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

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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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