla plans to use the bulk of the DOE loan to develop the less expensive Model S, a car that won’t hit full production until next year.

“None of us with any experience in the industry think there’s any sort of guarantee they’ll make it,” she said. “It looks pretty good right now, they’re building out their plant, things seem to be on track, so we’re all encouraged. But you know, we watched GM and Chrysler go bankrupt.”

Each DOE loan backed two projects for the companies

Fisker’s loan commitment, of $528.7 million, was announced in September 2009. The loan was broken in two parts.

In the first, Fisker would use $169.3 million for engineering integration costs to complete its first vehicle, the flashy Fisker Karma. Engineering work would take place in Pontiac, Mich., with support from the company headquarters in Irvine, Calif.— and final assembly completed overseas.

The luxury Karma, with a base price of $96,895, was supposed to be in showrooms last year, said the Department of Energy press release announcing the government’s loan commitment. “The four-door Karma is scheduled to appear in showrooms in summer 2010,” the DOE said. The company said a shipment of 40 cars just arrived in the U.S.

The bigger chunk of the loan, for $359 million, would bankroll Fisker’s Project Nina, a lower cost plug-in hybrid sedan. “Fisker estimates that up to 75,000-100,000 of these highly efficient vehicles will roll off assembly lines in the U.S. every year beginning in late 2012,” the Energy Department announced. That has now been pushed to 2013.

A month later, in October 2009, Biden traveled to his home state, Delaware, to herald Fisker’s plan to convert the closed GM factory to develop the Nina.

“Thanks to a real commitment by this administration, loans from the Department of Energy, the creativity of U.S. companies and the tenacity of great state partners like Delaware — we’re on our way to helping America’s auto industry reclaim its top position in the global market,” Biden said.

The plant re-opening followed a heavy lobbying push by Delaware politicians from both parties. In September 2009, Republican Rep. Mike Castle wrote to Energy Secretary Steven Chu, saying the Fisker proposal had “great merit,” and urging Chu to give the company “careful consideration” for the loan.

At the ceremony, the governor and state politicians took turns, along with Biden, to proclaim the project to cheering blue collar workers. They said it would produce thousands of jobs.

While Fisker has hired marketing, design and engineering teams in the U.S., the auto plant jobs in Wilmington right now number about 100. Meanwhile, Finland has gotten 500 jobs to build the Fisker car. Fisker said he remains convinced the Delaware jobs will come.

The Department of Energy loan to Fisker closed in April 2010, and again Biden took center stage in a statement announcing the loan. “The story of Fisker is a story of ingenuity of an American company, a commitment to innovation by the U.S. government and the perseverance of the American auto industry,” said the vice president.

ABC News sent questions to the White House Monday and requested an interview with the vice president. Biden was not made available but his office issued a statement: “The Office of the Vice President did not encourage the Department of Energy to choose any particular company over any other but, like others in the administration, supported the department’s loan program and the creation of car manufacturing jobs in the United States.”

Executives from Tesla and Fisker said they won government support because their projects had the best shot at success. They said the involvement of well-connected figures in their companies should not suggest they attempted to use special influence to secure the loans.

Beyond Biden, more political connections

Both companies have political heavyweights behind them. One of Fisker’s biggest financial supporters, records show, is the California venture capital firm Kleiner Perkins Caufield & Byers. The firm financially supports numerous green-tech firms, records show.

Kleiner Perkins partner John Doerr, a California billionaire who made a fortune investing in Google, hosted Obama at a February dinner for high tech executives at his secluded estate south of San Francisco. Doerr and Kleiner Perkins executives have contributed more than $1 million to federal political causes and campaigns over the last two decades, primarily supporting Democrats. Doerr serves on Obama’s Council on Jobs and Competitiveness. Doerr has not replied to interview requests since March.

Former Vice President Al Gore is another Kleiner Perkins senior partner. Gore could not be reached for comment.

“There certainly have been suspicions around Fisker because their major venture investor is Kleiner Perkins, who has Al Gore as a partner and is certainly politically connected in general,” said industry observer Sexton. “Whether that played a role or not is up to the DOE to explain.”

For months, as iWatch News and ABC News have explored how politically connected companies secured DOE funding, Energy Department officials have been steadfast: Politics never entered the picture. Each funded project was screened by professionals and decided on the merits.

Tesla brings political pull, as well. Steve Westly, who has “bundled” hundreds of thousands of dollars for Obama, sat on Tesla’s board from March 2007 to December 2009, a time period in which DOE announced its loan commitment to the Silicon Valley company. His Westly Group was also a financial supporter of Tesla Motors until Tesla went public in 2010, and Westly himself continues to invest in the company. He now serves on an advisory board to the Energy Secretary.

Westly has declined interview requests since February.

Tesla’s founder and CEO, Elon Musk, is a hearty political contributor who has primarily backed Democrats, including Obama. According to published reports, another Tesla investor is Nick Pritzker, a donor to Obama and a cousin of Penny Pritzker, the national finance chair of Obama’s 2008 campaign.

O’Connell, the Tesla executive, said political muscle played no role in the company’s award of the $465 million in loans, noting that the initial application was filed under Bush — though landed under Obama.

The president has backed electric car makers as part of his long-shot goal of 1 million electric vehicles on the road by 2015. In his budget earlier this year, Obama pitched handing consumers a $7,500 rebate when they buy an electric car. Tesla and Fisker would be among electric car makers to reap a windfall from that rebate, helping them sell cars on the back end after securing nearly $1 billion in government support to build them on the front end.

Tesla’s bet on a sedan

In Tesla’s case, as in Fisker’s, the government loan was broken into two parts.

The first chunk, for $365 million, is to finance a manufacturing facility for the Tesla Model S sedan, Tesla’s lower-cost answer to its earlier $109,000 Roadster.

The other $100 million funded a facility to manufacture battery packs and electric drive trains used by Teslas and other automakers, including the Smart Fortwo city car by Daimler. Tesla points to such partnerships — along with investments from Toyota and Panasonic — as signs that long established companies believe in its cars.

“We have a demonstrated track record on the financial side,” O’Connell said, “that should give great comfort to the American taxpayer, as they think about a loan that’s helped us to accelerate our business model.”

Unlike Fisker, Tesla is a public company. Its SEC filings offer a more sober assessment of the obstacles it faces on the road to profitability.

Tesla has yet to turn a profit and suffered net losses in each quarter. “Since inception and through the three and six months ended June 30, 2011, we had accumulated net losses of $522.8 million,” its most recent 10-K form shows.

It has no experience in high volume manufacturing of electric cars, its filings say — the very project it sees as the path toward profitability. Tesla said it encountered “significant delays” in launching the Roadster — and acknowledges that developing the Model S will be a more complex undertaking. The newer car is the project financed by DOE.

“We have no experience to date in high volume manufacturing of our electric vehicles,” Tesla’s SEC filings say. “Our future business depends in large part on our ability to execute on our plans to develop, manufacture, market and sell our planned Model S electric vehicle.”

The Roadster was produced in small quantities with the body assembled by Lotus in the United Kingdom and final assembly by the company at its facility in Menlo Park, Calif. The Model S, by contrast, will have much greater volume and be manufactured in Fremont, Calif. The company said production will begin next year.

“As a result,” Tesla wrote, “the non-powertrain portion of the production model for the Model S will be substantially different and significantly more complex than the non-powertrain portion of the production model for the Tesla Roadster.”

The company added, “We may experience similar delays in launching the Model S, and any such delays could be significant.”

Industry observers say Tesla’s grand plan to launch the Model S is fraught with challenges.

“They want to scale up production from 1,000 cars a year to 20,000 cars a year, that’s going to be a very hard trick for them to do. They want to make most of their own parts; Detroit can’t do that because it’s too inefficient. And Tesla wants to own its own dealerships. Henry Ford tried that back in the 1920s and gave it up because it was too difficult,” said Alex Taylor, a veteran auto industry analyst and writer.

Sexton, another industry watcher, said questions remain even as Tesla forges partnerships with experienced companies.

“Tesla is burning a lot of cash right now, no question. They’re just about sold out on their first car and the second car doesn’t come for close to a year. So they can only burn cash for that next nine months to a year or so,” said Sexton.

O’Connell said the SEC filings present worst case scenarios. He said the company, and its major investors, believe the risk will reap rewards.

“It is a risky venture in the best heritage of some of the other great companies that have grown up in the Silicon Valley,” he said. “This is a place where people propose ideas, finance those ideas, achieve milestones, attract a greater finance, and succeed along the way.”

Still, questions exist over how well the Energy Department is watching companies in its ATVM portfolio. The GAO’s February report said the department lacked the engineering expertise needed to fully monitor progress of loan recipients.

This approach, the GAO concluded, “may not be sufficient to ensure that the vehicles are delivered as agreed because their expertise is largely financial and not technical.”

The GAO suggested the Energy Department take two steps: to accelerate efforts to retain more engineering experts to track progress, and develop more quantifiable performance measures for its ATVM program goals.

Jonathan Silver, then executive director of DOE’s Loan Programs Office, disagreed with both GAO suggestions, saying the department was carefully monitoring progress, had employed engineering reviews when required and was on track. “DOE is very proud of the fact that the program was set up in record time,” Silver wrote. He has since resigned.