Creative Destruction of the Auto Industry via the Bailout?

Yesterday one of my students, Sam Cook, and I were talking before my Sustainable Business Venturing class began about the $25 billion that the auto industry wants. We both agreed that the money would be better spent supporting entrepreneurs. Some have suggested that the $25 billion come from money set aside for loan program for fuel-efficient cars. But with $25 billion, the government could foster a wave of innovative start ups in the auto industry that should do a much better job of developing and marketing more environmentally-friendly/fuel-efficient cars.

I don't think I'm the only one that doubts the automakers' ability and willingness to truly develop fuel-efficient cars. To do so would mean drastic changes and cannibalizing their existing product lines, which companies generally avoid doing, even when it means they could improve their company overall. On the other hand, there are several start ups making tremendous progress towards better cars. The most common example being Tesla Motors (most recently seen on a new Sci Fi channel game/reality show Cha$e). Besides Tesla there are many others around the world developing great new technology and if large sums of money were made available, many of the foreign-based companies would likely move to the US. The only way for the Big 3 to catch up would be to buy those companies. But why should these aging giants that clearly forgot basic business knowledge of market scanning to see trends take over these rising stars.

If you've studied economics it's likely you've been introduced to the term creative destruction, which is the basic idea of old industries being replaced by new innovative ones. One example that I remember from class, ironically, is that the auto industry 'creatively destroyed' the buggy industry. Once autos became commonplace, those making anything to do with the traditional horse and buggy went out of business. There was no bailout for them. The wise companies saw the trends and changed. The unwise? Well, they went on to become examples for future business students.

So here is a radical proposal: Set the $25 billion for a government-backed new venture capital (VC) firm to specifically invest in clean tech automakers willing to develop primary operations in the US. With that kind of money, companies like Tesla Motors can buy and modify production plants from the Big 3 and foreign-based companies would move to the US and hire US workers. That would keep jobs here, indirectly give the Big 3 some money to possibly stay in business, but also give them tremendous market pressure to improve the environmental performance of their vehicles (since I doubt that they will change much if the government tells them to change).