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Why Silicon Valley Won't Be Detroit For Green Carmakers

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Golden Gate Bridge, connecting San Francisco and Marin County, California

Golden Gate Bridge, connecting San Francisco and Marin County, California

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We don’t hear “death of Detroit” stories as often now as we did a year ago.

When GM and Chrysler plunged into bankruptcy and the entire U.S. industry laid off tens of thousands of workers in one year, the effects on an already battered Detroit region were dire.

And they led to a rash of stories that Detroit was done with. Many predicted that the new, green auto industry of the future would be built around the electronics expertise of Silicon Valley.

EV hub?

A June 2010 piece in the San Jose Mercury News, "Silicon Valley becoming a hub of electric vehicles," argued that following Tesla Motors' IPO, the area's early adopters and its expertise in information technology made it a logical place for new electric-car companies.

NPR boldly pronounced, "The new automobile of the 21st century is likely to benefit from the culture of Silicon Valley, where people are used to taking a chip, a cell or an idea and working on it until it becomes something big."

We’ve thought about it for a year, and discussed it with many people. And we don’t believe it. Silicon Valley is the wrong place to build an auto industry, for three main reasons.

Long cycles, faraway profits

First, the entire Valley is built around quick-turn invention and monetization. Consider famously successful startups like eBay, Google, and Facebook. None required more than a good idea, a few desks, some computers, and smart software coders.

That’s the antithesis of a car company. These days, it takes $1 billion or more to design, engineer, test, certify, and launch a brand-new vehicle. And that takes roughly five years.

We've never felt that venture capitalists and startup automakers were a good match. A new automaker or even a new brand can take more than a decade to break even (despite CEO Elon Musk's claim that Tesla Motors was profitable for a single month last year).

Ten years on, most venture-funded firms have long since either been killed off or sold for parts, or broken even and become self-sustaining and profitable enterprises.

Tesla Motors - electric motor assembly area

Tesla Motors - electric motor assembly area

Enlarge Photo

Wrong kind of engineers

Second, while Silicon Valley is replete with electrical and electronics engineers, the bulk of them are skilled at microelectronics. But integrated circuits for consumer electronics are very different from the large-scale electric machinery—high-voltage battery packs, electric motors of 100 kilowatts or more, and vehicle-grade power electronics—that electric vehicles require.

Silicon Valley may have proficient coders oozing out of every condo complex, but it lacks—and isn’t likely to develop—large numbers of engineers with the right mix of automotive mechatronics and high-voltage systems skills.

Tesla Motors admitted as much on its recent plant tour. Executives confirmed that the company recruits literally all over the world for engineers with the right mix of experience, including from England’s ample supply of Formula 1 race-car engineers.

Painful place to build things

Finally, California is an expensive and highly regulated place for companies to locate, especially if they manufacture physical goods. And in volume automaking, it's all about keeping costs below revenues.

The state has rules, requirements, and laws that simply aren’t found elsewhere—especially in the largely Southern, non-union states that lavishly subsidized green-field sites to attract plants built by BMW, Honda, Hyundai, Kia, Mercedes-Benz, Nissan, Toyota, and Volkswagen.

Those rules impose both a time and a cost burden. But it gets worse. After half a century of explosive growth propelled by the success of Silicon Valley startups, the San Francisco Bay Area is now very densely populated.

That means factories are no longer the highest and best use for large tracts of land. Office parks or dense residential development simply yield a better return. Sans Tesla, the likely fate of the Fremont plant may have been to be torn down for office parks and condos.

Then there’s the cost of living. The average price of a single-family house in Palo Alto, Tesla’s headquarters town, is over one million dollars—hardly par for the industry globally.


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Comments (12)
  1. These are complicated decisions being made by very smart people with lots of business experience. Does what a blogger thinks really matter? No. This article is just masturbation.
     
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  2. Obviously the editor doesn’t have idea what he’s talking about and how business works in the new decade, GM can hire hundreds or thousands and still they will produce a crappy car like Volt, companies like Tesla hire few people but smart.
    Quantity, strikes and bail out won’t help GM from going bankrupt.
     
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  3. Bwahaha. James and Daud kill me--must be engineers? Voelcker is correct. Tesla and all the electric startups must be gobbled up by bigger competitors since the IPO market is dead in the US and will be for the next decade at least. SV venture funding now requires all manufacturing to be done in China, not like the good old days when the protos were built here, the plant scaled up, then production moved to Asia when the product was mid-cycle. Maybe that will change, now that the Chinese government is extorting EV technology from it's "partners". Silicon Valley makes sense for engineering phds, but most of the lowly manufacturing types were kicked out 10 years ago...this coming from a lowly manufacturing type.
     
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  4. Tough call on either side. Tesla and its other SV siblings will most likely have to do some magic in order to remain in SV past the threshold where large-scale in-house manufacturing becomes necessary. Can they? What would that magic be? Robotics and automation come to mind, not least because we're talking about SV after all. Only if such magic 1) significantly magnifies worker productivity, and 2) the cost of relocating to a cheaper location is greater than simply remaining in SV and achieving incremental productivity gains. One might ask if that same automation would be even cheaper in, say Kentucky, but the labor pool there and its culture are very different from that in SV, yet another critical factor.
    I have to admit, R2Dad makes a harsh but realistic appraisal. It's going to be about ROI and cutting costs to the bone.
     
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  5. SoCal is better. That's why Coda is in Santa Monica.
     
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  6. This article is half right - its damn expensive in California (that's a deterrent more than regulations also see @Sleepingdog's comment) but if you're going to build a new technology you're going to need smartminds to do it and those are in the valley so that part of it is a fact. Maybe they won't manufacture in CA but design is a strong possibility.
     
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  7. Obviously the editor is clueless about the SF bay area. San Francisco is not a part of Silicon Valley. It's near Silicon Valley, and no where near the Golden Gate Bridge. Also there are plenty of companies that took a while before they turned a profit. HP, Apple, Google and the others took several years to become strong. There were plenty of busts too. I believe Stanford's, VW's and BMW's (full/partial) self driving car will be sold in larger volumes than electric cars in 5-10 years. There's little infrastructure cost for a self driving car, but there is a significant infrastructure cost for an all electric vehicle. That infrastructure cost will be more likely a problem for electric vehicles than the location of the innovation.
     
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  8. To @George "San Francisco is ... no where near the Golden Gate Bridge", I assure you, no one has stolen it from our fair city yet...
    Also, while wikipedia's definition and the historical name "Silicon Valley" did refer to Santa Clara county in the old days because of semiconductor companies, it is well understood nowadays to encompass all adjacent technology heavy cities such as Palo Alto, Mountain View, and yes, San Francisco as well as more than semiconductors.
     
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  9. I agree with Yo Ma. In practice, SV extends from SF all the way around the bays and way out to Pleasanton and beyond. Some may even include parts of Marin county, or even Sebastopol where O'Reilly is, although that's really pushing it.
     
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  10. With just a little research on their story, they would have noticed Bay Area companies designing batteries, high-current control electronics, and high-efficiency motors since the sixties (aerospace) and although Detroit is known for the rolling iron Californians make their cars handle, much faster, and then start racing them.
     
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  11. And apps and software is precisely what Lockheed Space Systems do in the valley, right? ;)
    I am confident that when the smart guys at Tesla figure out the economics of the volume they bring to the market in a few years, manufacturing will shift to places that are more affordable. After all, very little of the hardware/goods made by Valley companies are actually made there. Or in the US for that matter.
     
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  12. http://r.reuters.com/hyk92q is running a story on this debate...
     
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