Sustenance Test for The Bay Area Companies

One of my friends goes to China on business very often. Once he said, “Media has created so much hype about Solyndra in the Bay Area. We should send those guys to Shenzhen once. They will have their jaws down for three days. Shenzhen has hundreds of Solyndras. The smallest plant is ten times bigger than Solyndra.” Indirectly, he meant US must stop creating manufacturing jobs.

Now that Solyndra has filed for bankruptcy, many in the US blame China for all its woes. You tune into a news channel, every talk show host seems to love China-bashing. China, with trade surplus and hefty subsidies to the manufacturing companies, does have an unfair advantage. However, blaming that alone for Solyndra’s debacle is silly. I wish the moderators steer the conversations towards introspection, instead.

Hindsight is always 20-20 (at least for the non myopic eyes). Let’s ask some questions and check whether Bay Area was the right place for Solyndra to survive and sustain. This should also give us an insight about what type of companies might want to establish in the Bay Area. Why? What’s so special about Bay Area? One: high establishment and operational cost. Two: tough California laws.

We could pass companies – big or small – through a sustenance test by asking the following four questions. A company would fail the test if it cannot answer "Yes" to at least one.

1. Does your business model benefit from scale economies?

All software companies operate on scale economies, which means, making more copies of the same software product doesn’t require more people or resources on the same proportional scale. In other words, if the effort to produce one product is $1000, the effort to produce two products is significantly less than $2000.

A pure model of scale economies has only fixed cost and no variable cost. If your business model has both fixed and variable costs, then it’s prudent to have the fixed cost operations in the Bay Area, and variable cost operations elsewhere. As Apple does: design iPhones in Cupertino, but manufacture them in China.

Solyndra did invest heavily in robotics – which contributes significantly towards scale economies for manufacturing. However, the cost of goods sold, labor, inventory, and transportation to name a few are still variable.

2. Do you have a unique customer value proposition that enables you to demand high price for your products and services?

Solyndra did have a value proposition – their cells generated more energy, the cells need not face the sun all the times, and so on. Traditional solar photovoltaic cells that act as the substitutes are good enough for a normal consumer. Therefore, the value proposition isn’t unique. The greater value the Solyndra cells offer doesn’t demand a higher price. By having an establishment in the Bay Area, companies like Solyndra must make up for the high costs by higher prices.

3. Does your business require local presence in order to serve your customers?

Solyndra’s customers are not confined to Bay Area alone. Even if all the consumers were in the Bay Area, they won’t demand that the cells be built locally. For hospitals, construction businesses, retailers, and so on, they add value by staying close to their consumers. Unless your consumers are in the Bay Area, and they expect that you stay close to them, why would you establish a facility there?

4. Do you need access to resources in the local ecosystem?

Bay Area has the world’s largest Venture Capital pool. It has the largest community for technical talent in the United States, if not in the world. If your company innovates on the cutting edge of the technology, then yes, this is the place. Had Facebook or Twitter not been in the Bay Area, the possibility of them making such a scalable, high-quality solution would have been low. Did Solyndra need this ecosystem? Yes – may be, for the innovation side of its business. How about the manufacturing? May be not.


A “Yes,” to an answer doesn’t automatically qualify a company to be in the Bay Area. However, if there is no definite “Yes” to at least one of the questions, it is better to stay out. Solyndra’s answers for the above questions would be: 1-No, 2- No, 3-No, 4-To some extent. Therefore, Solyndra fails to pass the sustenance test.

Let’s compare it with, say, Facebook. Facebook’s answer would be: 1-Yes, 2-Yes, 3-No, 4-Yes, which suggests it’s not a bad idea to be in the Bay Area.

Now look at Tesla: 1-No, 2-Yes, 3-No, 4-To some extent. Now they have a unique value proposition for the customers in their market segment. As they grow, and as the electric cars become more ubiquitous, they will either move out of Bay Area, or they have to innovate something new that keeps them way ahead of others.