Corporate failure is one of the ways in which markets move things along: creative destruction and all that. A business built on a product that doesn’t catch on, or that is too expensive or that time has passed by (Blockbuster Video, anyone?) will ultimately fail. This process can be painful (something too easily downplayed), but it can pave the way for something better next time around.
Sometimes, of course, the operation of the markets can head off future pain. If a nascent start-up is struggling to raise the capital it needs, that may (markets are by no means perfect) be a sign that the people behind it are on the wrong track. Its failure to attract funding could be a blessing in disguise, ensuring that a future fiasco is stillborn. Alternatively, it may encourage those entrepreneurs whose idea it is to refine and improve their original concept in a way convincing enough to attract capital and, hopefully, succeed. This (very) basic market logic is something that the architects of industrial policy, like other central planners, have, all too often, a way of ignoring. They believe that their judgment is better than that of the markets and agree to supply capital or other financial assistance to a project that could not attract enough funds on its own. Sometimes they will even be right to do so (especially if their goals are focused on something other than the bottom line). Sometimes. But the chances of such a success will almost certainly be reduced if a project catches a politician’s eye.
And so, via the Wall Street Journal’s editorial board, the sad tale of Lordstown Motors:
Politicians are lousy at picking business winners and losers. Consider the electric vehicle startup Lordstown Motors, once hyped by Donald Trump. Despite rich government subsidies and mandates, Lordstown this week warned it could soon file for bankruptcy.
Lordstown was among a coterie of EV [electric vehicle] startups that went public during the pandemic through a merger with a SPAC, or blank-check company. Launched in 2018, the electric truck maker had little experience manufacturing vehicles. Yet it raised a trunk-load of cash with the help of Mr. Trump and the Federal Reserve’s easy money.
In 2019 Mr. Trump berated GM CEO Mary Barra for shutting down a Chevy Cruze plant in Lordstown, Ohio. “I asked her to sell it or do something quickly,” he tweeted. Ms. Barra followed orders and provided Lordstown Motors a $40 million loan to buy and retrofit the plant. Mr. Trump then used Lordstown as a prop in his presidential campaign.
In September 2020, Mr. Trump flogged a prototype of its Endurance pickup at a White House event with its then CEO. “The area was devastated when General Motors moved out, and then we worked together, and we made the deal on the plant,” Mr. Trump boasted. “This is a great technology,” and “I heard the sales are great.” Lordstown hadn’t yet sold a single vehicle.
Mr. Trump’s endorsement nonetheless fueled investor interest while near-zero interest rates drove a boom in SPACs. After Lordstown made its public debut in October 2020, its stock surged to $26 a share. Yet amid myriad manufacturing mishaps, its shares have sunk to 40 cents.
In January 2021, its pickup prototype burned during testing. As it burned through cash, Lordstown sold its namesake plant and contracted assembly to Foxconn Technology Group. Last November Foxconn agreed to invest $170 million in Lordstown, perhaps hoping that Inflation Reduction Act subsidies would provide a boost.
Yet Lordstown had manufactured only 31 vehicles by late February 2023—most of which had to be recalled. Losing patience, Foxconn on April 21 threatened to withdraw its investment, triggering Lordstown’s bankruptcy warning.
As interest rates have normalized, companies with little revenue are struggling to borrow and raise fresh capital. This is one reason stocks of other EV startups have crashed from their pandemic highs, including Canoo (down 96%), Nikola (99%), Faraday Future Intelligent Electric (99%), Rivian (90%), Lucid (87%) and Fisker (81%).
Artificially cheap money has a way, in the end, of being very expensive.
The story comes with a footnote:
Stellantis [the world’s fifth largest automaker] announced last week that it would offer buyouts to 31,000 hourly employees to free up cash for its government-mandated EV transition. “The competition is fierce, and the cost of electrification cannot be passed on to the customer,” North American chief operating officer Mark Stewart wrote to employees.
Translation: Workers will be collateral damage in the transition to EVs as they lose their jobs making gas-powered cars. President Biden flogs the jobs created at EV factories, but he never mentions the losers elsewhere owing to government mandates and subsidies that distort investment. Lordstown is a poster child of the new Washington consensus in favor of government industrial policy, and it won’t be the last casualty of the hubris.
As defenders of Soviet central planning (and more), used to say, “you can’t make an omelet without breaking eggs.”
But, as at least one observer asked, “where’s the omelet?”
Such skepticism would, of course, be inappropriate in the case of EVs. They will turn out to be so good, so convenient and so attractively priced that their main competitors (“traditional” autos) are going to be squeezed out of the market by a kindly government keen to stop those intent on sticking with the internal-combustion engine from making fools of themselves.
Not only that, EVs’, uh, accelerated introduction will go smoothly, made even better by an abundance of easily accessible charging stations. Oh yes, they will also help save the planet, and create far more jobs than they crush. And as for the suggestion that the switch to EVs is an economic and strategic gift to China, that’s just crazy talk.
Now, if you’ll excuse me, I must drink another cup of Kool-Aid.