Apple's Been On a Tear - Without Government Assistance

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Last week Apple rolled out its iPhone 5 to the eager anticipation of consumers, some of whom waited up all night for the bragging rights to own it first. Apple, whose share price of $691 makes it the world's biggest corporation as measured by market value, has been on a tear-without government assistance.

Last week also brought news that yet another government-funded electric vehicle maker is having difficulties. Smith Electric, which produces electric trucks in Kansas City, withdrew its initial public offering of stock. CEO Bryan Hansel said, "We were unable to complete a transaction at a valuation or size that would be in the best interests of our company and its existing shareholders."

In other words, financial markets didn't esteem Smith Electric nearly as much as its founders would have liked.

Smith Electric, which received a $32 million Energy Department grant in March 2010 under the stimulus bill, is short on cash and has lost $128 million since 2009. It planned to produce 620 trucks in 2012, but rolled out just 79 in the first 6 months of the year, it told the Securities and Exchange Commission.

President Obama visited the company in July 2010, a year after it opened, and gave it-and the kind of industrial policy that has supported it-his personal endorsement. He said, "What you are proving here at Smith Electric is the promise of a brighter future... You are setting a model for what we should be doing all across America. Congratulations."

No matter that of the 33 energy loan guarantees made under the Energy Department's programs, 26, or almost 80 percent, have shown signs of trouble. "Trouble" ranges from missed production goals to bankruptcy filings.

A report by the House Government Reform and Oversight Committee published in March reported that of the 27 loans issued under the Energy Department's 1705 program, with commitments of $16 billion, 23 loans were judged by ratings agencies as "junk" because of their low credit quality. The remaining four were rated BBB, a low investment grade.

Smith Electric might yet survive with private funds, but prospects look dim. It joins a list of many troubled companies that received government financial assistance.

To hear some politicians speak, you might think that the only way an American company can employ Americans is with help from Washington. Reasonable but uninformed people might conclude that Apple's enormous success comes from the largess of the federal government: subsidies here, tax breaks there, and winks and promise everywhere. Apple demonstrates otherwise.

In remarks in Kansas City, the president mentioned Abound Solar, a solar panel company in Colorado "that's going to create 2,000 construction jobs and 1,500 permanent jobs."

Mr. Obama did not mention Apple, or any number of other successful American companies. Politicians rarely praise companies that create jobs without government subsidies.

Abound Solar filed for bankruptcy in July 2012 citing aggressive pricing by Chinese competitors. Abound had received a $400 million loan guarantee, and spent about $70 million before the Department of Energy halted its credit line. The company suspended operations and dismissed its 125 employees.

Both Republican and Democratic administrations have practiced green "industrial policy," a phrase for the government's deciding which new industries or startups to support with federal money or loan guarantees or tax benefits. "Green," now in vogue, means renewable, non-carbon-based energy or energy conservation.

The authority for the Energy Department to issue loan guarantees, the Energy Policy Act of 2005, was passed by a Republican House and Senate and signed into law by George W. Bush. It authorized the issue of $4 billion of loan guarantees, a ceiling Congress later lifted in 2009 to $47 billion, to encourage the development of new technologies.

No Energy Department loan guarantees were issued by the Bush administration. The Department wanted to make a loan to Solyndra, a Fremont, California solar company, but career officials at the Office of Management and Budget did not approve it, on the grounds that the project was not financially sound. As most people now know, the Obama White House was less cautious, and therein likes a cautionary tale.

The Obama Energy Department rushed loan guarantees to Solyndra, with influence from campaign contributor George Kaiser, according to emails made public by the House Energy and Commerce Committee, so that Vice President Biden could appear at the factory in September 2009. Solyndra declared bankruptcy in September 2011 after receiving $528 million in federal loans.

It's not just Solyndra and Abound Solar that have gone bankrupt.

In August 2010, Beacon Power Corporation received a $43 million federal loan guarantee to build a $69 million, 20-megawatt flywheel energy storage plant in New York. After receiving $39 million of the loan, the company filed for bankruptcy in October 2011 and was subsequently bought by a private equity firm.

Ener1, a rechargeable batteries maker for the transportation, utility grid and industrial electronics markets, declared bankruptcy on January 26, 2012 after spending $55 million of a $118.5 million Department of Energy grant.

Evergreen Solar closed its doors and moved operations to China in January of 2011 after receiving $58 million in grants from the State of Massachusetts. It filed for bankruptcy in January 2012, citing lack of financing.

Failures are not limited to American companies. In December 2011 the first publicly traded German solar company, Solon, declared bankruptcy, citing competition from low-cost Chinese imports.

A myriad of other German solar companies followed suit, including Solar Millenium (December 2011), Odersun (March), and Inventux, Soltecture, and Sovello (May). Solarworld had to renegotiate terms of a $459 million loan in August, following announcements on June that it plans to layoff 10 percent of its workforce.

Some Chinese solar companies are also in difficulties. China's photovoltaic solar manufacturing industry is now facing a crisis caused by industrial overcapacity, according to Xianping Lang, professor of finance at the Chinese University of Hong Kong.

The Chinese company LDK Solar, the world's second largest polysilicon solar wafer producer, defaulted this summer on $95 million owed to suppliers. The local government of Xinyu City in Jiangxi Province bailed out the company to stop it from going bankrupt. If LDK were to collapse, according to reports in the China Business Journal, it would lead to a collapse of hundreds of photovoltaic related enterprises and destroy Xinyu City's economic development plans.

This week, many Americans are pondering which mobile phone to buy from manufacturers that don't take government handouts. Few Americans are buying government-subsidized electric cars, solar panels, or wind turbines. It's time for these government subsidies to end.


Diana Furchtgott-Roth, former chief economist at the U.S. Department of Labor, is senior fellow and director of Economics21 at the Manhattan Institute. Follow her on Twitter: @FurchtgottRoth.   

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