Why the Government Should Have Seen the Solyndra Collapse Coming

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If you knew of a company that had high manufacturing costs, was in a highly competitive market, and was hemorrhaging money, would you invest in it?

Well, U.S. President Barack Obama and the federal government did - using taxpayer money.

And now that company, Solyndra LLC, is bankrupt, and the $535 million loan it secured from the government stands little chance of being repaid.

Republicans have seized upon the Solyndra collapse as a political embarrassment for the Obama administration, which pressured the U.S. Department of Energy to approve the loan application in August 2009.

President Barack Obama's May 2010 visit to the Fremont, CA, facility established Solyndra as a focal point for his green jobs initiative.

But as a money-losing company with a business model that virtually assured eventual collapse, Solyndra was a bad bet. The company filed for Chapter 11 bankruptcy protection on Sept. 6.

"Solyndra was never profitable, and it was obviously poorly managed and unviable in the global market," Rep. Cliff Stearns, R-FL, chairman of a congressional panel investigating the Solyndra bankruptcy, told The New York Times.

It's amazing Solyndra needed a federal loan guarantee at all; it attracted $1 billion in private capital in addition to half billion it received through the federal loan guarantee program in September 2009.

Yet, by the end of August, most of it was gone.

Although the Obama administration has blamed the Solyndra collapse on poor luck and stiff competition from Chinese solar companies, many warning signs were apparent even before the loan guarantee was approved.

The evidence includes:

  • E-mails between DOE staff members in Aug. 2009 acknowledged that a credit rating agency had predicted Solyndra would run out of money in September 2011.
  • Based on securities filings, Solyndra's average sales price for the first nine months of 2009 was $3.24 per watt, while its manufacturing costs were $4 per watt. Worse yet, manufacturing costs for rival First Solar Inc. (Nasdaq: FSLR), which makes silicon-based solar panels, were far lower -- just under $1 per watt (they're now about 75 cents per watt).
  • Industry experts had predicted the sharp declines in the cost of silicon as far back as 2008. High-grade silicon was $1,000 per pound in early 2008, but fell to just $100 per pound by September 2009.
  • Solyndra lost $172.5 million in 2009 on revenue of $100.5 million. Its cumulative losses at that point totaled $373 million.

It Only Gets Worse

Solyndra's woes accelerated after the DOE approved the$535 million loan in September 2009, but instead of cutting off the flow of money, the Obama administration kept promoting the company as a showcase of green tech success.

In the months following approval of the loan guarantee:

  • Solyndra applied for a second federal loan guarantee for $469 million just weeks after winning the first, but the DOE never approved it.
  • In December 2009, Solyndra filed for an initial public offering (IPO), with plans to raise $300 million. Less than six months later, the company's board abandoned the idea after its investment bankers, Goldman Sachs Group Inc. (NYSE: GS) and Morgan Stanley (NYSE: MS), warned the stock would flop.
  • Solyndra used the money from the DOE loan guarantee to build a second factory with more capacity - capacity that wasn't needed. The new factory could produce 500 megawatts of panels, far exceeding the 110-megawatt capacity of the original factory. But 2010 sales amounted to just 65 megawatts. Employees became concerned as unsold inventory stacked up.
  • In March 2010, the company's own auditor, PriceWaterhouseCoopers LLP, cited Solyndra's "ability to continue as a going concern."
  • In July 2010, founder and Chief Executive Officer Chris Gronet stepped down. Successor Brian Harrison shut down the original factory to cut costs and address the excess capacity problem.
  • In January 2011, the Office of Management and Budget (OMB) was warning of an imminent default. The DOE rushed to release an additional $67 million installment of the loan to Solyndra.
With such a relentless stream of negative news, the chatter within the solar industry was that a Solyndra collapse was at least a strong possibility. As early as February 2010, the Greentech Media Website was warning investors the Solyndra story was "fraught with uncertainty," listing five major challenges, including the gap between manufacturing cost and selling price as well as the risk the company would burn though its cash before it would become competitive.

What Were They Thinking?

So why did the Obama White House jump on the Solyndra bandwagon and stay there right to the end?

Part of the explanation lies with President Obama's strong desire to promote green technologies. Solyndra, with its impressive and unusual approach to solar, caught the administration's fancy.

In addition, the federal loan guarantee program, started under President George Bush in 2005, had yet to approve any loans. President Obama allocated funds from his stimulus bill to the program both to help get it moving and boost the U.S. economy. Solyndra was the first company on the list.

But blinded by the allure of an innovative green tech company that had created 1,100 jobs, the Obama administration brushed aside a sea of red flags. With Solyndra's collapse, not only are those jobs gone, but so is $535 million of taxpayer money.

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