Wednesday, June 24, 2009

Carmakers get $8bn for green revamp

The US is to make billions of dollars in cheap loans available to Ford , Nissan and Tesla, the California electric carmaker, so they can re-equip their plants to build a new generation of electric and other fuel-efficient vehicles. Ford will receive $5.9bn, Japan’s Nissan $1.6bn and Tesla $465m from $25bn of government money that was set aside in 2007 for a scheme known as the advanced technology vehicles manufacturing incentive programme.

Does anyone think this will actually encourage automakers to become more efficient or adopt to changing tastes? It won't because they get to operate with cheaper capital which might make them profitable but won't necessarily make them more competitive long-term -- what happens when the cheap capital runs out? Those leveraged profits will come down quite a bit and they will require more debt carrying higher interest payments. Cheaper capital in this case doesn't encourage a company to be lean, mean, and responsive to consumers. Rather it affords the car makers too many inefficiencies that won't get noticed. Second, what are the secondary impacts of subsidizing automakers like this? Fewer new entrants, moral hazard, protectionism, larger government, ...

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