Did Obama Pick an Automotive Winner?
Floundering electric car battery manufacturer A123 Systems (NASDAQ:AONE) has received interim approval for $50 million of debtor-in-possession financing from the Wanxiang Group to fund its bankruptcy. A123, which received $249 million in federal grant money, filed for Chapter 11 in the middle of October after defaulting on a loan. Wanxiang has announced its interests in acquiring the bankrupt company but auto parts and battery supplier Johnson Controls (NYSE:JCI) previously entered into a purchase agreement, and has a November 8 court date to discuss bidding procedures.
On the other side of the world, Australian auto parts supplier Autodom is finally seeing some love from major car manufacturers with plants in the country. Autodom is facing plant closures and layoffs because demand for domestic vehicle production has fallen below sustainable levels. Ford (NYSE:F) and General Motors (NYSE:GM) will together underwrite the struggling company’s $6.5 million in debt. To be fair, if Autodom shut down, Ford and GM would likely have to suspend production in the country until they found another parts solution.
Catalysts are critical to discovering winning stocks. Check out our newest CHEAT SHEET stock picks now.
It’s interesting — and a bit relieving — to see companies coming to the rescue of other companies instead of the government. There’s no doubt that the auto industry in many parts of the world needs help. Australia has seen a number of plants close and thousands of workers have been laid off. The situation in Europe is even worse, with billions lost and tens of thousands of employees now out of work. Automakers have been scrambling to cut costs and scale back production as the economy remains weak and demand drops. Car manufacturers are turning for help wherever they can get it.
In order to maintain access to credit for dealerships and customers, the French government agreed to underwrite 7 billion euros ($8.9 billion) in bonds issued by Peugeot. Back in the United States, the presidential election has finally arrived and the government’s bailout of GM is still a hot ticket. President Barack Obama has been criticized by candidate Mitt Romney for “picking winners and losers,” and among those losers is A123.
But it seems impossible to escape government influence on the auto industry. There are standing tax credits for customers who buy electric vehicles and federal incentive programs for hybrid and alternative energy vehicle production. Tesla Motors (NASDAQ:TSLA) has attracted a lot of attention because it was the recipient of over $450 million in government loans, and has been awarded a grant from California. To its credit, the manufacturer of electric vehicles does not seem to be in danger of defaulting.
Officials in Shanghai have submitted a proposal to offer people a subsidy of as much as 100,000 yuan ($16,000) for purchasing an electric vehicle. Ideally meant to balance out the sometimes prohibitive cost of developing new, clean technology, subsidies certainly fall on the spectrum of “picking a winner.” Grants to companies like A123 meant to encourage research and development that may not take place in the private sector end up turning into losses for tax payers.
It’s unclear whether or not a company like Tesla could have launched successfully without assistance from the government. However, the company produces what could amount to a revolution in the auto industry, and innovation is the driving force of the market. At the point where combustion engines begin phasing out, it may become clear that the government actually managed to net a win.
Don’t Miss: What Good News Did Tesla Have for Shareholders?