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Tesla's Gift Box – Inefficiency Wrapped in Hype

John Petersen

Congratulations! You've been appointed Energy Czar for the island of Self Sufficiency; a wonderful place that can satisfy the bulk of its energy needs from domestic resources, but needs to import gasoline for a 10,000-unit automobile fleet that gets replaced at a rate of 1,000 cars a year. The island's battery factory can manufacture 45,000 watt-hours of lithium-ion batteries each year and depending on how they set the machines; the factory can make high-power batteries for HEVs or high-energy batteries for EVs.

Your mandate as Energy Czar is to minimize Self Sufficiency's fuel imports and CO2 emissions.

You have two competing proposals on your desk. The first is from Self Sufficient Motors, which wants to build a fleet of thirty HEVs using high-power batteries from the factory. The second is from Tesla Motors (TSLA), which wants to build one Model S using high-energy batteries from the factory. There is only enough capacity for one of the alternatives.

It you accept the proposal from Self Sufficient Motors, each of the HEVs will save 160 gallons of gasoline a year. So the combined fleet will reduce imports by 4,800 gallons a year and reduce CO2 emissions by 55 metric tons a year.

If you accept the proposal from Tesla Motors, the Model S will save one owner 400 gallons of gasoline a year and reduce CO2 emissions by 5 metric tons, but it will increase CO2 emissions from power generation by 2 metric tons, resulting in a net emissions reduction of 3 metric tons a year.

At first you're confused by the numbers because everyone knows that grid-powered electric vehicles are way cleaner than normal cars. Then your research assistant finds the following graph from the Union of Concerned Scientists that explains it all by showing that less costly HEVs fall nicely into the middle of the emissions range for grid-powered electric vehicles.

6.2.12 UCS Emissions.jpg

As a sensible, responsible and ethical public servant which alternative do you choose to support?

The fascinating thing about this simple example of an island nation is that the numbers closely approximate conditions in the US and they translate perfectly to a country, a continent or a planet. No matter how you slice and dice the fuel savings and CO2 emissions, there is absolutely no public policy justification for supporting grid-powered electric vehicles.

The bottom line is that grid-powered electric vehicles are unconscionable waste masquerading as conservation. There are enough batteries and battery materials to make electric vehicles for the few, the rich and the mathematically challenged, but there will never be enough batteries or materials to permit the implementation of grid-powered electric vehicles at a large enough scale to impact global, national or even local oil consumption. It's not an effective solution.

A grid-powered electric vehicle might make one driver feel warm and fuzzy about himself, but from a public policy and resource conservation perspective it's the most wasteful plan in history.

There is no room for rational intellectual debate.

At March 31st, Tesla had $123 million of working capital and $154 million of equity. It lost $89 million during the first quarter and burned $50 million of cash in operations. Its remaining DOE loan facility can only be used to buy equipment. Those funds cannot be used to buy parts, materials or labor to build cars, or to pay the overhead associated with running a company. At Friday's close, the market value of Tesla's outstanding shares was $2.96 billion, or 19.2 times book value.

I've heard the breathless claims that Tesla is the next Apple (AAPL) and Mr. Musk is a younger and far smarter version of Steve Jobs. That may be the case, but it can't change the reality that Apple trades at 5.2 times book value after a decade of extraordinary growth and profitability that consistently outperforms market expectations while Tesla is a rank startup with a long history of losses.

Many individual investors don't understand the Hype Cycle, the most dangerous dynamic in the stock market, until after they've been victimized at least once. Some investors never learn and they keep doing the same thing expecting different results. This graph from the Gartner Group conveys enough information to help sensible investors avoid Wall Street's version of a buffalo jump were the herd is sent stampeding over a cliff and the hunters feast on broken carcasses.

1.28.12 Gartner HC.png

A simpler tongue-in-cheek version from Paul Graham is too accurate to be funny. It shows his view of the stages all startup companies must survive on their path to becoming viable business enterprises. While the Gartner graph does a great job explaining the dynamics, I think the Startup Curve is closer to the truth.

3.25.12 Startup Curve.png

The root cause of the phenomenon is the simple fact that equity markets behave like people. During childhood and adolescence when all things are possible, equity markets act like voting machines – so Disney economics, wish upon a star thinking and irrational exuberance prevail. In most cases, investment decisions are based on the greater fool theory which holds that paying an outlandish price is acceptable because there will always be a greater fool to pay an even greater price. At some point, however, equity markets mature; children learn there is no Santa Claus and that wishing won't make it so. Then the weighing machine kicks in with a vengeance, stock prices collapse and neophytes who bought in reliance on the greater fool theory learn the identity of the last and greatest fool.

I can't predict when Tesla will reach that tipping point of market maturity, but I'm certain that it will.

If you doubt what I'm saying about the Hype Cycle and the Startup Curve, visit Yahoo! Finance and pull up the long-term price charts for Ballard Power (BLDP), Plug Power (PLUG), Pacific Ethanol (PEIX), First Solar (FSLR) and A123 Systems (AONE). The same pattern repeats itself time and time again because politically motivated energy policies and a technology du jour mentality that pervades every political organism repeat themselves time and time again, particularly when the last set of panacea technologies begins to generate backlash over fiscal black holes.

New readers love to assume that I hold some deep-seated animus for technology or that I'm simply an oil industry stooge. Nothing could be further from the truth. The fact is I'm an unrepentant early adopter when it comes to new technology. Notwithstanding my personal proclivities, I've been practicing securities law for over thirty years and have a profound understanding of the challenges all early-stage companies must face. I've also worked as an executive in the battery industry and understand the inherent wastefulness of battery-powered electric drive. Based on my knowledge and experience I see a perfect storm brewing for Tesla. Investors love to tell themselves that "it's different this time," but they invariably learn that it's never different.

Disclosure: I have no direct or indirect interest in Tesla and nothing to gain or lose from its future stock price movements.



was posted on AltEnergyStocks.com.


       

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Comments

John,
While I agree with you about Tesla, your simplified island nation example serves to highlight one of the weaknesses in your logic: you always use the underlying assumption that battery manufacturing capacity is a limiting constraint.

I don't follow the battery industry as closely as you do, but my impression is that there is a Lithium-ion battery supply glut. Doesn't that imply that some battery-hungry EVs might be a useful way of putting some of these otherwise unused batteries to use? Or perhaps you think they should be used to give all new cars stop-start capacity, displacing Lead based batteries?

The true limiting constraints are the raw materials used in lithium-ion batteries. With the insignificant exception of lithium which is only a couple percent of cell content, battery materials are all resource constrained and they all have alternative uses beyond counting. The only way those materials can be used to make lithium-ion batteries is if somebody diverts them from use in other products.

Where do you want your cobalt sir, in the aircraft turbine or the lithium-ion battery? How about that copper? Would you prefer electric light in Africa or electric cars in the US? How about your rare earths – wind turbines or EV motors? The litany of questions could go on forever and its way beyond my capacity to offer answers.

There is a glut of lithium-ion battery manufacturing capacity because companies and governments went haring off in pursuit of a seductive but economically impossible dream without asking whether there would be a stable supply chain for the factories, or whether the planet could produce enough battery materials to make a dent in fuel consumption. The fundamental assumptions are fatally flawed.

As I pointed out in the article "There are enough batteries and battery materials to make electric vehicles for the few, the rich and the mathematically challenged, but there will never be enough batteries or materials to permit the implementation of grid-powered electric vehicles at a large enough scale to impact global, national or even local oil consumption."

Batteries that can't add economic value to an application won't be used in that application. There are rumors that lithium-ion battery manufacturers want to take a run at stop-start with battery systems that are four times more costly and make the application uneconomic. I wish them luck, but don't consider them as credible competitive threats.

Let's go through your statements to see how many I can debunk or does not make logical sense or shows a lack of research.
1. That graph that you are looking at does not make any sense whatsoever. At the most, an EV releases 308 kg/mile and that assumes 100% coal energy, which is nearly impossible. The US average using 2009 data is 195 grams/mile for EVs,which is better than the best hybrid. If you get ALL your energy from renewables, from a full life cycle analysis, it is comparable to a car that gets over 1000 mpg.
I disagree with your statement about only having enough lithium for a few. Lithium is one of the most abundant materials. If the price of lithium increased by a factor of 3, that makes salt water refining economically viable (add 1,000 to the cost of a battery). The batteries decrease by more than that per year. The other materials in batteries are pretty common, steel? nickel? carbon? cobalt? recycled plastics? If we don't have enough of those, we have much more pressing concerns. Also, wouldn't those batteries in the end be recycled like lead batteries if lithium batteries are so valuable?
Correct me if I'm wrong, but comparing A123 to Tesla is not very apt. Tesla is a car maker. A123 a battery maker. Tesla has not had a huge amount of recalls or major screw-ups, A123 has.

Let's go with your argument that all the materials are in short supply (besides steel). The Panasonic battery that Tesla uses is a mix of lithium, manganese, nickel, and cobalt
Let's look at Cobalt
1. Cobalt is used extensively in massive amounts in oil refining. Would it be logical to assume that less oil needed means less cobalt needed?
2. Nickel and Manganese- let's say we've mined all the nickel out there. I would assume people would be turning in their stainless steel left and right just for the value these metals
3. Aluminum- My best guess is that we do not have an issue with aluminum. Seriously, if we did, you would see people picking up soda cans left and right OR soda companies would stop making cans due to economic viability (or the cost of pepsi/coke for cans would be through the roof- not the case in the US)
4. The electric motor that Tesla uses does not use "rare earths" like many other manufacturers.
5. Copper is rare? It has it's uses, but if copper became very, very rare I can see a situation where people would replace their copper pipes with PVC, scrap copper pots and bronze objects, and cash in the copper or "find" 1982 or older pennies and melt them down or do something else. If they wanted to, they could use aluminum as a substitute for copper for heat conduction.

The bottom line is that even IF you tripled the cost of these materials, it may add a few thousand to the materials costs for the car. One a 100 K vehicle with a 20 + % profit margin (20 + K in that case), I think Tesla would eat the cost. I would be more concerned about the other car manufacturers with regular cars, since their profit margins are lower, a Ford Fiesta doesn't even sell for 20 K, a Chevy Cobalt has less than 1000 profit margin, they would have to increase the price just to stay even if the price of metals increased.
I actually think Tesla has a good product compared to other manufacturers and the ONLY potential competition is BYD in terms of range.
Do I think Tesla is going to do well? Yes, I would not short their stock. They are more or less sold out of the Model S for the next year without significant advertising, and I may add no one has driven one (that's insane, but shows the demand- would you shell out 10%-20% just for the "option" to buy something without seeing it, touching it, seeing how it works, 14,000 people have already). The only company that can say the same is Harley Davidson

I used the Union of Concerned Scientists graph because they’re highly regarded by friend and foe alike. Their graph shows a range of 100 to 340 grams of CO2 per mile as the relevant range for Grid Powered EVs in the US. It also showed a value of 225 grams per mile for a Prius-class hybrid. EVs can be moderately cleaner than HEVs in grids that have a high proportion of hydro or nuclear power, but a basic unsubsidized EV is literally twice as costly as a basic unsubsidized HEV. In light of the reality that people in Asia and elsewhere are certain to burn any additional supply created by your efforts to avoid oil at all costs, aren’t you engaging in sophistry that has all the intellectual integrity of a no peeing zone in a swimming pool?

Wind and solar, like many things in life, are good in moderation and toxic in excess. Spain and Germany have both found that instability becomes a serious problem with penetration rates above 10% and the risk of catastrophic failure becomes huge with penetration rates above 20%. So talking about what might happen with carbon-free grid is interesting, but irrelevant, unless you live in Switzerland like I do.

I did not suggest that Lithium was a problem because it's not. Many of the other metals used in EVs and non-recyclable lithium-ion batteries are.

According to the USGS the world produced 98,000 metric tons of cobalt last year, including 52,000 metric tons from the Congo and 5,700 metric tons from Zambia where mine workers are about a quarter-step up from slavery. Most lithium-ion battery cells are about 10% cobalt by weight. Using 150 wh/kg as an energy factor a Leaf battery pack uses about 16 kg of cobalt while a Model S battery pack is closer to 30 kg. A fleet of a million Leafs would require 16,000 metric tons of colbalt, or roughly 16% of global production. Six million Leafs a year would require 100% of global production and leave over 90% of new vehicles burning gasoline.

We can go through the same drill for the supply and utilization chain for almost every mineral around. According to the USGS, about 12% of global copper production is used in vehicles. That works out to about 30 kg in a compact car. EVs use twice as much copper per vehicle. The rest is used in inconsequential things like the electric grid, electronic products, consumer products and industrial equipment.

Tesla doesn't use rare earth permanent magnets, but all of the other EV manufacturers do. Over the last two years rare earth metal prices have increased by over 1000%, which is what happens when metals markets hit the limits of supply constraints.

The entire point is that EVs cannot scale to RELEVANCE on a resource constrained planet. A solution that can't be implemented at relevant scale is SNAKE OIL.

I think Tesla would be an interesting speculation if the stock was trading in the $6 to $8 range at a price to book value comparable to Apple's. Heck I'd be pounding the table over the speculative merits if the stock was trading for $3. With the stock trading at $30 the only possible explanation is the greater fool theory. I don't short stocks personally and think it's a very dangerous game because the market can stay irrational longer than I can remain liquid. But Disney thinking is extremely hazardous in the investing world.

You cite cobalt as an example, but there are many other lithium chemistries that could be in EVs. The beauty of EVs, specifically those that do not use rare earths in their motors is that they have the potential to switch chemistries.
Curious, why attack Tesla directly if it does not use rare earths?
If what you say is true with regards to rare earth metals, why not invest in companies that mine these materials instead of denigrating Tesla? At least in the short run, these companies make out like bandits, along with people who own those stocks
Let's look at some materials, at least from a Tesla, since you are focused on them

Cobalt- $43/lb (increase of 400% in 9 years)
Nickel- $7/lb (150% increase in price in 9 years)
Moly- $13.56/lb

Copper may be used in compact car, but compare apples to apples, please. Compare a Roadster to a Lotus, or a Model S to a Porsche or Audi A7- that's the comparison that matters

If you want to talk about slavery- fine, how about we talk about how most people in oil producing countries live in poverty, or how about how diamonds are mine, or some sweatshop where children made Nike shoes, or how about the Foxconn X-box 360 plant in China. Walmart's suppliers. Or how about the fact that some forms of oil refining and products are known carcinogens and people die a slow painful death. Let's be pragmatic about it- if it's not happening to you or anyone you know, people really don't care- it's just how the world works. Microsoft, Nike, Apple, Debers, etc, save money, company makes money and consumers don't care are non the wiser. You can not cherry pick without mentioning other industries.
Long term as EV penetration and batteries and EV parts become more and more recyclable, not that much rare earths would be needed. Look at steel, aluminum, or lead- all of those parts are recycled in some form to 90 some %.
My belief is a little different in terms of market cap. Does Tesla have a plant valued at close to billion dollars (old Nummi plant which they bought for peanuts)? At $30/share, investors could get back 75% if Tesla went under today and liquidated everything. I would go the opposite way and say that Tesla is worth around $50/share if you include their properties and IP rights. Note: I don't own any stocks in Tesla, from my analysis they have a market cap of around $4 billion.
If we are talking stocks, what about facebook? I'm curious about your insight into this since the company has even less going for it than Tesla

Last year the world produced 4.9 billion metric tons of oil, or 695 kg for every man, woman and child on the planet. Excluding steel it produced 18.7 kg of metals that are used for all the necessities of life.

I believe it's patently obvious that humanity cannot find enough excess from the 18.7 kg per person, which is already fully committed to other essential purposes, to make a RELEVANT dent in the 695 kg per person.

If you want to believe differently all we can do is agree to disagree.

Fair enough, but your math assumes every man,woman and child have cars or will have products that need that metal. The Amish do not have cars, some tribal people do not have cars, people in underdeveloped countries whom do not have enough to eat do not have cars, etc, etc.

If you want to play the metals game, please mention that there are only 130 tons/yr of platinum manufactured. This is used in normal cars catalytic convertors, along with many other uses- some of which have no chance of being recycled (cis-platinum comes to mind). Barring any other uses, this is only enough for

The flaw in your thought process is that our last industrial revolution put cell phones into the hands of the world's poor.

Now that the poor are no longer ignorant of the fact that life can be more than dirt floors and bare subsistence they're all trying to earn a small slice of the economic pie. They're more numerous than you can count, they frequently have equivalent or better education and they invariably have a better work ethic.

To elevate the purchasing power of the poor to 15% parity with the west, global production of everything will have to double. The other alternative, of course, is an 80% haircut in the lifestyle most of us consider a god-given right.

The first step is eliminating waste in all its forms, and there's little in the world more wasteful than using batteries to let you burn coal instead of gasoline without changing the total energy used.

We can't increase metal consumption in the name of reducing hydrocarbon consumption. Platinum is a great example because demand exceeds supply and there are no alternatives. We'll be seeing that more and more frequently.

While I agree that cell phones/TV/radio will play a role with the world's poor want more, there are other things to consider for those countries such as infrastructure.

Having been to quite a number of those countries, the roads (if you can call them that) are not in very good shape, some places in South America do not even have roads (I remember traveling via boat). Let's look at cars in general in those countries, I can tell you from experience that I've broke a rear on a Jeep hitting a pothole (imagine what that would do to a normal car)
Also in terms of EVs consider other countries grid stability and % electrification. Somewhere in the neighborhood of 18% of the world population does not have electricity. EVs would not be for them- you can't use them.

Also how can you say burning coal compared to gasoline is wasteful if your EV graph Fact #1 graph clearly shows it's 22% more efficient than an average new compact car. (actually the value shows the coal exhaust if it was directly vented, with no heat recover techniques- can't get much less efficient than that and it's still more efficient than a regular car)

Also platinum is used for regular cars, not EVs so if more people buy cars, platinum increases drastically and that puts the cars out of reach of the "poor".

I have been many of those same places.

The question isn't whether those places will want EVs, because they clearly won't. The question is whether building EVs in the US will compete with their need to build roads and utility infrastructure, or buy simple things like washing machines. They may not compete for high end goods made from the same materials, but they'll surely fight over the materials so they can have the low end goods.

A hundred asians who need a half kWh each for their e-bikes will always outbid the American who needs 50 kWh for his Model S. Not only that, the manufacturer would rather sell to the asians because they'll be willing to pay a higher price per watt hour because their needs are more modest.

What you are suggesting is a resource limited economy. The caveat to that is that people's ingenuity usually prevails in a resource limited economy and they find uses for other materials which they would not have found viable before. The good part about the batteries in EVs is that their are a few types of competing chemistries, some phospahte polymer bases, some titanium, some cobalt, some nickel and who knows what else. The point is that if people start grabbing the material to make one not economically viable, you can use another one, and so on and so forth.
I'll give you an example in another industry- Soda, specifically Coke and Pepsi, sugar became too expensive so the used HFCS, now sugar is coming down so they are using sugar, if both went up in price, they would use another sweetner. Pepsi is not going to go bankrupt or stop making products because the Chinese started freebasing sugar or they started using HFCS on a massive scale. Corn is limited from a land perspective, ideal land to grow sugar is limited. Same argument can be made. A hundred asians who develop a taste for sugar smacks is NOT going to affect my need for a soda, worse comes to worse, they change the formulation and get it to taste similar to the old way.

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