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March 14, 2014

Turning Conventional Battery Tech into Unconventional Profits

by Debra Fiakas CFA

Near the end of February 2014, Highpower International (HPJ:  Nasdaq) announced its first order for large-format lithium ion batteries to use in electric vehicles. Its customer, Huizhou Yipeng Energy Technology will be integrating the batteries into buses destined for the sales outlets of China-based manufacturers.

The boost in sales for Highpower is likely to be meaningful.  Management estimates each bus will use as many as 288 of the company’s 20-ampere-hour battery.  Guidance for annual sales from Huizhou Yipeng alone is in a range of $4 million to $5 million.  In the most recently reported twelve months Highpower claimed $125.2 million in total sales.  That means the orders from Huizhou may boost annual sales by 3% to 4%.

Highpower has been earning a slim profit on its sales of nickel metal hydride and lithium ion battery technologies for motor bikes, power tools, and personal-care devices.  The company has production facilities in Shenzhen and Huizhou, China.  Its recent operating profit margin was 1.2%.  Still over the past for years the company has been successful in converting 3.1% of its sales to operating cash flow.

The ability to generate internal resources is vital for Highpower, which continues to invest heavily in capital projects and product development.  Operating profits are not sufficient for the company’s investment budget.  Thus cash resources continue to be important for Highpower’s strategic plans.  Cash at the end of September 2013, the last time the company reported financial results, was $37.1 million.

The company also has $68.7 million in short- and long-term debt on its balance sheet.  Debt is not the only balance sheet consideration.  Typical of China-based companies, Highpower carries significant accounts receivable and accounts payable on its balance sheet.  Days sales outstanding were 105 days at the end of September.  At least Highpower has managed to maintain good enough relationships with suppliers to leave 148 days of costs in payables outstanding.  Highpower maintains a relatively low inventory at only 62 days of sales.  Thus the company enjoys a favorable financing interval and actually receives 19 days of financial support from suppliers  - a  value near $5.3 million  -  instead of having to dig into cash resources to support working capital needs.

A review of recent trading patterns in HPJ shares suggests the stock has built up enough momentum to rise to the $8.00 price level.  Yet there appears to be some disagreement among investors about the company’s future.  In the final day of trading last week the stock completed the formation of what technical analysts call a ‘high pole warning,’ suggesting that lower prices may be ahead at least in the short term.  We believe this could be trading in HPJ shares illustrate the usual fascination with the strong growth that China offers, but the ever present concern that investors have for the veracity of financial reports from China-based companies.

Debra Fiakas is the Managing Director of
Crystal Equity Research, an alternative research resource on small capitalization companies in selected industries.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.  

March 07, 2014

Geely Joins New Energy Buying Binge

Doug Young

Chinese car makers are fueling a new global buying binge of clean-energy assets, with the latest word that Geely Automobile (HKEx: 175) is buying a British electric car startup. This is in addition to Geely announced a new joint venture to produce electric cars with Kandi Technologies (Nasdaq: KNDI).  Geely’s deal comes just weeks after China’s Wanxiang Group completed its second major acquisition of a clean energy firm in the US, hinting at a growing wave of global M&A by tech-hungry Chinese car makers. This flurry of deals also comes as China’s leading electric vehicle (EV) maker, BYD (HKEx: 1211; Shenzhen: 002594; OTC:BYDDF), spotlights new government data that showcases its own technology development prowess.

Perhaps I’m being a bit cynical, but all of these latest developments seem at least partly aimed at drawing attention to the development and acquisition of intellectual property by the Chinese car makers. Companies in most western markets wouldn’t typically seek attention for this kind of acquisition and development, and would instead focus on promoting and publicizing their actual products, which in this case would be their latest electric and hybrid vehicles.

But this is China, a place where companies all feel at least a certain obligation to show they are complying with the latest goals and policy directives from government leaders in Beijing. In this case, central leaders are under growing pressure to breathe new life into an aggressive but sputtering government program to add millions of clean-energy vehicles to China’s congested roads. The imperative has gained more urgency in the last week, following a prolonged period of heavy smog in Beijing that has attracted global headlines and is once again shining a spotlight on China’s polluted air.

All that said, let’s look at the latest headlines from Geely, one of China’s most acquisitive automakers, which has confirmed its recent purchase of a British new-energy auto startup called Emerald Automotive. (English article) No actual price was given, but the reports say Geely has pledged to invest at least $200 million into Emerald’s operations over the next 5 years. Emerald is currently working on 2 prototype electric delivery vans, though Geely says the same technology could be used in electric powered taxis.

The reports indicate that Geely may use Emerald’s technology to help produce just such taxis for Manganese Bronze, the storied cab maker that fell on hard times and became insolvent before Geely bought it last year for just $18.5 million. (previous post) I suppose I should applaud Geely for at least trying to find some innovative ways to resuscitate Manganese Bronze, though I have serious doubts about whether electrifying its taxis is the right solution.

Geely’s latest new energy plan comes just weeks after Wanxiang won the bidding to buy US-based Fisker Automotive, another former high-flyer that also fell onto hard times. Last year Wanxiang also purchased another former new energy superstar when won the bidding for battery maker A123 Systems in a US bankruptcy court. Perhaps not too coincidentally, BYD has just put out a completely separate announcement trumpeting its position as China’s fifth most prolific recipient of new patents last year, behind only telecoms stalwarts Huawei and ZTE (HKEx: 763; Shenzhen: 000063), state-owned energy giant Sinopec (HKEx: 386; Shanghai: 600028; NYSE: SNP), and leading microchip maker SMIC (HKEx: 981). (company announcement)

Obviously it's an oversimplification to tie all of these developments to one week of smog in Beijing, or to the opening of the National People’s Congress, an annual event starting this week where company executives like to showcase their efforts to assist central government initiatives. But that said, this sudden flurry of activity to develop and acquire new clean energy technology certainly has some political overtones, and probably presages more similar deals and announcements in the year ahead.

Bottom line: Geely’s new energy purchase in the UK could presage a new round of similar overseas acquisitions by Chinese firms eager to show their support for Beijing’s clean auto initiatives.

Doug Young has lived and worked in China for 16 years, much of that as a journalist for Reuters writing about Chinese companies. He currently lives in Shanghai where he teaches financial journalism at Fudan University. He writes daily on his blog, Young´s China Business Blog, commenting on the latest developments at Chinese companies listed in the US, China and Hong Kong. He is also author of a new book about the media in China, The Party Line: How The Media Dictates Public Opinion in Modern China.

January 28, 2014

Tesla Could Sell 8,000 EVs in China in 2014

Doug Young

Tesla Logo
Tesla sets ambitious China targets

US electric car maker Tesla (Nasdaq: TSLA) is setting some tough goals for itself during its first year in China, aiming to take advantage of government incentives and its high-end brand image to quickly take a big share of the market. I did a little math based on the company’s latest remarks, and its ambitious target for this year would represent around three-quarters of all electric vehicles sold in China in 2012. If it really can meet the new target, I suspect the company’s biggest strength will be its position as a luxury brand, since most people who buy EVs in China will probably do so more for the snob factor than due to any incentives from Beijing or desire to save the environment.

Tesla was in the China headlines late last year and again in January due to a trademark dispute after a local company registered the Chinese version of its name. (previous post) But Tesla’s China chief said the dispute has been resolved, which should pave the way for it to offer its cars under both its Chinese and English names. (English article) The trademark squatter had reportedly wanted up to $30 million for the Chinese name, though Tesla declined to give any terms of the settlement.

With that distraction behind it, Tesla’s new China chief has laid out a roadmap that would have China contributing one-third of the company’s sales growth this year. Tesla sold about 24,000 cars last year and aims to double the figure this year, presumably meaning this year’s growth should also be about 24,000 cars. If China contributes a third of that, then the company would have to sell about 8,000 cars in the market this year. It would do that by opening about a dozen sales outlets in China during the year, including its recently-opened flagship store in Beijing.

That looks like quite a tall order for a market where all electric car sales totaled just 11,375 vehicles in 2012, and the number was on track to reach that level again in 2013. Tesla’s cars aren’t cheap either. The company has announced its EVs will sell for 734,000 yuan ($121,300) each in China, or about 50 percent higher than what they sell for in the US. That price tag is considerably higher than most models currently in the market, which come mostly from domestic names like BYD (HKEx: 1211; Shenzhen: 002594; OTC:BYDDY), Chery and BAIC.

Beijing last year announced new incentives to try and sell more electric cars, giving buyers around $10,000 in subsidies for each car. But price is just one of the obstacles preventing such cars from gaining traction in the market. Other big factors have been the availability of charging stations, and reliability due to the inexperience of Chinese car makers. Beijing has set out a goal of having 500,000 EVs and hybrid vehicles on its roads by 2015, and 5 million by 2020. Much of that could come from pilot programs by local governments, which have better resources to build up taxi and bus fleets comprised of electric, hybrid and other clean energy vehicles.

So, why do I think that Tesla may actually meet its ambitious sales target in China this year? If we take a look at all the major obstacles I mentioned, none of them really applies to Tesla. The company’s cars already enjoy a reputation for good quality and reliability, and anyone who can afford one can probably find ways to charge it without too much difficulty. Perhaps most important is the snob factor that I mentioned at the outset. Newly rich Chinese are always looking for ways to show off their wealth, and buying a trendy and prestigious Tesla could be just the way to achieve that goal. In that light, Tesla’s goal of selling 8,000 EVs in China this year doesn’t really look so impossible.

Bottom line: Tesla could stand a good chance of meeting its goal of selling 8,000 EVs in China this year, drawing on its reliable products and high-end image among brand-conscious Chinese.

Doug Young has lived and worked in China for 15 years, much of that as a journalist for Reuters writing about Chinese companies. He currently lives in Shanghai where he teaches financial journalism at Fudan University. He writes daily on his blog, Young´s China Business Blog, commenting on the latest developments at Chinese companies listed in the US, China and Hong Kong. He is also author of a new book about the media in China, The Party Line: How The Media Dictates Public Opinion in Modern China.

January 11, 2014

CarCharging Off to the Races?

by Debra Fiakas CFA

CarCharging Group, Inc. (CCGI:  OTC) producers electric car charging stations.  It partners with property owners such as shopping malls or parking garages to operating the charging stations and collect fees from electric car owners.  At the end of September 2013, the last time the company reported financial results. CarCharging had eighty-seven strategic partnerships with a gaggle of private and public entities such as Walgreens, Icon Parking, the City of Miami Beach, and the Pennsylvania Department of Environmental Protection.    A mobile app helps car owners find locations by city or zip code.

CarCharging has reported a total of $502,833 in revenue since its inception in September 2009, of which $194,210 was in the most recently reported twelve months.  While the company earns a gross profit on its sales  -  29.4% average over the past five years and 30.4% in the most recent twelve months.  Unfortunately, compensation for its employees looms large on the CarCharging income statement, leaving a net loss of $20.3 million in the last twelve months.   Since inception the reported net loss was $37.6 million. 

Since much of the company’s compensation and general and administrative costs have been paid using common stock and options, cash earnings look a bit more encouraging.  Operations have used a net $7.4 million in cash since inception, of which $1.5 million was used in the twelve months ending September 2013.

Even though it appears management is making some headway in penetrating the car market and has made progress in getting the cash burn under control, it does not mean CarCharging is off to the races.  The company has a bit of debt already and has precious little cash on its balance sheet.  CarCharging become public through a reverse merger and has not had the benefit of developing strong relationships with institutional investors such as venture capital, private equity or managed funds.  It has yet to attract research coverage by a sell side analyst.

The lack of strong sponsorship in the capital markets is a drawback for a company that needs expansion capital.  At a dollar and two bits, CCGI shares trade more like an option on the company’s business model than as a multiple of future earnings.  The stock has been somewhat volatile, falling to a low of $0.71 in late October and from a high of $2.00 at the beginning of August 2013.  


CarCharging appears to have gained some momentum in the electric car market.  In December the company announced progress in its joint initiative with Nissan, installing charging stations for Nissan’s Leaf at a marquee shopping center in Palo Alto, California.  The mall serves families living in Silicon Valley.  The company has also partnered with Standard Parking at a commercial facility on Constitution Avenue in Washington DC very near the U.S. Capital and the White House.  While it is not likely the President is very worried about charging locations, making a good impression on Congressional decision makers and their staff has to be helpful.

There is more change on the road ahead for CarCharging.  In October 2013, it won the bid for Ecototality’s Blink car charging network.  This the second time in as many years that CarCharging has scooped up the assets of a defunct electric vehicle charging service provider.  It also acquired the assets of 350Green after that charging operation failed.  CarCharging reportedly paid $3.3 million for the Ecototality assets, including over 12,000 installed electric vehicle charging stations, a number of 110 DC Fast charging stations and the Blink network.  The deal dramatically expands CarCharging’s footprint, but also complicates the company’s financial profile.

Expect more acquisitions in the future  -  and more financial complications.  In 2013, CarCharging also acquired Beam Charging, an independent car charging serve that caters to parking garages in the New York Metro area.  So far the company has kept the Beam branding.  In the future it seems plausible that CarCharging will continue rolling up small, independent service providers that are pioneering electric car charging services.  There could be efficiencies in uniting them under one brand and marketing campaign. 

Consequently, an investment in CarCharging will require some work by investors beyond simply reading the headlines and checking earnings (or loss) per share.  Then it will be a matter of how much risk an investor is willing to assume in an unproven business model.
 
Debra Fiakas is the Managing Director of
Crystal Equity Research, an alternative research resource on small capitalization companies in selected industries.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

January 07, 2014

The Other Electric Car Company

by Debra Fiakas CFAKandi logo
 
If you are putting together a list of 2013 phenomena, you can put Tesla Motors (TSLA:  Nasdaq) and its Model S electric car near the top.  The stock bounced off a low of $32.11 in early January last year and nearly went into orbit.  TSLA share closed the year 2013 at $150.43, representing a return of 368% from the 52-week low.  Impressive! 

The market pundits cannot seem to get enough of Tesla and its founder/CEO Elon Musk.  Yet Tesla is not the only electric car producer that has met with some success with consumers. 

China’s Kandi Technologies Group, Inc. (KNDI:  Nasdaq) produces small, low-speed electric vehicles for off-road and campus use as well as all-electric and gas-electric hybrids for street transportation.  Kandi’s best selling product, the Go-Kart, accounts for about one-third of unit sales, but contributes close to 60% of total revenue.  All together Kandi sold just over 137,000 units in the last twelve months.  About 85% of Kandi’s vehicles are sold at home in China, but even so some of those domestic sales are to distributors which end up bringing the vehicles to the U.S. market.
 
Anyone who reads this column more than just a few times, knows I put a high priority on cash flow performance.  Measuring how much of sales is converted to cash helps separate companies with real financial strength from those that rely on financial fluff in the media to drive shareholder value.

In the most recently reported twelve months Kandi converted 34% of sales to operating cash flow.  Granted much of that cash flow was contributed by a short-term loan from a joint venture partner.  That said, Kandi’s three-year average cash flow generation was 14% as a percentage of sales.  If the loan from the joint venture partner is excluded, then the cash conversion ratio was 5%.

Tesla on the other hand is a significantly larger company, earning $1.7 billion in total sales in the most recently reported twelve months.  During this period the company reported positive cash flow for the first time in its history, managing a cash conversion ratio of 5%.

Kandi may be a more consistent producer of operating cash flow, but size and proximity to investors in the U.S. market has helped give TSLA a far higher valuation.  TSLA trades at 10.8 times sales while KNDI commands a multiple of 7.2 times sales.  In terms of cash flow, investors are paying 20.5 times CFO for KNDI, but are willing to advance a whopping 200 times Tesla’s cash flow to get a stake in the Model S producer.

As a China-based operation Kandi Technologies may have a credibility problem with investors.  Too many of the China companies that have registered as public companies in the U.S. have turned out misleading or even false financial reports.  However, there is much to be said about having access to Chinese consumers who are increasingly affluent and keenly interested in novel transportation options.  What is more Kandi is a very innovative car manufacturer.

Consumers in Hangzhou, China – a cozy little city of 8.7 million people  -  will soon be able to step up to a Kandi automated garage, insert a card, and drive away in a Kandi electric car.  The driver will get up to 75 miles for the equivalent of $3.25 an hour.  The car can be dropped up at another Kandi rental site, much like the bicycle-sharing program that has become popular in the U.S.  This is different that the car sharing scheme of Zipcar that works more like a car rental.

Kandi has also come up with a solution for the problem of recharging batteries with a battery ‘swapping’ option.  Consumers who opt for a long-term lease instead of car-sharing can drive up for a convenient battery swap.  This is particularly important for Chinese drivers who might not have the ability to plug in an electric car at home or work.  Tesla may have the caught the attention of U.S. investors with its sleek electric sports cars and sophisticated publicity campaign.  However, Kandi Technologies is a contender in its own market with rental options that make sense for its customers.

Just like shares of Tesla, KNDI followed a pretty steep trajectory in 2013. By the end of 2013, the stock had delivered 250% growth from its 52-week low in late January 2013.  With the Hangzhou project coming on line in the coming months, it seems the company should be able to deliver earnings in a similar trajectory.
 
Debra Fiakas is the Managing Director of
Crystal Equity Research, an alternative research resource on small capitalization companies in selected industries.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

December 21, 2013

Tesla: What's In A Chinese Name?

Doug Young

How do you say
Tesla Logo
in Chinese?

This week had US electric car maker Tesla (Nasdaq: TSLA) officially driving into China despite its failure to resolve a trademark dispute, meaning it has no official Chinese name as it enters the market.

All of the world’s top car makers now manufacture in China. But that’s a very expensive business, and other companies have been chasing more niche-oriented spaces in the market. Online car information provider Autohome (NYSE: ATHM) is one of those, and successfully sold investors on its growth story with a highly successful IPO in New York last week. (previous post)

Now we’re getting word that another niche player, high-profile US electric car maker Telsa, has formally started selling its popular vehicles in China, even though it’s still involved in a trademark dispute that has left it without a formal Chinese name. (English article) Tesla is hoping to make its own strong debut in China by capitalizing on its sleek designs and generous incentives from Beijing to promote green energy vehicles. Its formal launch had been highly anticipated, and the company has already been taking pre-orders for several months.

The trademark squatter that registered Tesla’s Chinese name reportedly wants $30 million for the rights, quite a large amount for a company of Tesla’s size. Accordingly, the company has decided to go ahead and start selling cars in China simply using its English name without a Chinese translation for now. (English article) The company formally opened a showroom in Beijing this week to start selling its popular Model S sedans and has a website as well, though neither has its Chinese name.

If I were advising the company, I would tell it to simply choose a new Chinese name or perhaps even skip a Chinese name altogether, and leave the squatter with a worthless trademark. After all, Tesla is still new to the China market and there isn’t much consumer awareness of its previous Chinese name, which is pronounced like te-se-la. That would teach those squatters a lesson!

Bottom line: Tesla should choose a new Chinese name to avoid dealing with a trademark squatter.

 Doug Young has lived and worked in China for 15 years, much of that as a journalist for Reuters writing about Chinese companies. He currently lives in Shanghai where he teaches financial journalism at Fudan University. He writes daily on his blog, Young´s China Business Blog, commenting on the latest developments at Chinese companies listed in the US, China and Hong Kong. He is also author of a new book about the media in China, The Party Line: How The Media Dictates Public Opinion in Modern China.

November 14, 2013

Tesla Tussles With Chinese Squatter

Doug Young 

Tesla LogoUS electric car maker Tesla Motors (Nasdaq: TSLA) has landed in the headlines with an escalating trademark dispute in China, casting a spotlight on Beijing’s ongoing efforts to bolster the country’s intellectual property (IP) protections. China has made great strides in its IP protection in the last 5 years, resulting in a healthier business environment where both domestic and foreign companies can feel more secure that their trademarks, copyrights and product designs won’t be illegally stolen and copied.

But this latest case involving Tesla shows there is still more work to do, especially in trickier areas like Chinese-language equivalents of famous western brand names. Tesla is the latest major trademark case in China to make headlines over the last 2 years, reflecting the recent build-up by many famous brands in the fast growing market. Media first reported on the case in August, saying a Chinese businessman had registered the company’s name locally in both English and Chinese in 2006. (previous post) The man also registered the Chinese Internet domain of tesla.com.cn, which carries a logo almost identical to the US Tesla’s and claims to be selling its own electric car.

According to the latest reports, the businessman now wants $30 million for the trademarks. (Chinese article) Tesla executives said last week that the trademark dispute is one of the last remaining obstacles to the company’s entry to China, following its recent approval by the government to sell its popular electric cars in the market.

Tesla’s trademark roadblock follows a similar high-profile dispute in China last year involving global tech giant Apple and its iPad tablet computers. (previous post) In that instance, a Guangdong-based computer parts maker had registered the iPad trademark years ago for a line of products that it later discontinued before Apple’s 2010 launch of its popular tablet computers with the same name.

Apple believed it had purchased the trademark through a deal with an affiliate of the Guangdong company, but realized later the trademark transfer was never consummated. Apple later sued to legally get possession of the trademark, and the Chinese courts ultimately helped to mediate a settlement that reportedly saw Apple pay $60 million for local rights to the iPad name.

In another high profile case last year, luxury goods maker Hermes lost in its latest bid to claim the rights to its name in Chinese, which had been registered by a clothing maker from Guangdong. In that case Hermes had registered its native French name in China as early as 1977, but failed to register the Chinese equivalent at a time when the domestic market for luxury goods was tiny.

Since then, demand for luxury goods in China has exploded with the nation’s rising economic clout, and the market is now one of the world’s largest. Hermes took the Guangdong company to court several times to try to regain the Chinese name. But in the latest case that reached a conclusion last year, a Beijing court ruled against the French company because it could not prove that it was a famous brand in China before 1995, the year that the Guangdong company registered the name.

Each of these 3 cases involves slightly different issues, but all are common in showing how so-called “squatters” can use Chinese trademark laws to force big western names to pay large sums for the rights to their trademarks in China. Such problems also exist in the west, but less complex language issues and a more experienced court system has made the squatter problem far less significant there.

China has taken big steps in its effort to stamp out the squatter problem, bringing the country more in line with global practices. Companies that can prove they were already famous brands in China when a local squatter registered their name can use that defense in the courts to win back their trademarks. But legal experts say Tesla may have difficulty convincing a judge the company was already famous in China when the Chinese businessman registered the company’s name in 2006. Hermes has had problems for similar reasons.

China should be commended in its recent efforts to boost trademark protection and more broadly for its moves to protect intellectual property, which have created a more level playing field for all businesses. But as the latest Tesla case shows, there are still a number of loopholes that need to be closed to improve this important area that is critical for orderly development of a private sector that plays an increasingly important role in China’s economy.

Bottom line: China needs to further improve its trademark registration system to stamp out the problem of squatters who register western brands.

Doug Young has lived and worked in China for 15 years, much of that as a journalist for Reuters writing about Chinese companies. He currently lives in Shanghai where he teaches financial journalism at Fudan University. He writes daily on his blog, Young´s China Business Blog, commenting on the latest developments at Chinese companies listed in the US, China and Hong Kong. He is also author of a new book about the media in China, The Party Line: How The Media Dictates Public Opinion in Modern China.

November 04, 2013

BYD Hits California Speed Bumps

Doug Young 

bigstock-speed-bump-sign-painted-on-the-36460063.jpg
Speed bump photo via BigStock

After a year of relative calm in which its shares have surged, electric vehicle (EV) aspirant BYD (OTC: BYDDF; HKEx: 1211; Shenzhen: 002594) is once embroiled in a couple of mini-scandals involving its labor practices and technology in California. While I doubt that either of these problems will have a long-term impact on the company, they do highlight the many speed bumps that BYD and other Chinese automakers will face as they move into the global marketplace. The risks are particularly high for BYD, which is 10 percent owned by billionaire investor Warren Buffett, since the company is relying heavily on global markets to fuel its EV business.

The bigger of these 2 mini-scandals has made headlines around the US, and saw BYD fined $100,000 for breaking California’s tough labor laws. (English article) Such labor law violations aren’t all that uncommon, especially for a company like BYD that hasn’t done much business in the US. I suspect the main reason this story attracted so much attention was due to BYD’s Warren Buffett connection. The company was fined the amount for violating California’s minimum wage law, and also for failing to provide some pay documentation to the state.

BYD has responded by saying it was the victim of a misinformation campaign by a labor advocacy group, and that it plans to hire more workers as it ramps up its EV bus production at a newly built local plant. (company statement) According to BYD, the controversy stems not from the wages it pays to locally-based California employees but rather from wages paid to some of its China-based technicians who are on site at the new plant to train local workers.

As I’ve already said, this case doesn’t look too significant to me and I doubt there will be any long-term impact on BYD’s US plans. But it does spotlight the potential conflicts the company could face in many of the global markets where it is trying to expand, which run the range from emerging markets in Argentina to developed ones like Britain and Germany.

byd logo

The second setback involves BYD’s technology as the company works with the city of Long Beach, one of its main electric bus customers in California. (previous post) BYD has just built a plant to manufacture its electric buses in California, and now some local media are reporting that 7 of 9 bus sub-assemblies that were made at the plant failed to get approval by the Long Beach government. (English article) The failure to win approval looks related to a series of quality problems with the new plant as it revs up production.

Again, I would expect that this kind of quality problem is probably the result of launching a new facility rather than a long-term issue related to BYD’s technology. If that’s the case, then presumably BYD will fix the issues as the plant gains more experience and this kind of problem will soon disappear.

Both of these issues come as BYD’s prospects have improved greatly over the past year, igniting a rally that has seen its stock double since January. In its latest quarterly results announced this week, the company forecast its profit could rise as much as 7-fold this year, mostly on improving sales for traditional gas-powered cars. (English article)

But the company has also said it plans to start phasing out its gas-powered cars and eventually leave the business, focusing instead on EVs. Its EV sales are still tiny and mostly confined to a number of pilot programs both in China and abroad. To keep its rebound alive, those pilot programs need to start showing some results soon and contributing to the company’s top and bottom lines. That looks increasingly likely, though these latest California setbacks show there could be some hiccups along the way.

Bottom line: Two mini-scandals for BYD in California looks like minor setbacks, but reflect obstacles the company and other Chinese automakers will face in their global expansions.

Doug Young has lived and worked in China for 15 years, much of that as a journalist for Reuters writing about Chinese companies. He currently lives in Shanghai where he teaches financial journalism at Fudan University. He writes daily on his blog, Young´s China Business Blog, commenting on the latest developments at Chinese companies listed in the US, China and Hong Kong. He is also author of a new book about the media in China, The Party Line: How The Media Dictates Public Opinion in Modern China.

September 30, 2013

China's Electric Vehicle Subsidies: Winners And Losers

Tom Konrad CFA

On September 17th, the Chinese Ministry of Finance announced the long anticipated renewal of China’s New Energy Vehicle (i.e. electric vehicle or EV) subsidies.  The new subsidies for cars were in-line with market expectations, but will be reduced to 10% below the current levels next year, and 20% below the current levels in 2015.  Subsidies for buses fell short of expectations.

Conventional gasoline-electric hybrid models were not included in the subsidies, but some plug-in hybrid (PHEV) were.  The subsidies amount to 60,000 ($9,802) yuan for pure electric autos with a range over 250 km (155 miles), and 50,000 yuan ($8,168) and 35,000 yuan ($5,718) for EVs with range over 150 km (93 mi) and 80 km (50 mi), respectively. A restriction on the subsidy for low-speed electric vehicles was removed.

Electric and Plug-in hybrid electric buses also received subsidies, depending on length.  For buses over 50 m in length, EVs will receive 500,000 yuan ($81,680), and PHEVs will receive 250,000 yuan ($40,840.)  shorter PHEV buses do not receive a subsidy, by EV buses over 8 m and 6 m will receive 400,000 and 300,000 yuan respectively.

Stock Winners

The big winners here seem to be manufacturers of Chinese low-speed electric vehicles, among which are Kandi Technologies (NASD:KNDI note:I was long this stock when this article was written; I have since sold my position.) and its joint-venture partner Geely Automotive (OTC:GELYY.)  Several other Chinese manufacturers of low speed electric vehicles such as Chery Automotive, Shandong Shifeng Group,  and Hebei Yu Jie Ma may benefit as well.  The day after this article was first published, Kandi issued a press release detailing the benefits of the new subsidy policy on its operations, and received significant coverage in the US press.  The stock soared as high as $7 over the next two days, and I sold my position.

Losers

Makers of high-performance electric cars like Tesla Motors (NASD:TSLA) will benefit relatively less because, unlike in the US, the subsidies are based only on a vehicle’s range, not on the size of its battery pack.   This should not significantly effect Tesla’s prospects, however, since the company only recently started selling cars in China.

BYD Co (OTC:BYDDF Note: A hedge fund I co-manage is long BYD) has been falling, because, while it makes EVs, it also makes PHEVs, which received a lower than expected incentive.

Neither Winner Nor Loser

Surprisingly, Maxwell Technologies (NASD:MXWL Note: I am short MXWL) has been rallying.  On September 17th, I  assumed the rally was triggered by rumors that these subsidies included a subsidy for Chinese hybrid buses, which often account for over 50% of Maxwell’s revenue.  I found comments to that effect on the message boards, including a mis-identification of the plug-in hybrid subsidy as a hybrid bus subsidy.  On the 18th, as I was writing this article it appear that Maxwell's rally was triggered by a Piper Jaffray upgrade, a reversal of their downgrade in March following the resignation of Maxwell’s auditor.  I had not seen the research note, but I knew it could not be based on the Chinese subsidies, given that these do not include Maxwell’s customers.

I confirmed this with Mike Sund, Maxwell’s head of investor relations on the 17th .  He told me that this subsidy announcement does not include subsidies for Maxwell’s hybrid bus customers.  Those customers expect a separate subsidy package later this month to include hybrid buses, which is what the company had been saying all along.

Maxwell’s rally is even more surprising if we assume that the lower-than expected subsidies for PHEV buses and hybrid cars are an indicator of what the hybrid bus subsidies may be like.

Shortly after this article was first published, I read that  Piper Jaffray had reversed their upgrade, saying they had mis-interpreted the subsidies.  According to the fly on the wall:

This morning Piper Jaffray upgraded shares of of Maxwell to Overweight based on misinterpretation of data on China’s new hybrid bus subsidy, and failed to note it was only for plug-in hybrids, which the company has immaterial exposure too. The analyst has changed its rating and price target back to Neutral and $8.

This makes the large upgrade unsurprising, since the subsidies for PHEV buses are much larger than anyone expects for hybrids (which are much less expensive than PHEVs.)

Conclusion

The biggest winners from this announcement will be Chinese manufacturers of low-speed electric vehicles, such as Kandi.  The biggest losers seem to be makers of higher powered EVs like BYD and Tesla, but the total impact seems likely to be limited for both.

The announcement should have little bearing on hybrid bus manufacturers and their suppliers like Maxwell Technologies, unless we assume that the slightly disappointing subsidies for plug-in hybrid buses are an indicator of what is to come for hybrid buses.  The wild and short-lived rally of Maxwell stock on September 17th and 18th was triggered not by fundamentals but by a short squeeze triggered by the Piper Jaffray upgrade based on confusion about the Chinese subsidy announcement.  It ended shortly after they reversed their upgrade the next day.

An earlier version of this article was first published on the author's Forbes.com blog, Green Stocks on September 18th.

Disclosure: Short MXWL, Long BYD.

DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results.  This article contains the current opinions of the author and such opinions are subject to change without notice.  This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.  Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

August 26, 2013

Tesla Hits Chinese Speed Bump; BYD Rounds A Corner

Doug Young

A couple of interesting news bits are coming from the new energy vehicle sector, including a potential roadblock into the China market for up-and-coming US player Tesla (Nasdaq: TSLA) and new results from struggling domestic electric car maker BYD (HKEx: 1211; Shenzhen: 002594; OTC:BYDDF) that look encouraging but not too exciting. The main common theme in this latest news is that new energy vehicle makers continue to hold out hopes for the China market, banking on strong government policies to boost the market, even though progress has been slow so far.

byd logoLet’s start with a look at BYD, which started its life as a cellphone battery maker, then expanded into cars and most recently has placed big bets on the new energy vehicle sector. That big bet helped to attract billionaire investor Warren Buffett, who purchased 10 percent of BYD in 2009. His investment sparked a massive rally in BYD shares, though they later gave back most of the gains as the company’s traditional car business sputtered.

BYD shares have more than doubled from their lows last year, largely on hopes for a turnaround at its traditional gas-powered car business that accounts for half of its revenue. In that regard, investors should be relieved to see that BYD’s revenue grew 13 percent in the first half of 2013 to 24.2 billion yuan ($3.9 billion), reversing 2 years of declines. (results announcement) Car sales grew a healthy 25 percent, or about twice the rate of the broader Chinese car sector. Those solid gains helped to fuel a 26-fold rise in its profit to 427 million yuan.

But despite those upbeat figures, it’s interesting to note that BYD didn’t include any individual mention of its electric vehicle (EV) business in the highlights section of its report, which reflects the tough road that business has faced. Despite earlier strong hopes for the business, BYD has yet to make much major inroads with consumer buyers. Instead, it has had to rely on fleet buyers of taxis and electric buses for most of its sales.

The number of those fleet buyers has been growing steadily, though most programs are currently in the trial phase and it’s unclear if any will ultimately result in the bigger orders the company needs to make some profits from its big EV investment. It’s probably still a bit too early to call the BYD’s current line of EVs a failure. But time will start to become a major enemy soon as BYD’s current technology starts to become obsolete. Accordingly, I suspect that the company will have to make some major write-downs on its EV campaign in the next 2 years.

tesla logo From BYD, let’s look quickly at Tesla, which began taking orders in China last week for its high-end car, the Model S, costing about $70,000. The company had made most of the necessary preparations to start delivering its first vehicles this year, including preparation of a showroom in Beijing. But now media are reporting Tesla has hit an unexpected setback due to the registration of its name by a Chinese trademark squatter. (English article)

This case looks reminiscent of a much higher profile one last year between Apple (Nasdaq: AAPL) and a bankrupt technology company that owned the rights to the iPad name. Apple went to court to get back rights to the iPad name, and reportedly ended up settling the case for $60 million. (previous post)

I suspect the government got involved in that case due to its high profile and helped to broker the settlement. This Tesla case is far lower profile, meaning it will probably have to go through the usual legal channels if Tesla wants to resolve the matter in courts. Rather than face such delays to its China plans, I expect the company will probably negotiate with the squatter to get back the rights to its name, though it will probably pay far less than the $60 million Apple paid for the iPad trademark.

Bottom line: BYD’s latest results show it is running out of time for its EV push, while Tesla is likely to negotiate a deal to regain the rights to its trademark in China.

This article was first published in the online edition of the South China Morning Post.

Doug Young has lived and worked in China for 15 years, much of that as a journalist for Reuters writing about Chinese companies. He currently lives in Shanghai where he teaches financial journalism at Fudan University. He writes daily on his blog, Young´s China Business Blog, commenting on the latest developments at Chinese companies listed in the US, China and Hong Kong. He is also author of a new book about the media in China, The Party Line: How The Media Dictates Public Opinion in Modern China.

July 04, 2013

Tesla Motors and the Political Economy of Dealer Franchise Laws

by Lynne Kiesling

05rG8q321Mf4w_2105[1].jpg
The Tesla Model S: Bypassing dealer franchises. For now.
Tesla Motors (NASD:TSLA) is doing more than shaking up the automobile industry by producing an exciting high-end electric vehicle and establishing a network of battery-swapping stations. Tesla wants to sell directly to consumers, bypassing established dealer franchising that dominates the industry. But such dealer franchising has not been a mere transaction-cost-driven Coasian outcome — it’s undergirded by state laws that require manufacturers to sell their automobiles through independent dealers (Francine Lafontaine and Fiona Scott Morton, Journal of Economic Perspectives Summer 2010 (pdf) provides a useful overview of the history of such laws).

Existing dealers object to Tesla’s direct-to-market approach, and are using the dealer franchise laws to stop Tesla from doing so in states like Virginia; see also this Reason post on legislative events in New York. Note that Virginia law prohibits manufacturers from owning dealerships, outlawing vertical integration in the name of promoting competition, which means that a potential competitor can’t use vertical integration as a competitive strategy (yeah, that’ll promote competition …). Think about that restriction, and apply it to another innovative company: Apple. Dealer franchise laws in electronics would prohibit Apple (and Samsung, etc.) from operating its own stores. How would such a law affect competition in electronics? The answer is not clear, which is the point; vertical integration is not inherently anti-competitive at the retail level. In many ways, these laws are a relic, a holdover from a century ago when the economics of vertical integration was not well understood and vertically integrated firms with market power were per se suspect.

Dan Crane has a really nice post at Truth on the Market about the state dealer franchise laws that examines all of the arguments in favor of state dealer franchise laws. After countering them all and finding them wanting, Crane concludes that

Since the arguments for dealer laws are so weak, I’m left with the firm impression that this is just special interest rent-seeking of the worst kind.  It’s a real shame that Tesla—seemingly one of the most innovative, successful, and environmentally correct American industrial firms of the last decade—is going to have to spend tens of millions of dollars and may eventually have to cut shady political deals for the right to sell its own products.

This raises an interesting political economy situation. When innovative and environmentally correct meets the crony corporatism of existing legislation, is the entrenched incumbent dealer industry sufficiently politically powerful to succeed in retaining their enabling legislation that raises their new rival’s costs?

Lynne Kiesling is a Distinguished Senior Lecturer in the Department of Economics at Northwestern University. Her economic specialty is industrial organization, regulatory policy and market design in the electricity industry.  In particular, she examines the interaction of market design and innovation in the development of retail markets, products and services and the economics of “smart grid” technologies. She also teaches undergraduate courses in principles of economics, energy economics, environmental economics, and history of economic thought, and she writes about economics as the editor/owner at the website Knowledge Problem, where this post first appeared.

June 10, 2013

Rent this EV Stock and Enjoy the Ride, But Don't Keep it Too Long

Tom Konrad CFA

This article was first published on the author's Forbes.com blog, Green Stocks on May 31st as "Kandi Technologies: Weighing The Evidence." I have since added a short update to the end of the article.

Last year, I brought Chinese off-road vehicle and electric vehicle (EV) manufacturer Kandi Technologies (NASD:KNDI) to readers’ attention.  I like Kandi because the company was already profitable and trades for a tiny fraction of what a US-based EV maker would.

The Strategy

I also like Kandi’s electric vehicle strategy, which focuses on inexpensive commuter vehicles combined with battery-swapping.  While this sounds a lot like the the strategy of recently bankrupt Better Place, Kandi’s strategy avoids one of the biggest problems with Better Place’s strategy: Kandi does not have to bear the expense of extra sets of batteries or swapping infrastructure.  The batteries are owned by the local utility, which can use them when they are not in cars to provide stabilization and ancilliary services to the grid.  Kandi just (profitably) manufactures the cars and licenses the battery swapping IP.

With the Chinese government in Beijing pushing hard for more “New Energy Vehicles” as the Chinese call EVs in order to cope with its horrific problem of urban pollution, even China’s largest privately owned automaker, Geely (HKEx: 175, OTC:GELYF) got religion, and has signed a 50-50 joint venture to produce EVs with Kandi.

The Valuation

With Kandi already profitable based on its legacy ATV business, I and other Kandi shareholders have long been frustrated that Kandi does not trade at a much higher multiple of earnings and revenue.  Kandi has a trailing P/E ratio of 20, and trades at less than 2 time trailing revenue.  Meanwhile EV high-flyer Tesla (NASD:TSLA) is trading at 13.5 time revenue, and 100 times next year’s expected earnings (Tesla lost money last year, and is expected to only break even in 2013.)

The China Price

There are several factors contributing to Kandi’s low valuation:

  • Kandi got its Nasdaq listing through a reverse merger, a strategy which was followed by a number of other Chinese companies, many of which were later found to have fiddled their books, absconded with shareholder funds, or otherwise been frauds.
  • As a result of its small market capitalization and the general wariness of Chinese stocks, no analysts follow Kandi.
  • A number of negative articles, many of which were written by investors who were short the stock, have highlighted irregularities in Kandi’s listing process and past reporting.

Although the negative articles about Kandi have been disturbing, none of them have turned up anything wrong with Kandi’s  financial accounting.  I’ve generally taken this as a good sign.  When the same group of people who made good profits by shorting Chinese stocks and then exposing their accounting frauds have been unable to turn up anything so serious about Kandi, I have to wonder if there is anything to find.

With this in mind, I set out last month to parse through the novel-length and rather dense Kandi-bashing articles to demonstrate that there was nothing there for investors to worry about.  I failed, and instead found myself doubting the judgement and/or honesty of Kandi’s management.  I’d like to emphasize that there is no proof of wrongdoing, but investors who wish to hold on to their money don’t have the luxury of waiting until their suspicions are confirmed beyond a reasonable doubt.

Sharesleuth

The most in-depth articles looking into irregularities surrounding Kandi were written by Chris Cary of Sharesleuth.  Carey is a former reporter for the St. Louis Post-Dispatch.  Sharesleuth is funded by Mark Cuban, who often trades on the information Carey digs up before he publishes his articles.  Some people find this business model distasteful  but as Carey puts it, “If Sharesleuth.com exposes fraudulent companies and Mark Cuban uses profits from trades to finance more investigative reporting, then I’m OK with that.”  I’m also OK with it.  I don’t see the difference between Sharesleuth and any mutual fund manager who goes on CNN to talk about his portfolio.  Or between Sharesleuth and a blogger writing about stocks he owns on Forbes or Seeking Alpha, for that matter.

The controversy about Sharesleuth’s business model mostly seems to arise because most of Cuban’s trades are on the short side.  But in the case of Kandi, Cuban was never short.  I asked Carey about this in an interview, and he responded that Kandi is a very difficult stock to short.  For a billionaire like Cuban, the money he could make shorting a tiny stock like Kandi is hardly enough to move the needle.  Carey uncovered the information in his articles in the course of investigations into the people who brought it public, along with ten other Chinese reverse merger companies, including New Oriental Energy (OTC:NOEC), Telestone Technologies Corp. (Nasdaq: TSTC); and Orsus Xelent Technologies Inc. (OTC: ORSX).  Many of these have since been delisted, and Kandi is virtually alone among them for not trading well below its initial offering price.

Price chart of four Chinese Reverse Merger Companies.  Source: Barchart.com

Clearly, Kandi should not be indited based on guilt by association, and the scrutiny the company has been under because of these associations should give us some confidence that any past misdeeds are either very well buried or have already been revealed.  Nor do any of those misdeeds reach the level of the outright accounting fraud found in many of the Kandi’s reverse-merger brethren.  Kandi has not been accused of anything illegal.

My distillation of the Sharesleuth revelations is:

  • A number of people made millions off Kandi’s reverse merger, and these people were never properly identified in the company’s SEC filings.
  • From 2009 to 2011, Kandi significantly overstated the number of EVs it sold.  After Sharesleuth showed that Kandi’s claimed sales of EVs were not supported by the number imported or sold by Kandi’s dealers, the company quietly revised its financial statements, revealing that many of its claimed EV sales were actually sales of gas powered vehicles.

The Defense


Kandi’s defenders dismiss the first point as old news, saying that what should really matter to investors is Kandi’s current prospects.   To the second point, they say that Kandi has admitted its mistake, and the miscategorization of sales of gas powered cars as EVs made no difference to Kandi’s revenue or earnings in any of the affected years.

They also emphasize that Kandi is not accused of any criminal act or fraud, and attempt to undermine the credibility of Kandi’s detractors by calling the negative articles paid hit pieces.  Of course, Kandi’s defenders are long the stock (as am I), which is at least as much of a bias as being short.

My Take

I’m certainly happy that Kandi has not been accused of fraud, and I do prefer to focus on Kandi’s future than on events which occurred before I was ever a shareholder.  On the other hand, when we’re trying to predict how management will behave in the future, our best evidence is how they have behaved in the past.

In the case of unknown individuals profiting from the reverse merger, this was at best bad judgment on the part of Mr. Hu, Kandi’s President, CEO, and largest shareholder.  The reverse merger process seems to have needlessly diluted existing shareholders, and also shows Mr. Hu working with a number of unsavory characters, perhaps unwittingly.  At worst, Mr. Hu and his associates may have directly benefited from the transactions in ways which were not disclosed.

Either way, the incident undermines my faith that Mr. Hu will do everything in his power to protect the equity of the company’s current small shareholders.

In terms of the misreported EV sales, the best case scenario is that it was simply a translation mistake.  I find this scenario unlikely, because the exaggeration occurred repeatedly over a couple years.  Nor does the fact that the mis-categorization of EV sales did not affect reported sales or revenues mean that the number of Kandi’s EV sales was not material to investors’ investment decisions.  The Kandi “story” depended on the growth of its EV business even then: Here’s an article from 2010 making the link explicit: Kandi Tech Reports Strong Results, But Future Depends on Electric Car Growth.

Other Evidence

After  couple of my picks recently revealed that they would have to restate their financial accounts because of misreported revenue, I began using the Beneish M-Score as an early warning system for earnings manipulation.  I calculated Kandi’s M-Score based on annual accounts from 2010 to 2012, and on quarterly accounts for the last three quarters.  The M-Score combines factors which might give a company an incentive to manipulate with factors which pick up the distortions caused by common forms of earnings manipulation.  Details about how to calculate M-Score and a spreadsheet can be found here. For nearly all the periods I tested, M-Score indicates that Kandi has a moderate chance of having performed some earnings manipulation.  Exactly what this probability is is hard to say, but the M-Scores are a long way from giving an “all clear.”.  The 2010 annual report looks most likely to have been manipulated, mainly because of a high level of receivables growth relative to sales growth.  Note that this period coincides with the inflated EV sales numbers.

Companies can have high M-Scores without having manipulated earnings, but a high M-Score says “proceed with caution.”  Maxwell Technologies (NASD:MXWL) had an M-Score in the third quarter of 2012 that was similar to Kandi’s annual 2010 M-Score, and the next quarter they announced that they had been misreporting revenue since 2011.  (I suspect Maxwell’s mis-reporting may be greater in extent than has yet been revealed.)  M-Score will not flag all earnings manipulation, but it may flag some honest companies as well.

Reading through Kandi’s filings, I noticed that Kandi’s largest shareholder at the time of its listing was ExcelVantage Group, a fund controlled by a Chinese retiree Tim Ho Man.  In 2010, Mr. Tim transferred control of ExcelVantage to Kandi’s CEO, Mr. Hu, “pursuant to a Transfer of Equity Agreement” between them.  Kandi’s listing documents made no mention of any connection between Mr. Hu and Mr. Tim.  While it is possible that Mr. Hu bought ExcelVantage from Mr. Tim in an arms-length transaction, it seems more likely to me that the two men had an undisclosed agreement between them which gave Mr. Hu effective control of ExcelVantage all along.

Once again, there is nothing illegal about this, but it had the effect of obscuring the fact that Mr. Hu retained a controlling stake of Kandi at the time it went public.  That’s something I would have wanted to know had I been considering investing at the time.

Conclusion

There are a number of instances and red flags about Kandi’s management that lead me to want to proceed with caution.  At the very least, the company has not been forthcoming with relevant information that investors would have been interested in.  A company looking to build a reputation for good shareholder relations would have disclosed this information.  At worst, the company may have intentionally misled investors regarding its EV sales at a time when its accounts also showed signs of possible distortion.  If that’s the case, it would be reasonable to assume that they will do something similar in the future.

On the other hand, the evidence of Kandi’s current progress at building acceptance for its EVs is based not only on the company’s statements, but a large number of articles in the Chinese press, and agreements with Geely and a number of Chinese cities and provinces.  My feeling from this is that Kandi will continue to rack up good press and increasing EV sales for the rest of the year.   The fact that Kandi also recently filed an S-3 to allow it to sell additional securities also leads me to believe that, if the company is likely to exaggerate its results, it will do so in the coming months in order to boost the share price.

If you would like to read the full bull case for the stock, the best place to start is to read these three recent articles by Art Porcari.

After weighing the evidence, I no longer consider Kandi a long-term hold.  That said, my concerns about management are long-term in nature, and I think Kandi’s short term trend will be up.  This article itself may cause a downward blip, but Kandi’s shareholders are so used to negative articles about the stock that I doubt this one will have any long term effect, and I expect Kandi’s upward momentum will soon resume.  I intend to maintain my reduced holding to take advantage of that trend.

Update 6/10/13: The upward climb I predicted above started much sooner than I thought, when a relatively minor news story about a car developed for the Kandi-Geely JV received approval from the Chinese government, and Kandi finally caught some of the Tesla (NASD:TSLA) fever.  When I wrote this article 10 days ago, Kandi was trading around $3.80, today it's trading at $6.50.  I'm now mostly out of the stock, having sold covered calls at $5, but I'm not ready to call a top.  As Tesla showed, once an EV stock catches investors' imaginations, it can completely defy gravity and fundamentals.  Bottom Line: If you still own Kandi, enjoy the ride, but this hot EV stock should be a rental, not a purchase or even a long term lease.

Disclosure: Long KNDI stock, short KNDI covered calls, MXWL.

DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results.  This article contains the current opinions of the author and such opinions are subject to change without notice.  This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.  Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

May 22, 2013

Geely Revs Up EV Drive; BYD Brings EVs to Hong Kong

Doug Young

Kandi Coco
Geely recently signaled its committment to EVs by forming a joint venture with Kandi Technologies, the maker of the Coco EV above.  Photo by Tom Harrison.

After making increasing noises about its intent to develop electric vehicles (EVs), domestic automaker Geely (HKEx: 175) is getting serious about the effort by moving one of its top executives into a new role overseeing its EV sales. Meantime, rival EV maker BYD (HKEx: 1211; Shenzhen: 002594, OTC:BYDDF) has gotten its own new boost in the space with the launch of a new pilot program for its electric taxis in Hong Kong.  Both developments are certainly positive for the sector, and indicate the Chinese automakers haven’t given up on their dreams of bringing EVs to both China and the world.I’m no expert on EVs, but based on what I’ve seen and heard the current technology still isn’t quite ready for true commercialization and will require another generation or two of new technologies before it’s ready for true mass market sales. But that said, perhaps BYD and now Geely are positioning themselves to become leaders in the space if and when that happens, alongside most major western players that have been in the market for more than a decade.

Let’s start with a look at the latest news from Geely, which has announced that Liu Jinliang has left his older role as head of the company’s car sales to focus exclusively on developing its EV business. (company announcement) In a bid to ease concerns that the move might represent a demotion, Geely is quick to add that Liu will retain his role as a company executive director.

I’m no expert on the inside workings of Geely, but recent signs do appear to indicate this move really does represent what Geely says, namely an effort to seriously develop its EV business. The company’s sales have been weak in the last few years as it lost share to more aggressive foreign players. But it’s done relatively well so far this year, with sales up 21 percent in the first 4 months of 2013 as it works to revive its traditional car business. At its annual meeting last week in Hong Kong, Geely also said it expects sales growth to accelerate in the second half of the year as it introduces new models. (English article) That certainly doesn’t sound like the kind of performance that would merit a demotion for Liu.

Geely is also planning to roll out an electric vehicle model in the second half of the year, the EC7, hinting that Liu’s move might be related to a major push for the car. This latest move would come just 3 months after Geely announced a new joint venture to produce electric cars with Kandi Technologies (Nasdaq: KNDI), again emphasizing the company’s intent to make a serious bid into the EV space.

From Geely, let’s take a quick look at BYD, the Warren Buffett-invested company that has just announced the latest in a series of pilot programs aimed at selling its electric taxis and buses to fleet owners outside of China. The company has already launched trial programs in Europe and the US and its hometown of Shenzhen, and now has just begun another program in Hong Kong. (company announcement) This latest deal will see 45 of BYD’s electric taxis rolled out initially in the former British territory, and includes a program to build up the necessary charging infrastructure.

As a former Hong Kong resident, I have to say this latest deal looks quite encouraging to me due to the territory’s heavy reliance on taxis as part of its public transportation infrastructure. This pilot program could easily become a major selling point for BYD’s EVs if the taxis perform well on Hong Kong’s crowded roads. But BYD could also suffer a major blow if there are lots of problems, which is always a possibility with this kind of new technology. All that said, this latest move for BYD certainly looks positive for the company — if it can survive long enough to see some of its EV pilot programs finally bear fruit with major fleet and eventually consumer sales.

Bottom line: New moves by Geely and BYD indicate the EV space is gaining momentum among China’s domestic automakers, providing a psychological boost for the sector.

Doug Young has lived and worked in China for 15 years, much of that as a journalist for Reuters writing about Chinese companies. He currently lives in Shanghai where he teaches financial journalism at Fudan University. He writes daily on his blog, Young´s China Business Blog, commenting on the latest developments at Chinese companies listed in the US, China and Hong Kong. He is also author of a new book about the media in China, The Party Line: How The Media Dictates Public Opinion in Modern China.

Tesla Issues First EV-Related Climate Bond

by Sean Kidney

Tesla issues $600m, 5yr EV convertible bond

Tesla Motors’ [NASD:TSLA] inaugural bond issue has been, as you’d expect, electrifying (just had to say that). The US electric sports car manufacturer has just issued a 5 year, $600m convertible bond in a fundraising program which has seen it raise approximately $1bn through shares and convertible bonds. Coupon is 1.5-2%; conversion premium is 35%; bookrunners were JPMorgan, Goldman Sachs, Morgan Stanley.

Tesla had planned to raise $450m through convertible bonds, but this was raised to $600m after strong demand from investors. That demand allowed Tesla to drop what was going to be a 2-2.5% coupon down to 1.5%-2%. Investors were certainly bullish on the notes.

Over 200 investors participated in a group investor call and Tesla management also held a number of one-to-one investor meetings. We’re not sure yet who the main investors were (although we do know that one of them was the company’s co-founder and CEO Elon Musk) but unlike many convertible bond deals, buyers were primarily long-only funds (few hedge funds).

Approximately $450mn of the money raised will go towards repay a $452mn loan from the Federal government through the  DOE’s Advanced Technology Vehicles Manufacturing loan guarantee scheme.

Would the Tesla bonds qualify for Climate Bonds certification? Well, electric vehicle (EV) technology will be eligible, although we are still working on details of inclusion definitions. At this stage, we don’t see any problem with convertible bonds for pureplay companies like Tesla; but if it wasn’t pureplay then we’d have to take a deeper look. In our 2012 Bonds and Climate Change report, we didn’t find any bonds solely linked to EVs, so (as far as we can tell) this is a first!

Sean Kidney is Chair of the Climate Bonds Initiative, an "investor-focused" not-for-profit promoting long-term debt models to fund a rapid, global transition to a low-carbon economy. 

April 24, 2013

Tesla, Graphene, and the 1,000 Mile EV

By Jeff Siegel

A good friend of mine recently took delivery of a brand-new Tesla (NASD:TSLA) Model S.

This is the electric car you've read about in these pages before: a sleek, all-electric vehicle boasting high-end luxury, state-of-the-art design, and an all-electric driving range of 300 miles...

Take a look:

modelstesla

Not only is the Model S a top-notch vehicle that crushes every other electric car available in the marketplace today, but its ability to travel 300 miles on a single charge has proven to be a serious game-changer in the world of electric cars.

In fact, in the first quarter of this year, Tesla delivered more electric cars than any other automaker selling electric cars.

Remember, this is a small, Silicon Valley start-up competing against the manufacturing muscle of companies like GM (NYSE: GM), Nissan (PINK SHEETS: NSANY) and Ford (NYSE: F). And they're crushing it, thanks mostly to the fact that the Model S provides the kind of driving range that calms the nerves of those who worry about their electric car running out of juice.

It also doesn't hurt that this pure-play electric car company has been building a network of charging stations across the country...

Here's a map of the projected network to be completed in less than two years (much of the Northeast corridor and a string of stations along California are already in place and operational):

teslamap

Bottom line: In these early days of electric vehicle integration, the ability to provide exceptional all-electric ranges is paramount to any electric car manufacturer's success.

Of course, while 300 miles on a single charge is worthy of respect and admiration, the truth is in another six or seven years, 300 miles will be considered the “low end” of what is possible for commercially viable electric cars.

1,000-Mile Electric Car

An Israeli-based tech company announced last month it has developed an electric vehicle that can travel 1,000 miles on a single charge. The vehicle is “fueled” by a lithium-ion battery and an aluminum-air energy system that uses the energy released by the reaction of aluminum with oxygen to generate power. And because the system is mechanically reloaded, charge times are quite fast.

The company behind this technology, Phinergy, claims it will have production volumes ready in 2017.

In the meantime, there are plenty of other tech companies and universities looking to get a piece of this action as well...

Take the new microbattery recently developed at the University of Illinois. This is essentially a millimeter-sized battery that has the ability to jump-start a car battery and charge a cell phone in just a few seconds.

Although the battery technology is currently focused on personal electronics, the possibilities for these microbatteries in electric cars are quite enticing, as this technology can help shrink battery sizes down by 30 times while allowing electric vehicles to charge 1,000 times faster than what's available today.

Professor William King, the man behind this research, claims this technology will be available for use in consumer electronics in as soon as two years.

Graphene Matters

While the future of battery technology is enough to excite any tech geek, as investors, it's merely something we have to monitor from a distance — while focusing on opportunities that are available to us today, not five to ten years from now.

Fortunately, when it comes to electric car battery technology, we don't have to wait very long to profit from the next big thing...

Though there are a number of new battery chemistries that'll be entering the market in another five to ten years, right now lithium-ion remains the chemistry of choice.

But thanks to a new development in supercapacitor technology, the next generation of electric cars could be equipped with graphene supercapacitors that'll allow you to charge an electric car in just minutes instead of hours.

My friends, that's the kind of game-changing technology that changes everything.

And thanks to graphene — the same material that's now being used to double the efficiencies of solar panels and make airplanes 70% lighter — electric cars are on the verge of offering the kind of power and range that is demanded by most Americans.

Yes, this completely changes the dynamic of electric cars.

So keep your eyes peeled for some good graphene plays in the future. Because it's ultimately going to be graphene — not lithium — that'll deliver the biggest profits in the electric vehicle space over the next few years.

To a new way of life and a new generation of wealth...

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Jeff Siegel is Editor of Energy and Capital, where this article was first published.

April 23, 2013

BYD Junks Traditional Cars, Issues Shares

Doug Young

byd logo Billionaire investor Warren Buffett has remained faithful to Chinese car maker BYD (HKEx: 1211; Shenzhen: 002594; OTC:BYDDF), refusing to change his 10 percent holdings in the company despite a rapid tumble as its bet on electric vehicles (EVs) fails to take off. But soon the man known as the Oracle of Omaha may have no choice but to reduce his stake, since BYD has just announced a plan to issue more shares to raise desperately needed cash. Of course Buffett may choose to buy some of those new shares to maintain his stake at 10 percent; but I suspect his patience is probably running out with this company, with the result that his stake in BYD will get diluted with this planned share issue. BYD has announced it wants to boost its Hong Kong-listed share count by up to 20 percent, meaning it could sell up to 159 million more shares. (company announcement) Based on its Friday closing price, the company could raise around $500 million if it issues all the news shares. If it did that, then Buffett could see his stake reduced to about 8.3 percent, helping him to automatically lower his holdings as a possible prelude to an eventual exit from the company.

BYD is quite frank about its need for cash, which should come as no surprise since its profits have plunged over the last 2 years as sales of its traditional gasoline powered cars plummeted and its EV program failed to gain much traction. In its announcement on the plan to issue more shares, it says the capital raising plan is the result of the “current capital strain” on the company due to fierce competition.

In a separate media report, BYD also disclosed that it plans to abandon its older gasoline-powered car business completely over the next 2 years as it focuses on its EV program. (English article) Traditional cars were once BYD’s biggest money maker, helping the company to rake in big profits at the time when Buffett made his landmark investment in 2008. But BYD has seen its sales of those cars tumble over the last 2 years as it failed to find a replacement for its F3, once China’s best selling car model.

The company is trying to put a positive spin on its decision to abandon gas-powered cars, calling the move part of a “rebirth” to end its downward skid that has seen its profits evaporate over the last 2 years. Perhaps somewhat ironically, this so-called rebirth plan could send the company into a death spiral if BYD’s EVs don’t start to find a bigger audience in the near future.

I personally have been quite mixed on BYD in the past. On the one hand I think the company is risking its future by placing too much emphasis on EVs, even though most of the world’s top automakers have failed to succeed in the space despite years of effort. On the other hand, I do like BYD’s recent decision to focus on big customers who operate fleets of taxis and buses, since such customers have the resources to build necessary infrastructure and their driving patterns are more suited to EV use.

The most immediate problem for BYD is that time is emerging as its biggest enemy. Many of its bus and taxi fleet customers have launched pilot programs in the past year, meaning it will probably be at least another year or two before they place major orders if those programs are successful. In the meantime, the company is burning through lots of cash to support the EV program, even as its traditional car business sputters.

At the end of the day, this decision to abandon gas powered cars and issue new shares will probably buy BYD another year or two to keep developing its EV program. But the company could face a very challenging future if results from the EV pilot programs are mixed or negative, and it’s quite possible that future won’t include the continued support of Warren Buffett.

Bottom line: BYD’s decisions to abandon traditional cars and issue more shares could buy it 2 more years to make its EV program succeed.

Doug Young has lived and worked in China for 15 years, much of that as a journalist for Reuters writing about Chinese companies. He currently lives in Shanghai where he teaches financial journalism at Fudan University. He writes daily on his blog, Young´s China Business Blog, commenting on the latest developments at Chinese companies listed in the US, China and Hong Kong. He is also author of a new book about the media in China, The Party Line: How The Media Dictates Public Opinion in Modern China.

February 07, 2013

Kandi Technologies' Art of War

Denny Schlesinger

Machiavelli's The Prince and Sun Tzu's The Art of War are the two best known classic treatises on strategies to conquer and to govern. As Kandi Technology Group's [NASD:KNDI] electric vehicle strategy unfolds, I'm reminded of these masterpieces.

The Challenges

There are many of them. To start with, the current personal land transportation paradigm, the internal combustion engine, is not just well entrenched, it is becoming more efficient as time goes by. The fears of peak oil are vastly exaggerated specially now that fracking technology has added billions of barrels of recoverable reserves to the inventory. Fuel efficiency continues to increase with not just better engines and lighter and better designed cars but also with developments like hybrids, micro-hybrid start-stop technology and alternative fuels like natural gas for light vehicles and LNG for heavier ones. Cheap and abundant natural gas is a strong incentive to develop the required fuel distribution infrastructure.

The batteries themselves are a huge challenge. Batteries cannot compete with hydrocarbons in fuel density. The weight and bulk of the batteries cuts down on the range and payload of the electric vehicle requiring frequent recharging and recharging a battery takes a lot more time than filling a tank with gas. This makes recreating the driving experience of an internal combustion engine vehicle with an electric car very difficult. As if this were not enough, the lifetime expectancy of batteries is low when compared with the life of a gas tank which lasts as long as the car itself. Add to that the high cost of the battery and electric cars become mission impossible except for specific and limited uses like certain fleets (post office, etc.).

With high expectations for wind and solar power it seemed logical to people who did not think the problem through, that electric vehicles were a given. Traditional auto makers expected to replace the gas guzzler with a similar car but with an electric motor. This does not work for, among others, the reasons given above. The challenge, then, is to think outside the box.

Disruptive vs. Sustaining Technology

Clayton Christensen labels new technology as being either sustaining or disruptive. A sustaining technology is one that fits easily into a company's exiting frame of reference. Hybrids such as the Toyota Prius and micro-hybrid (start-stop) electric cars are example of sustaining technology. An upstart like Kandi has practically no chance against the incumbent industry giants with such a technology.

Disruptive technology, to the contrary, is one that incumbents find hard to incorporate into their exiting frame of reference. The challenge, then, is to think outside the box to find or to create a disruptive technology. A paradigm shift, if you will.

Kandi's Paradigm Shift(s)

Technology Adoption Life Cycle

TALC
In his marketing books, Crossing the Chasm and Inside the Tornado, Geoffrey Moore uses the Technology Adoption Life Cycle (TALC) to describe how high technology products move from garage to market. He calls TALC "a model for understanding the acceptance of new products." In The Gorilla Game, he tells investors how to use TALC to help identify the winners -- the gorillas -- and how to use TALC to time the investments.

The Whole Product

If you have a car but there are no roads in your vicinity and no gas pumps and no mechanics, then the car is not useful to you except as a conversation piece. The whole product includes the car, the roads and all the services like gas pumps, oil companies, mechanics, spare parts, driving schools and traffic lights.From Telecosm Crosses the Chasm
Of course, I cannot get inside the head of Kandi CEO Xiaoming Hu. I can only report what has happened. Kandi started out making all terrain vehicles (ATV) for export. It was suggested to Kandi that a US listing of its stock would create a more solid image that would help sales in the USA. The listing was done via a reverse merger which turned out to be unfortunate because several other Chinese reverse mergers turned out to be frauds, tarring the legitimate ones in the process. Business was doing well until the financial crisis of 2008 hit. Whether for that reason or for some other, Mr. Hu redirected Kandi into the pure electric vehicle business of which I became aware through the Seeking Alpha articles of Arthur Porcari in mid 2010. [Editor note: These articles were first published on AltEnergyStocks.com, and syndicated on Seeking Alpha.] I liked what I saw and I wrote my first Kandi article on October 31, 2010.
Can electric vehicles (EVs) be disruptive technology? Not the way the major auto makers are approaching the market. To be disruptive a technology has to be cheaper and the Volt sure isn't, and it has to serve an under-served market and the Volt sure doesn't. To have a chance of success, EVs need a really new paradigm. It seems that Kandi Technologies has found such a new way.
The first big shift was in battery ownership which in hindsight makes perfect sense since the battery is the main stumbling block. The car would be sold (with the help of subsidies) and a swappable battery would be leased. The program was announced with great fanfare, an initial lot of cars was sold and then sales dried up. What happened? According to the Technology Adoption Life Cycle (TALC), some "innovators" bought the cars but there was no follow up. The Whole Product was missing. A viable infrastructure, which was quite beyond Kandi to establish, was missing. For that Kandi needed help.

Again, I don't know what happened behind closed doors but the powers that be in the PRC wanted electric cars and Kandi had them. In addition to provincial governments providing subsidies, the two principal state electric utilities got involved. They would own the batteries which would serve double duty powering the cars as well as serving as grid storage in what is being called Vehicle to Grid (V2G) for plug-in rechargeable batteries and Battery to Grid (B2G) for swappable and otherwise stand alone batteries. This makes for a very powerful combination. Batteries that are no longer good enough to power cars can be used for grid storage extending their useful life. As grid storage the electricity subscribers help defer the batteries' cost. Selling electricity is the utilities' business which is a good reason for them to build the battery swap service stations.

The next important paradigm shift was to stop looking at it as private transportation. The EVs would become public transportation with the various city or provincial governments creating lease and rental programs. The lease vehicles would have swappable batteries while the rental cars would have rechargeable batteries which would be charged in the program's vertical garages while waiting for the next customer.

Not only would these programs lower the cost of entry for users, it guaranteed a much larger initial sales volume for Kandi, removing some of the obstacles created by the more usual TALC style adoption. The first lease program would be for 20,000 vehicle to be delivered over a period of 12 months. Although some orders for batteries and cars were placed, the 20K vehicle lease program was also delayed on account of the missing Whole Product. Now we are expecting it to go forward after the Lunar New Year (February 9 to 15, 2013).

Alliances Mr. Hu Has Made

Clearly Kandi could not expect to go it alone. Each province wants to have its own industries which means Kandi needs provincial partners. Kandi needs the cooperation of the electric utilities and also reliable battery suppliers. These are some of the strategic alliances Kandi has made:
  1. State Grid Power Corporation
  2. Jinhua City, Zhejiang province, 3,000 EV subsidy program
  3. Tianneng Power International, Ltd., batteries for Jinhua City project
  4. Wanning City, Hainan Province, parts factory 100,000 cars
  5. Wei Fang City, Shandong Province, parts factory 100,000 cars
  6. Hangzhou, Zhejiang Province, 20,000 car lease program
  7. Zhejiang Guoxin Car Rental Co., Ltd., Hangzhou EV leasing program
  8. Hangzhou Green EV Rental Co., Hangzhou EV leasing program
  9. Hangzhou Yulong EV Technology Co., Ltd., Hangzhou EV leasing program
  10. Zhongju (Tianjin) New Energy Investment Co., Ltd., Hangzhou EV leasing program
  11. China Aviation Lithium Battery Co., Ltd. ("CALB"), a subsidiary of Aviation Industry Corporation of China ("AVIC"), Batteries for Hangzhou 20,000 EV leasing program
  12. Hangzhou 100,000 EV rental project with vertical parking garage
  13. Zhejiang Zotye Holding Group Co., joint venture
  14. Geely Automobile Holdings Ltd., joint venture
  15. TongXu AoXing Vehicle Co., Ltd., marketing agreement in TongXu County, KaiFeng City, HeNan Province
Mr. Hu is systematically covering all his bases getting partners to do all the things that are outside Kandi's core competence. I found it significant that Mr. Hu visited Mr. Li at Geely last November, not the other way around. It shows that Mr. Hu is the driving force.

Name Change

It might be entirely symbolic but last December Kandi changed its name from Kandi Technologies Corp. to Kandi Technologies Group, Inc. to better reflect the new reality: Kandi is no longer just a go-kart and ATV maker but the leading developer of pure electric vehicles in China, a position it has achieved in barely three years.

Kandi claims to have an annual capacity to make 300,000 cars. There is no reason why the two manufacturing joint ventures can't make a similar number. When this venture finally takes off, and it could well be this Year of the Snake, the results should be impressive.

Disclosure: Long KNDI.

Denny Schlesinger is a retired management consultant, individual investor and editor of Software Times where this article was originally published.

References

The Prince Niccolo Machiavelli (Author), Daniel Donno (Translator, Introduction)
The Art of War Sun Tzu (Author), Samuel B. Griffith (Translator), B. H. Liddell Hart (Foreword)
The Innovator's Dilemma: When New Technologies Cause Great Firms to Fail by Clayton M. Christensen
Telecosm Crosses the Chasm Software Times
FORM 8-K Name change, 2012 Annual Meeting of Stockholders

Arthur Porcari's four part series on KNDI at Alt Energy Stocks

January 26, 2013

The CapEx-OpEx Fallacy, Electric Cars, and Biofuels

Jim Lane

“Electric power is cheap”, and “cellulosic biofuel costs less than $1.00 per gallon”.
English: Photo of the Tesla Model S, from the ...
The Tesla Model S, from the unveiling on 26-Mar-2009. (Photo credit: Wikimedia Commons)

So why isn’t everyone buying a Chevy Volt? And why can you get lower interest rates on your Visa Card than next-gen biofuel developers face?

It’s the old capex-opex (Capital Expense vs. Operating Expense) fallacy.

Earlier this week, a new study from researchers at UC Santa Barbara determined photovoltaics to be much more efficient than biomass at turning sunlight into energy to fuel a car.

“Even the most land-use efficient biomass-based pathway,” the researchers wrote, “(i.e., switchgrass bioelectricity in U.S. counties with hypothetical crop yields of over 24 tonnes/ha) requires 29 times more land than the PV-based alternative in the same locations.”

Which raises two fundamental questions. First, why don’t all biofuels developers close shop and go home? Second, why for all that efficiency are the sales of battery-electric vehicles so low?

Time for a fresh look at the data.

Turns out that rational consumers — i.e. you — make choices not based on land use but on price and preference.

To cite an example, it takes more land to support a US football football team than an MLS soccer team, so why does anyone watch the Super Bowl? It takes far more land to produce a pound of hamburger than a pound of grass, so why doesn’t McDonalds sell grass? Yada yada yada.

But there’s something else in this analysis that is more important to look at.

The comparison — between biofuels-ICU engines and the solar-electric engine driving option — is actually a variation on the business model for selling razors and blades, or printers and inks.

You know how it goes, you buy a cheap printer for under $100, then spend a fortune on the ink.It’s the old capex-opex fallacy.

What is that? “Low operating expense doesn’t always lead to the best choice” — because the capex might be unaffordable, unfinancable, or so high that no operating efficiency will ever make up the difference.

Comparing the all-electric Chevrolet Volt to the comparably-sized Chevrolet Eco Cruze, the New York Times reported that (based on a workup from TrueCar), the payback period on a Volt was 26.6 years. After the article appeared, rebuttals surfaced placing the true break-even period at 8.7 years.

8.7 years!? 26 years?! Cars go vintage at 25.

The 8.7 year payback required the Volt owner to never drive more more than 38 miles in a single excursion, was based on a gasoline price of $3.85 per gallon (vs the current average price of $3.31), 15K miles driving per year (vs. the real-world average of 13.4K) and based on a $7,500 subsidy given to the Volt buyer.

And — oops — that all-electric subsidy that, by law, will sunset if Chevrolet’s all-electric sales ever climb above 200,000 cars in a single year. In short, if it helps the economics so much that you actually want to buy an all-electric, it goes away.

That’s like Mom saying “If you get a job this summer, you can can give us all the money you earn for extra rent.” Yes, Mom. Looking at the want ads right now, Mom.

We might add, the costs are based on a car without many of the trimmings – the MRSP of a fully-loaded Volt is $46,265 — and, surprise, you need to install a $490 charging system in your garage — if you have one — and it takes four hours to power up.

Cost, recharge time and range anxiety — that’s why the general public has not embraced the electric car.

Perhaps one day soon the economics will change. Sigh.

Turning to advanced biofuels

When it comes to biofuels as a system, too — beware of the capex-opex fallacy — that any system is a feasible system as long as the operating costs are low.

Or vice-versa. Just in case I can interest you — step right this way, sir and madam — in a FREE phone! …er, pay no attention to the man with the five year mobile contract with those debilitating prices.

One of the highly-touted advantages of all next-generation biofuels platforms is that it provides a work-around for a dependency on a single feedstock such as corn, sugarcane or soybeans — and prices for all those feedstocks have soared over the years, regardless of whether you think biofuels or other sector demands or input costs are to blame.

It was Coskata that first tipped a potential, roughly four years ago, for a fuel with an operating cost of $1.00 per gallon. The company picked up a tremendous amount of attention with that line of argument. So why has the company been unable to construct its first commercial plant, even more than a year after being “open for business” after the highly-successful conclusion of its pilot project?

In fact, the company has pivoted away from biomass and towards natural gas as a feedstock for its first commercial plant. Why is that, if it can produce fuel at $1.00 per gallon?

Ah, it’s the capex-opex problem, again.

Cellulosic fuels, for sure, have access to transformatively low-cost biomass. For example, a bushel of corn yields around 50,000 BTUs per dollar of corn, depending on how you value the co-products. By contrast, a dollar of $55 per ton biomass brings you 140,000 BTUs or so – if you use the Coskata yields of 100 gallons per ton.

So why is there so much corn ethanol and so little cellulosic ethanol?

The answer lies in the capex — because it costs less than $2 per gallon of installed corn ethanol capacity, vs somewhere between $6 and $12 per gallon for cellulosic ethanol capacity, depending on which technology you choose.

Given the cost of capital for high technology in these nefarious times we live in, that’s why there aren’t cellulosic ethanol plants cropping up everywhere, every day. And that’s why, if you ask advanced biofuels developers what they are working hardest on, it is knocking down the capital costs.

When the Congress passed the 2007 Energy Independence and Security Act, it probably seemed incomprehensible to lawmakers that credible technologists — backed by credible investors, with significant offtake contracts and low-cost inputs — could get lower financing costs for a shopping spree charged to a Visa Card than for their emission-busting, energy security-promoting and job-creating technologies.

Perhaps one day soon the financing economics will change. Sigh.

Here’s a thought. Maybe one of these days, someone is going to produce a car with a fuel nozzle that only accommodates, say, renewable diesel — and they are going to offer you “FREE FUEL FOREVER!” and simply load the projected lifetime cost of the renewable fuel into the cost of the car.

At an average of $3.30 per gallon, 30 mpg, and 13,000 miles per year for five years, it would add about $7,150 to the price of the car. Even if drivers doubled up on fuel consumption because of the all-inclusive effect, the difference would still be less than the premium paid, at this time, to drive an all-electric.

Hoo-boy, I wonder what people will write then. They probably will point out the capex-opex fallacy — and would be right in doing so. But I see an awful lot of low-cost printers flying off the shelves at my local Best Buy – don’t you?

Between now and then — beware of the free printers, phones, the cheap razors, $1 per gallon cellulosic ethanol, and buying an electric car in order to save money. Buy an electric car in order to do something positive and personal for the environment, or because you like the zippy acceleration or the low-noise. If you do, rock on with your Tesla (NASD:TSLA) and peace on you, my friend.

But leave off with the smug glance for your hard-pressed neighbor, just trying to pay the bills, who chooses the lower-cost route of embracing a biofuels-powered vehicle — and who ought to be getting your “awesome!” or your fist-bump, not your gentle shove under the bus.

And, we might add: beware of research papers that put some lipstick, for those who haven’t seen it before, on the old capex-opex fallacy.

Disclosure: None.

Jim Lane is editor and publisher  of Biofuels Digest and BioInvest Digest where this article was originally published. Biofuels Digest is the most widely read Biofuels daily read by 14,000+ organizations. Subscribe here.

January 23, 2013

The Kandi Story

Denny Schlesinger

The policy is hot, but the market is cold

"The policy is hot, but the market is cold" is how a Chinese industry spokesman described the problem facing electric vehicles, the public is not buying.

The core problem is the battery. A battery is no match for a tankful of gasoline in energy density meaning reduced driving range. Recharging the battery is time consuming, no match for a quick fill-up. If you use fast charge, you diminish the battery's life expectancy. To add to these worries, the battery typically costs as much as the rest of the car but its life expectancy is just a fraction meaning you'll have some big expenses during your ownership of the vehicle. Additionally there is the problem of the resale value, just how much life is left is that used battery?

Optimists want to rely on battery R&D but the time-frame for a breakthrough, if there is one, is too far in the future to promote car sales today.

New Business Model

In China they have discovered that the short term solution to the battery problem is not a better battery but a new business model. You cannot sell pure electric vehicles (EV) the way you sell traditional internal combustion engine (ICE) cars.

The first proposal was to sell the vehicle without the battery. The battery would be leased and instead of it being charged by the car owner, spent batteries would be swapped for fully charged ones using the Quick Battery Exchange (QBEX). By transferring ownership of the battery to a leasing company, the car owner would be relieved of the problems created by the battery. The batteries would be charged and maintained by an entity more capable of giving them the proper care. The EV ownership experience would be more in line with traditional car ownership.

The program was launched with great expectations in 2011. The two major state owned electric utilities were recruited, the provincial and city governments offered copious subsidies yet sales failed to materialize beyond a few hundred to so called "visionaries." One can only speculate about the reasons: maybe a lack of a sufficient number of QBEX stations, maybe a lack of parking spaces, maybe the out-of-pocket cost was still too high despite the subsidies.

Kandi Technologies (NASD:KNDI), the company at the heart of this plan, survived 2011 on the strength of their legacy all-terrain vehicle (ATV) business. Kandi proposed two additional business models. Instead of selling the cars, lease or rent them.

The lease model would use the QBEX battery swap while the rented cars would have rechargeable batteries. The rental cars are charged in the vertical garages located at airports, train stations, and other convenient high traffic locations.

The first 20,000 car lease program was set to start in August 2012. The first order for the delivery of 5,000 cars by the end of December 2012 was placed but delays again occurred. This time they were of a bureaucratic nature. Initially the EV programs were handled on a province by province basis but it was soon realized that China required a nationwide set of standards if cars were to drive from city to city and province to province. There was also the issue of the change in Communist Party leadership.

The good news is that the infrastructure continues to be built out. Additional cities and provinces are setting up plans for the adoption of pure electric vehicles. Three hundred of the new vehicles have been granted license plates.

The Kandi Story

Disruptive technology follows in a fairly uniform pattern, uniform enough that Clayton Christensen was able to document it in his book The Innovator's Dilemma. A new technology comes along that is too underpowered to threaten incumbents but also cheap enough that it finds under-served markets. One example Christensen gives is the hydraulic backhoe which was so underpowered that it presented no threat to the mechanical monster excavators of the day but was perfect for digging narrow ditches in urban settings, a job for which no equipment exited at the time. In time the hydraulic excavator took over from the mechanical ones as it developed more power and more capabilities.

Tesla Motors (NASD:TSLA) is one contender making a lot of headlines and it has its full contingent fans and detractors. One reason why Tesla is not a disruptive technology is that the price is too high, there is no under-served luxury car market that I know of. Tesla is taking the luxury car market head on, where it might or might not succeed, but even if it does it won't disrupt the automobile mass market. The small size --so often derided by American commentators-- and the low cost of the Kandi EV are key features in the disruptiveness of the Kandi model.

Why don't incumbents develop the disruptive technology themselves, why do they ignore the new technology until it is too late? The reply to those questions is quite complex but it centers on the fact that the new technology is of no interest to the incumbents' best clients. It is seen an neither a threat nor a money maker by the incumbents. This phenomenon is covered in The Innovator's Dilemma as well as in Geoffrey Moore's Living on the Fault Line .

It might seem strange at first that a small, unknown Chinese all-terrain vehicle (ATV) maker should lead the innovation in pure electric vehicles. It is precisely the lack of an existing mass market auto business that allows them to think outside the box, they don't have a market to defend but one to attack. And on the attack they are. Not content to push passenger vehicles, Kandi recently gained certification for its new pure EV van, pictured above.

After the false start last year, 2013 might prove to be the turning point for the adoption of the pure EVs in China. Unfortunate as it is, the record SMOG in major Chinese cities, reminiscent of the storied London Fog, might provide that last push to get the business going.

Disclosure: Long KNDI.
Denny Schlesinger is a retired management consultant, individual investor and editor of Software Times where this article was originally published.

December 20, 2012

BYD Boosts EV Network With California Bus Plant

Doug Young

320px-BYD_Electric_Taxi[1].jpg
BYD e6 - Electric Taxi in Shenzhen, China.
Photo by Brücke-Osteuropa
If struggling car maker BYD (HKEx: 1211; Shenzhen: 002594; Pink:BYDDF) ultimately fails in its dream to become a leader in new energy vehicles, at least it will have lots of global assets to leave as a record of its efforts. Perhaps I'm sounding a bit too cynical in my latest musings on this company, since I really am starting to become more convinced that perhaps BYD's electric dreams could actually someday become a reality, especially with its new announcement of plans to build an electric bus manufacturing plant in the US. (English article)

After punishing BYD's stock for much of the last 2 years as sales for its traditional gas-powered vehicles tumbled and its profits evaporated, investors also seem to be cautiously returning to this beaten-down company, which first powered onto the global stage after billionaire investor Warren Buffett purchased a 10 percent stake in 2008. BYD shares have jumped about 50 percent over the last 2 months, as the company's traditional car business starts to stabilize and perhaps as investors start to believe in BYD's vision of becoming a global leader in electric vehicles (EVs).

After building its dreams at least partly on hopes of tapping the mass consumer market, BYD has largely abandoned that part of its vision for now in favor of focusing on big buyers such as bus and taxi operators. Such a move looks smart, as those kinds of buyers tend to have more stable driving patterns that make recharging EVs more practical. They also have the resources to build necessary infrastructure for maintaining their fleets.

Such buyers can also work closely with BYD to improve and maintain their vehicles, and can start off with pilot programs that they slowly build up over time as they become more confident in the technology. This slower, more targeted approach has seen BYD sign a series of global deals to sell electric buses and taxis to operators in markets ranging from Britain and Germany in Europe, to Singapore in Asia, and the US and Canada in North America.

To be closer to those customers, the company has recently begun an ambitious program of building a series of manufacturing facilities around the world. Just last week the company formally signed a deal to form a joint venture EV plant in Bulgaria (English article), and earlier this year it announced plans to serve the Latin American market with a new plant in Argentina. (previous post)

Now a company official has disclosed that BYD also plans to set up a wholly owned electric bus-making plant in California, with a formal announcement to come in 3 or 4 months. That plant should come into operation later next year, and should slowly ramp up production to an annual capacity of more than 500 buses by 2015.

BYD isn't saying how it will finance all these new investments, but I suspect the company is getting strong support from China's state-run banks, which are under orders from Beijing to support the new energy sector. BYD already gets very strong support from the government in its hometown of Shenzhen, which has recently discussed plans to have 50 percent of the city's buses and all of its taxis powered by electricity by 2015. Beijing has also rolled out other recent incentives to encourage other cities to try out EVs and hybrid vehicles (previous post).

After being bearish on BYD for much of the last 2 years, I'm starting to become interested in the growing momentum of the company's EV campaign, though I still think there are many obstacles ahead. Still, a continuation of this kind of new investment and more orders from both home and abroad are positive signals that could hint that BYD has finally turned the corner after a prolonged difficult period.

Bottom line: Plans for a new US manufacturing plant are the latest sign that BYD may finally be turning a corner and its EV program gaining momentum following a 2-year downturn.

Doug Young has lived and worked in China for 15 years, much of that as a journalist for Reuters writing about Chinese companies. He currently lives in Shanghai where he teaches financial journalism at Fudan University. He writes daily on his blog, Young´s China Business Blog, commenting on the latest developments at Chinese companies listed in the US, China and Hong Kong. He is also author of a new book about the media in China, The Party Line: How The Media Dictates Public Opinion in Modern China.

December 11, 2012

Tesla: Time to Take Profits?

by Debra Fiakas CFA
English: Photo of the Tesla Model S, from the ...
The Tesla Model S, from the unveiling on 26-Mar-2009. (Photo credit: Wikimedia Commons)
 
The Wall Street Journal reported on Friday morning that Blackrock has cut its position in electric sports car innovator Tesla Motors (TSLA:  Nasdaq).  Blackrock is a widely known and respected fund manager.  I imagine more than just a few investors grabbed whatever device might be available at the time and punched in sell orders on the supposition that smart money always know best.  The really smart investors had already looked at Blackrock’s filing with the SEC detailing the reduction in its TSLA holding by a whopping 0.66% from the beginning of the year.  Most probably these investors had already concluded it prudent to hold their hand.

Even though Blackrock appears to be holding onto its position in Tesla Motors for the time being, it does not mean that smart investors should not question Tesla’s future.  Recently the Wall Street Journal also reported Elon Musk used the Twitter social platform to declare Tesla on the cusp of positive cash flow.  Musk’s interests in Twitter aside, it was a bold statement.  Tesla used $233.1 million in cash to support operations over the twelve months ending September 2012.  For clarity, that is $19.4 million per month on average.  Musk’s declaration might suggest that the situation is improving.

However, in the most recently reported three months, Tesla was using even more cash than usual  -  an average $32 million per quarter.  The Company started shipping its Model S in June 2012 and geared up for volume production by investing in its supply chain.  Tesla reported that it manufactured 350 cars in the quarter ending September.

The question is whether available cash will be enough to see the Company through until cash starts coming in from selling those 350 Model S cars.  Tesla has been able draw down funds from a Department of Energy Loan.  The Company reported taking the last $33.3 million of the total $465.0 million DOE loan in the third quarter.  With the $85.7 million in unrestricted cash it had on its balance sheet at the end of September 2012, and at the average cash burn rate, Tesla could have lasted through the end of January 2012.

Musk, who seems to be forever speaking into a reporter’s microphone, promised to take as much as $1 million of the 6.9 shares Tesla offered in a follow-on offering staged at the beginning of October 2012.  The shares were sold at $27.89 per share.  The stock has climbed steadily since, ending trading the day before this post near $34.00 per share.  Trading in TSLA shares may have temporarily run out of steam, probably because shareholders like Blackrock are tempted to take profits by the rising price and ample trading volume.  I do not believe the stock is not likely to challenge the 52-week high near $40 until investors hear how many of those 350 Model S cars have been sold.
 
Debra Fiakas is the Managing Director of Crystal Equity Research, an alternative research resource on small capitalization companies in selected industries.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein. 

November 13, 2012

Beijing EV Campaign Targets Mass Buyers

Doug Young

byd s6.png
The BYD gas-powered S6 SUV debuted in Chile last month. Image Credit BYD.
Struggling electric vehicle (EV) maker BYD (HKEx: 1211; Shenzhen: 002594, OTC:BYDDF) got a major boost last week when Beijing announced an innovative new plan to stimulate an anemic industry whose sales have failed to take off despite generous government support. The plan this time around looks much smarter than previous ones by focusing on big customers.

Unlike previous campaigns that focused mostly on consumers, this new campaign takes aim at Chinese cities and mass buyers like taxi fleet operators, whose driving patterns are more suitable to using such vehicles and which have the money and resources to invest in expensive but necessary EV infrastructure. (BYD announcement) The new campaign also takes square aim at pricing, another major obstacle that has kept many cash-strapped cities from taking a more serious look at the technology.

Beijing believes that new energy vehicles are the wave of the future and has actively encouraged its development by domestic car makers despite slow progress for most of the world’s major automakers. BYD has been the most active Chinese firm in the space, and many believe its strong focus on the area was a major reason why billionaire investor Warren Buffett decided to buy 10 percent of the company in 2008.

But BYD has stumbled badly in the last two years, partly due to sputtering sales for its traditional gas powered cars and also because EV sales in China have failed to take off. Beijing rolled out generous incentives for EV purchasing in 2010, including direct cash subsidies and tax rebates, and was reportedly considering additional incentives earlier this year.

Yet EV and hybrid vehicle sales totaled just over 8,000 last year, accounting for a tiny fraction of overall domestic vehicle sales that reached 18.5 million. The program’s failure lies largely in its targeting of consumer buyers, many of whom worry about technological constraints that limit EV driving ranges and their ability to be recharged.

By comparison, this new program targets government buyers of electric taxis and buses by offering similar generous financing packages from China Development Bank and other Beijing-backed policy lenders. BYD has already found a willing buyer for its electric buses and taxis with the government in its hometown of Shenzhen, and has also launched trial programs in overseas markets including Germany and Britain, proving that governments and other mass buyers are interested in the technology.

This new program aimed at the domestic market should remove one of the major concerns voiced by many cash-strapped local governments, namely the relatively high cost of buying and maintaining electric buses and taxis compared with gas-powered vehicles. Many of these governments have said if costs were lower they would seriously consider buying such vehicles, since doing so would not only reduce pollution but help to support one of Beijing’s focus industries.

If this current program proves successful, Beijing should consider using more incentives to target not only domestic mass buyers, but also global customers for EVs from BYD and other Chinese manufacturers. By doing so, it can let these bulk buyers build out the necessary infrastructure and help to boost consumer confidence to eventually make EVs attractive for the mass market.

Bottom line: Beijing's latest incentive program for EVs looks like a smart move by targeting mass vehicle buyers who are more willing than consumers to try the technology but worry about high costs.

Editor Note: This same campaign should also help lesser-known China EV maker Kandi Technologies (NASD:KNDI), which already sells to mostly governement buyers, and just sold 100 EVs to government-owned Hangzhou New Energy Taxi Company last week.

Doug Young has lived and worked in China for 15 years, much of that as a journalist for Reuters, writing about publicly listed Chinese companies. He currently lives in Shanghai where he teaches financial journalism at a leading local university. He also writes daily on his blog, Young’s China Business Blog, commenting on the latest developments at Chinese companies listed in the US, China and Hong Kong. He is also the author of an upcoming book about the media in China, The Party Line: How The Media Dictates Public Opinion in Modern China .

October 11, 2012

Kandi Technologies Says "Here's the Beef"

Tom Konrad CFA

KD501
The Kandi KD501 Mini-EV to be leased in Hangzhou. Photo by Marc Chang.
Ever since July, when I wrote about Kandi Technologies' (NASD:KNDI) deal to sell 20,000 mini-electric vehicles (EVs) to a leasing program in the Chinese city of Hangzhou, the company’s detractors have been harping on the fact that this deal was simply a “Letter of Intent” (LOI) and not legally binding.   This morning, Kandi put those concerns to rest, with a signed sales contract for 5,000 mini-EVs to be delivered in between now and the end of the year.

This contract is good news in a second way as well.  The LOI had only envisioned 4,000 vehicles being delivered by December, so this announcement also shows that the time frame is accelerating.   The price for the 5,000 vehicles will be RMB 199,000,000 (approximately US$31,587,301 or $1.06 per share), or 277% of the Kandi’s entire revenue in Q4 2011.

When I first wrote about the Hangzhou deal, KNDI was trading near $3.  It has risen fairly rapidly since then as details of the Hangzhou deal come out, and also as a result of a much bigger deal  in Shandong province announced in late July, as well as prospects for a 100,000 vehicle EV Hangzhou rental program in addition to the 20,000 vehicle leasing program  discussed above.  As I write, KNDI is trading at $4.50, and it would have been much higher except for a rambling and article last Thursday on Seeking Alpha, which claimed to “connect the dots” on related party transactions within the company, as well as dragging out the usual critique that Kandi does not yet have a viable EV business.

Rational investors like to buy a stock before all the good news comes out, so the critique that Kandi does not have significant past EV business seems irrelevant to the typical forward looking investor.  As for the related party transactions, investors who have been following Kandi closely for several years tell me that these transactions have long been disclosed, and while I found the article hard to follow, I did not see anything which made me believe that company insiders were using related party transactions to drain money from the company.  The theory that the article was simply an attempt to manipulate the stock lower and allow a short to get out (the author was short) makes the most sense to me.

On the bright side, the scare from Thursday’s article gave me a chance to pick up a trading position at $3.50 and sell it on Friday for $4.40.  I would have held on and added those shares to my long term position If I had known about the news which would be coming out this morning.

Disclosure: Long KNDI

This article was first published on the author's Forbes.com blog, Green Stocks on October 1st.

DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results.  This article contains the current opinions of the author and such opinions are subject to change without notice.  This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.  Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

October 05, 2012

The Chinese Key to Electric Vehicle Adoption

Tom Konrad CFA

Vertical parking structure
Kandi Technologies Vertical Parking Garage Mock-up at 2012 Hangzhou Green Expo. Source: Kandi investor presentation.

The Chinese State Council Development Research Center Enterprise Institute, “a leading policy research and consulting institution directly under” China’s State Council, just released a policy whitepaper endorsing business model innovation as the key to China’s goal of rapid electric vehicle (EV) adoption.

The policy details the well-known differences between electric and conventional car technology which create barriers to rapid EV adoption:

  • Limited range when compared to gasoline vehicles (100-150km, compared to 400-500km)
  • High cost (approximately double the cost of gasoline vehicles)
  • Slow charging (6-8 hours, compared to 4-6 minutes)

US EVs: Square Pegs, Round Holes

The US policy (if it can be called that) for overcoming these barriers, has been to provide purchase and manufacturing subsidies (although not nearly enough to make the costs comparable) and some local support for vehicle charging networks.  Beyond these, we have relied on the hope that technical innovation in charging and batteries will reduce charging times and cost quickly.

The lack of a US policy to overcome slow charging times, and only weak policies to overcome the high cost and limited range consigns electric vehicles to niches and prevents their use as truly mass market vehicles.  In this context, Tesla’s (NASD:TSLA) lowered guidance and possible need to renegotiate its loan covenants with the Department of Energy should come as no surprise.  Tesla CEO Elon Musk attributed the massively lower third quarter revenue guidance ($44-46 million, vs. analysts’ expectations of $83 million) to quality issues similar to those which have plagued rival Fisker Motors, but was that the root cause?  Quite possibly these quality issues are a symptom of American EV manufacturers trying to make EV technology work within the current internal combustion vehicle paradigm.  This square peg, round hole approach means that problems are almost certain to pop up in unexpected places.

Chinese EVs: Cut a Square Hole

Rather than trying to force EV technology to work like conventional car technology, the new Chinese policy outlines steps to cutting square holes suited to the square peg of rapid EV adoption  in the mass market.  These models overcome slow charging and the high initial cost of electric vehicles by endorsing swappable batteries owned by their parties, such as electric utilities.

Electric utilities can charge batteries centrally, timing their charging to help balance grid loads, and can also ensure that batteries are always charges in optimal environments, extending their useful lives and extracting additional vale in the form of electric grid stabilization.

EVs designed with quick swappable batteries also solve the problem of slow charging.  An automated battery swap can be completed in three minutes, less time than it takes to fill a conventional vehicle’s tank.

China’s many compact, dense cities make limited range less of a problem.  According to the paper, average daily commutes in Beijing are less than 50 km, and a network of battery swapping stations can provide extra range when it is needed.

The paper points out that while electric bikes are still niche products in the West, they are already mass market in China, with 120 million on the road in 2010.  They see new business models as the key to achieving the same success with EVs.

Chinese Models

The paper details three pilot programs as models for EV adoption around China, depending on local needs and character.

The first model is most suitable to fleet vehicles, with a single customer contracting for a large number of vehicles.  This model is similar to that which is being experimented with by some companies like GE (NYSE:GE) in the US, and is appropriate both for fleet cars and larger vehicles such as buses, delivery trucks, and sanitation vehicles.

The second model is from the City of Hangzhou, where EVs from Kandi Technologies (NASD:KNDI) designed for quick battery swapping will be paired with a network of battery swapping stations and quick chargers.  The cars will be rented to the public rather than sold, with rental stations at the city’s airport, rail stations, commercial centers, and residential areas.  The rental model allows vehicle charging, maintenance, and battery recycling to all be centralized, leading to economic efficiency.  The batteries will be owned by the local utility, allowing another revenue stream from grid stabilization to improve the economics.

The third model involves the local government promotion of particular vehicle types most suitable to the locality.  For instance, the promotion of electric buses running on a busy routes with fast charging, while a police vehicle fleet could be paired with slow charging in parking lots.

Stocks

Will China succeed in the rapid mass adoption of electric vehicles?  It would be foolish to bet against them, given the advantage of central planning and less established car culture make the country much more suitable to experimentation with new business models more suited to EVs than Western countries.  Even limited success of a few of these models has the potential to produce massive revenue growth for the companies involved.

The only US-traded public company mentioned in the policy paper was Kandi Technologies (NASD:KNDI), whose mini-EVs are designed with automated rapid battery swapping in mind.  Kandi has also developed a multi-level smart garage (see photo), suitable for EV rental operations because it allows many of the company’s cars to be stored and quickly accessed in a vertical structure that uses only one square meter of real estate per vehicle.  This efficient footprint should prove a large advantage in China’s dense cities, where land is often at a premium.

Kandi stock currently suffers from a “China discount,” and at less than $5 has plenty of room for upside if the company achieves its production targets.  A recent article put the potential profits from these plans at $4.42 annually in the first year of production ramp-up, up to $13.26 in the third year.  If China’s plans for rapid EV adoption are realized, that $4.42 of earnings will likely come  in 2014, and the $13.26 (or more) in 2016.  Even a modest earnings multiple of 10 would give a stock price of $44 in two years, and $133 in four.

For those who think Chinese EV adoption will be slower than the government hopes, a good bet might be Maxwell Technologies (NASD:MXWL.) Maxwell is also reasonably valued now because the European crisis has caused delays in the adoption of the company’s ultracapacitors in hybrid car models.  Company insiders have been taking the opportunity to load up on the stock.  Maxwell makes significant profits from ultracapacitors in Chinese hybrid buses.  While it’s possible to see quick charging Chinese electric buses also use significant ultracapacitors to reduce the strain of quick charging on the buses batteries, a failure of China’s EV plans would likely lead to an even greater reliance on hybrid technology in China, which would likely be a boon to Maxwell.

I personally see both Chinese EV and hybrid markets growing rapidly, so I own both stocks.

Disclosure: Long KNDI, MXWL

This article was first published on the author's Forbes.com blog, Green Stocks on September 25th.

DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results.  This article contains the current opinions of the author and such opinions are subject to change without notice.  This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.  Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

October 02, 2012

Tesla Motors: Is This the End for Electric Cars?

By Jeff Siegel

Back in March, I was speaking at a conference about the future of personal transportation.

I discussed how a new generation called the Millennials or Generation Y would ultimately force change in the marketplace and present a real challenge to car makers.

You see, there have been a number of studies that have suggested this particular generation — which represents the kinds of numbers that allowed the baby boomers to dictate a lot of our consumer decisions today — is less interested in car ownership than previous generations...

They prefer public transportation, biking, walking, and car-sharing services like Zipcar (NASDAQ: ZIP).

And for those folks who now fall between the ages of 19-31 who are receptive to car ownership, they account for about 25% of the U.S. automobile market. In ten years that's expected to rise to 40%.

So, what will they drive?

According to a recent Deloitte study, these folks tend to mock gas guzzlers and embrace hybrid, plug-in hybrid, and electric vehicles (EVs).

If you're a regular reader of these pages, you know I've long been a supporter of electric vehicles. I firmly believe that by the end of this decade, EVs will capture between 1% and 1.5% of the total US vehicle market.

On the surface, this may not seem like much. But it's actually a pretty aggressive target — and a pretty big deal.

As a result, we've profited from the early development of this market from every angle; most of this came from riding the early wave of lithium and high-performance battery plays a few years back. Today it's a bit more difficult. And while I remain a strong supporter of electric vehicle development, I'm extremely cautious as an investor.

In fact, the only EV-related stock I've played this year was Tesla (NASDAQ: TSLA), and I jumped out back in March after the stock started looking a bit top-heavy after crossing the $36 mark.

Since then, I've watched the stock tumble and rise a few times. I've seen a number of trading opportunities (although I did not play the stock this way), and I've read some pretty long and detailed analyses of the company by both credible analysts and overly-optimistic bloggers posing as analysts, as well as by the typical anti-EV narcissists who get off at watching a game-changing industry struggle with the early bumps and bruises that come with any disruptive technology.

The latter, of course, typically provide little more than noise. But they came out in full force this week after Tesla's recent announcement that it was cutting its 2012 revenue forecast... 

Due to a slower-than-expected rollout of the Model S sedan, the company has adjusted its full-year revenue to come in at around $400 million to $440 million. This is down from Tesla's prior outlook of between $560 million and $600 million.

mertsla

Tesla Model S

This is a pretty big discrepancy. And on the day of that announcement, the stock fell in excess of 10%

Needless to say, the knuckle-dragging naysayers were busy little bees over the past few days, finding as many ways as they could to not only trash Tesla, but the EV market as a whole.

We heard the same broken record rhetoric about how no one wants these cars, how sales are disappointing, and how the technology “isn't there yet”...

It's all nonsense.

Don't get me wrong; I'm not rushing out to buy shares of Tesla. And quite frankly, I think some analysts' price targets on this one are a bit off base. I was very suspicious last week after Morgan Stanley put a $50 price target on this thing.

Of course, I don't have access to the same intelligence and data as the suits at Morgan Stanley, so perhaps I'm missing something...

But I don't believe Tesla will even have the capacity to impress enough to push the stock to those levels until we get some better clarity on Q4.

It is only then when we will have a better read on Model S volumes. If volumes do in fact increase, then we should see the cost improvements necessary to improve gross margins.

I remain bullish on Tesla as a small but growing force in the auto industry. And I definitely wouldn't bet on Tesla to crash and burn, as some not-so-honorable analysts have suggested.

However, I'd be hesitant about believing overzealous price targets on this one. Because the truth is, until we see how Q4 shakes out, there's just not enough data to back a price target exceeding $35.

To a new way of life and a new generation of wealth...

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Jeff Siegel is Editor of Energy and Capital, where this article was first published.

October 01, 2012

Energy Storage: Q4 2012 Winners and Losers

John Petersen

In late June I wrote a forward looking article that identified several companies in my energy storage and vehicle electrification group that I expected to perform well or perform poorly during the third quarter. Since short-term market changes are notoriously hard to predict, it’s worthwhile to look back and see where I got things right and where I got them wrong. So I’ll start today with a quick summary table and assess the relative accuracy of my Q3 calls, and then turn my attention to Q4, which is shaping up as a time of bright opportunity for some companies and continuing risk for others.

9.30.12 Q3 Performance.png

My list of expected Q3 winners included Exide Technologies (XIDE), Active Power (ACPW) and Axion Power International (AXPW.OB). I was wrong on all three counts because Active Power lost 1.2%, Exide Technologies lost 7.7% and Axion Power lost 20.6%

My list of expected Q3 losers included Valence Technologies (VLNCQ.PK), which lost 98.4% when it filed a voluntary petition under Chapter 11 of the Bankruptcy Code, and Tesla Motors (TSLA), which lost 6.4%. While I was right on both counts, Tesla didn’t perform as poorly as I expected and just last week it completed a $195 million secondary offering that should keep it out of the ditch for a couple more quarters. While I rarely have glowing praise for Tesla’s business model or product line, its management team deserves double kudos for pulling off a critical eleventh hour financing transaction on better terms than I would have thought possible.

Q-4 Winners

Exide Technologies was on my list of likely Q3 winners and it remains on my list of likely Q4 winners. Over the last five years, Exide has reported total earnings of roughly $35 million after restructuring and impairment charges of almost $210 million. Since its earnings were so bad for so long, Exide trades at a 10% discount to book value and 8% of sales while its peers trade at an average of 1.6 times book and 44% to 70% of sales.

I maintain long-term price tracking charts on all the companies I follow and believe Exide's chart is signaling a turn to the upside in the fourth quarter. If you look at the chart you'll see that the 10-, 20- 50- and 200-day weighted moving average prices are clustered in a $0.13 range and during the third quarter the 10-, 20- and 50-day averages all moved up through the 200-day average, signaling the beginning of a new trend. Similar chart patterns existed in the summer of 2009 and the fall of 2010. While I'd be reluctant to estimate the next peak, Exide's past performance is enough to convince me that a double is likely and a good deal more is possible.

9.30.12 XIDE.png

Active Power was on my list of likely Q3 winners and it remains on my list of likely Q4 winners. Since the end of June the 10-, 20-, 50- and 200-day averages have all drifted down a couple cents and are currently clustered in a two-cent range. Active Power's historical stock price behavior is enough to convince me that a double is likely, if not a triple.

9.30.12 ACPW.png

Axion Power International was on my list of likely Q3 winners and it remains on my list of likely Q4 winners. The last couple years have been very difficult for Axion as one legacy holder after another decided to liquidate for reasons that had little or nothing to do with Axion’s business and technical progress. As near as I can tell the legacy holders, as a group, are down to something less than a million shares. Since much of the buying over the last couple years has come from readers of my blog, I expect the market dynamic to quickly reverse from a supply driven downtrend to a demand driven uptrend. In addition to price data like I provided for Exide and Active Power, my Axion chart includes a fifth line that tracks 50-day average trading volume to highlight periods of intense selling pressure since January 2010.

9.30.12 AXPW.png">

Last week I had the pleasure of delivering a keynote presentation for the 13th European Lead Battery Conference in Paris. For readers who are interested, an online version of my ELBC presentation with voiceover is available here.

While other lead battery manufacturers who presented at the ELBC talked about improving their charge acceptance rates from 0.05 to 0.1 amps per amp-hour of rated capacity, Axion was presenting charge acceptance rates of 2.0 to 3.0 amps per hour of rated capacity with four to five times the cycle life. These are not modest incremental gains like one typically sees in the battery world. Instead, they’re disruptive step changes that have several first tier OEMs and battery users making substantial direct investments in the kind of redundant validation testing that always precedes the adoption of a new technology for use in mass market products. While Axion’s PbC is not a silver bullet for all battery applications and the company still faces a variety of manufacturing, commercialization and financing risks, the principal technical risks of developing an entirely new class of energy storage device have, in my view, been successfully overcome.

In addition to my three primary picks, I’m seeing interesting chart patterns develop for Altair Nanotechnologies (ALTI), Johnson Controls (JCI), Maxwell Technologies (MXWL) and UQM Technologies (UQM). The stock prices for all four of these companies have been beaten down this year and could well be poised for a turnaround.

Q-4 Losers

The scariest company in my tracking list is A123 Systems (AONE) which peaked shortly after its IPO and has been on a downhill slide ever since. In May and June of this year, A123 announced a pair of toxic financing deals that had variable conversion rates and seemed likely to be highly dilutive. In August A123 announced that China’s Wanxaing Group had agreed to provide up to $450 million of additional financing in exchange for an 80% ownership stake. The combination of these three transactions has had A123 printing stock faster than the Fed prints money ever since.

On June 30th A123 had a total of 147 million shares outstanding. By August 6th the total had climbed to 170 million and by August 23rd the total had climbed to 202 million. The reason for the explosive ramp in the number of shares outstanding was a decision to leave the toxic securities in place, instead of redeeming them, and to alter the terms of the Wanxaing financing to provide for a variable conversion rate that’s tied to a percentage of ownership rather than a fixed stock price.

During the period from June 30th through August 23rd, total reported trading volume in A123’s stock was 305 million shares, or roughly 5.5 times the number of newly issued shares. Since August 23rd, another 491 million shares have traded. Since it’s impossible to tell whether the proportionality between new share issuances and total trading volume has held steady over the last three months, it’s also impossible to estimate the total number of shares currently outstanding. At a minimum I’d expect A123 to report 300 million shares outstanding on September 30th, but the actual number could be far higher. Based on the terms disclosed for the Wanxaing transaction, that would imply a fully diluted share count in the 1.5 billion range.

9.30.12 AONE.png

In light of the production problems it’s experienced to date and a recent brush with insolvency that will be clearly visible on the face of its September 30th financial statements, I continue to believe that Tesla Motors will soon pass its peak of inflated expectations and begin a descent into the Valley of Death that resembles the A123 experience. I don't want to denigrate Tesla's accomplishments as the first fledgling automaker to bring a new car to market since DeLorean, but it seems like all of the possible good news is already priced into Tesla's stock while the bulk of the execution risks and disappointment opportunities have become frighteningly imminent.

I get hundreds of comments every time I mention Tesla's name. The enthusiastic readers I hear from expect rave reviews, expect high reservation conversion rates, expect demand to skyrocket, expect the Model S to perform flawlessly in heavy daily use and expect Tesla to avoid the delays, defects and missteps that plague even seasoned manufacturers who launch a completely new product. I may be cynical when it comes to the applicability of Moore's Law in the battery and auto industries, but I'm a firm believer in Murphy's Law, fondly known as the fourth law of thermodynamics, which states: "If anything can go wrong, it will."

Disclosure: Author is a former director of Axion Power International (AXPW.OB) and holds a substantial long position in its common stock.

September 28, 2012

EV Woes at Tesla and Toyota: The Week In Cleantech, 9-28-2012

Jeff Siegel

September 25: Toyota (NYSE:TM) Scraps Electric Car

320px-2012_Toyota_Prius_plug-in_hyrid_--_07-14-2012[1].JPG
2012 Toyota Prius photographed in Washington, D.C., USA.. (Photo credit: IFCAR via Wikimedia Commons)

Claiming the company misread the market, Toyota (NYSE:TM) is scrapping its plans for a global roll-out of an electric mini-car called the eQ.

To be honest, I'm not particularly surprised. Toyota has not been very aggressive, or interested really, in pursuing the electric vehicle (EV) market. And I get it. When it comes to delivering a superior conventional hybrid vehicle, Toyota still runs the show. The Prius is one of the most popular vehicles in the marketplace, with more than 3 million units sold since the hybrid superstar first launched.

My point is, it doesn't need EVs to lure fuel economy-conscious drivers into showrooms.

Look, it's no secret that when gas prices head north, so do Prius sales.

Hell, back when oil crossed the $140 mark and gasoline was well over $4.00 a gallon, folks were running to Toyota dealers and paying above sticker price to get one of these vehicles. Even today, boasting 50 miles-per-gallon can certainly help provide a nice hedge against unstable gas prices.

So when it comes to superior fuel economy, Toyota's got a good thing going. And I suspect the company has no interest in pouring a bunch of capital into EV development, when all it has to do to keep fuel economy-conscious drivers coming in, is continue to inch those miles-per-gallon up every few years with Prius upgrades.

That being said, I do wish company reps would back off the anti-EV rhetoric – however subtle it may be.

Here's what I mean. . .

In response to this recent decision, Toyota's vice chairman Takeshi Uchiyamada said:

“The current capabilities of electric vehicles do not meet society's needs, whether it may be the distance the cars can run, or the costs, or how it takes a long time to charge.”

Do not meet society's needs?

Roughly 70 percent of US consumers drive no more than 40 miles per day. Every all-electric car from a major automaker on the road today can deliver that – and then some.

How long it takes to charge?

This is such a bullshit argument. Every EV owner I know charges while he sleeps, wakes up, drives to work, returns home and plugs back in. It ain't rocket science, and unless you only sleep for four hours a night, long charging times are really not the deal-breaking issue that some would have you believe.

Look, the thing is, Toyota doesn't need to come at it this way. The company does not need to justify its decision to anyone. And certainly management doesn't need to recite the tired and inaccurate arguments of the anti-EV brigade.

Truth is, Toyota has done a lot to help integrate fuel economy into the car-buying lexicon. The company charged forward with its hybrid offerings when a lot of folks mocked the technology and the ability of Toyota to even make it work economically.

The company proved the naysayers wrong, and today Toyota gets the last laugh.

So if Toyota decides not to pursue electric vehicles right now, that's fine. This doesn't change my opinion of the company or of the Prius, which is a superior vehicle. And it definitely doesn't change my opinion regarding Toyota's leadership role in providing vehicles that can help us reduce our foreign oil consumption.

But putting out those careless and untrue comments about the electric vehicle market? Come on, Toyota. You're better than that!

September 25: Will Tesla (NASDAQ:TSLA) Crash and Burn?

English: Photo of the Tesla Model S, from the ...
The Tesla Model S, from the unveiling on 26-Mar-2009. (Photo credit: Wikimedia Commons)

Back in March, I was speaking at a conference about the future of personal transportation.

I discussed how a new generation called the Millennials or Generation Y would ultimately force change in the marketplace and present a real challenge to car makers.

You see, there have been a number of studies that have suggested this particular generation, which represents the kinds of numbers that allowed the baby boomers to dictate a lot of our consumer decisions today, is less interested in car ownership than previous generations, preferring public transportation, biking, walking and car-sharing services like Zipcar (NASDAQ:ZIP).

And for those folks who are now around the ages of 19 and 31 that are receptive to car ownership, they account for about 25 percent of the US automobile market. In ten years, that's expected to rise to 40 percent.

So what will they drive?

According to a recent Deloitte study, these folks tend to mock gas guzzlers and embrace hybrid, plug-in hybrid and electric vehicles (EVs).

If you're a regular reader of these pages, you know I've long been a supporter of electric vehicles, and I firmly believe that by the end of this decade, EVs will capture between one and 1.5 percent of the total vehicle market.

On the surface, this may not seem like much. But it's actually a pretty aggressive target, and a pretty big deal.

As a result, we've profited from the early development of this market from every angle. Although most of this was the result of riding the early wave of lithium and high-performance battery plays a few years back. Today, it's a bit more difficult. And while I remain a strong supporter of electric vehicle development, I'm extremely cautious as an investor. In fact, the only EV-related stock I've played this year was Tesla (NASDAQ:TSLA), and I jumped out back in March after the stock started looking a bit top-heavy after crossing the $36 mark.

Since then, I've watched the stock tumble and rise a few times. I've seen a number of trading opportunities (although I did not play the stock this way), and I've read some pretty long and detailed analyses of the company by both credible analysts, overly optimistic bloggers posing as analysts and the typical anti-EV narcissists who get off at watching a game-changing industry struggle with the early bumps and bruises that come with any disruptive technology. The latter, of course, typically provide little more than noise. But I suspect they'll be coming out in full force this week after Tesla's recent announcement that it was cutting its 2012 revenue forecast.

Due to a slower-than-expected rollout of the Model S sedan, the company has adjusted its full-year revenue to come in at around $400 million to $440 million. This is down from Tesla's prior outlook of between $560 million and $600 million.

This is a pretty big discrepancy, and in pre-market the stock has fallen about ten percent.

So today, the haters will be busy little bees, finding as many ways as they can to not only trash Tesla, but the EV market as a whole. We'll hear about how no one wants these cars, how sales are disappointing, how the technology “isn't there yet” and probably a few cheap shots at Washington for supporting the development of something that can ultimately help us displace a decent amount of foreign oil.

It's all bullshit.

Don't get me wrong. I'm not rushing out to buy Tesla. And quite frankly, I think some of these recent upgrades are insane. I was truly surprised, and a bit suspicious, when I read that Morgan Stanley put a $50 price target on this one.

Of course, I don't have access to the same intelligence and data as the suits over there, so perhaps I'm missing something. But I don't believe Tesla will really impress enough to push the stock to those levels until we get some better clarity on Model S volumes and gross margins in Q4.

I remain bullish on Tesla as a small, but growing force in the auto industry. And I definitely wouldn't bet on Tesla to crash and burn. But I'd be hesitant about believing overzealous price targets. At least until we see how Q4 shakes out.

Editor's Note: Also in EVs...

While EVs are struggling in the West, China has a plan for their rapid adoption.

DISCLOSURE: No positions

Jeff Siegel is Editor of Energy and Capital, where these notes were first published.

August 03, 2012

While Tesla is Heading into the Valley of Death, Kandi has Already Crossed

Tom Konrad CFA

  My friend and frequent electric vehicle (EV) critic John Petersen recently worried that Tesla (NASD:TSLA) shareholders now buying the stock because of the launch of the company’s new Model S were doomed to lose money, since the company is just entering the “trough of disillusionment,” as shown in this stylized diagram of the losses a company suffers in the Valley of Death from Osawa and Miyazaki.
Tesla Kandi Valley of Death.png
Although Petersen is relentlessly negative on EVs, he has a great depth of experience with launching new technologies, and investors ignore him at their peril.

Fortunately, Tesla is not the only EV game in town, and there is another EV company at a much more auspicious stage of the product cycle.  That company is Chinese mini-EV manufacturer Kandi Technologies (NASD:KNDI.)  Incidentally, Kandi is the only EV company Petersen has ever written a positive article about.

05rG8q321Mf4w_2105[1].jpg
Model S: Fast like a hare. Photo courtesy Tesla Motor

Today, Kandi Technologies announced that they had signed a framework agreement with the government of Weifang Binhai Economic Development Zone  in Wei Fang City of Shandong Province under which Kandi will build a factory in the Zone.  The Zone will provide support in the form of infrastructure, promotion, and incentives in order to help the company sell no less than 20,000 EVs per year in Shandong Province.  The factory will have capacity to manufacture key components of up to 100,000 vehicles per year, and is expected to be completed within two years.

According to Wikipedia, Shandong province is one of the most populous and affluent in China.  Shandong is also new territory for Kandi, which recently signed a deal to sell 20,000 EVs for a leasing program in the city of Hangzhou in Zheijiang Province.  More details of that deal emerged yesterday, when it was said (unfortunately in Chinese PDF only) that the order would proceed with 1000 EVs per month for September to December 2012, and 2000 EVs per month from January to August 2013.  Since we can expect a gross profit of about $1300 to $1700 per vehicle, that should amount to an additional $0.15-0.20 a share profit in 2012, and additional $0.60 to $0.80 cents a share in 2013.

kd5011
The Kandi KD5011 Mini-EV to be leased in Hangzhou. Kind of looks like a tortoise, doesn't it? Photo by Marc Chang.

Kandi was already profitable on the basis of its growing off-road vehicle business.  It earned $0.20 a share over the last 12 months with only minimal EV sales.  With rapidly growing sales of EVs underwritten by Shandong and Hangzhou, Kandi has had the kind of help across the Valley of Death that Tesla can only dream of.

Tesla CEO Elon Musk may expect the company to sell 20,000 EVs in 2013, but such sales depend on fickle consumers.  Analysts expect a loss of $2.44 a share this year, and a profit of only $0.63 a share next year.   Further, it will cost you over $30 a share to buy TSLA, which has a book value of only $1.46 a share.

Meanwhile, Kandi already has an order to sell 16,000 EVs in 2013, and more are likely to follow.  I expect the company to earn between $0.40-$0.60 a share in 2012, and $1.20 to $2.00 a share in 2013.  It only costs $4.05 to buy the stock as I write (although the stock has been advancing rapidly on the recent news).  Kandi’s book value easily exceeds Tesla’s at $2.14 a share.

So why is anyone bothering with Tesla?

Disclosure: Long KNDI.

This article was first published on the author's Forbes.com blog, Green Stocks.

DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results.  This article contains the current opinions of the author and such opinions are subject to change without notice.  This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.  Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

July 21, 2012

Kandi Technologies Bags Largest Single Electric Vehicle Order Ever

Tom Konrad CFA

KD501
The Kandi KD501 Mini-EV to be leased in Hangzhou. Photo by Marc Chang.

The city of Hangzhou just signed a strategic cooperation agreement with Kandi Technologies (NASD:KNDI) and nine other companies to supply 20,000 electric vehicles (EVs) for the city’s “pilot” EV leasing program.  Kandi is the only EV supplier to take part; other companies involved will supply the batteries (Air Lithium (Lyoyang) Co. Ltd.) and charging by the local utility.  The utility will fund construction of a charging and battery swap station network as well as paying for the batteries.

The batteries will serve a dual use for grid stabilization, or  Vehicle to Grid (V2G) technology.  The batteries will be financed by charges to electricity customers because of this dual use.  So, in addition to this being the largest EV sale ever announced, the project is also effectively the largest scale trial of the use of EV batteries for V2G.  V2G is a concept  much talked about in academic circles, but so far if has only seen small scale pilot projects in the West.  Part of the problem with implementing V2G is typically the split incentives between battery owners and the utility.  Battery owners naturally worry about reduced performance of their very expensive battery packs if they are used for V2G.  The Hangzhou project neatly avoids this conflict of interest because the utility owns the batteries, and the EVs are only available for lease.

Financial Impact for Kandi

The program will begin in August, and is scheduled to be completed by the end of 2013.  We can expect Kandi to sell EVs at a rate of over 1000 per month during implementation.  Kandi’s revenues for each vehicle will be around $6800 per EV.  Kandi’s gross margins are about 25% on its existing off-road vehicle business, and observers of the company tell me Kandi would be unlikely to undertake a project if it earned substantially less than that.  We can expect an increase in gross profit of about $1300 to $1700 per vehicle, or about $0.70 per share annual gross profit, most of which will flow through to earnings.

Kandi is already profitable, with trailing earnings of $0.20 per share (EPS), so we can expect total EPS for 2012 is likely to be around $0.40 per share, and EPS for 2013 is likely to be around $0.80 per share based just on this deal and zero growth in the company’s existing business.  The existing off road vehicle business has been growing rapidly, and additional EV orders seem likely, so $0.40 and $0.80 EPS in 2012 and 2013 should be considered a lower bound on earnings, which will most likely be higher.

China’s Aggressive EV Goals

Kandi’s  rapid earnings growth could continue if Kandi manages to grab a decent share of the 500,000 EVs by 2015 and 5,000,000 EVs by 2020 goals set by the central government.

China is currently behind in implementing these EV adoption goals, largely because of the high cost of EVs from Kandi rivals such as BYD (OTC:BYDDY), and lack of charging stations.  The Hangzhou pilot project, with its rapid, utility-financed build-out of charging stations and inexpensive mini-EVs from Kandi seems designed to address both these problems.

Kandi’s mini-EVs may be just what the Chinese government ordered.

Disclosure: Long KNDI

This article was first published on the author's Forbes.com blog, Green Stocks.

DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results.  This article contains the current opinions of the author and such opinions are subject to change without notice.  This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.  Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

July 17, 2012

EVs, Batteries and Tales From The Valley of Death

John Petersen

Today is the fourth anniversary of my blog on investing in the energy storage and electric vehicle sectors. Over the last four years I've penned 275 Articles and 45 Instablogs on topics ranging from technical minutiae to broad macroeconomic trends. Since most of my work focuses on challenges and risks instead of lofty and optimistic goals, I'm often derided as a curmudgeon who doesn't understand the dream. Truth is I've been a guide in the Valley of Death for over thirty years and while I love panoramic scenery, I can't overlook the dangers of old mine shafts, cactus patches and the poisonous critters that live in the valley. So I while occasionally gaze in awe at the majesty of the landscape, my big concern is always the next step.

The scary part is knowing that companies I praise rarely live up to my lofty expectations but companies I criticize always perform worse than I think they will.

Most companies that enter the Valley of Death don't emerge. For the fortunate few that do, the difficult times usually last longer than anyone expected. The single character trait all entrepreneurs share is unbridled optimism. The three character traits all survivors share are determination, focus and fiscal restraint. The following graph from Osawa and Miyazaki is a stylized view of the cumulative losses companies suffer as they transit the Valley of Death.

7.17.12 Valley of Death.png

The next graph from the Gartner Group is a stylized view of the Hype Cycle, a well-known but frequently misunderstood market phenomenon that gives rise to extreme overvaluation during a company's early stages that’s frequently followed by a period of extreme undervaluation in later stages when the major development and commercialization risks have been overcome, cash flows are about to turn positive and stockholders have grown so weary of waiting for good news that they're willing to sell at distressed prices despite improving business fundamentals.

7.17.12 Hype Cycle.png

The graphs are not perfect overlays on a horizontal time scale, but they're close, and that's where the dangers lurk. The reason for the differences between the two graphs is a curious split personality of investment markets that was first described by Benjamin Graham who observed, "in the short term, the stock market behaves like a voting machine, but in the long term it acts like a weighing machine." Stock prices always peak in early stages of a product launch because the dream is so beautiful. At the Peak of Inflated Expectations, the voting machine personality is firmly in control. When the day-to-day difficulties of building a successful and sustainable business become obvious prices begin an inexorable slide into the Trough of Disillusionment. As they reach the bottom of the trough, the weighing machine personality assumes control.

In combination, these graphs are the reason for Warren Buffet's oft quoted wisdom that "Investors should remember that excitement and expenses are their enemies, and if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy when others are fearful."

That's why truly successful investors who understand the Valley of Death usually follow one of two strategies:
  • Venture capitalists buy during the Innovation Trigger and plan on selling during the Peak of Inflated Expectations.
  • Vulture capitalists buy during the Trough of Disillusionment and plan on holding for the long term.
Everybody else is betting on the greater fool theory of investing which holds that no matter the price paid by a fool, there will always be greater fool who's willing to pay an even higher price. The lucky ones can make a few bucks but those who press their luck frequently learn the identity of the greatest fool of all.

As I confessed above my record at predicting short-term success is spotty at best and many companies that I've praised over the last four years have been mired in muddle through survival mode for longer than I would have thought possible. With the sole exception of C&D Technologies, however, they've all survived and they continue to make solid business progress. Companies in the survivor group include Active Power (ACPW), Exide Technologies (XIDE), Maxwell Technologies (MXWL), ZBB Energy (ZBB) and my old teammates at Axion Power International (AXPW.OB). These companies have all had their ups and downs, but they've avoided catastrophic errors and grown their businesses through determination, focus and fiscal restraint. I continue to believe that all five will emerge from the Valley of Death as formidable competitors in their respective sub-sectors and provide market-beating returns for patient investors.

Turning to the other side of the ledger, my track record has been flawless when it comes to identifying companies that were riding the Hype Cycle but unlikely to survive the Valley of Death. Beacon Power, Ener1 and most recently Valence Technologies (VLNCQ.PK) were complete and utter failures that ended up in Chapter 11. Altair Nanotechnologies (ALTI) avoided a total loss by selling control to a Chinese company after its stockholders lost 90% of their value. A123 Systems (AONE) is on the deathwatch and seems unlikely to survive the year after watching its market capitalization shrivel from $2.3 billion in December 2009 to $123 million at yesterday's close. The one trait they all shared was an errant belief that the glory days would last forever and that bullish press releases could obviate the need for determination, focus and fiscal restraint.

Over the last several months I've become increasingly vocal about the risks Tesla Motors (TSLA) faces as it launches its first credible consumer product and begins a long and arduous trek through the Valley of Death. Adherents and advocates are certain that I don't understand the dream. Truth is I understand the dream perfectly but I know that no company can overfly the Valley of Death on the wings of a dragon. The only way through the valley is on foot in sweltering heat.

At March 31st Tesla had $123 million in working capital and $154 million in stockholders equity. Unless it slashed spending during the second quarter, its June 30 financial statements should show working capital and stockholders equity of roughly $65 and $85 million, respectively. At yesterday's close, Tesla's market capitalization was an eye-watering 45 times its estimated net worth, or about ten times higher than it should be at this stage in the company's development.

Tesla is entering the most cash intensive period in its business history where it will have to make cars instead of talking about them. Unless management acts quickly, Tesla will run out of cash this quarter. I was surprised that Tesla didn't close a substantial capital raise during the second quarter because its financial statements were looking so weak at the end of March. Now that we're two weeks into July with nary a peep about additional fund raising, I have to believe Tesla is facing difficult market conditions and significant investor skepticism over immediate execution risks that can't be overcome with happy talk. The potential investors have the upper hand in this particular waiting game because they know that Tesla is trapped between the rock of a down-round financing and the hard place of a going concern qualification on the Form 10-Q it has to file by August 9th.

The clock is ticking.

As a long-term guide in the Valley of Death I've been in that position before and know how the game is played. This is not an opportune time for retail stockholders who aren't paying attention to the carrion birds circling overhead.

Disclosure: Author is a former director of Axion Power International (AXPW.OB) and holds a substantial long position in its common stock.

July 12, 2012

Musings From The EV Black Knight

John Petersen

In June an anonymous blogger at Clean Technica dubbed me the “EV Black Knight,” the mortal enemy of electric cars.  While I was flattered by the tribute, I was deeply offended by the suggestion that I might be foolish enough to impale a lithium-ion battery pack with the burnished broadsword of economics.

Seriously, anybody who’s spent any time studying battery safety knows that shockingly bad things can happen when you puncture a lithium-ion battery pack with a conductor and even a full metal jacket wouldn’t be enough to protect a knight errant from the kind of explosive thermal runaway that did about $5 million of damage to a GM battery testing laboratory that was designed to safely manage catastrophic battery failures.

Truth is I’d rather have an e-bike than a horse, I find pens mightier than swords and I think green eyeshades enhance vision while face visors lead to the kind of tunnel vision I find so appalling in ideologues and Tesla (TSLA) stockholders who apparently think we can waste massive quantities of metal for the dubious luxury of powering a car with coal instead of gasoline.

I think the basic problem is that we’re painfully aware of energy costs but blissfully ignorant of the cost of making the machines that either produce or consume energy.

In the case of the family car, we know it burns 400 gallons of gas a year and hate the fact that each gallon costs $3 to $4. Heck, over a 15-year useful life we’ll spend $18,000 to $24,000 on fuel alone. Spending as much for fuel as you spend to buy the car seems outrageous until you consider that the cost of fuel includes the cost of:
  • Manufacturing the machines that drill for and produce crude oil;
  • Manufacturing the machines that that transport crude oil for refining;
  • Manufacturing the machines that convert crude oil into fuel; and
  • Manufacturing the machines that transport fuel to market.
I’ve never seen a detailed analysis, but I’d give long odds that if you start with the purchase price of the family car and add a proportional share of the cost of the upstream machinery, equipment and processing facilities that keep it running, you’ll find that machinery represents at least three-quarters of total ownership costs.

While I can’t pin down a precise number, most reports that discuss the economics of wind power claim an all-in power production cost of $.05 per kWh. In the typical analysis 25% of total power production cost is attributable to operations. The remaining 75% is attributable to capital cost recovery – the cost of manufacturing the turbines that turn free energy into useful energy.

With the exception of simple devices that burn fuel directly for heating and cooking, the cost of every useful form of energy pales in comparison to the cost of the machines that use the energy and the cost of the upstream machinery, equipment and processing facilities that deliver energy to our machines in a useful form.

If you spend enough time thinking about the supply chain, the issues become obvious.

We don’t have an energy cost and supply problem.

We have a machinery cost and supply problem.

Energy from wind, sun and water may be free, but machines to make that energy useful are anything but free. The same is true for coal, oil, natural gas and uranium. The in-place energy resources cost nothing, but the machines that extract, transport, refine and use those resources are expensive indeed.

Last year we produced 1,996 kg of energy resources for every man, woman and child on the planet. We also produced 214 kg of iron and steel per capita and 19 kg of nonferrous metals.

While energy resources are single use commodities, ferrous and nonferrous metals are essential for the manufacturing of:
  • EP – machines that produce energy and convert it to useful form;
  • EU – machines that use energy to perform useful work; and
  • NM – non-mechanical essentials of modern life including buildings, power distribution grids and an infinite variety of durable and disposable consumer and industrial goods.
The essential conundrum of modern life is that EP + EU + NM can never exceed total metal production. If we increase metal consumption in one category we have to reduce it somewhere else unless one believes in natural resource fairies.

According to a recent McKinsey study, “Resource Revolution: Meeting the world’s energy, materials, food, and water needs,”  the planet supports 1.8 billion middle class consumers. Over the next 20 years that number will increase to 4.8 billion, a gain of almost 270%. Every one of them will demand energy produced by machines, energy using machines and the non-mechanical essentials of modern life. The problem, of course, is there simply won’t be enough raw materials to go around.

Something’s got to give!

Simply stated, the great challenge of our species will be overcoming persistent global shortages of water, food, energy, building materials and every commodity you can imagine.

The McKinsey report argues that available resource productivity improvements could:
  • Offset 100% of the expected increase in land demand;
  • Address more than 80 percent of expected growth in energy demand;
  • Offset 60 percent of anticipated growth in water demand; and
  • Address 25 percent of expected growth in steel demand.
Unfortunately the report is completely silent on more troublesome resources like nonferrous metals that are absolutely essential for:
  • EP;
  • EU; and
  • NM.
Whether we like it or not, supply chain shortfalls will have to be overcome by wasting nothing, recycling everything and making the most efficient possible use of every natural resource.

That doesn’t leave much room for idealists that want to use non-recyclable 1,000-pound battery packs so they can choose coal instead of gasoline to power their car.

In the battery industry the strain on metal supply chains will be immense. The problems won’t be overwhelming for metals like lithium and lead that are abundant in nature but require major new investments in mines and infrastructure, but they’ll be crippling for metals like copper, nickel, cobalt, vanadium and rare earths, which are already in short supply and likely to encounter even more daunting supply chain disruptions over the next two decades.

I’m not a Black Knight wantonly attacking peaceful, frugal and righteous peasants. I’m humble scrivener with enough mining and oil and gas experience to know when the specious assumptions of aspiring eco-princelings can’t work.

I’d certainly never waste hundreds of pounds of steel to protect myself from starry-eyed fools in motley who didn’t endure the cruel tutelage of Sister Mary Angelica in their formative years.

7.13.12 Darasz.jpg

This article was first published in the Summer 2012 issue of Batteries International Magazine and I'd like to thank editor Mike Halls and cartoonist Jan Darasz for their contributions.

Disclosure: I have no direct or indirect interest in Tesla and I have nothing to gain or lose from its stock price movements. While I am a former director and current stockholder of Axion Power International (AXPW.OB), a nano-cap company that has developed a robust and affordable lead-carbon battery for use in micro-hybrid, railroad and stationary applications, I can't see how the success or failure of a fairy tale product like the Tesla Model S could impact the value of my investment in a company that's focused on relevant mainstream markets.

July 01, 2012

Two EVs for the Other 99%

Tom Konrad CFA

English: Photo of the Tesla Model S, from the ...
The Tesla Model S, from the unveiling on 26-Mar-2009. (Photo credit: Wikipedia)

An EV for the 1%

The chatter among electric vehicle (EV) enthusiasts and investors is all about the launch of the Tesla (NASD:TSLA) model S.  A cool ride, no doubt, but not many of us are ever going to buy a sedan that starts at $49,900, even after the $7,500 tax subsidy.

Fortunately for the rest of us, this week also brought news about two much more affordable EVs.

An EV for the 99%

Chicago EV enthusiasts will soon not have to stump up $50K to ride an EV, they’ll be able to ride an EV for just $2.  That’s because the Chicago Transit Authority (CTA) just placed the first order for two of New Flyer Industries’ (OTC:NFYEF, TSX:NFI) recently launched battery-electric transit bus. The CTA will pay $2.2 million for the buses, and will begin a pilot program to understand how they will operate in Chicago’s harsh climate.

The buses come equipped with traction drives and components from Siemens (NYSE:SI) and will be delivered in 2013.

An EV for the Chinese Working Class

Kandi EV
Kandi EV. Photo credit: Marc Chang

On the other side of the world, the Chinese press identified  Kandi Technologies (NASD:KNDI) as a supplier to the City of Hangzhou’s 20,000 vehicle EV rental program.  The program will be active in “July and August,” meaning that the first EV purchases will occur within a month.

The vehicles may come from a variety of manufacturers, but only Kandi Technologies (NASD:KNDI) was identified as having a model approved for the program.  The reporter was shown a Kandi tw0-seater, and Kandi’s mini-EVs were identified by a local power company official (which is a partner in the program) to “possibly” be promoted as they are “more suitable for city driving.”

Another official stated that the rental fee would be low and affordable to working class families.  Previous articles have put the monthly rental at 800 yuan a month, or about $126, a price which includes free charging and battery exchanges.   At such low rental prices, Kandi’s $7,500-$8,000 EVs will clearly be favored over their competitors’ EVs, all of which cost more than $20,000.  The next-cheapest competitor, the Zoyte Longhorn currently rents for 2400 yuan, or $380 per month in Hangzhou, a price which does not include free charging.

Another reason to think that Kandi’s EVs will make up the bulk of the program is the emphasis on battery exchange.  Only Kandi’s EVs were designed as electric vehicles from the ground up, with plans for battery exchange.  Competitors such as the Longhorn are modified versions of gas vehicles, and have the batteries under the back seat.  This means that battery exchange would require an empty back seat, and considerably more time and effort than Kandi’s quick battery exchange system.

Although we’ve suspected it for some time, this is the first official word that Kandi has been selected as part of Hangzhou’s rental program.  From the evidence, it seems that Kandi’s vehicles will not only be included in the program, but they will make up most of the planned 20,000 vehicles.

Disclosure: Long NFYEF, KNDI

This article was first published on the author's Forbes.com blog, Green Stocks.

DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results.  This article contains the current opinions of the author and such opinions are subject to change without notice.  This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.  Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

June 30, 2012

Energy Storage: Q-2 2012 Review and Analysis

John Petersen

While I jumped the gun last week and published my third quarter outlook for the energy storage and vehicle electrification sectors early, it's worthwhile to take a look back and see how my tracking list of companies performed over the last quarter and examine the past to see what the tea leaves in the bottom of the cup portend for the coming quarter. So without further delay I'll present my price performance table for the second quarter that ended on Friday.

6.30.12 Price Table.png

Q-2 was a dreadful quarter for Maxwell Technologies (MXWL) and ZBB Energy (ZBB) as their prices fell by 64% and 41% respectively. While the declines were precipitous, they were also one-off events and I believe both companies are trading at very attractive prices for investors who want to position their portfolios for the mean reversion upswing that usually follows fast on the heels of a painful downturn. My long-term tracking charts for both companies show distinct bottoms forming and I believe they're both likely to trend up for the rest of the year.

It was also an ugly quarter for UQM Technologies (UQM), Valence Technology (VLNC) and Tesla Motors (TSLA). While I believe UQM is attractively priced, I'm convinced that Valence and Tesla are only seeing the beginning of storms that are likely to get more severe through the summer and fall months.

The following table tracks several key financial metrics for the companies I follow. Today I'll try to explain why I track this data and show how I use peer group comparisons to identify stocks that are either overvalued or undervalued. If you want to understand the balance of this article, you should pay close attention to the table instead of simply blowing past the data and focusing on the words.

6.30.12 Metrics Table.png

The first metric I consider when analyzing any company is working capital adequacy. I see development stage companies that don't have at least twelve months of working capital as problem children because as sure as the sun will rise tomorrow, they'll be going back to the market for more money within a few months. The two companies with the worst working capital positions are A123 Systems (AONE) and Tesla. Both had less than six months of working capital at March 31st, even after adjusting A123's numbers for a recent $50 million toxic debt offering, and both will look truly dismal when their June financial statements are released in early August. Wunderlich Securities recently cut its price target on A123 to $0.50 and I think they're being generous. Absent a major turnaround, I expect A123 to follow the path blazed by Solyndra, Beacon Power and Ener1. While Tesla has a couple more financing rounds left in its bag of tricks, I don't expect the terms to be particularly generous to existing stockholders because the execution risks are so massive and so immediate.

The second financial statement metric I key on when trying to distinguish overvalued from undervalued is the difference between a company's market capitalization and its book value. That number is a good proxy for the value the market puts on a company's technology, customer base and other intangibles that don't show up on the balance sheet. When the market premium is a low or negative number, it indicates either opportunity or risk. When market premium is an objectively high number, it's a sign of extreme price risk – much like a robotic voice screaming "Danger Will Robinson, Danger!"

Turning to the table, A123 is trading at a modest discount to book value that doesn't fully reflect the risks it will face over the next six months as it tries to recover from a simple calibration error that gave rise to roughly $70 million in warranty costs and inventory write-offs. A123's cash needs will be huge and the best they could do in their last financing round is a death spiral note that's payable bi-monthly and convertible at 85% of market. Possible future product offerings in the micro-hybrid and aviation markets aren't even interesting because neither is soon enough or large enough to materially improve A123's operating results over the short-term.

Next on the list is Valance technology, which has had a deficit in its stockholders' equity for years. A bad capital structure has finally caught up with Valence and it will probably lose its Nasdaq listing sometime in July. Valence's LiFePO4 battery technology is proprietary, but it's not all that different from A123's proprietary LiFePO4 battery technology. With both companies needing major equity infusions, I see more risk in Valence than I do in A123 because the market values its technology, customer base and other intangible assets at a $167 million premium to A123. Frankly I just don't see a good reason for the discrepancy.

The only company in the table with an obviously low market premium is Exide Technologies (XIDE) which trades at a 35% discount to book value because the market has grown weary of exaggerated losses flowing from a multi-year business restructuring that's finally coming to an end. Once the bleeding stops, I expect Exide to perform very well.

On the extreme bleeding edge of the market premium spectrum we have Tesla which trades at a silly level of 21.4 times book value while every other company I follow trades at three times book or less. That valuation excess is solely attributable to the Hype Cycle, which seems to be running its course. Over the last two years Tesla has been driven higher and higher as the delivery date for its first Model S cars drew nigh. The long anticipated event finally happened a week ago Friday and the Model S drew spectacular reviews from the automotive press. Despite the good news, the price fell by 7% last week.

The reason is simple. The market expected the deliveries to go off without a hitch and it expected rave reviews. So there was no "good" left in that news. Now, however, the business dynamic has changed. Instead of sounding like a politician and focusing on how good it's going to be, Tesla will have to begin dealing with day-to-day business realities like actual reservation conversion rates, actual production problems and actual manufacturing cost overrruns. While I suppose Tesla could be different from every new manufacturer in the history of business, I see very little in the way of unexpected good news that could lift its stock price while Tesla's business of making electric cars is entering a target rich environment for sequential disappointments that could crush its stock price. This is not a favorable risk reward dynamic for investors who care about their portfolio value.

The thing I like best about the market premium metric is that it lets an investor assemble a hierarchy of opportunity to compare the different companies in a sector. The following table is a simple example that excludes several outliers and shows market premium as an absolute number, and as a relative number compared to book value, my "BS to Book ratio."

6.30.12 Premium Table.png

I'm not a fan of electric cars because the entire sector has been mercilessly over-hyped while the real economic costs and illusory environmental and national security benefits are just now coming to light. If I did want to make an EV investment that had a good chance of significant appreciation instead of an outsized risk of loss, I'd pick UQM and Kandi Technologies (KNDI) over Tesla. Kandi is profitably selling low cost transportation for the masses in China, a country that's striving to raise living standards for all of its people. Kandi has a healthy working capital balance and a low BS to Book ratio. UQM is still reporting modest losses, but its balance sheet is strong and its BS to Book ratio is one of the lowest in my tracking group. The risk-reward dynamic for both companies is quite favorable because the potential for additional price deterioration is modest while the potential for future price appreciation is substantial. In other words, they're both polar opposites of Tesla.

The same kind of analysis holds in the middle range where Axion Power (AXPW.OB), ZBB, Active Power (ACPW) and Maxwell carry market premiums that range from $14.3 million to $72 million and have BS to Book ratios of 2.0 or less. A blog like this one is not a good place to  slice and dice the respective technical strengths of four companies that are focused on different products that have different applications that don't really compete with each other. But all four of them are one or two solid announcements away from market premiums in the $200 to $400 million range which A123 and Maxwell both carried at some point in the last twelve months.

When you're betting on trees to grow, you don't pick the tallest one in the forest because it's the one most likely to get struck by lightning. You don't pick the diseased trees because of their high mortality risks. Instead you pick healthy young trees that have modest mortality risks but are poised to enter a period of sustained growth. For my money all four of these mid-range companies have that kind of significant growth potential for this year, and through 2015 and beyond.

Disclosure: Author is a former director of Axion Power International (AXPW.OB) and holds a substantial long position in its common stock.

June 23, 2012

Energy Storage: Q3 2012 Winners and Losers

John Petersen

I usually write a quarterly recap to summarize what happened in the energy storage and vehicle electrification sectors, but Q2 was a tough enough period that I don't see much sense in dwelling on the bloodletting. So instead of focusing on the past, I'll offer a quick summary table with lots of red ink and turn my attention to Q3, which is shaping up as a time of bright opportunity for some companies and profound risk for others.

6.23.12 Q2 Performance.png

I expect three companies in my tracking group to perform very well in Q3 – Exide Technologies (XIDE), Active Power (ACPW) and Axion Power International (AXPW.OB). All three look terrible if you only look at historical performance, but when you dig deeper into business history and market dynamics it becomes clear why all three have market-crushing potential over the next three to six months.

Q-3 Winners

Exide Technologies has been the Rodney Dangerfield of the battery industry since emerging from Chapter 11 in 2004. The reason is simple. While Exide had solid prospects after its bankruptcy reorganization, it was not a healthy company and it was burdened by a lot of dead weight. During the four years I've been following Exide they've been restructuring their operations, closing marginal facilities and paring fat wherever possible. Over the last five years, Exide has reported total earnings of roughly $35 million after restructuring and impairment charges of almost $210 million. Since its net earnings were so bad for so long, Exide currently trades at a 38% discount to book value, 4.4 times earnings and 8% of sales while its peers trade at 1.5 times book, 11 times earnings and 70% of sales.

Restructuring costs are an accounting oddity. If a company builds a new plant to increase earnings, the costs of that plant are added to the balance sheet and depreciated over time. If a company closes an unprofitable plant to increase earnings, the associated restructuring costs are charged against net income. When a company like Exide embarks on a multi-year restructuring program, the positive earnings impact of the restructuring is not obvious until the restructuring is complete and earnings morph from dreadful to spectacular in very short order. Exide has reached the end of its restructuring and expects to emerge later this year. When the write-offs are old news and the positive impacts of the restructuring become obvious, the market's perception of Exide should change dramatically.

I maintain long-term price tracking charts on all the companies I follow and believe Exide's chart is signaling a sharp turn upward in the third quarter. If you look at the chart you'll see that the 10-, 20- and 50-day weighted moving average prices are clustered in a narrow range below the 200-day average and have already turned sharply upwards. When they push up through the 200-day average, Exide will have a classic golden cross to mark the beginning of a new uptrend. Similar chart patterns existed in the summer of 2009 and the fall of 2010. While I'd be hard pressed to estimate the next peak, Exide's historical price performance is enough to convince me that a double is likely and a good deal more is possible.

6.23.12 XIDE.png

Active Power is a classic Valley of Death stock. It went public in 2000 right before the tech wreck and reached a high in the low $70s before falling to its all time low of $0.25 in late 2008. Since then Active Power has been working its way out of the Valley of Death and getting stronger with each quarter. Like Exide, Active Power's chart is right on the verge of a golden cross like we saw in the spring of 2009 and the summer of 2010. While I'd be hard pressed to guess the next top, Active Power's historical stock price behavior is enough to convince me that a double is likely, if not a triple.

6.23.12 ACPW.png

Axion Power International is another Valley of Death stock that looks like a very ugly duckling until you dig down into the business fundamentals and understand the market dynamics that crushed the stock price over the past three years. Axion went public through a reverse merger in late 2003 when it was still an early-stage R&D company. During its first five years as a public company Axion's stock traded by appointment and total reported trading volume for 2009 was only 7.7 million shares, or about 3.8 million shares on the sell side and 3.8 million on the buy side.

In late 2009 Axion closed an immense private placement of 45 million shares, or the equivalent of 12 years of trading at historic levels. While I believed that the four anchor investors in the private placement were swinging for the fences with venture capital investments in a stock that offered no reasonable prospect of a short-term liquidity at a decent price, an unfortunate series of events including the death of one buyer, management changes in two more and unrelated financial problems in three legacy stockholders forced huge blocks of stock into a market that couldn't handle the selling pressure.

In addition to price data like I provided for Exide and Active Power, my Axion chart includes a fifth line that tracks 200-day average trading volume and highlights the seventeen-fold increase in daily trading volume over the last three years. When I contemplate the sheer mass of shares that have moved during that period, I'm amazed that the price didn't collapse completely.

6.23.12 AXPW.png

In spite of a dismal price chart, Axion's business execution over the last three years has been flawless. Its PbC battery has progressed from a pre-commercial prototype to a production ready energy storage solution that beat all contenders including nickel metal hydride, lithium-ion, sodium metal chloride and fuel cells in two and a half years of testing for battery-powered locomotive applications, was used in the first behind the meter frequency regulation resource in the country, is a front-runner in energy storage for micro-hybrid vehicles and has recently set its sights on hybrid solutions for the long-haul trucking market. I can still account for a few million shares in the hands of likely sellers, but once those shares are absorbed the future market price will be in the hands of the patient long-term investors who have been buying Axion's stock over the last two years and squirreling it away in their sock drawers. Unless trading volume collapses, the selling pressure can't continue for more than another month or two.

Q-3 Losers

After years of supporting a $150 to $200 million market capitalization with a negative stockholders equity it looks like Valence Technology (VLNC) will lose its Nasdaq listing within the next few weeks and be downgraded to the OTCBB. While the listing could be saved with capital infusion in the $60 million range, that possibility seems pretty remote.

While it's riding a wave of euphoria after the delivery of its first Model S sedans last week, I continue to believe Tesla Motors (TSLA) will pass its peak of inflated expectations in Q-3 and begin a dizzying descent into the Valley of Death. I don't want to denigrate Tesla's accomplishments as the first manufacturer of a high production volume electric vehicle and the first fledgling automaker to bring a new car to market since DeLorean, but it seems like all of the possible good news is already priced into Tesla's stock while the bulk of the execution risks and disappointment opportunities have become frighteningly imminent.

I get hundreds of comments every time I mention Tesla's name. The enthusiastic readers I hear from expect rave reviews, expect high reservation conversion rates, expect demand to skyrocket, expect the Model S to perform flawlessly in heavy daily use, expect Tesla's financial resources to be adequate for its foreseeable needs and expect Tesla to avoid the delays, defects and missteps that plague even seasoned manufacturers who launch a completely new product. I may be cynical when it comes to the applicability of Moore's Law in the auto industry, but I'm a firm believer in Murphy's Law, fondly known as the fourth law of thermodynamics, which states: "If anything can go wrong, it will."

Disclosure: Author is a former director of Axion Power International (AXPW.OB) and holds a substantial long position in its common stock.

June 21, 2012

OECD Analysis Suggests That Electric Cars Are Not Ready For Prime Time

John Petersen

On June 14th the International Transport Forum of the Organization for Economic Co-operation and Development released a Policy Brief that asks the rhetorical question "Electric Cars: Ready for prime time?" I was very surprised that the OECD, an organization of 34 democratic, industrialized and overwhelmingly western nations, would even ask the question. I was even more surprised by their conclusions that most claimed benefits of electric passenger cars are illusory while the societal costs are $9,000 to $15,000 more per vehicle than conventional automobiles. In other words, every EV produced and sold makes society poorer. No matter how you "feel" about electric cars, the OECD Policy Brief and the related discussion paper, "Electric Vehicles Revisited – Costs, Subsidies and Prospects" suggest that global thought leaders are rapidly distancing themselves from the idea that electric drive is a sensible solution.

The discussion paper begins with an introduction that explains, "The International Transport Forum at the OECD is an intergovernmental organisation with 53 member countries. It acts as a strategic think tank with the objective of helping shape the transport policy agenda on a global level and ensuring that it contributes to economic growth, environmental protection, social inclusion and the preservation of human life and well-being."

These guys aren't oil industry puppets and they don't evaluate macroeconomic issues from the perspective of an individual consumer who's trying to make a car buying decision. Instead they focus on the broader questions of whether individual consumption decisions are productive or counterproductive for society and humanity as a whole. When the OECD starts openly questioning the fundamental economic and environmental value of electric drive, you know the geopolitical winds are shifting rapidly. When the first graph in an OECD discussion paper is a simplified version of the Gartner Group's Hype Cycle, it's a clear indication that evolving attitudes of policymakers are bad news for investors in companies like Tesla Motors (TSLA) that want to drive the auto industry in directions that don't serve the best interests of society or humanity.

As a staunch critic of electric drive, I was particularly pleased with the OECD's admission that electric cars are “displaced emission” rather than zero emission vehicles, that the environmental benefits of electric drive are wholly contingent on the marginal electricity production used to charge the vehicles, and that where electricity generation is relatively polluting, the air quality-related health impacts of electric vehicles are worse than gasoline ICEs but better than diesel ICEs. It's nice to finally see an honest acknowledgement that moving pollution from a tail pipe to a power plant doesn't solve the problem. It merely shifts the suffering from the polluter to somebody else.

Since I'm weary of juvenile arguments with EVangelicals who cleave to eco-religious dogma without exercising their power of independent thought, I'll refrain from providing a detailed analysis of the OECD policy brief and discussion paper. I will, however, suggest that both documents are Must Reads for prudent investors who want to understand the likely future of government support for the fatally flawed proposition that battery-powered electric vehicles can overcome the laws of thermodynamics, chemistry, physics and economic gravity.

Disclosure: Author is a former director of Axion Power International (AXPW.OB) and holds a substantial long position in its common stock.

June 15, 2012

Tesla Motors; Automaker or Graphic Novel?

John Petersen

One of the hardest parts of blogging about energy storage and vehicle electrification is the inability of some readers to wrap their minds around large numbers. We throw around numbers like thousand, million, billion and even trillion with surprising alacrity, but many fail to grasp their significance because the underlying realities are too big to comprehend.

The other day I stumbled across a website that tracks the national debt and uses the humble second to put incredibly large numbers into perspective:
  • A thousand seconds is 16.6 minutes;
  • A million seconds is 11.6 days;
  • A billion seconds is 31.7 years; and
  • A trillion seconds 31,688 years.
In the last 12 months the US imported 3.25 billion barrels of oil and produced another 2.13 billion barrels domestically. That works out to a little over 226 billion gallons a year, an incomprehensibly large number. The following graph tracks monthly oil supplies in the US for the last 30 years and shows how slowly things change in the energy industry. We might want things to change quickly, but they can't because the baseline numbers are so immense.

6.15.12 Oil Supply.png

Since hitting a peak in 2005, oil consumption in the US has fallen by about 6% as higher prices encouraged more efficient vehicles and driving habits. During that same period improvements in oil production technology have increased domestic production by about 25%. There are many who think domestic oil production will contribute more to supply than imports by the end of the decade. I hope they're right because domestic production adds to the economic vitality of the nation while imports are a major drain. Whatever changes the future holds, however, they're not going to be big or fast. Energy transitions take decades to unfold and while there are no panacea solutions, false promises abound like flowers in an alpine meadow.

I enjoy making fun of electric car advocates who believe that companies like Tesla Motors (TSLA) and its iconic CEO Elon Musk will change the world with ambitious plans to make 5,000 prohibitively expensive toys this year and 20,000 next year if they can find enough buyers. The reason is simple. I know that even if Tesla succeeds the success is irrelevant. The cars it plans to make in 2012 and 2013 would save about a million gallons of gas a year, or two minutes and nineteen seconds on the US oil supply clock. No matter how you slice and dice the numbers, Tesla just can't matter.

From my perspective the most frightening aspect of Tesla hysteria is the pervasive view that Mr. Musk is some kind of new-age superhero. Earlier this week I got an e-mail from a group that had created a graphic that highlights the life and times of Elon Musk, "The Real Life Tony Stark." You can access it yourself by clicking here.

My first impression was that the group had a rich sense of humor and had crafted a brilliant parody. As I researched the host website, however, it became increasingly clear that the creators are serious and honestly believe that St. Elon of Palo Alto is a larger than life superhero who can change the world with bold plans and magic beans.

A Branch Davidian or Jonestown mentality is tragic in a religious cult. It's catastrophic in an investment security because those who believe in graphic novels usually believe in alternate universes where cruel realities like oil supply and demand and the physics of moving mass over distance at speed can change in the twinkling of an eye.

I track both short- and long-term volume weighted moving average prices for all the stocks I write about. At this point I think Tesla's chart is looking pretty ugly. The Model S was launched in 2009 when Tesla started taking reservations. The deliveries that will start next week are already baked into the stock price. Without a big surge to the upside, a death cross where the 50-day average plunges down through the 200-day average is all but inevitable by the 4th of July.

6.15.12 TSLA.png

I don't believe in superheroes and I haven't read a graphic novel since I was an adolescent. I plan to watch this train-wreck unfold from the sidelines. I'll be the first to congratulate Tesla and Mr. Musk if they can meet their lofty goals, develop sustained product demand and build stockholder value. I won't be holding my breath over the risk of a stewed crow dinner.

Disclosure: I have no direct or indirect interest in Tesla and I have nothing to gain or lose from its stock price movements. While I am a former director and current stockholder of Axion Power International (AXPW.OB), a nano-cap company that has developed a robust and affordable lead-carbon battery for use in micro-hybrid, railroad and stationary energy storage applications, I can't see how the success or failure of a graphic novel product like the Tesla Model S could impact the value of my investment in a company that's focused on relevant mainstream markets.

June 09, 2012

Why Range Anxiety is the Mortal Enemy of EV Efficiency

John Petersen

Last week the green car press was abuzz with stories that General Motors (GM) was increasing the electric drive range of the 2013 Chevrolet Volt from 35 miles to 38 miles. The increase is due to better batteries. GM's battery supplier LG Chem (LGCIF.PK) has apparently improved the volumetric energy density of their cells to a point where GM can fit 16.5 kWh of storage into a space that could only accommodate 16 kWh in January 2011. The GM press release also noted "tests have revealed less battery degradation, the ability to withstand temperatures as low as -30 degrees Celsius and less impact by energy throughput."

According to my calculator the cell improvements represent a volumetric energy density gain of 3.125% in less than two years along with modest gains in cycle-life and cold weather performance. Since I know how hard it is to increase energy density and boost battery performance, I'm impressed. The accomplishment does, however, highlight the unpleasant reality that step-change gains in battery performance and major cost reductions are very unlikely. Battery research, development and commercialization is a long, slow, difficult and expensive process that has nothing in common with the short product development cycles and steep cost reductions we all came to know and love during the IT revolution.

The research, development and manufacturing dynamic is very different this time. It's so different that Professor Vaclav Smil refers to the new dynamic as Moore's Curse.

With last week's announcement from GM and this month's launch of the Model S from Tesla Motors (TSLA), now seems like a great time to revisit an issue that I discussed in December 2008 and most EVangelicals still don't grasp –

Range anxiety is always and everywhere the mortal enemy of EV efficiency
.

In the world of finance, the value of any asset is based on the number of payments its owner can receive in a given period of time and the amount of each payment. A hotel room that rents for $1,000 a day is more valuable than an executive suite that rents for $1,000 a week, which is more valuable than an apartment that rents for $1,000 a month. While living space and batteries have nothing else in common, their intrinsic value to an owner is based on the same ironclad laws of finance. Full utilization and daily turnover maximize asset values while inefficient utilization and slow turnover savage values.

In the US, an average driver puts about 12,500 miles per year on his car, or about 40 miles a day by the time you account for different weekend driving patterns. Compared to a CAFE compliant new car, each 40-mile daily commuting cycle in electric-only mode represents a potential savings of 1.3 gallons of gasoline for an effective "day rate" of about $5.

Using that day rate as a starting point, I can put on my green eyeshade and drill down into the operating inefficiencies that are directly attributable to range anxiety.

The most efficient battery in the plug-in vehicle world is the 5.5 kWh pack in the new plug-in Prius from Toyota (TM), which has an EPA certified electric-only range of 11 miles. A driver who has access to charging infrastructure on both ends of his daily commute can use 100% of the battery capacity twice a day. So the baseline battery efficiency factor for a plug-in Prius is 200%. Salesmen, soccer moms and others who have several daily trips and good access to charging infrastructure may be able to push their battery efficiency factor to 300% or more.

Second place belongs to the 16.5 kWh pack in the 2013 GM Volt with an electric-only range of 38 miles. Even without access to charging infrastructure, an owner will probably use 100% of his battery capacity every day.

Third place belongs to the 24 kWh pack in the Leaf from Nissan (NSANY.PK), which has an EPA certified electric-only range of 73 miles. Since the Leaf's electric-only range is nearly twice the average daily commute, the battery efficiency factor falls to 56%.

Fourth place belongs to the 40 kWh pack in the Tesla Model S-40, which should have an EPA certified electric-only range of 140 miles. Since the Model S-40's electric-only range is more than triple the average daily commute, the battery efficiency factor falls to 29%.

Fifth place belongs to the 60 kWh pack in Tesla Model S-60, which should have an EPA certified electric-only range of 200 miles. Since the Model S-60's electric-only range is five times the average daily commute, the battery efficiency factor falls to 20%.

Last place belongs to the 85 kWh pack in Tesla Model S-85, which should have an EPA certified electric-only range of 265 miles. Since the Model S-85's electric-only range is almost seven times the average daily commute, the battery efficiency factor falls to 14%.

Batteries cost money; lots of money. While GM is pretty tight-lipped on the subject of battery costs, most experts believe the battery pack for a Volt costs less than $12,000. In comparison the battery pack for a Tesla Model S-85 costs about $45,000. In most cases, the driver of a Model S-85 won’t save any more gas than the driver of a Volt. Paying a $33,000 premium for electric-only range that most drivers will rarely use is more than a little wasteful.

The first great tragedy is that electric-only range, the most over-hyped feature in EVland, is the mortal enemy of EV efficiency. Electric drive is most economic when you buy no more battery capacity than you plan to use a daily basis. Soothing range anxiety with a huge battery pack might feel better, but it destroys any pretense of efficiency.

The second great tragedy is that EV batteries cost $30 to $50 a pound to manufacture but they're not worth recycling. The commodity value of recoverable metals in most lithium-ion batteries ranges from $0.50 to $5 a pound, but collection, transportation, primary battery recycling and secondary metal separation and refining cost more than the recovered metals are worth. There are a few companies that have built pilot scale lithium-ion battery recycling facilities, but those facilities are experimental and current recycling technologies are nowhere near cost-effective. That range anxiety soothing battery pack that crushes EV efficiency during the battery's useful life also gives rise to unconscionable waste of scarce nonferrous metals at the end of life.

Notwithstanding the blistering, scurrilous and occasionally defamatory comments that my articles seem to draw from the ever vigilant and perpetually myopic Knights of St. Elon, efficient cars like Toyota's plug-in Prius are marginal economic propositions at their best while the least efficient electric vehicles like Tesla's Model S-85 are obscenely wasteful.

Benjamin Graham once said, "In the short run, the market acts like a voting machine, but in the long run it acts like a weighing machine." While Mr. Graham was talking about the stock market, his wisdom applies to all markets. EVangelical fervor over the Revenge of the Electric Car can only last so long. When consumers and government start weighing the true cost of electric drive against it's largely illusory benefits the house of cards will collapse and investors will suffer.

Disclosure: I have no direct or indirect interest in Tesla, GM, Nissan or Toyota and I have nothing to gain or lose from any of their stock price movements. While I am a former director and current stockholder of Axion Power International (AXPW.OB), a micro-cap company that has developed a robust, affordable and serially patented third-generation lead-carbon battery for micro-hybrid, railroad and stationary energy storage applications, I can't see how the success or failure of a niche product like electric drive could impact the value of my investment in a company that's focused on much larger and more predictable mainstream markets.

June 06, 2012

Tesla's Troubling Risk-Reward Profile

John Petersen

While the broader market focuses on trivial issues like Asia, the Eurozone and an upcoming presidential election, a small but extremely vocal segment of the car shopping public is breathlessly awaiting the dawn of a new age with the first deliveries Tesla Model S electric cars to customers on June 22nd. The excitement among fervent Tesla Motors (TSLA) acolytes is palpable, but I have to at least ask whether their view of the company's risk-reward profile is rational.

Is Tesla a great investment opportunity, or are we witnessing a weird form of transference that attributes a visceral hatred of oil companies and a love of flashy cars and speeding tickets to a moneyed adult population that couldn't care less? In four years of blogging about energy storage and vehicle electrification, the only truly compelling pro-EV argument I've heard is embodied in the mathematical equation: EV ownership = HOV lane access. The rest is coal smoke and mirrors.

Tesla's stock currently trades at space cadet levels of 19.9 times book value because the company plans to build 5,000 cars this year and 20,000 next year. With prices ranging from $57,400 to $105,400 (before subsidies), Tesla's potential revenue is huge, but I'm very unclear about who's going to buy all those cars. Seriously, how many people are willing to pay twice the national average salary for HOV lane access? Frankly I find Tesla's Ray Kinsella approach, "if we build it they will come," more than a bit disconcerting. In fact, it strikes me as a prescription for disaster.

In an effort to assess the reasonableness of Tesla's lofty sales ambitions, I started by cobbling together historical data from "Dashboard Reports" on the HybridCars website that break monthly green vehicle sales down by model and manufacturer. I learned that over the last year, sales of HEVs averaged 122,600 units per quarter and about two-thirds of those cars were made by Toyota. Plug-in vehicle sales for the same period averaged about 9,000 units per quarter with the GM Volt taking the lead at 4,075 units per quarter, the Nissan Leaf running second at 3,180 units per quarter and Toyota coming on strong with a plug-in version of the venerable Prius that launched in March and sold 3,638 units in three months. In comparison, green vehicles from Tesla and BMW in the Model S price range stumbled along at 262 units per quarter. Ouch!

While it's too early to reach firm conclusions about market behavior for new plug-in vehicles, the typical trend seems to be a respectable volume ramp for three or four quarters after a launch date followed by a sharp decline once the customers who were waiting for a particular model get their wish. When I study the following graph of quarterly sales for the leading plug-in vehicles, I don't see anything that even resembles a stable or sustained growth rate. As near as I can tell, the only reason for this year's surge in Volt sales was, you guessed it, HOV lane access in California.

6.6.12 Quarterly Sales.png

Tesla began accepting reservations for the Model S in the spring of 2009. It reported 2,000 reservations in 2009, 1,400 in 2010, 4,600 in 2011 and 1,800 in the first quarter of 2012. In its most recent quarterly letter to stockholders, Tesla said the current Model S reservation tally is over 10,000 vehicles. Reservation deposits on those vehicles total about $105 million and are fully refundable until a sales contract is signed.

While it's a decidedly unpopular view among Tesla aficionados, I can't bring myself to believe that all 10,000 reservations are certain sales. In February of last year, Edmunds reported that only 40% of Leaf reservations became purchases. While I would expect a higher conversion percentage for Tesla, which requires a $5,000 down-payment instead of the token $100 Nissan requested with a Leaf reservation, the $44,900 to $79,900 that's due when a reservation becomes a contract is a big number and I have to believe that a meaningful percentage Tesla of reservation holders figured an interest-free $5,000 loan to Tesla was a fair price to pay for a place in line and two or three years of bragging rights. It will be fascinating to watch over the next few quarters and see how all those reservations play out.

Regardless of what you think Tesla's reservation conversion percentage will be, it's clear that deliveries of 5,000 cars this year and 5,000 cars per quarter in 2013 will eat through the backlog in short order even if there are no cancellations. From that point forward a sales organization that's never booked more than 1,800 reservations in a quarter will need to generate sales of 5,000 units per quarter to meet production targets. Given the pattern I've seen with other plug-in launches, I can't help but believe Tesla's 2013 sales targets are unattainable.

A troubling aspect of the upcoming Model S launch that many investors don't understand is that building and delivering cars will savage Tesla's cash reserves. When Tesla accepts a $40,000 reservation payment on Model S Signature Edition, the cash gets added to the assets section of the balance sheet and a corresponding amount is reflected as a liability. When the reservation is converted into a $105,400 sale, the liability is cancelled but only $65,400 in cash flows into the company's coffers. That cash, in turn, must pay all costs of manufacturing the car plus the unabsorbed costs of underutilized property, plant and equipment. In the early stages of a production ramp, those unabsorbed costs can be big enough to eliminate any gross margin that might have been recognized with full factory utilization. Investors who are expecting 25% gross margins on automotive sales will be sorely disappointed by dreadful second quarter margins, dismal third quarter margins and lackluster fourth quarter margins. Things may improve in 2013 if everything goes off without a hitch, but the next three reports of operating results from automotive sales will look pretty grim.

At March 31st, Tesla had $123 million of working capital and $154 million of equity. It lost $89 million in the first quarter and burned $50 million of cash in operations. While Model S sales will generate a couple million of incremental second quarter revenue, I expect the operating losses and cash burn to increase, perhaps significantly. Additional cash stress will arise from significant inventory builds that will be necessary to support Tesla's transition from development to production. Collectively, these factors will leave Tesla in a position where its June 30, 2012 financial statements look like an absolute train wreck unless it sells a substantial amount of additional stock within the next three weeks.

When Tesla did a $150 million follow-on offering in June of last year market conditions were pretty good and it was able to sell 5.3 million shares at a price of $28.76 per share. This year market conditions are aggressively ugly, investors are timid and the risks of an exciting but uncertain product launch are immediate. Under the circumstances I'll be surprised if Tesla can pull off another follow-on offering without a 10% to 20% discount from the market price.

I know all about Tesla's strengths and virtues including whiplash inducing acceleration and an iconic CEO who can build cars, launch rockets and take a solar panel company public at the same time while giving each company's business and shareholders all the time, effort and attention to detail they deserve. What bothers me are things I don't know, like:
  • Whether Tesla can ramp production from under 200 cars a quarter to 5,000 cars a quarter inside a year;
  • Whether Tesla will be able to avoid the delays, defects and recalls that plague competitors like Fisker;
  • Whether 10,000 car reservations and $105 million in deposits will become revenues or refunds;
  • Whether reservation rates of 1,800 vehicles per quarter can ramp to sales of 5,000 cars per quarter;
  • How much additional working capital will Tesla need as it transitions from development to production; and
  • Whether new investors will provide additional capital at a reasonable price or pull Tesla over a barrel.
In my view the market price of Tesla's stock doesn't reflect any of these real and substantial business risks. Since 33 years of representing developing companies has made me a firm believer in Murphy's Law, I spend more time worrying about things that could go wrong than I do dreaming about things that could go right. When things go according to expectations, a modest uptick is not unusual. When things don't go according to expectations, the downdrafts are often severe.

It could all work out perfectly for Tesla, but we could also see a situation where a minor problem, hiccup or delay sets off a chain reaction of unpleasant events. Historically Tesla's done a great job of managing expectations by telling investors that nothing good would happen until June of 2012. The long anticipated performance date has arrived and the carefree can kicking days of youth are past. Now Tesla has to execute to perfection or suffer the consequences of disappointment.

Disclosure: I have no direct or indirect interest in Tesla and nothing to gain or lose from its future stock price movements. It should, however, be an entertaining show to watch from the sidelines. I am a former director and current stockholder of Axion Power International (AXPW.OB), which has developed a robust and affordable third-generation lead-carbon battery for micro-hybrid, railroad and stationary energy storage applications.

June 02, 2012

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.

May 24, 2012

120,000 Chinese Electric Vehicles

Tom Konrad

index_r1_c11[1].jpgI asked Art Porcari for a paragraph about what Kandi Technologies' (KNDI) recent press release meant for the company to be included in this article. He managed to keep it to a page, but it was too much for an article about ten stocks.  I thought I'd share his thoughts here.

  In its Q3, 2011 10Q filing Kandi (KNDI) stated:

“On August 14, 2011, a team is formally formed in Hangzhou by Development Research Center of the State Council, Society of Automotive Engineers of China (SAEC), and Zhejiang University to begin the research of a subject proposed by the Company: the feasibility of building a 100 thousand pure EV renting network in Hangzhou and the related supporting policies required. The objective of this research is in order to resolve the problem of industrialization of pure EV, the traffic jam problem and parking difficulties in current Chinese cities. This research is planned to be finished by the end of 2011, and expected to help stimulate the Company’s development.

The results of this study were reported in Beijing on May 14 to top governmental leaders as noted in a press release by Kandi May 21.

Kandi Advances Plan for Innovative Pure EV Rental System Before Top Government Leaders and Transportation Experts in Beijing

Pure EV Rental Model in Hangzhou Features 100,000 Vehicles in Centrally Managed "Smart" Vertical Parking Facilities to Relieve Traffic Congestion, Scarce Parking and Environmental Pollution

Hangzhou, home base of Kandi’s Executive offices, has established the dominant position as China’s Model City for EV development, this putting Kandi in the prime position to influence EV development throughout all of China.  Due to this status, it is likely the announced development of the “State of the Art” multi-story EV Parking/Charging facilities for rental EV’s will be first established in Hangzhou. However; the decision to formally unveil the program in Beijing, seems wise in that no city in the world would seem to need the mass introduction of small environment friendly EV’s more than Beijing;  a city that recently has made it virtually impossible for one to acquire a new ICE car license due to oversaturation. As can be seen by recently filed Kandi patents ( 1, 2 ), should this new high tech Zip Car (ZIP) like approach to EV rental be embraced by China, the upside to Kandi could be immeasurable.

This100,000 EV rental trial program is in addition to the rumored Kandi’s long awaited and soon to be implement 20,000 EV Hangzhou leasing program for the City of Hangzhou residents. Under this program the City would purchase the 20,000 EVs  then lease them to eligible residents under a turnkey 36 month lease for 800 yuan (US$126) per month including unlimited Quick Battery Exchange. Should this be formally announced with Kandi as the sole or primary beneficiary, Kandi would immediately be vaulted into a lead position in EV’s not just in China, but world-wide. This differentiation can be easily be surmised by this portion of the above PR:

“Mr. Hu further noted Kandi is involved with the Hangzhou government in a cooperative effort with others such as State Grid and Air China Group (the lithium battery business of Air China) in the implementation of an EV "battery swapping model" for the launch of 20,000 EVs in the market. He sees this as an excellent foundation in which sufficient experience will be gained to build a pure EV rental network.”

Disclosure:Both Porcari and I are Long KNDI

May 05, 2012

EV Dreams and Industrial Metal Nightmares

John Petersen

The hardest part of blogging about the energy storage and vehicle electrification sectors is coping with ideologues who are so enthralled with their myopic EV dreams that they can't see the industrial metal nightmares that make those dreams impossible at relevant scale in the real world. They whimper, whine and complain about the obscene prices charged by diabolical oil companies and gush over how safe, quiet, clean and secure life will be when plug-in cars with immense battery packs are common as wildflowers in an alpine meadow and getting cheaper every day.

The fly in their soothing balm for the ills of humanity is that electric vehicles and the batteries to power them require immense amounts of nonferrous industrial metals for electric motors, batteries and other essential components.

To begin with, the prices of industrial metals are more volatile than oil prices and they usually increase faster. The following graph offers a seven-year comparison of market prices for Brent Crude and a basket of industrial metals represented by the Dow Jones UBS Industrial Metals Index (^DJUBSIN).

5.5.12 Crude-Metals.png

Nothing in that graph leads me to believe oil prices and industrial metals prices will decouple in the foreseeable future and make dreams of significantly cheaper EVs possible. Technology can do marvelous things with electronic devices made from bits of silicon and plastic. It has little or no ability to improve the efficiency of electric drive components or reduce the cost of large quantities of industrial metals used to make those components. There's always room to nibble around the edges, but electric motors and batteries have been around for a long time and they're not going to get much better.

Simply stated, the dream of falling EV prices is impossible because the underlying technologies require massive inputs of industrial metals.

To make matters worse, global production of energy resources is two orders of magnitude greater than global production of industrial metals. The following table is derived from published industry data and summarizes annual global production of energy resources on both a gross and a per capita basis.


Production
Per Capita

(Metric tons)
(Kilograms)
Coal 7,229,000,000
1,032.71
Oil 4,866,000,000
695.14
Natural Gas 1,880,000,000
268.57
Uranium 42,700
0.01
   All energy resources 13,975,042,700
1,996.43

The next table is derived from statistics published by the USGS and summarizes global production of iron, steel and all major industrial metals on both a gross and a per capita basis.


Production
Per Capita

(Metric tons)
(Kilograms)
Iron & Steel 1,500,000,000
214.29




Aluminum 44,100,000
6.30
Chromium 24,000,000
3.43
Copper 16,100,000
2.30
Manganese 14,000,000
2.00
Zinc 12,400,000
1.77
Titanium 6,700,000
0.96
Magnesium 5,900,000
0.84
Lead 4,500,000
0.64
Nickel 1,800,000
0.26
Bromine 460,000
0.07
Tin 253,000
0.04
Molybdenum 250,000
0.04
Antimony 169,000
0.02
Rare Earths 130,000
0.02
Cobalt 98,000
0.01
Tungsten 72,000
0.01
Niobium 63,000
0.01
Vanadium 60,000
0.01
Arsenic 52,000
0.01
Lithium 34,000
0.00
Silver 23,800
0.00
Cadmium 21,500
0.00
Bismuth 8,500
0.00
Gold 2,700
0.00
Mercury 1,930
0.00
Graphite 925
0.00
Platinum Group 399
0.00
Beryllium 240
0.00
   All nonferrous metals 131,200,994
18.74

The ratios are simple if you forgive a little rounding. For every 100 pounds of energy resources, our planet can produce ten pounds of iron and steel and one pound of nonferrous industrial metals. If you'd rather tighten the focus to oil and the specific industrial metals highlighted in red that are essential for electric drive components, the ratio works out to eleven ounces of industrial metals for every hundred pounds of oil.

The numbers simply can't work. When demand for a particular metal reaches a tipping point where it exceeds supply, the outcome is always the same; a price spike that lasts until supply and demand are brought back into balance. We’re already going through the first modern example with rare earth metals. Their prices increased by more than 1000% over the last couple years and the market is responding by developing new mines that will hopefully bring supply and demand into balance at a higher metal price over the next few years. Until balance is restored, metals that were relatively cheap and available before the inflection point will be difficult to obtain and prohibitively expensive.

All of the metals produced last year were used to make the necessities and luxuries of life for the planet's seven billion inhabitants. There is no slop or surplus in the industrial metals supply chain and while production of some metals can be increased with massive investments in new mines and production infrastructure, the required level of new investment can only increase price pressures and make metals that are very expensive today even more expensive tomorrow. There is no way to insure that incremental metal production will be dedicated to a particular use and there are plenty of competitive uses.

Just last week a group of technology titans including Google executives Larry Page and Eric Schmidt announced the launch of Planetary Resources, a venture that hopes to mine asteroids for industrial metals. While I can't comment on the business merits of their new venture, the fact that these men are investing their own money in off-planet exploration for industrial metals that the earth can't produce in sufficient quantities speaks volumes.

The bizarre theory of electric drive as packaged by EVangelicals and their eager commercial accomplices at Tesla Motors (TSLA), Nissan Motors (NSANF.PK), General Motors (GM) and others is that humanity can increase its consumption of scarce industrial metals including copper, manganese, nickel, rare earths, cobalt and lithium for the sole purpose of giving EV owners the dubious luxury of replacing energy from oil with energy from coal, uranium and natural gas. The idea that all natural resources are worth conserving never even enters the picture.

EVs cannot change global production of energy resources or the emissions from using those resources. Since the planet only has one atmosphere, the idea that moving emissions from Point A to Point B is somehow "virtuous and green" has all the intellectual integrity of a no peeing zone in a swimming pool.

The world currently produces enough industrial metals to make a few electric vehicles for eco-royalty who don't care whether their choices make economic sense. It cannot produce enough industrial metals to make affordable electric vehicles, or for that matter make enough electric vehicles to put even a tiny dent in global oil consumption.

No matter how the ideologues and their commercial accomplices twist, distort and spin the facts, electric vehicles cannot make a society or the world a safer, quieter, cleaner or more secure place to live. They're selling snake oil promises based on the gullibility of politicians and the general public and the absurd proposition that humanity can waste materials that are a hundred times scarcer than the energy resources ideologues want to replace.

On a micro-scale, electric vehicles and plug-in hybrids are feel-good eco-bling for the emotionally committed and the mathematically challenged. On a macro-scale they use more energy, emit more CO2 and are more expensive than established HEV technology. They're unconscionable waste and pollution masquerading as conservation.

I'm a lawyer, a battery guy and a policy geek. I know that six billion people on our planet want to earn a small piece of the lifestyle one billion of us have and take for granted. I also know that as a result of the information technology revolution, about half of the six billion have access to electronic data and understand for the first time in history that there is more to life than mere subsistence. Even if we assume that they'll only become consumers at 5% to 10% of purchasing power parity, the increased pressure on water, food, energy and every commodity you can imagine will be immense beyond reckoning. The big challenge will be creating enough room at the table so that we can avoid the unthinkable consequences of inaction.

I like hybrid vehicle technology because it minimizes waste of both gasoline and other natural resources. I'd like it even more if it were tied to a compressed natural gas fuel system that would eliminate dependence on imported oil, but that's a different discussion. I'm also a big fan of micro- and mild-hybrid vehicles that use less robust electric motors and simpler batteries to reduce waste for the masses that can't afford to upgrade to an HEV. I'm deeply offended by P.T. Barnum class hucksters that use the false promise of electric vehicles to create bloated market capitalizations and lead investors down a primrose path that's certain to end in massive losses for the gullible.

Disclosure: None.

March 30, 2012

Lux Research Dissects Lithium-ion Battery Mythology

John Petersen

We all know that you can't have a cost-effective electric car without a cost-effective battery. We also know that a small but vocal hodgepodge of ideologues, activists, politicians and dreamers wants everyone to believe that rapid and stunning advances in lithium-ion batteries will finally make the dream a reality after a century of one abject failure after another.

I frequently caution readers that it won't be anywhere near as easy as the proponents claim.

In a new report titled "Searching for Innovations to Cut Li-ion Battery Costs" Lux Research did a yeoman's job dissecting lithium-ion battery mythology and putting the often inconsistent and invariably confusing world of battery cost claims into an understandable and comprehensive framework that:
  • Explains the technical differences between various types of lithium-ion cells;
  • Explains how future technological improvements will impact cell costs;
  • Explains the differences between cell and battery pack costs;
  • Explains the differences between nominal and useable pack capacity; and
  • Reinforces the inconvenient but undeniable truths that:
    • it's lithium-ion batteries or bust for plug-in vehicles;
    • battery costs will ultimately dictate the future of EVs;
    • there isn't much hope for stunning cost reductions through the end of this decade, and
    • over the next eight years incremental solutions like micro-hybrids will be preferred by automakers and consumers alike because they provide reasonable fuel savings at a reasonable price.
Lux has created a formidable piece of work that's directed at industry professionals and institutional investors. While I can't do the report justice in a blog, I can at least touch on a few high points. For readers who'd like to learn more directly from the source, Lux will be presenting a free webinar on Tuesday April 3rd at 11 a.m. EDT.

All lithium-ion batteries are not created equal. A critical but frequently misunderstood battery performance metric is the relationship between power and energy.
  • Hybrid electric vehicles, or HEVs, are power applications that typically use a small (±1.4 kWh) battery pack to absorb braking energy for immediate re-use in the next acceleration cycle.
  • Plug-in hybrid electric vehicles, or PHEVs, occupy the middle ground and use a mid-sized (5.2 to 16 kWh) battery pack to offer both hybrid and  electric drive functions, which means they require both power and energy.
  • Battery electric vehicles, or BEVs, are energy applications that use a massive (24 to 85 kWh) battery pack to propel vehicles for long distances at high speeds.
In general, HEV batteries cost more per kWh than PHEV batteries, which in turn cost more per kWh than BEV batteries. Likewise, smaller battery packs for short-range BEVs from Nissan (NSANY.PK) cost more per kWh than larger battery packs for long-range BEVs from Tesla Motors (TSLA).

Nominal cost per kWh is far lower than effective cost per kWh of useable energy. Most battery packs are designed with safety margins that reduce battery strain from operating a vehicle at a very high or a very low state of charge. Since nominal capacity is always higher than useful capacity, battery pack cost per kWh of useful energy is always higher than than nominal battery pack cost.

Nominal pack cost for PHEVs is currently about $800 per kWh, but the effective pack cost is closer to $1,500 per kWh of useable energy. By 2020, Lux expects nominal pack cost for PHEVs to decline to about $500 per kWh, but it believes effective pack cost will be closer to $800 per kWh of useable energy.

Nominal pack cost for BEVs is currently about $750 per kWh, but effective pack cost is closer to $1,400 per kWh of useable energy. By 2020, Lux expects nominal pack cost for BEVs to decline to about $400 per kWh, but it believes effective pack cost will be closer to $700 per kWh of useable energy.

The following graph from the Lux report shows how they expect nominal and useable costs of automotive cells and EV battery packs based on nickel, manganese, cobalt chemistry to evolve through the end of the decade. It can be particularly instructive for investors who've had a hard time visualizing the disparities between nominal cell and battery pack costs and effective useful energy storage capacity costs.

3.30.12 Lux Graph.png

While the latest Lux forecasts for battery pack costs are significantly higher than most imagine based on press releases and news reports, they tie closely to comparable 2020 cost estimates from an AutomotiveWorld webinar last Thursday on "Reducing the cost of EV batteries." While neither organization focused on the fact that the price a battery manufacturer charges an automaker doesn't include the automaker's integration costs or markup, the fact remains that the effective 2020 cost to the consumer will be on the order of $1,000 per kWh of useful battery capacity.

HEVs are fuel efficiency technologies that squeeze as much mileage as possible from a gallon of gasoline. In contrast, PHEVs and BEVs are fuel substitution technologies that swap a battery pack for a fuel tank so that owners can swap electricity from coal and natural gas for gasoline. Advocates wax poetic on using alternative energy to charge EVs, but the truth is the virtue of green electrons lies in their creation, rather than their use, and most drivers want to use their cars during daylight hours, which is the only time solar panels work. While electric drive can be highly efficient in runabouts like the cute Renault Twizy, it can be preposterously wasteful in rubenesque halo cars like the Fisker Karma.

3.30.12 Twizy.jpg 3.30.12 Karma.jpg

It's a mystery to me how EV advocates can steadfastly cling to their mythology in the face of caution from leaders like Energy Secretary Steven Chu who told participants in the November 2010 United Nations Climate Change Conference:

"And what would it take to be competitive? It will take a battery, first that can last for 15 years of deep discharges; you need about five as a minimum, but really six- or seven-times higher storage capacity and you need to bring the price down by about a factor of three."

The Secretary's goals seem pretty straightforward:
  • A 15 year life;
  • Five to seven times higher storage capacity; and
  • A two-thirds cost reduction.
Achieving those lofty goals is proving to be far more daunting than describing them.

Lux is currently forecasting a fifty percent reduction in battery costs over the next eight years in the most likely scenario, which works out to an aggressive but attainable improvement of five to six percent per year. A123 Systems (AONE) has not made significant visible progress in efforts to reduce manufacturing costs over the last three years. While Altair Nanotechnologies (ALTI) and Valence Technologies (VLNC) are a good deal more opaque than A123 Systems when it comes to providing reliable cost data to the SEC or the markets, they also seem to be having problems reducing their costs.

Investors who expect cost reduction curves like we've seen in electronics will be sorely disappointed. Investors who pay 17.5 times book value for a money losing startup like Tesla when they could pay 6.3 times book value for an established and extraordinarily profitable innovator like Apple will pay dearly to learn an important lesson:

– that markets may act like a voting machine in the short term, but they always act like a weighing machine in the long term.

Disclosure: None.

March 25, 2012

Electric Drive – Still Crazy After Five More Years

John Petersen

The sunshine, lollipops and rainbows electric car press was at it again in mid-March. This time they were gushing over a $3,800 report from Pike Research predicting that automotive lithium-ion battery prices will fall by more than one-third by 2017. According to Pike, the market for Li-ion batteries for transportation will grow from $2.0 billion annually in 2011 to more than $14.6 billion for 28 million kWh of batteries by 2017. For those without a calculator handy, the figures work out to a future industry average price of $520 per kWh in 2017 versus a current industry average price of $780 per kWh.

At the outset it's probably worth observing that the Pike forecast of 28 million kWh of annual battery sales by 2017 is a good deal more aggressive than last summer's forecast from Lux Research that estimated 2017 lithium-ion battery demand at 12 million kWh in their $200 oil price scenario, 3 million kWh in their $140 oil price scenario and under 2 million kWh in their $70 oil price scenario.

3.25.12 Lux Graph.png
Where Lux is forecasting a massive glut of lithium-ion battery manufacturing capacity for at least a decade, Pike apparently believes the capacity glut will only punish manufacturers for five years. Neither scenario strikes me as particularly attractive for investors in battery manufacturers like A123 Systems (AONE) which is struggling to find customers for 645,800 kWh of government financed battery manufacturing capacity and suffered $45 million in unabsorbed manufacturing costs last year.

Regardless of whether you prefer the Pike or the Lux forecast, electric drive will remain hopelessly uneconomic because small batteries are beautiful when it comes to transportation economics but large batteries are aggressively ugly.

To prove the point again, I'm going to assume that Pike's numbers are correct. I'm also going to assume an annual average fuel consumption of 330 gallons per year in a 37.8 mpg CAFE compliant 2017 model year passenger car and:
  • A $10 gasoline price;
  • A $1,000 per kWh pack level price for high power HEV batteries;
  • A $500 per kWh pack level price for automotive grade EV batteries;
  • A $300 per kWh pack level price for the lower quality batteries used by Tesla Motors (TSLA); and
  • Fuel savings of 27% for a Prius, 75% for a Volt and 100% for an EV.

I don't believe for a minute that these assumptions are reasonable, but they do align well with the happy talk forecasts one encounters regularly in the mainstream media, political speeches and industry puff releases.

My first table summarizes the battery specifications for six electric vehicles, the cost of the battery pack and the annual fuel savings based on incremental fuel efficiency. The vehicles include the Prius HEV from Toyota Motors (TM), the Volt PHEV from General Motors (GM), the Leaf EV from Nissan Motors (NSANY.PK) and three levels of the Tesla Model S.

Vehicle Capacity Per kWh Pack Cost Fuel Savings
Prius 1.3 kWh
$1,000.00 $1,300 $897
Volt 16 kWh
$500.00 $8,000 $2,475
Leaf 24 kWh
$500.00 $12,000 $3,300
Model S-160 40 kWh
$300.00 $12,000 $3,300
Model S-240 60 kWh
$300.00 $18,000 $3,300
Model S-300 85 kWh
$300.00 $25,500 $3,300

My second table summarizes the incremental battery investment, or IBI, and incremental fuel savings, or IFS, for each step up the electrification ladder from a conventional vehicle to a Prius, from a Prius to a Volt, from a Volt to a Leaf and from a Leaf to three levels of Tesla Model S. It then calculates incremental fuel savings as a percentage return on the incremental battery investment, or ROIBI.

Vehicle IBI IFS ROIBI
Prius $1,300 $897 69%
Volt $6,700 $1,578 24%
Leaf $4,000 $825 21%
Model S-160 0%
Model S-240 $6,000 0%
Model S-300 $7,500 0%

The first thing that caught my attention was that a Tesla Model S, regardless of battery pack size, won't save the average user any more fuel than a Nissan Leaf. So the incremental battery investment of $6,000 to $13,500 has nothing to do with saving fuel and simply represents the incremental cost of range anxiety. There are a lot of folks who know they can't live with the range limitations of a Leaf, so they'll have to pay through the nose if they want electric drive and a car that suits their needs with the same set of tires.

The second thing that caught my attention was that even with $10 gasoline and sunshine, lollipops and roses battery cost figures, the ROIBI falls a cliff as soon you move beyond the Prius. I guess that's why Bill Reinert, Toyota’s US manager for advanced technology is frequently quoted for gems like these:

That’s the first law of Disney — wishing will make it so. I see it all the time from those Palo Alto types. They think the whole world is like a computer company, and they’re always trying to recreate the dot-com economy.

I used to be a big 100-miles-per-gallon guy. But I realized that we’re above the level of diminishing returns at 50 miles per gallon. So why not make a whole bunch of 50-miles-per-gallon cars and put people who are driving 20-miles-per-gallon cars into them?

"The expectations have always been too high for electric cars. The realities have always been clouded by the dreams. I like to say it’s the first law of thermodynamics versus the first law of Disney."

No matter how you analyze the facts, the economic realities of electric drive do not and cannot match the hype. Vehicle electrification that goes beyond the minimalist approach of a Toyota Prius is inherently expensive and wasteful. The only consumers that will ever buy the absurdity are the philosophically committed or the mathematically challenged. Tying a pink bow around the EV pig's neck does not change the fact that it's a pig and investors who hurry to invest their money in response to the hype will almost certainly lose that money when reality sinks in.

Start-ups and brash entrepreneurs like Elon Musk are always exciting. Experienced investors understand the grim reality underlying Paul Graham's Startup Curve.
3.25.12 Startup Curve.png
It won't be long before a new generation of Tesla investors learns the same lessons that prior generations of investors learned in the thrilling panacea energy solutions of yesteryear including Ballard Power (BLDP), Pacific Ethanol (PEIX), Vestas Wind Power (VWDRY.PK), First Solar (FSLR) and, of course, A123 Systems.

Disclosure: None

January 29, 2012

Ten Reasons Why Electric Drive is Stranded on The Bleeding Edge of Transportation Technology

John Petersen

The first thing every securities lawyer learns is that technology is a two edged sword. On the leading edge, developers of cheap innovations that ramp rapidly over a few years build thriving businesses that deliver market beating returns for investors. On the bleeding edge, developers of expensive technologies that can't be implemented at relevant scale for years morph into financial black holes that suck the lifeblood out of portfolios and teach a new generation of investors about an insidious market phenomenon the Gartner Group refers to as the hype cycle.

1.28.12 Gartner HC.png

The second thing every securities lawyer learns is that business risks are cumulative, and a lot like a leaky roof – unless you can locate and patch every hole, the ceiling will end up in your lap.

Hope is a timeless virtue, but it's a horrible investment strategy.

Last week I traveled to Stockholm and spoke at the Annual Partners Conference for CTEK Sweden, a global leader in smart battery chargers for conventional cars, trucks and motorcycles. It was a different kind of audience that wanted a better understanding of the path their business would take over the next few years. They wanted a high level overview instead of deathless analysis of techno-trivia. After making the presentation, it dawned on me that investors who want to build bullet proof portfolios for the next five years deserve nothing less. So instead of drilling down into the detail like I usually do, I'll focus today on ten fundamental business and economic forces that will leave electric drive stranded on the bleeding edge of transportation technology for decades.

The bottom line is the mainstream media, our fearless political leaders, rainbow legions of Eco-zealots and starry-eyed investment analysts all have it wrong when it comes to electric drive. No matter how badly we might want a clean green transportation alternative that frees us from the tyranny of imported oil, electric drive is hopelessly uneconomic and will continue to be a financial black hole until each and every one of the following problems are overcome.

Since many of these ideas have been discussed at length in other articles, the top ten list contains several links back into my author's archive.

#10.  Rich vs Poor. For most of human history 90% of the world's population lived in crushing poverty and ignorance, but as long as the poor were kept ignorant, the other 10% could consume the lion's share of global economic output with impunity. Our last industrial revolution changed everything because cheap and ubiquitous communications taught the world's poor that there's more to life than deprivation. Now they all want a piece of the comfortable lifestyle that the 10% have always considered a God-given right. The only way that the 90% can have a place at the global economic table is if the 10% change their worst habits and make room for the new well-informed poor. Gluttony, over-indulgence to the point of waste, has long been viewed as a capital vice or cardinal sin. The idea that people in advanced economies can afford to waste anything is an inexcusable relic of a barbaric past that has no relevance to humanity's future.

#9.  Electric drive is not truly clean or green. The amount of energy needed to move a given mass a given distance at a given speed is a constant. It makes no difference whether the energy comes from a gallon of gasoline or a lump of coal. In a country like the US where the substantial bulk of night-time power comes from coal-fired plants, EVs may be marginally cleaner than internal combustion engines but they're dirtier than HEVs that cost $12,000 less and conserve energy instead of simply substituting one dirty fuel for another dirty fuel. I've heard the fervent arguments that EVs can be powered from alternative energy sources, but the arguments all fail for one simple reason. The virtue of green electrons lies in their generation, not their use. Once green electrons exist, it makes no difference whether they're used to power an EV or a toaster oven. One will be cleaner and the other will be dirtier. There is no double credit.

#8.  Energy resources are scarce, but non-ferrous metals are far scarcer. Last year the planet produced 1,920 kg of energy resources for every man, woman and child on the planet, but it only produced 8.4 kg of non-ferrous metals. Those metals are essential in most of the necessities and little luxuries of modern life. There are no spare metal supplies lying around looking for a user. For decades metal prices have been as volatile as energy prices, but most of us don't notice because we don't buy metals in minimally processed form. If we used all of the planet's metal production to build energy saving machines, we couldn't make a dent in energy consumption. Panacea solutions that can't be implemented at relevant scale are nothing more than a cruel hoax.

#7.  Lithium-ion batteries are a recycling nightmare. At $500 per kWh and 125 wh/kg, automotive grade lithium-ion cells cost about $28.50 a pound to manufacture. Unless you're evaluating a cobalt based chemistry, the material values that can be recovered through recycling are less than $1.00 per pound. Since the recycling process uses a lot of energy, net disposal costs for lithium ion batteries are estimated at $0.75 per pound plus collection and transportation charges. There is no such thing as a cost effective recycling process for old lithium-ion batteries. They're a use it once and throw it away technology. Anybody who claims otherwise is lying. The media is full of optimistic stories about second-life uses for old EV batteries. Since there is no proof that those batteries will survive a 10-year first life, the stories are premature. Moreover, chemical systems deteriorate with age, so using new batteries to simulate the performance of old used batteries is little more than a side-show to deflect the attention from the wasteful single-use reality.

#6.  The marginal returns from bigger batteries are terrible. The Prius from Toyota Motors (TM) uses a 1.5 kWh battery pack to save about 160 gallons of gasoline per year. In comparison, the Leaf from Nissan Motors (NSANF.PK) uses a 24 kWh battery pack to save about 400 gallons per year. While the Prius battery saves about 107 gallons of gas per year for each kWh of battery power, the Nissan Leaf only saves 17 gallons per kWh. This shocking example of the diminishing marginal utility of batteries is generous when you consider that Tesla Motors (TSLA) will only save 9.5 gallons of gasoline per kWh of batteries in its flagship Model S.

#5.  The up-front cost of electric drive is roughly $200 per barrel of avoided oil consumption. Bernstein and Ricardo recently published a cost-walk analysis that pegged the cost premium of an electric vehicle at $19,800, or roughly $190 per barrel of avoided future oil consumption. You can get to a similar result with a simpler comparison. The Nissan Leaf costs $12,000 more than a Prius and it will save the equivalent of 60 more barrels of oil per vehicle over the span of a decade. The net premium per barrel of avoided future oil consumption is $200. If you work from the bottom up like Bernstein and Ricardo did, or work from the top down by comparing the difference between a Prius and a Leaf, you end up at the same place. Saving a $100 barrel of oil with an electric vehicle that costs $200 is a deal that can only appeal to the philosophically committed and mathematically challenged.

#4.  Rapid advances in battery technology are unlikely. The phrase is an oxymoron. In 1883 Thomas Edison complained to a reporter, “The storage battery is one of those peculiar things which appeals to the imagination, and no more perfect thing could be desired by stock swindlers than that very selfsame thing. Just as soon as a man gets working on the secondary battery it brings out his latent capacity for lying." We were spoiled by the information and communications technology revolution where performance doubled every 18 to 24 months and costs plummeted. That phenomenon was unique in technological history because different science made it possible to do more work with fewer resources. That science is meaningless in the fields of transportation and chemistry. A hundred years ago Edison built batteries that had specific energy in the 30 wh/kg range. Today's best automotive battery packs can't top 150 wh/kg. In a century when electronic technology saw billion-fold gains, battery technology improved by a factor of five. Expecting that century old trend to change is irrational and ignorant, not reasonably optimistic.

#3.  Electric drive technologies have already reaped their economies of scale. New industries and technologies often give rise to significant economies of scale as manufacturers improve production processes and supply chains become more mature and efficient. The battery industry has had decades to optimize its production processes and supply chains. The same is true for electric motors. There may be modest savings as production rates for a specific SKU ramp, but the underlying industries have already squeezed the economies of scale out of their products and the margin for additional improvement is negligible. This is not a case where flat panel TVs are replacing CRTs. It's more like an upgrade from a 30" flat panel to a 36" flat panel, or from a five pound box of laundry detergent to a ten pound box.

#2.  Increasing fuel efficiency will make EV economics worse. The calculation that electric drive costs $200 per barrel of avoided future oil consumption is based on the 2012 CAFE standard of 29.7 mpg. Using the 2016 standard of 34.1 mpg the marginal cost of electric drive will be closer to $230 per barrel of avoided future oil consumption. If you push the analysis out to 2025 and use a targeted fuel efficiency of 55 mpg, the marginal cost per barrel of avoided oil consumption will be $360. As the world's automakers continue to improve their core vehicle technologies, the marginal cost of electric drive will become increasingly hard to justify.

#1.  The green in consumers wallets is more important than the green in their cocktail conversations. Everyone wants to be clean and green, but they don't want to pay for it. Green products that offer comparable performance at a comparable price are usually a hit. Green products that command premium prices frequently fail. In the US auto market, 3% of the population has demonstrated a willingness to pay a premium price for ultra-high efficiency. That percentage has been stable since 2006 and shows no signs of changing. Nobody wants to suffer for the sake of saving the planet and the most fervent EVangelicals are those who think that buying a high-performance EV from Tesla is a capital idea. These are not useful products for adults, they're high-end toys for the self-absorbed who care nothing for the economy, the environment or common sense as long as they can spend somebody else's money on eco-extravagance. They don't understand the difference between buying a $200 Optimus Prime toy from Hasbro and buying a $70,000 Sub-optimus Prime toy from Tesla.

At heart I’m an incurable optimist who believes that “In America we get up in the morning, we go to work and we solve our problems.”  But I know those problems cannot be solved by exotic electric drive constructs that are stranded on the bleeding edge and promise facile but economically impossible solutions to incredibly complex problems.

When I consider the number and variety of business risks that stand between electric dreams and commercial success I'm shocked at the market values of companies like Tesla Motors which is hemorrhaging cash while catering to the new eco-royalty. I see the odds of commercial success as remote beyond reckoning and believe the best historical analogs are companies like Ballard Power (BLDP) which lost over 99% of its peak market value when hydrogen fuel cells hit the skids, Pacific Ethanol (PEIX) which generated comparable losses in the ethanol space and Ener1 (HEVVQ.PK) which was a DOE favorite in 2009 but driven into bankruptcy by an ill-advised effort to revive the thrice-failed Th!nk Motors. The history of investor catastrophes that flowed from unworkable panacea energy policies is long and colorful. Investors who refuse to learn from the past are condemned to repeat it.

Will Rogers once observed, "There are three kinds of men. The one that learns by reading. The few who learn by observation. The rest of them have to pee on the electric fence for themselves." If Will were alive today, he'd have a field day with electric drive.

Disclosure: None

January 25, 2012

Dark Clouds Threaten German Clean Energy Ambitions

John Petersen

During the fourteen years that I've lived in Switzerland, the Germans have been the world's staunchest supporters of green power and alternative energy. Their aggressive development of wind power was breathtaking, as was their warm embrace of photovoltaic power. Over the last few weeks, however, there has been an ominous change in the mainstream German media's tone as the political class finally comes to grips with the unpleasant reality that rooftop solar panels are worthless on short, grey winter days and "For weeks now, the 1.1 million solar power systems in Germany have generated almost no electricity." Three recent and highly negative articles from Der Spiegel Online include:
As recently as last year, articles like these would have been unthinkable. Today they're viewed as reasonable discussions of critical issues as the laws of thermodynamics and economic gravity assert their absolute primacy.

The Germans have been trailblazers in all things green since the emergence of the Green Party in the 1980s. In fact, it's hard to name an alternative energy technology that Germany hasn't welcomed with open arms. When it comes to green power and alternative energy, the Germans have been on the far left of the technology adoption curve for a very long time.

1.24.12 Tech Lifecycle.png

If the tone of the recent Der Spiegel articles is a reasonable indicator of public sentiment, the innovators are getting ready to throw in the towel on green panacea solutions and get down to the serious work of conserving energy instead. They're weighing the costs and benefits, and reaching an entirely predictable conclusion that it's impossible to depend on variable and inherently unreliable power sources as the backbone of an industrial economy. As Germany goes, so goes the world.

If the world's standard-bearer for green power and alternative energy abandons the quest and chooses a more sensible path of conservation and energy efficiency, the backlash against the solar power industry will be immense and risks to the wind power industry will skyrocket. After all, it's hard to argue the merits of "One for the Price of Two" power solutions; which is exactly what you get when wind and solar power have to be fully backed up by conventional power plants. If the solar and wind power dominoes fall, they'll almost certainly take out the emerging electric vehicle industry that demands huge amounts of money and natural resources to simply substitute one fuel source for another.

Currently all eyes are on Germany as the epicenter of European efforts to restore fiscal balance in an age of profligate and unsustainable government spending. The apparent German surrender on green power and alternative energy may just be an unfortunate victim of that broader effort. Until the dark clouds dissipate and we have a clearer view of the landscape, I'd minimize my exposure to solar, wind and electric drive and focus instead on less costly energy efficiency technologies that work with the laws of thermodynamics and economic gravity instead of fighting them.

Disclosure: None

January 16, 2012

Updating My Buy Exide and Short Tesla Paired Trade

John Petersen

On November 15th I suggested a paired trade where investors would buy 11.5 shares of Exide Technologies (XIDE) and short one share of Tesla Motors (TSLA). Over the last two months, investors who made the trade on November 15th would have realized the following gains.


15-Nov-11
13-Jan-12
Net

Entry
Exit
Gain
Buy 11.5 Exide
-$30.59
$36.69
$6.10
Sell one Tesla
$33.93
-$22.79
$11.14
Pair trade total
$3.34
$13.90
$17.24

A conservative trader might very well call it a day and close both positions at this juncture. A less conservative trader might be inclined to push his luck a little further. I'm squarely in the second camp.

Almost half of the gain on the Tesla short came on Friday afternoon when Tesla collapsed in the last 45 minutes of trading and closed at $22.79, down $5.46 from its Thursday close pf $28.25. The apparent reason for the collapse was the loss of two engineering executives over the last month. While no small company likes to lose important employees, I have a hard time imagining any circumstances where the loss of two employees would justify a $570 million market cap beat down. While I've never seen a company schedule an emergency conference call to discuss something this trivial, that's exactly what Tesla has done. The market reaction, or over-reaction if you prefer, coupled with management's extraordinary effort to calm the market strikes me as clear proof that Tesla's unrealistically high share price has become brittle. This is a stock that wants to fall and is looking for almost any excuse to do so. My tracking chart that plots 10-, 20-, 50- and 200-day volume weighted moving average prices is looking just plain ugly as the 10- and 20-day averages have plummeted down through the 200-day average.

1.16.12 TSLA.png

Exide, in comparison, is looking stronger today than it did in mid-November. I've recently explained how the liquidation of a hedge fund that owned over 30% of Exide's stock in January 2009 has been a big contributor to market volatility over the last two years. I've also speculated that a final push to liquidate the hedge fund's position before year end was the primary reason for the fourth quarter price decline. At this point my tracking chart for Exide is looking very strong as the 10- and 20-day averages push up through the 50-day average.

1.16.12 XIDE.png

With Tesla's stock price looking increasingly frangible and Exide's price looking increasingly firm, I'd be inclined to keep the pair trade open until we have a third-quarter earnings release from Exide.

Disclosure: None.

January 15, 2012

Tesla Stock Collapses But Looks Massively Oversold

by Clean Energy Intel

Model S Signature -
Signature Red
Image Source: Tesla Motors, with permission.

Having traded in a tight range for most of the day, Tesla Motors (TSLA) collapsed in the last 45 minutes of trading on Friday. The stock hit a low of 22.64 and closed at 22.79, down 19.3% from its previous close. Although it was reported to have bounced 7% in after hours trading, the price action remains a clear worry. More worryingly, the move took place on what became the third highest volume day of the last 52 weeks - with just over 5.5 million shares changing hands.

The stock indeed closed down 35% from the $35 high it saw twice in November and December of last year.

The move took place after Tesla confirmed that Chief engineer Peter Rawlinson and Nick Sampson, supervisor of vehicle and chassis engineering, had left the company. 

Not much has been said publicly about the moves. However, in an emailed statement attributed to spokesman Ricardo Reyes, Tesla made the following comments to Investor's Business Daily

"Having completed conceptual and design engineering work on Model S, Peter has decided to step away to tend to personal matters in the U.K.,..... Nick Sampson is no longer with Tesla. He had fully transitioned from any Model S activities by the time of his departure."

All of this would imply that the departure of these two players should have little effect on the launch of the Model S in the summer. However, the market may worry about this for a while longer- and that of course would be likely to be reflected in the price action.

Source: barchart

Nevertheless, from a big picture perspective, Tesla looks heavily oversold. As the chart above indicates, we are now in the rough $22 to $24 range that has seen good support in the past 52 week period. Moreover, Tesla has already announced the pricing and broad timely of it´s year´s launch of the model S - for more detail see here.

I already have a small position in Tesla, having recommended the stock on a few occasions last year. However, I intend to use the current weakness in the stock price to build a significant position ahead of what should in the end be a solid launch of the Model S.

Finally, you can read our bigger picture analysis on Tesla and the future of the electric car here.

Disclosure: I am long Tesla.

Clean Energy Intel is a free investment advisory service produced by a retired hedge fund strategist. You can read more at www.cleanenergyintel.com


January 11, 2012

Electric Vehicles: No House of Cards

Tom Konrad CFA

Once again, John Petersen  has gone too far with his petrol-head arguments against Electric Vehicles (EVs.)

In a recent article fetchingly titled, , he argues that because "the incremental cost of vehicle electrification [is] an up-front capital investment of $190 for each equivalent barrel of oil saved." Since the oil price currently barely tops $100, he considers this (to put it mildly) a bad investment.  He concludes,
Electric drive proponents are selling a house of cards based on fundamentally flawed assumptions and glittering generalities that have nothing to do with real world economics. Their elegant theories and justifications cannot withstand paper, pencil and a four function calculator.
He's quite right that pro-EV arguments don't stand up to "paper, pencil and a four function calculator."  That's because, in order to use these crude methods, he has to make a number of simplifying assumptions which have the side-effect of understating the benefits of electrified transportation.

False Assumption: The only benefit to EVs is oil savings.

To get his $190 cost for each barrel of oil saved, he divides the barrels saved by the additional cost of an EV.  But if there are other benefits to EVs, then some of that incremental cost should be allocated to the other benefits, not to reducing oil consumption.  Here are a few advantages of EVs he ignores.
  • No oil changes/ less maintenance.  This saves both direct costs, and the owner's time.
  • No trips to the gas station.  How much time do we waste (and extra miles do we drive) going to the gas station (or even going a few miles out of our way to get the best price on gas)?  With all the attention to range anxiety, there seems to be very little attention to the fact that your car recharges while you sleep.  Do you know anyone who enjoys spending time in a gas stations?  Not driving to gas stations probably saves an additional gallon per year, and the driver's time is of course valuable, too.
  • Quieter ride.  Many luxury car owners are willing to pay a lot for a quieter ride, so it must have some value.
  • Potential to make money selling frequency regulation to the grid.  This much-talked about concept still needs regulations and market structures to make it practical, so while I think it deserves a mention, I won't give it any value in my calculations.
  • Batteries in base of car lowering center of gravity and improving handling.
  • No tailpipe emissions.  Since car exhaust often infiltrates into homes via connections to the garage, this should be seen as a benefit to anyone who has an attached garage and cares about their own and their family's health.

Using Peterson's estimated savings of 104 barrels of oil over the course of a decade, each $1040 we attribute to the above benefits of EVs should reduce the cost of a barrel of oil saved by $10.  I'd say $1040 would be a very low-end estimate of the above benefits, while $5200 would be a high-end estimate, so the cost of saving a barrel of oil through vehicle electrification is between $140 and $180 once we take these benefits of EVs into account.

Price Stability

An EV buyer is essentially purchasing her fuel savings up-front, at a fixed price, partly because it costs much less per mile to drive an EV than an conventional vehicle, and partly because electricity prices are much more stable than gasoline prices.

Price stability is valuable in itself, since it allows much more effective budgeting.  Many people buy oil or propane to heat their homes in advance in order to lock in a fixed price, so they must value the price stability.  An EV is an opportunity to lock in most of the fuel price for the life of the vehicle.  Even if that price is $140 or $180 per barrel of oil, it still will have value to some drivers.

Will the price of oil average more than $140 over the coming decade?  I think the chances are high.  There is even a decent chance that oil prices will average more than $180 over the next decade, in which case an EV buyer today will be quite pleased with herself five or ten years from now.

Driving Habits

Finally, as I have discussed previously, not everyone is an average driver.  Drivers with regular commutes who have the opportunity to charge their vehicles more than once per day gain significantly more benefit from plug-in vehicles than drivers who charge their vehicles less often per day.

EVs are not an economic option for everyone, or even for most drivers.  Drivers who can use more than the full range of their vehicle per day by charging more than once, and drivers who place high values on the other benefits of EVs describe above, may find that electric vehicles make economic sense. 

Conclusion

Are electric vehicles a panacea to our car culture woes?  No.  But it is a mistake to call vehicle electrification a house of cards based on a back-of-the-envelope calculation.

DISCLOSURE: None.

January 08, 2012

Why The Electric Vehicle House of Cards Must Fall

John Petersen

A few days ago Alex Planes published an extraordinary article on The Motley Fool titled the "Real Costs of Alternative Energy" that summarized direct US subsidies for our principal energy sources, restated annual energy consumption from each of those sources using equivalent barrels of oil as a standard measure, and calculated the direct Federal subsidy per unit of useful energy consumed. The following table condenses and reorders the data from the lowest to the highest direct Federal subsidy per unit of useful energy consumed.

1.8.11 US Subsidies.png

As I pondered Mr. Planes' work and methodology, the first question in my mind was "How would electric drive stack up using the same methodology?" Today I'll share my answer to that question.

Since the primary goal of electric drive is to reduce gasoline consumption, it seems reasonable to treat fuel savings as equivalent to oil production. On a thermal equivalency basis, 50.4 gallons of gasoline have the same BTU value as one barrel of crude oil. Since gasoline is a refined product while crude oil isn't, we need to adjust the equivalency factor for the energy used in refining and distribution. When we include all costs of refining and distribution, not burning 40.5 gallons of gasoline is the functional equivalent of producing one barrel of oil.

A CAFE compliant new car will offer an average fuel economy of 33.3 mpg while a CAFE compliant new light truck will offer an average fuel economy of 25.4 mpg. The combined fleet standard is 29.7 mpg. To keep things simple I'll round that figure up to 30 mpg. At 30 mpg, the owner of a new light duty vehicle will consume about 420 gallons of gas per year, or 4,200 gallons over the course of a decade. That's the equivalent of 10.4 barrels a year or 104 barrels of over the course of a decade.

Now comes the fun part!

In a recent analytical report titled "Global Autos: Don't Believe the Hype – Analyzing the Costs & Potential of Fuel-Efficient Technology," Bernstein Research and Ricardo PLC performed a bottom-up cost walk analysis that started with a $19,000 gasoline powered vehicle, deducted the costs of unnecessary internal combustion drivetrain components and then added the incremental costs of necessary electric drivetrain components. The end result of this bottom up cost walk analysis was a $38,800 electric vehicle. The following graphic summarizes the Bernstein-Ricardo cost walk.

1.8.11 Cost Walk.png

I've previously shown how an electric vehicle will save the average driver 104 barrels of oil over the course of a decade. When you turn the crank on the incremental cost of vehicle electrification, it works out to an up-front capital investment of $190 for each equivalent barrel of oil saved. It's like Milo Minderbinder's scheme to buy eggs for a dime, sell them for a nickel and make up the difference on volume.

If we forget about the immense capital costs and focus exclusively on the direct Federal subsidy per barrel of oil saved, it works out to $72.11 without including any State, local or indirect incentives.

The ultimate obscenity is that a conversion from gasoline drive to electric drive will not reduce the total amount of energy used in transportation. It merely shifts the energy burden from lightly subsidized oil and gas to more heavily subsidized energy from coal, nuclear and renewables.

Electric drive proponents are selling a house of cards based on fundamentally flawed assumptions and glittering generalities that have nothing to do with real world economics. Their elegant theories and justifications cannot withstand paper, pencil and a four function calculator.

The law of economic gravity cannot be ignored and will not be mocked. Shiny new electric vehicles from General Motors (GM), Ford (F), Nissan (NSANF.PK), Toyota (TM), Tesla Motors (TSLA) and a host of privately held wannabe's like Fisker Motors and Koda are doomed to catastrophic failure. Their component suppliers will fare no better. There is no amount of political or wishful thinking that can change the inevitable outcome.

Disclosure: None.

December 27, 2011

Tesla Confirms Pricing and Launch Date of Model S

Clean Energy Intel

model-s-signature-red_960x640_b[1].jpg
Tesla Model S: Image used with permission from Tesla.

Tesla (TSLA) officially announced the pricing, options and timing for next year´s US launch of the Model S this week. There have been some worrying rumors that the company would forced to raise its prices due to cost factors. Consequently, the good news for Tesla stock is both that the pricing has been held steady and that the summer launch date remains in place. Confirmation of both of these factors is certainly welcome news.

Firstly, the official pricing for the US market remains as previously indicated:
  • The starting price for a Model S with a basic 40 kWh battery (160 miles) comes in at $49,900 after the $7,500 Federal Tax Credit.
  • The price for a Model S with a 60 kWh battery (230 miles) comes in at $59,900 after the Federal Tax Credit.
  • The price for a Model S with a 85 kWh battery (300 miles) comes in at $69,900 after the Federal Tax Credit.
  • The price for a Model S Performance with a 85 kWh battery (300 miles) comes in at $79,900 after the Federal Tax Credit. The Performance model can do 0-60 mph in 4.4 seconds - faster than the Porsche 911 Carrera.

Secondly, Tesla has officially confirmed that the company is on schedule to deliver the first Model S vehicles in the summer of next year. The schedule remains:

  • Summer 2012 - Production of the Model S with 85 kWh battery and the Model S Performance
  • Autumn 2012 -  Production of the Model S with 60 kWh battery
  • Winter 2012 -  Production of the Model S with 40 kWh battery

You can see the detail of all of the pricing and options on Tesla´s new web page outlining the everything you need to know about the Model S.

Both the pricing and the timing for the Model S are of course key factors with regard to which the market has been looking for confirmation. The fact that the company is on track to meet both commitments is clearly bullish for the stock. Consequently, we remain bullish on Tesla and expect to see a retest of the $34.94 November high.

You can read our last article recommending Tesla and discussing the company´s recent deal with Mercedes here. Finally, you can read an in depth discussion of Tesla and the future of the electric car here.

Disclosure: I am long Tesla (TSLA)

About the Author: Clean Energy Intel is a free investment advisory service (available at www.cleanenergyintel.com), producedby a retired hedge fund strategist who also manages his own money inside a clean energy investment fund.

December 14, 2011

The Chevy Volt: Trying to be All Things to All People

Garvin Jabusch

We're within a year of the launch of GM's flagship electric vehicle (EV), the Chevy Volt, and we're already seeing detractors call it a failure (e.g. "Revenge of the Internal Combustion Engine") and begin using it as evidence that the entire EV premise won't work. This outcome was predictable, not because EVs are conceptually flawed, but because the Volt is a terrible value proposition, whether measured against better EVs or against high-mileage internal-combustion engine cars. The Chevy Volt isn't failing because it's electric, but because it's a bad value.

The Volt is not a pure EV. Basically, it's a Chevy Cruze outfitted with a relatively small battery pack and electric motor attached to an independent drive train. The battery pack is low-powered enough that it depletes after just 35 miles, and what you’re driving after that is just a heavier, gas-powered Cruze (the two cars are built on the same platform). So at best the Volt is a hybrid, and not even a very efficient one, because unlike Toyota's (and others) single hybrid drive, the Volt runs separate drive trains for its electric and gas motors. In effect, it's trying to be a gas powered Cruze, and also an all-electric Leaf as well as a hybrid Prius. A car can be an EV, a hybrid, or a gas-burner, but not all three. I understand the desire to try to bridge the gap in an effort to appeal to more consumers, but the result is an inappropriate juxtaposition that appeals to few.

Chevy has said one reason for the lack of enthusiasm around EVs is potential customers may have range anxiety, and in the case of the Volt, who can blame them?  Even combining the ranges of the Volt's fully-charged battery pack and a full tank of gas will only get you about 300 miles, which not too different from the electric-only range of some pure-EVs, and 200 miles less than the 500 mile range of the plug-in Prius.  If your daily driving averages at or below 35 miles, though, and you charge every evening, you could drive the Volt in pure-EV mode indefinitely and never fill the tank. But then you'd never be using the conventional drive train, which you paid a lot for. And for me, this is the heart of the Volt's limitations. It has two independent drive trains and three transmissions (to make the transmissions work together), making the final car complex, heavy and expensive. The better models of cars using any of the single drive train systems (internal combustion, electric or hybrid) can outperform the Volt for the price. This includes Chevy's gas-only Cruze, which rings in at about $19,000 and gets 42 MPG. For comparison, the Volt is about $45,000 (or $38,000 after federal tax credit; economy info below), the Leaf is $35,000 (or $28,000 after the credit) and burns no gas, and the Prius is about $28,000 (no tax credit available) and gets better than 50 MPG.

The Volt compares so unfavorably with the Leaf and Prius also because once you've driven that first 35 miles on electric power, drained the battery and switched to the gas engine, the Volt only gets 33 mpg. "And why, you should be asking," quipped Motor Trend, "does the Volt in gas mode deliver 13 [I count 17, but okay - GJ] fewer mpg than the Prius?" It's simple, the Volt is two cars in one, sporting almost entirely separate gas and electric drive trains, making it heavy, unwieldy, expensive and uneconomical.  All this over engineering also makes the vehicle very internally complicated, which presents opportunities for problems; for example, the Volt’s unique liquid cooling system appears to be the culprit in recent fires. No big surprise that sales are trailing expectations.

Prius-leaf-volt
Prius, Leaf and Volt (image source: hybridcars.com)

Volts aren't as popular on the used market either.  After 36 months, a Volt will lose 58% of its value, while a Prius will depreciate 46%, according to Kelly Bluebook's projections. The secondary market as usual is figuring out how to price value, and maybe a three year depreciated Volt at $17,000 is comparable to the equivalent used Prius at $15,000, but I think I still would choose the Toyota.

GM had big ambitions for the Volt, planning to make 10,000 units during 2011, then quickly ramp production to 45,000 Volts in 2012. To date, though, they've sold only 5,000. There are good reasons for this poor sales performance, but none that indicate EVs as a class are bad cars.

Nevertheless, don't be surprised to see GM begin to announce things like "we tried with the Volt to make a big push into electric cars, but Americans just aren't ready," or "consumers have made it clear they prefer gas engines." And when this happens, don’t believe it. Because the fact is that it's not EVs Americans don’t like, it’s inferior products.

The conclusion for potential consumers seems to be, if you want a hybrid, get a Prius, it's far less expensive, far simpler and arguably more functional than the Volt.  If you want a pure EV, the Leaf is a fine choice, but there are several other interesting models from smaller, niche, pure-play EV makers that range in price and luxury from about $900 (Kandi Technologies [KNDI]) to $60,000 and beyond (Tesla Motors [TSLA]).

Electric vehicles are the future. Since we're just at the earliest stages of adoption, though, it's possible for one bad model to have a disproportionate negative impact on perceptions. But don’t believe the negative hype. As I mentioned recently, EVs will "'slowly but steadily gather momentum for a few years' until a tipping point is reached 'where they're obviously the superior value, and in many ways the superior performance option across the board.'"

Disclosure: Green Alpha Advisors is long KNDI and TSLA

Garvin Jabusch is co-founder and chief investment officer of Green Alpha ® Advisors, and is co-manager of the Green Alpha ® Next Economy Index, or GANEX and the Sierra Club Green Alpha Portfolio. He also authors the blog “Green Alpha's Next Economy."

December 02, 2011

Culling My Energy Storage Tracking Group

John Petersen

In my second quarter update I deleted China Ritar Power (CRTP.PK) from my energy storage tracking list because of its decision to terminate its SEC registration during a period when China-based companies with US listings were bogged down in a dense fog of suspicion. Since then the carnage in the energy storage sector has been far worse than I expected and it's time to permanently remove the companies highlighted in pink from my energy storage and vehicle electrification tracking list for the reasons described below.

12.2.11 Cull List.png

Current Culls

In March of this year when its stock was trading in the low $3 range, I predicted that Ener1 (HEVV.PK) would be forced to come to grips with an improvident investment in Th!nk Motors and a pair of mushy balance sheet accounts including $11.7 million of intangible assets and $51.7 million of goodwill. Since then the collapse of Ener1's stock price has been catastrophic as it wrote off the Th!nk investment and said that it would impair the bulk of its goodwill and intangible assets. When I adjust Ener1's last reported balance sheet amounts for known write-offs and likely intervening operating losses, it's clear to me that stockholders equity has been completely wiped out and while Ener1's creditors may recover some portion of their investment, the holders of 197 million outstanding common shares own an empty bag.

Earlier this year I was hopeful that Beacon Power (BCONQ.PK) would gain enough momentum from the commissioning of their Stephentown frequency regulation facility and a favorable FERC ruling to keep the company afloat long enough to prove the technical and economic merit of their high-speed flywheel technology. Unfortunately, management concluded that bankruptcy reorganization was the only option and filed on October 31st. Beacon subsequently agreed to sell the Stephentown facility for the benefit of its principal creditor, the US Department of Energy. The impairments included in their Form 10-Q for the period ended September 30, 2011 were savage and like Ener1, Beacon's stockholders equity has been completely wiped out, leaving the holders of 32.2 million outstanding common shares with an empty bag.

C&D Technologies (CHHP.PK) has been a problem stock since the fall of 2010 when it unexpectedly took a $46 million impairment charge that resulted in a forced restructuring of the company's debt. While it appeared that the reorganized C&D would continue to operate as a public company, it announced in October that its principal stockholder would buy all remaining shares for cash at a price of $9.75 per share during the fourth quarter. Accordingly, the company is no longer of interest to me.

In March of this year several articles on Seeking Alpha challenged the accuracy of SEC reports filed by Advanced Battery Technologies (ABAT.PK) and while much of the criticisms seemed to be based on innuendo and conjecture, there were some questions that concerned me enough to back away from my prior support of the company. I wasn't troubled much by ABAT's aloof response to the accusations but I became concerned when a wholly-owned subsidiary needed a $6.3 million line of credit while the parent reportedly had cash balances in $75 million range. The subsequent abrupt departure of their CFO set off alarm bells. On Monday the company's chairman told shareholders that ABAT was unwilling to comply with the Nasdaq Stock Market's request for formal confirmations prepared by its banks in the presence of its auditors because the procedure was degrading. I understand the importance of "face" in Asian culture, but I can't condone, understand or abide by an abject refusal to provide bank confirmations to a stock exchange when the price of refusal is delisting. It may all be a grand xenophobic conspiracy as ABAT's chairman claims, but I'm not willing to assume that risk.

The final cull is the result of a surprise announcement this week that New Energy Systems (NEWN) had agreed to sell its two battery manufacturing subsidiaries to employees. It will apparently retain a consumer battery design and marketing operation as well as a solar panel business, but it will no longer manufacture batteries or components. Accordingly, the company is no longer of interest to me.

Overvalued Stock Watch List

I remain very concerned with the viability of Valence Technology (VLNC) which has been surviving from hand to mouth on open market sales of securities and loans from a principal stockholder for years. In its last Form 10-Q Valence reported a negative stockholders equity of $56.8 million, which means its current market capitalization of $146.1 million represents a whopping $203 million premium to book value. As a native English speaker who lives in a French speaking country, I know all about relying on the kindness of strangers. It may work as a lifestyle, but I've never seen it work as an investment philosophy. Unless and until Valence eliminates the Sword of Damocles threat of $66.7 million in related party debt, I think the stock is too risky to own.

While Tesla Motors (TSLA) is not facing an imminent threat, its working capital adequacy is troubling if you're willing to consider possibility idea that it might encounter an unanticipated delay or two with the launch of its Model S or maybe even fall short of ambitious sales targets for 2013. At yesterday's close Tesla's market capitalization was a stunning $3.4 billion, an amount that's 11.6 times its September 30th book value of $294 million. When world class companies like Bernstein Research and Ricardo agree that electric vehicles will not be a credible market force until 2025 but almost all analysts and talking heads are gushing over Tesla's prospects, it's a sure sign that a stock has reached the Peak of Inflated Expectations which is inevitably followed by an eye watering descent into the Trough of Disillusionment. I will be first to congratulate Tesla if they pull off an Exodus-class miracle and meet current expectations, but I've seen far too many cases where the herd went careening over Wall Street's buffalo jump to believe a happy ending is likely. After all, how many other vehicles can proudly bear the following truth in advertising sticker?

12.2.11 Bumper Sticker.png
Disclosure: None.

November 18, 2011

BYD Testing The EV Market In China

Clean Energy Intel


BYD at the Central China High-Tech Fair, Shenzhen, November 2009.  Source: Wikipedia / Brucke-Osteuropa.

Over the course of the past few weeks we have seen a couple of noteworthy developments at Chinese auto maker BYD (BYDDF.PK). I have previously discussed the troubles at BYD, which by mid-September had taken the stock down 72% year to date.

However, a couple of developments suggest that the Warren Buffet-backed automaker is at least worth keeping an eye on in the period ahead. In late October, the company opened its US Headquarters and 30,000-square-foot facility in Los Angeles. The aim is to create 150 new jobs and to move towards providing a range of new battery electric vehicles - most importantly the e6 battery-electric SUV. The company will also be marketing a 40-passenger battery-electric bus. One such bus has already been tagged by Hertz for use in shuttling its customers around LAX.

Also in late October, BYD announced that it would start selling its e6 battery electric SUV to the general public in China. Auto Observer points out that with a 190-mile range on a single charge, this will be "the first long-range all-electric vehicle to be offered to the masses in that country". The rough details we have thus far are the following:


  • The e6 is a 5-passenger all-electric SUV.
  • It utilizes Lithium Iron-Phosphate battery chemistry.
  • The car will retail at 369,800 yuan (circa $57,000). However, BYD indicates that after government subsidies in China the net cost should be reduced to $38,000. 
  • It has a range of 190-miles on one charge. Currently only BYD and Tesla (TSLA) offer electric vehicles with a range above the 70 to 100-mile area targeted by most other automakers who appear to be focusing on the second car market.
  • Home charging units will be installed in conjunction with China Southern Grid.
  • A fleet of e6 SUVs have seen significant testing on the streets of Shenzhen, where they have accumulated a reported 3.8 million miles, driven by local taxi drivers.

BYD´s share price has suffered this year as sales of its traditional and hybrid cars have disappointed. Auto Observer  reports that: "For the first half of the year, BYD's profit dropped 89 percent from a year earlier to 275 million yuan ($43.1 million) on a combination of rising costs and an 11-percent drop in revenue. Last year, BYD sold 519,800 vehicles, well short of the goal of 800,000 sales the company had set for itself; it sold just 232,400 vehicles during the first half of this year".

This will be a very interesting initial test for both the EV market in China and BYD itself. The company also has a 50:50 joint venture with Daimler AG for the production of a battery electric vehicle, a prototype of which is scheduled to be produced by the spring of 2012. If sales of the e6 go well, there´s seems plenty of room for BYD to expand. Worth keeping an eye on.

Finally, you can read a more detailed, bigger picture view of the future of the electric car here.

Disclosure: I have no position in BYDDF.PK. I am long TSLA.

About the Author: Clean Energy Intel is a free investment advisory service (available at www.cleanenergyintel.com), produced by a retired hedge fund strategist who also manages his own money inside a clean energy investment fund.

November 17, 2011

Electric Vehicles; Ineptitude, apathy ... and piles of taxpayer money

John Petersen

The last few weeks have been a media and political circus in the US as a pair of high-profile Department of Energy loan guarantees wound up in bankruptcy court. In the first case, solar power innovator Solyndra filed two years after closing a $535 million loan for a factory that never quite made it into production. In the second case, flywheel storage innovator Beacon Power (BCONQ.PK) filed about a year after scoring a $43 million loan for a 20 MW frequency regulation plant that was commissioned in June. Both are black eyes for the Obama administration’s green energy policies.

Commentators are quick to note that loan guarantees to undercapitalized companies are indistinguishable from sub-prime mortgages for busboys — the ultimate “heads I win, tails you lose” opportunity for the chosen few. While they’re right, of course, I think a superficial analysis of individual outcomes obscures deeper and more disturbing policy choices that are having a disastrous impact on American innovation, particularly in energy storage.

The ancients taught that necessity is the mother of invention, which is why we have such a wide variety of energy storage technologies. They each serve different needs and they’re each important in their own right because we live in a world where there are no silver bullets and the best we can hope for is silver buckshot. Unfortunately, preferential governmental support for a specific technology or family of technologies is the equivalent of an intellectual abortion clinic. The mere act of choosing one technology group for favorable treatment stifles inquiry and innovation on other ideas that deviate from the government sanctioned path of righteousness.

It’s official, OTHERS NEED NOT APPLY!

Lithium-ion has been chosen as the golden child of energy storage and heaven help the innovator who has an idea for a second-generation nickel metal chloride battery, a new flow battery, an advanced lead-acid battery or any other energy storage device or system that doesn’t pay grovelling homage to the official orthodoxy. In the end, society suffers when government chases the pipe dreams and promises of politically connected demagogues, ideologues and snake oil salesmen. The only possible outcome is catastrophic malinvestment that subverts the stated policy goals. While the taxpayers usually get fleeced, investors invariably get gutted.

In August 2009, the US gave a stunning $1.2 billion of ARRA Battery Manufacturing Grants to a handful of battery companies on the theory that good intentions would trump economics and usher in a golden age of electric cars to free America from the tyranny of imported oil. The 95% allocation to emerging lithium-ion technology compared to the 5% allocation to all other battery technologies combined said it all. Pharaoh has spoken – So let it be written, so let it be done!

Nobody bothered to ask whether the world’s mines could produce enough raw materials to make the batteries at relevant scale. In most cases they’re still not asking, even though metal prices are climbing faster than energy prices. Power-drunk political appointees simply assumed there would be no critical supply chain or technology issues and staggered down the primrose path. Similar ill-conceived plans were adopted with reckless abandon by governments worldwide.

We live on a resource challenged planet where six billion people want a small slice of the lifestyle that one billion of us have and take for granted. Our world produces almost two tons of energy resources a year for every man, woman and child on the planet, but it only produces 8.5 kg of non-ferrous industrial metals. Given the stubborn and inflexible nature of metal production constraints, it doesn’t take much math skill to see the problem.

The stark reality is humanity can’t make enough machines to have a significant impact on global energy consumption and CO2 emissions because the world's miners can’t provide the necessary raw materials. It's not just a question of lithium. The physical constraints on global production of aluminum, copper, lead, nickel, cobalt and a host of scarcer metals are staggering and the six billion people who simply want electric lights, a washing machine and maybe a refrigerator will not sacrifice their basic needs so that Tesla Motors (TSLA) can sell electric cars in California financed by a $465 million ATVM loan that it can’t possibly repay without an Exodus-class intervention from the Almighty.

The first fruits are evident. Existing and planned lithium-ion battery plants will be able to manufacture cells for 2.4 million EVs a year by 2015, however, they can only expect 820,000 units of demand in a high penetration rate scenario. While the looming global glut of cell manufacturing capacity is widely recognized, a more pervasive and perverse dynamic exists in the supply chains for several critical components those factories will need if they hope to manufacture cells.

The following graph comes from an August 2011 presentation from Roland Berger Strategy Consultants. It shows that the global supply chain for anodes will be exhausted if cell production reaches 430,000 units per year while the supply chain for separators will be exhausted if cell production reaches 450,000 units per year. It also shows that the supply chain for cathodes and electrolytes will hit ceilings at 660,000 and 770,000 units respectively.

11.17.11 Berger Graph.png

Since it’s impossible to manufacture cells without anodes, cathodes, separators and electrolytes, I have to wonder about the management teams that are building cell manufacturing facilities without first ensuring the integrity of their supply chains. The apparent lack of concern over supply chain issues is staggering. I can’t decide whether it’s reckless apathy or simply a childlike faith that the taxpayers, like doting first-time grandparents, are breathlessly waiting for any opportunity to provide whatever the golden child needs or wants.

How do you justify building cell-manufacturing capacity that’s three times greater than your best-case demand?

How do you justify building cell-manufacturing capacity that’s six times greater than your supply chain can support?

Is government somehow exempt from the duty to conduct reasonable due diligence before investing?

Seriously, where are the adults in this process?

While the media can’t begin to comprehend the magnitude of the impending catastrophe, the dominoes have started to fall.

Ener1 (HEVV.PK) spent about half of its $120 million ARRA Battery Manufacturing grant before an obscenely optimistic investment in Th!nk Motors brought the company to its knees. In the process its stock tumbled from a post-grant high of $7.53 to a current price of $0.11. Now Ener1’s third management team in eight months plans to change the business focus from automotive to heavy-duty transport and grid-based applications. Thanks to $80 million of improvident borrowing and $51.8 million of additional planned goodwill impairments that are buried in an attachment to its recent Notification of Late Filing, Ener1’s fate will probably be decided in a bankruptcy case controlled by its largest creditor Goldman Sachs, which put a $3.75 price target on the stock last March while I was warning readers to run for cover.

How the hell do you default on a grant?

A less dramatic but equally ominous surprise was the Johnson Controls (JCI) - SAFT divorce. Their ambitious plans to make automotive batteries together till death do us part couldn’t even survive the commissioning of a new factory that’s being built with $300 million of DOE grants. In the face of feeble automotive demand, JCI wanted to expand the joint venture's focus to encompass stationary and ancillary markets. SAFT wanted no part of that proposal because it didn’t want yet another competitor for its factory in Florida that was; you guessed it, built with $95.5 million in DOE grants.

While they’re keeping a stiff upper lip in public, I can’t help but feel a little sorry for A123 Systems (AONE), which is building a factory with $249 million in DOE Grants and wants to borrow hundreds of millions more under the DOE's ATVM loan program. Their IPO prospectus spoke of strong relationships with global automotive manufacturers and tier 1 suppliers, but their automotive design wins to date are limited to a $15,000 electric upgrade to the $15,000 GM Spark and the gorgeous but corpulent Fisker Karma, which is being financed with yet another $530 million from the public trough.

While it’s a decidedly pessimistic view I can identify over $3 billion in battery and electric vehicle projects funded by Federal money that have poor to dismal business prospects, including:

$299.2 ARRA Battery Manufacturing Grant to JCI-Saft
$249.2 ARRA Battery Manufacturing Grant to A123 Systems
$118.5 ARRA Battery Manufacturing Grant to EnerDel
$95.5 ARRA Battery Manufacturing Grant to Saft America
$528.7 ATVM Loan to Fisker Automotive
$465.0 ATVM Loan to Tesla Motors
$1,400.0 ATVM Loan to Nissan Motors

I’m a frequent critic of the headlong rush to build electric vehicle manufacturing capacity and infrastructure without any real proof that the planned wonder vehicles will satisfy customer needs, or that the facilities will be used for something other than homeless shelters for displaced green workers.

My fundamental problem arises from the fact that every industrial revolution in history started with a technology that proved its economic merit in a free market and then went on to change the world. Companies and indeed industries that cannot survive without government subsidies can’t thrive with them. Supporting the moribund with the lifeblood of the vibrant may be compassionate, but it can’t produce a good economic outcome.

Over a decade of experience in the HEV market shows that consumer demand ramped sharply for several early years, hit a market penetration rate of about 3% and then flatlined. Over the last three years, clean diesels and plug-ins have begun to cannibalize the HEV market, but they've done nothing to bring new buyers to the fold.

Once again, governments are pushing on a string and trying to force the market to embrace electric drive, the only vehicle class with an unbroken 100-year history of failure. Once again governments will fail, just like they did with other panacea energy solutions including fast breeder reactors, synthetic fuels, hydrogen fuel cells, clean coal and the ever popular corn ethanol and biodiesel that turn food into fuel and make both more expensive.

In late 2008 the world fell into the mother of all recessions as it reached the peak of a decades long debt supercycle. Now the piper is demanding his due and individuals, businesses and governments around the world are being forced to reduce their crushing debt burdens. In the midst of a global deleveraging, I don’t see how insolvent governments can continue to use public funds to subsidize the ideology-based personal consumption of eco-royalty. How many bottomless pits can one nation's taxpayers be expected to fill?

11.17.11 Money Pit.png
Even if our governments are willing to continue this foolishness, I don’t see how a vibrant market for EVs can possibly develop among real world consumers who can buy gasoline versions of a Lotus Elise, Ford Focus or GM Spark for half the price of their electric counterparts.

The transformer Optimus Prime is a big hit with little boys. Spending billions so big boys can pay twice the price for their very own Suboptimus Prime strikes me as a triumph of hope over experience.

This article was first published in the Fall 2011 issue of Batteries International and I want to thank editor Michael Halls and cartoonist Jan Darasz for their contributions.

Disclosure: None.

November 15, 2011

High Conviction Paired Trade – Short Tesla Motors And Buy Exide Technologies, The Sequel

John Petersen

Last November I broke with tradition for the first time in over 30 years and suggested a paired trade that bought Exide Technologies (XIDE) and shorted Tesla Motors (TSLA). Over the following three months, investors who made the trade and bought four Exide shares while shorting one Tesla share pocketed the following gains.


16-Nov-2010
16-Feb 2011
Net

Entry
Exit
Gain
Buy Four Exide
-$29.76
$49.68
$19.92
Short One Tesla
$30.80
-$24.73
$6.07
Pair Trade Total
$1.04
$24.95
$25.99

While the paired trade hit its peak value in mid-February of this year, it didn't turn south until early June.

11.15.11 2010 Pair.png

Since June, Exide has fallen to unsustainably low levels and Tesla has climbed to unsustainably high levels, which means it's once again time to recommend a paired trade that buys Exide while shorting Tesla. At yesterday's close the ratio works out to an 11.5 share Exide buy for each shorted share of Tesla. The results this time around should be even better than last year because the valuation disparities summarized in the following table are so immense.


Exide
Tesla
Price Per Share
$2.87
$33.22
Market Capitalization
$244.2
$3,464.2
Working Capital
$512.1
$257.9
Book Value
$415.8
$294.1
TTM Sales
$3,092.9
$201.1
TTM Earnings
$8.8
-$224.3

A couple days ago I suggested that Exide's Recent Price Collapse Was Unjustified and explained how forced liquidations by a large Exide shareholder have crushed its stock price on two occasions during the last two years. Today I'll summarize a few of the headwinds that Tesla must face and overcome if it hopes to avoid a major price decline.

Battery Safety Questions. Over the last week there have been numerous news stories about an NHTSA inquiry into the safety of automotive lithium-ion battery packs after a GM Volt that had been used for crash testing spontaneously caught fire at an NHTSA facility. While the stories remain optimistic about the outcome, they overlook the inconvenient truth that safety testing of lithium-ion battery packs is not comparable to the procedures automakers used for other batteries.

In the late 90s Ford built a test fleet of electric delivery vans called the EcoStar that used sodium sulfur batteries. As part of their normal testing, Ford took a "Vlad the Impaler" approach to safety and used a hydraulic ram to drive a ten-inch long four-vaned arrowhead wedge into a fully charged 35 kWh battery pack. The sodium sulfur battery passed the test. As far as I know, safety testing for lithium-ion batteries is limited to driving an eight penny nail into a single cell. I have not been able to find any published reports of destructive pack level testing to determine how the failure of one cell might cascade through a battery pack that contains up to 6,800 cells.

To put the safety question into sharper perspective, Japan's NGK Insulators suspended its sodium sulfur battery production and asked its customers to stop using its products until an investigation uncovered the cause of an unexplained battery fire. Before the incident NGK had a flawless 10-year safety record, but it still asked its customers to suspend operations on an installed base of 305 Megawatts of power and over a gigawatt hour of energy storage at 174 locations worldwide because of a single incident where nobody was hurt.

If the NHTSA reaches an entirely reasonable conclusion that pack-level testing of lithium-ion batteries has been given short shrift in the headlong rush to bring electric vehicles to market, the delays and risks of thorough pack level testing and the associated news coverage could be catastrophic for specialty EV manufacturers.

Charging Infrastructure Issues. For several years China has been perceived as a global leader in vehicle electrification. Over the last several months, public statements from Chinese leaders have grown increasingly wishy-washy, suggesting that fuel efficiency and HEV technologies would be easier and less expensive to implement at relevant scale. Just this week Forbes reported that China’s power-grid giants – China Southern Grid and State Grid – may throw another monkey wrench into the works by insisting on battery exchange schemes instead of distributed charging infrastructure. While actions in Mainland China will probably not have much direct impact on Tesla, the risk of similar restrictive decisions by utilities in more important markets cannot be dismissed out of hand.

Resale Value Questions. One of the biggest unanswered questions in the electric vehicle space is resale value. Advocates assure us that EVs will retain their value better than conventional cars despite the fact that the battery packs that represent up to half of the vehicle cost are consumable and wear out over time. Yesterday's Wall Street Journal reported that vehicle leasing firms in Israel were having second thoughts about Project Better Place because of uncertainty over residual value. While leasing and residual value issues may not be critical to buyers of the Tesla Roaster, they're likely to be important to buyers of the upcoming Model S which is targeted to an upscale consumer market where vehicle leasing is commonplace.

The Valley of Death. There are no greater, crueler or more universal truths in the stock market than the hype cycle and the valley of death. While there are exceedingly rare exceptions like Google, substantially all new companies and new industries go through a cycle of inflated expectations followed by profound disillusionment. Substantially all cases where companies have avoided the hype cycle have involved a high level of business maturity and close to flawless execution. The following graph from the Gartner Group illustrates the typical stages.

11.15.11 2010 Pair.png

Tesla's execution to date has been pretty good and as far as I can tell it hasn't encountered any significant delays or setbacks. Unfortunately its stock is priced to perfection and anything less than flawless execution going forward can be a catalyst that pushes the stock off the peak of inflated expectations and into the trough of disillusionment. Given the substantial external risks I've discussed above and the inherent risks discussed in Tesla's SEC filings, I think the downside risk in Tesla's stock outweighs the upside potential by an order of magnitude.

Disclosure: None.

November 06, 2011

Tesla Finds Strength In Another Deal With Mercedes

by Clean Energy Intel
Tesla Model S.  Image used with permission from Tesla
Tesla%20Model%20S[1].jpg
 
Last week was a very good week for Tesla (TSLA) stock - up 13% on the day on Thursday and ending the week at $32.31, up a solid 8.2% from the previous Friday's close. This was partly because the company's earnings statement provided a loss that was below expectations - but probably largely a result of the announcement that the company has secured another deal with Mercedes.

Tesla's third-quarter net loss widened to $65.1 million from $34.9 million a year ago. However, excluding items, the loss was 55 cents a share versus market expectations of 60 cents.The company also raised its forecast for 2011 revenues from a previous range of $180 million to $190 million to a higher range of $195 million to $200 million. Overall the earnings announcement was just enough to keep the market in a forward-looking mode.

What got the market excited was no doubt the announcement by the company in a letter to shareholders of another deal with Mercedes, which sounds like a considerable expansion of the previous agreement between the two companies. As things stand, we have little detail on the deal beyond the following:

  • Mercedes has issued a letter of intent to Tesla on the agreement
  • It relates to the provision of  'full powertrains in the Mercedes line'
  • A fuller announcement will be made towards the end of the year

This deal, alongside the company's deal with Toyota over the electric RAV4, once again illustrates that Tesla can compete effectively in terms of both peformance and cost in terms of both battery packs and powertrains. The deal with Toyota is worth $100m and the deal with Mercedes certainly has the potential to be of a similar magnitude.

Tesla has indicated, in a Company Overview this summer, that its battery pack costs for the Model S are roughly in the 320 to 450 $/kwh range. In 2010 average costs in the industry were 650 $/kWh or higher. Consider this: Tesla is a luxury end provider with what appears to be the lowest costs in the industry for Lithium battery packs on a $/kWh basis.

Moreover, there has been some discussion that there may be another deal with Toyota on the way - with a price tag of as much as $1 billion on it. You can read more about that potential deal here.

Finally, you can read my more detailed thoughts on the outlook for the electric car in general and Tesla in particular here.

The bottom line is that, with its 300 mile range, the Tesla Model S is out on its own in terms of what it can deliver. No other automaker is remotely talking about delivering a pure EV with such a range. The company has already taken deposits for 6,500 units of the Model S and seems set to create a significant niche market for its product. Moreover, the company has plenty of room for growth in its powertrain business, with strong relationships with both Mercedes and Toyota. Given these facts, it certainly seems that Tesla's stock has plenty of room on the upside.

Disclosure:
I currently have no position in Tesla having taken profits on a previous holding. I intend to use any lower prices to re-enter that position.


About the Author: Clean Energy Intel is a free investment advisory service (available at www.cleanenergyintel.com), producedby a retired hedge fund strategist who also manages his own money inside a clean energy investment fund.

October 20, 2011

Another Reality Check for EV Investors

John Petersen

Earlier this month Deloitte Touche Tohmatsu Limited’s Global Manufacturing Industry group rained all over the plug-in vehicle parade when they published the results of a survey of over 13,000 individuals in 17 countries that concluded:

"The reality is that when consumers actual expectations for range, charge time, and purchase price (in every country around the world included in this study) are compared to the actual market offerings available today, no more than 2 to 4 percent of the population in any country would have their expectations met today based on a data analysis of all 13,000 individual responses to the survey."

While Deloitte's conclusions didn't surprise me, they did clarify my thinking about the market for ultra-high efficiency vehicles and the changes I've been following for the last three years. While I'm usually pretty opinionated, this article will focus more on uncertain market dynamics that aren't clear today but will become self-evident over the next couple years.

The niche market for ultra-high efficiency vehicles has only existed since 2000 when Toyota (TM) introduced the Prius. For the first nine years, the only real contenders were hybrid electric vehicles. Beginning in 2008, we saw demand emerge for new classes of ultra-high efficiency vehicles including "clean diesels" and plug-in vehicles like the Tesla Roadster (TSLA), which was recently joined by the Nissan Leaf (NSANY.PK) and the GM Volt (GM). The common characteristic of all ultra-high efficiency vehicles is a price premium that ranges from $4,000 in the case of a clean diesel to $15,000 or more in the case of a plug-in.

The following stacked graph shows total US sales of ultra-high efficiency vehicles since 2000 and estimates 2011 sales based on sales through September 30th.

11.20.11 UHE Vehicles.png

Over the last three years, the niche market for ultra-high efficiency vehicles has basically stagnated, averaging about 3% of new car sales. While that number ties nicely to Deloitte's conclusion that plug-in vehicles would satisfy the expectations of 2 to 4 percent of the population, the more fascinating thing about the graph is that while the trendline for the ultra-high efficiency vehicle class isn't all that bad given the financial turmoil we've experienced since 2008, it's crystal clear that clean diesels and plug-ins are eating into the HEV market instead of attracting new converts to the ultra-high efficiency vehicle fold.

Logically it makes sense to me that only a small percentage of US car buyers would be willing to pay a $4,000 to $15,000 premium for an ultra-high efficiency vehicle, but we'll need to see at least a couple more years of data before drawing any definitive conclusions. Until we see a major upswing in the overall market penetration rate for the ultra-high efficiency vehicle class, however, I have to assume that plug-ins, clean diesels and HEVs will compete hammer and tong with each other for the 3% of the new car market that doesn't care about cost premiums and be politely ignored by the 97% of the market that thinks the green in their wallets is more important than the green in their cocktail party conversations.

Usually when I get to this point in an analysis, the EVangelicals start trotting out their subsidy arguments to justify the exorbitant costs. While a wide variety of subsidies and incentives have been adopted over the last couple years, I don't believe they have any long-term viability because the world has reached a tipping point where governments can no longer afford to throw public money at an ideology embraced by the 1% at substantial cost to the 99% who are finally taking to the streets in sheer unfocused frustration. While today's protestors lack the coherent goals that we had during the civil rights and anti-war movements of the 60s and 70s, public fury over government policies that benefit the new royalty at the cost of the masses is mounting and it's only a matter of time before people come to grips with the inherent immorality of taxing Peter to buy Paul a new car, particularly when Paul is part of the 1%. When you add in recent developments like a car dealer Congressman who fired an employee over the unauthorized purchase of a GM Volt for his dealership, I have to conclude that today's immense but wholly unjustifiable eco-bling subsidies will quickly become little more than footnotes in automotive history.

My favorite reader comments are the ones that breathlessly compare Tesla and other EV developers with Apple (AAPL). The comparisons are actually quite apt, but not in the way commenters intend. For the first 15 years that I used Apple's computer products they focused on the 3% to 5% of the market that was willing to pay a stiff premium for something different and clearly superior. The stock was one of the worst investments in the tech sector and those of us who loved Apple's computers spent a lot of time worrying that the company would fail. The dynamic didn't change until Apple rolled out its iPod line for the masses in late 2001. Since then serial successes with mass market products including the iPhone and iPad have Apple them the success story of the new millenium. The possiblilty that Tesla or any other EV developer will be able to make a comparable splash with four wheels, a massive battery and a 25 foot power cord is laughably remote.

The graph clearly shows that the ultra-high efficiency vehicle market has temporarily if not permanently flat-lined at a 3% market penetration. While it may be a fun place for technology geeks to marvel over the latest gee-whiz press release, it's not a market for serious investors because there's no upside unless the market penetration rates change significantly. For the next five years, the solid potential for market beating performance will be in un-loved battery industry stalwarts like Johnson Controls (JCI), Exide Technologies (XIDE) and Enersys (ENS) and emerging technology developers like Axion Power International (AXPW.OB) that are working on less dramatic fuel efficiency technologies for the 97% of the market that doesn't care about premium priced eco-bling and believes baby steps matter.

Since September 30th, the broad market indexes have gained an average of 6.7%. During that period JCI has gained 20.6%, Exide has gained 12.5%, Enersys has declined 0.4% and Axion has declined 1.9%. All four companies have rebounded convincingly from recent bottoms and appear likely to outperform the market on a go-forward basis.

Disclosure: Author is a former director of Axion Power International (AXPW.OB) and holds a substantial long position in its common stock.

September 27, 2011

Plug-in Vehicles Have Been Weighed in the Balance and Found Wanting

John Petersen

A comment from maxkilmachina recently drew my attention to an article in the Proceedings of the National Academy of Sciences titled Valuation of plug-in vehicle life-cycle air emissions and oil displacement benefits. While it costs $10 to download the article and supporting documentation, I believe it's worthwhile for all serious energy storage and electric vehicle investors because the underlying study is the first comprehensive total cost of ownership analysis I've seen that includes both direct end-user costs and identifiable externalities like emissions, military and other indirect costs arising from oil consumption in the US. While all studies leave room to quibble, the bottom line conclusion is clear:

"[T]oday’s HEVs and PHEVs with small battery packs offer more emissions reduction and petroleum displacement per dollar spent with less of a need for new infrastructure and with lower uncertainty about future costs ..."

The detail is a bit dense for an investment blog, but two summary graphs from the article go a long way toward reducing glittering generalities to hard economics. They summarize the direct and indirect costs for five types of vehicles under three possible scenarios. The term CV refers to conventional vehicles with internal combustion engines. The term HEV refers to conventional hybrid electric vehicles. The terms PHEV20 and PHEV60 refer to plug-in hybrids with electric drive ranges of 20 km and 60 km, respectively (12.5 and 37.5 miles). The term BEV240 refers to a battery electric vehicle with a 240 km range (150 miles).

The first graph deals exclusively with unpriced externalities including emissions, military and global supply and demand impacts of US oil consumption. While bigger battery packs offer modest advantages in the wildly optimistic case of a zero emission grid, they're not as cost effective as HEVs and PHEV20s in either real world scenario.

9.27.11 Externalities.png

The second graph ties it all together in a unified total cost of ownership analysis that accounts for all direct and indirect costs including purchase price, fueling, maintenance and unpriced externalities. Once again, bigger battery packs offer modest advantages in the Pollyanna case but are 50% to 100% more expensive in both real world scenarios.

9.27.11 TCO.png

The message for investors is clear. When you cut through the hand waving and glittering generalities plug-in vehicles with big batteries have been weighed in the balance and found wanting. They promise the worst possible combination of facile emotional appeal and dismal economics. They can only be attractive to the philosophically committed or the mathematically challenged. As the ugly truth becomes apparent to congressmen, businessmen and consumers that are staggering under crushing debt burdens and facing an immediate need to balance revenues and expenses, the hype induced euphoria over companies like Tesla Motors (TSLA) that make plug-in vehicles and battery companies like A123 Systems (AONE) and Valence Technologies (VLNC) that make big battery packs for toys must fade because immutable laws of economic gravity won't permit any other outcome.

As a child of the 1950s I once believed Superman could leap tall buildings in a single bound. As a mature adult of the 2010s I know the only way to reach a mountaintop is by climbing a slippery slope one step at a time. When I consider the magnitude of the economic sophistry underlying current government policy, I'm not sure that I'd want to be a Congressman or Senator standing for election next year and explaining how subsidized toys for the politically favored eco-elite benefit the voting public. Green jobs that cost consumers money instead of saving it simply aren't worth having.

I'm a securities lawyer, accountant and investment writer, not a futurist. My only concern is whether a particular company will prosper over the next five years or struggle. Anything beyond that is unknown and to my way of thinking largely unknowable. While investors are constantly bombarded with shimmering mirage-like visions of what might happen in a decade or two, they're largely ignorant about the concrete steps automakers are taking today to improve fuel economy and reduce emissions now. The following graph is a great example because it shows how the auto industry is responding. It begins with 2010 plans for the rollout of stop-start technology, layers on new plans that were announced this year and offers a conservative estimate for likely future additions. Stop-start is only a baby step toward a more fuel-efficient future, but it's an immediate step that will save more fuel over the next decade than all HEVs and plug-ins combined.

9.27.11 Global SS.png

The first beneficiaries of the rapidly evolving implementation of stop-start as standard equipment will be established battery manufacturers like Johnson Controls (JCI) and Exide Technologies (XIDE) that will see their revenue per vehicle double and their margin per vehicle triple as automakers upgrade their starter batteries from flooded lead-acid to valve regulated AGM batteries. Second tier beneficiaries include Maxwell Technologies (MXWL) which has partnered with Continental AG to offer a system that pairs a supercapacitor module with an AGM battery to improve performance; A123 Systems which is offering a 1,100 watt hour lithium-ion battery for stop-start applications; and Axion Power International (AXPW.OB) which is completing the development of a third generation lead-carbon battery that promises lithium-ion class performance for stop-start applications at an advanced lead-acid price point.

It will be a horse race, or a knock-down drag-out brawl, as established manufacturers and emerging technology developers compete for their share of a $5 to $10 billion market that didn't exist three years ago. We probably won't be able to identify the ultimate winners with any degree of confidence for another three to five years. In the interim the stock prices of all the credible competitors are certain to climb because they're in the race for a major business prize. While it's hard to find much good in current market conditions, the stock prices for most of the credible competitors have recently been beaten down to very attractive levels. In a period of transition it's only natural for the more timid element to run for cover, but these are the days elephant hunters dream of when the broader market is distressed but the universe of likely players is small.

Talking about what the vehicle fleet might look like in a decade or two is fun for futurists but it's very dangerous ground for investors because of intervening business and technical risks, overwhelming and unavoidable natural resource constraints, the time value of money and the inherent unreliability of forecasts that extend for more than a few years. For my money, today's sure thing is far more attractive than a wildly uneconomic technological long shot.

Disclosure: Author is a former director of Axion Power International (AXPW.OB) and owns a substantial long position in its common stock.

UPDATE: I just received an e-mail message advising that the lead author of the PNAS report has posted a free copy on his faculty web page at Carnegie Mellon University.

September 15, 2011

It's Time to Kill the Car Culture, Drive a Stake Through Its Heart, and Electrify Mobility

Tom Konrad CFA

Stop debating the viability of electric cars, and work on fixing our broken transportation paradigm.

My friend and colleague John Petersen has it in for the electric car.  Recently he wrote a summary of his anti-electric car views, entitled "It's Time to Kill the Electric Car, Drive a Stake Through its Heart and Burn the Corpse."  Did I mention he also has a flair for the dramatic? 

Many electric vehicle (EV) advocates, or "EVangelists," as he calls them, have tried to refute his arguments.  One of the more coherent attempts was "Tesla and the Future of the Electric Car,"  which I recently reprinted as a guest article on AltEnergyStocks.

Innovation

I personally find both arguments incomplete.  Petersen has a strong libertarian streak, and the thought of wasteful subsidies drives him to distraction.  EV subsidies top his list of pet peeves, although he's curiously a fan of government meddling in the transportation market when it comes to CAFE standards.  The EVangelists often correctly point out that Petersen is overly pessimistic about innovation, but they focus too much on the potential of innovation to reduce the price and increase the durability of vehicle battery packs.  Yet even the true battery experts are skeptical of the rapid advances in batteries EVangelists predict.  I find both sides to be too focused on "winning" the argument when what we all should be doing is trying to overcome the very real economic barriers to EV adoption.

Like the EVangelists, I believe in the power of innovation.  But it is the nature of innovation to appear where it is least expected.  Battery technology will advance, but the innovations which reduce our dependence on fossil fuels for transportation need not be innovations in battery technology.  Innovations to our mobility system have the potential to reduce the use of oil far more quickly than than improvements in batteries, even while battery innovation will continues.  Such innovations are likely to include potential better battery chemistries and manufacturing, as well as improvements in the rest of the battery, such as better separators, or other changes most of us have not yet thought of.

Systems Thinking

Those battery innovations we can foresee will only bring marginal improvements to battery performance.  As energy efficiency professionals know, giant qualitative improvements come not from replacing a building's components with more efficient ones, but by redesigning the whole system with energy use in mind.  The same is likely to be true in our transportation system: just replacing internal combustion engines (ICE) with electric motors leaves all the potential gains from system improvement on the table.

To get some idea what sorts of system changes may be effective, it helps to understand the costs of our current car paradigm, and why simply replacing the ICE with electric drive alone is unlikely to lead to the widespread adoption of EVs.

Most of the objections to electric cars, and certainly Petersen's, focus on the up-front cost of the car, and the difficulty of paying this back based on the lower operating costs of an electric car.  The key to understanding EV economics (or "EVconomics") is that compared to the cost of the fuel a gas tank holds over its lifetime, it is practically free, while the cost of a rechargeable battery is comparable or even greater than to the cost of all the electricity/fuel it will hold over its useful life.  While ICEconomics is all about the cost of fuel, EVconomics is about getting the most out of the expensive battery, while the cost of the electricity to charge it is relatively unimportant.

EVconomics

A car battery which is only recharged at night will be fully cycled no more than once daily, and probably much less if the car is not driven to its full range every day and may stay in the garage some days.  Because of this, it seems unreasonable to expect an electric car battery to go through more than 300 full charge cycles a year, while 200 full cycles per year is probably closer to the real world average for cars charged only at night.  Since EVs get between 2 and 6 miles per kWh, while gasoline vehicles (not counting hybrids) get between 15 and 40 mpg, I will use as an approximation that 1 gallon of gas can be displaced by about 8 kWh.  That means that each kWh of a battery pack will displace approximately 25 gallons of gas with 200 kWh, and at most 38 gallons of gas with 300 kWh in a year's use.  The following chart shows the number of annual savings expected for each kWh of an electric car's battery for different driving/battery recharging intensities. 
 
EV battery
paybacks.png

If electric cars are to become truly mass market, they will need to accommodate drivers who normally only use half of their potential range a day, and don't drive some days (for about 100 full charge cycles per year, represented by the yellow line) as well as the most intensive users with 300 or more full charge cycles per year.  The yellow line only reaches breakeven over five years with the most optimistic (many would say unrealistic) battery improvement scenario, and then only with gasoline prices doubling to $9 a gallon, meaning that EVs will not make sense for casual drivers any time in the foreseeable future.

EVconomics of the Urban Commuter

Yet even EVangelists do not consider causal drivers to be ideal electric car users.  They tend to focus on the urban commuters.  Such urban commuters have regular commutes that allow them to use most of their battery range on a near daily basis (300 full charge cycles per year, represented by the middle green line on the chart.)  For this group, a five year payback can be achieved if we assume battery prices falling to a more believable $750 per kWh and gas prices rising to a not-incredible $4.80 per gallon.  Yet such intensive usage might reasonably be expected to shorten battery life, meaning that a shorter three year payback might be needed to make the electric car economic. (Note that a battery's life depends not only on the number of times it is cycled, but the depth of those cycles, and how long it is kept at full charge.  Keeping a Lithuim-ion battery at full charge or fully depleted can be particularly damaging.)  A three year break-even would require either a battery cost breakthrough and gas at $5.20, or significant battery improvement and gas at $7.50 per gallon, which seems possible, but is not likely in the next few years.

In other words, without daytime recharging, significant increases in the gas price and significant reductions in battery prices are required to make electric cars economic for even the most intensive drivers.  Only with daytime recharging and average usage of more than a full charge cycle per day (500 full charges per year) do EVs begin to make economic sense with current ($4) gas prices and ($1000/kWh) battery prices.  Current prices lead to a five year breakeven at 500 full charge cycles per year, although some increase in the gas price or reduction in battery prices will probably be needed to accommodate the reduction in battery lifetime that would come from such intensive usage.

Societal Benefits and Costs

At this point, it would be easy to conclude that Petersen is right, and EVangelists are high on "hope-ium," since massive improvements in battery economics or massive increases in the price of gas would be required to make EVs economical beyond the small niche comprised of vehicles that can be recharged frequently.

That conclusion would be premature, as it only considers the economic benefit of fuel savings as a possible motivation to buy an EV.  If we were only motivated by economics, no one would ever buy a sports car, let alone a Hummer.  (Admittedly, no one is buying Hummers anymore, but there was a time in the early 2000s when they were wildly popular.)  Most people buy vehicles because of what the vehicle says about them, not for the economics. 

In addition to non-fuel economic benefits such as the possibility of using EVs for grid services such as frequency regulation, and the much lower maintenance costs of EVs (bye-bye oil changes and brake pad changes, not to mention trips to the gas station.)  Even if EVs are not lower cost than ICEs, they do a good job lowering the volatility of fuel costs, which can be a significant help in budgeting, as monthly expenses will not swing wildly with the price of gas.

In terms of societal benefits of electric vehicles over conventional vehicles, there are
  • advantage that electricity is produced from domestic sources, leading to increased economic growth
  • the reduction of conventional pollutants in our cities leading to better health,
  • less noise pollution
  • the ability to use our existing electricity infrastructure more intensively and so get more value out of it
  • The potential to reduce the cost of renewable electricity integration.
On the other hand, EVs come with some cost as well.  Lowering the unit cost of driving will encourage more of it, and while more driving brings marginal benefits to the driver, it also comes with costs to society.  Societal costs of driving include
  • traffic congestion
  • pollution (even if a vehicle is charged with renewable electricity, that electricity could have been used to reduce the use of fossil electricity if it had not been used for driving)
  • traffic accidents leading both to property damage and injuries/fatalities
  • increased road maintenance and construction costs
  • The potential increases in the cost of electricity infrastructure (these may be minimal with smart charging, but could be substantial without it.)
Why Not Natural Gas?

I'm not swayed by arguments that it makes sense to subsidize natural gas vehicles in preference to EVs because they currently are a more economic solution.  Natural gas vehicles are a band-aid "solution" to the problem of peak oil, as they depend on a limited fossil resource.  Natural gas vehicles only delay the day we will have to transition to renewable transportation fuels, and so the necessary infrastructure for refilling natural gas vehicles will only delay the day that we shift to a truly sustainable transportation infrastructure.

It makes sense for society to subsidize a technology to the extent that society benefits from that technology.  Natural gas vehicles lack some of the societal benefits of EVs (the potential to lower the cost of renewable electricity integration, reduced noise,) and have more societal costs, namely an increase in the price of natural gas which will be a consequence of increasing demand.  As such, the case for societal subsidies for natural gas vehicles is much weaker than the case for subsidies for EVs.

The Right Sort of EV Subsidy

To the extent that the societal benefits of electric vehicles outweigh the societal costs, it makes sense to subsidize their adoption.  Nevertheless, there are much better ways to do this than to subsidize the purchase of vehicles.  Such subsidies will maximize societal benefit from EVs, not the benefits to individual EV owners.

Any intervention to favor EVs should focus on maximizing societal benefit, not benefits to individual users.  From my discussion and chart above, it is clear that there are at least three possible paths to broad EV affordability:
  1. Increased gasoline prices would make EVs more practical by increasing the incremental savings of using electric drive
  2. Breakthroughs in battery manufacturing and technology would increase EV affordability by reducing the cost of batteries.
  3. Increased deployment of charging infrastructure would allow EV owners to recharge more often and receive more benefit from each kWh of battery pack.  This would in turn make EVs with smaller battery packs more practical, and bring down the overall cost of EVs.
  4. Funding EVs for public use.
We'll need to make significant progress on multiple fronts before EVs are truly competitive with fossil fueled vehicles.  Note that direct subsidies for the purchase of plug-in vehicles are not in my list. That is because the benefits of such subsidies flow directly to the EV buyer, but do much less for society as a whole. 

Increasing Gas Prices

Since driving carries external costs to society (congestion, pollution, accidents, and road maintenance), raising gas prices through a gas or carbon tax not only helps to make electric vehicles more affordable, it makes ICE drivers internalize some of those societal costs.  Yet since many of these negative externalities of driving are common to all cars, including EVs, gas taxes are not the most efficient way to address these externalities.  A much better way in terms of economic efficiency would be charges based on Vehicle Miles Traveled (VMT), since fuel efficient vehicles (including EVs) create just as much congestion, road wear, and as many accidents as inefficient ones.  The best argument for using gas taxes instead is simply that we already have the mechanism in place, and therefor gas taxes would be easier to implement than VMT charges.  Gas taxes have the side effect of encouraging EV ownership, but they do nothing to address the societal costs of congestion, accidents, and road maintenance.

On the other hand, in the current political anti-tax climate, raising gas taxes is probably a non-starter, even if it were done in a revenue-neutral way with the increased revenues being used to reduce other, less economically efficient taxes.  VMT charges might actually be more politically acceptable, if they replaced existing flat fees (such as vehicle registration and insurance.)

Battery and EV Research

Scientific and technical breakthroughs often hold significant benefits for society as a whole, while investors are seldom able to capture much more than a small fraction of the benefits.  Hence, it is easy to justify public funding of research into advanced batteries, since better, cheaper, longer lasting batteries will benefit all of society.  Such research funding is likely to be money much better spent than subsidies for individuals buying plug-in vehicles.

Charging Infrastructure

As I demonstrated in my analysis of EV economics above, frequent charging can greatly improve the economics of EVs.  More frequent charging requires neither uncertain technical breakthroughs nor politically intractable increases in gas prices.  Subsidizing the deployment of a network of public charging stations also has much broader benefits than subsidizing EV purchases, because public charging stations benefit current and future plug-in vehicle users, not just the individual EV owner who receives a rebate.

Charging stations on the fringes of the network bring benefits to plug in vehicle owners even if they are never used, because the existence of a nearby charging station gives an EV owner the confidence needed to overcome range anxiety, and hence use more of a vehicle's battery capacity on a given trip, and since such charging points are unlikely to recoup their costs through usage fees, subsidizing charging stations at the edges of the network is easy to justify because their societal benefits are high while their profit potential is low.

One charging infrastructure stock is ECOtality (ECTY), afavored electric car investment of Jeff Siegel at Energy and Capital.  Although I think electric vehicle infrastructure is the right sort of investment for society, I'm less sure buying this stock is the best idea for stock market investors.  The company has little debt, but is rapidly burning through cash, and seems to be a long way from profitability, with a -127% operating margin (i.e. they are losing more money on every sale than they get in revenue, even before paying for overhead.) 

That said, ECOtality's prospects would be greatly helped if government did the right thing and shifted electric vehicle subsidies to infrastructure rather than the purchase of cars.  But my faith in government doing the right thing these days is quite low, given the incredible level of partisan bickering, ideological grandstanding, and incredible idiocy which were recently on display in Washington in the form of a game of fiscal chicken played with the possibility of default by our so-called leaders on Capitol Hill in the debt ceiling debate.

Public Vehicles

If we are going to subsidize EVs directly, it makes much more sense to subsidize EVs used by as many people as possible, rather than those owned by individuals.  EVs in public transit make a lot of sense in this regard, since the benefits of lower operating costs flow not to private individuals, but to the all the users of public transit.

The other advantage of electric vehicles for public transit is that many are well suited to electrification.  Electrification of rail and trolley bus routes is economic on more heavily traveled routes, as many trains can share the same electric infrastructure.  Such routes could be extended short distances at fairly low cost by adding batteries to trolleys and electric locomotives to increase their range onto less frequently used routes without electrification.  When these trains or trolleys return to the electrified portion of the route, the batteries could be recharged while the bus or locomotive was still in service, allowing many charge cycles per day, making this sort of EV economic even at current battery prices.

Giving car-sharing services such as Zipcar (ZIP) incentives to use EVs may also make sense since these vehicles are typically rented by the hour and return to a limited number of fixed locations where charging points can be located.  Measures to encourage e-bikes among bike-sharing services make sense using a similar logic.  Although e-bikes have more associated emissions than traditional muscle-powered bikes, the electric assist on e-bikes opens bicycle commuting to the less physically fit who might otherwise choose to use a car.  If even one e-bike ride in five displaces a car journey, there will be a net benefit in terms of congestion and emissions.

Conclusion

Electric drive technology, especially batteries, has not yet reached a point where EVs make economic sense when compared to traditional hybrid electric vehicles or ICE cars.  Until it does, the primary drivers of EV adoption are likely to be the intangible benefits to EV owners.  Like sports cars and SUVs, EVs are most likely to be bought by individuals who like what EV ownership says about themselves.  In this situation, it makes no more sense to subsidize the individual purchase of EVs than it makes sense to subsidize the purchase of granite counter tops.

Yet current economics of EVs do not mean that government cannot or should not take useful measures to promote the transition from ICE to electric drive.  Just because today's EV technology is not economic in the context of our current transportation paradigm does not mean that EVs have no potential.  Appropriate policy can ensure that EVs both suceed and are a benefit to society as a whole.  Nudges such as VMT fees which reduce the societal cost of driving and encourage the use of alternative transport which is more suited to electric drive are one example of such policies. 

There are many useful niches for electric drive technology in vehicles that can be charged more than once a day, and better charging infrastructure and support for battery research can make useful contributions to making electric drive an economic and practical part of the solution to the challenge of peak oil which can also help with the challenge of climate change by aiding with the integration of variable renewable energy into the electric grid. 

September 13, 2011

Tesla And The Future Of The Electric Car

guest post by Clean Energy Intel

A debate has once again been raised with regard to the future of clean technology and in particular the electric car. Whilst many of the issues on which this debate is based are genuine, they in fact fail to get to the heart of the matter. It therefore seems worthwhile to address some of central issues directly.

The Global Problem of Oil’s Monopoly in the Transport Sector

At the heart of the matter is the simple fact that a number of threatening global issues cannot be dealt with unless we end the effective monopoly of petroleum products in the transportation sector:

  • Economic security – the monopoly position currently enjoyed by oil leaves the global economic cycle very exposed to the gyrations of both the oil price and political instability in the Arab world – an arena which continues to be very volatile. It is no co-incidence that the recession and financial calamity of 2008 was preceded by a sharp rise in the price of oil or that the same has been true of the softening of the recovery this year. Oil is the only strategic commodity capable of having such a disruptive impact on the economic cycle and frankly the world’s oil reserves are largely concentrated in hands which don’t necessarily appear to act in favor of stability.
  • National Security – oil’s monopoly position ensures a continued flow of funds into the national economies of nations who are not particularly friendly to the interests of the US or western democracy as a whole.
  • Global warming and associated abnormal weather patterns. I have no wish to get embroiled in the current debate over climate science. However, the risks are clearly there whether or not we fully understand the processes at work. Most importantly, climate science predicts not just a warming of the planet over time but more importantly a proliferation of abnormal weather patterns – more frequent occurrence of droughts and floods etc. That is exactly what we are seeing. If climate science is correct these disruptions will continue to get worse. I don’t believe that the precise interactions at work here can be definitively proven. Only time will tell. However, all the risk is that this is another factor likely to increasingly influence both policy-makers and consumers.

I don’t feel the need to argue the precise detail related to each of these points. The fact of the matter is simply that, taken together, they represent inordinate risks to the global policy environment – risks which we largely face because we accept the monopoly position enjoyed by oil in the transportation sector.

No matter which way you look at it, one or other of these issues will keep rearing their head until we address them. As we have seen this year, developments on a global scale will simply keep bringing us back to the essential dilemma that oil’s monopoly needs to be dealt with.

That will continue to influence both policy-makers and consumers. The pressure on these issues may die down for a while – but only until the next oil shock or some other calamity. Consequently, time and again we will be brought back to the fact that we have to allow and encourage a free market in alternatives to oil in the transportation sector.

The essential point to understand is simply that these issues will keep coming to the forefront of the policy agenda until dealt with – and that both policy-makers and consumers will increasingly move towards solutions.

Resource Scarcity and Replacing Oil as a Strategic Commodity

The problem is of course that given the all-pervasive use of oil in the transport sector, it is extremely difficult to find a single technology or commodity capable of replacing it on its own. This is particularly true in the face of the growing demands on the earth’s limited resources which are rising relentlessly due to both population growth and the shift in global incomes towards poorer populations. Whilst the later factor is of course desirable, it produces an inexorable rise in global demand.

These factors have of course been prominent in creating the very need for clean technology and the related need for an end to oil’s monopoly in the transport sector. However, they also suggest that we are likely to face supply constraints across a range of commodities going forward – particularly those related to new demand for high-tech solutions.

These issues are extremely important and point to a number of conclusions:

  • It would be a grave mistake for anyone in the green community to see the electric vehicle or any other single technology as a simple solution to the problem of the way in which we fuel the transport sector.
  • It would be an equally grave major mistake for governments to try to pick winners or force a single solution to these problems. The end result would likely be alternative supply constraints and difficulties.
  • We need to let the free market do its job.

And this brings us to the heart of the matter. The problem with oil is not simply that it is a limited natural resource with an associated highly volatile price. Many other commodities face the same problems. What makes the problem with oil significantly different is that it is in a monopoly position as the sole strategic commodity in the transport sector.

Where the free market is allowed to function properly, the pricing mechanism creates proper resource allocation and usage, alters the pattern of demand and generates demand for alternatives, stimulating investment and innovation. It’s not perfect but it works. It gets the private sector moving on the deliverance of solutions.

Conversely, there are massive barriers to entry in terms of refueling the transport sector and this does not allow the market to flexibly adjust to supply constraints and use a multiplicity of solutions in order to spread demand across a range of resources.

The bottom line is that governments get themselves into trouble when they pour money speculatively into specific solutions. It’s not the government’s role to pick winners. However, it is the government’s job to act against monopolistic barriers to entry and to ensure a free market. That’s what needs to be done with regard to oil’s monopoly role in the transport sector.

The electric car has a role here. Not as the single solution to the problem but rather as one of a range of potential solutions. The most rational path forward is to break down the barriers to entry, allow free competition and let the market do the rest. A few steps forward seem appropriate:

  • Greater use of natural gas in the trucking sector. The Natural Gas Act would aid the roll-out of natural gas filling stations across specific trucking corridors.
  • The Open Fuel Standard Act. For the cost of merely $100 per vehicle, new cars can be produced with the capacity to take ethanol, methanol and other biofuels as they are developed. Again, simple free competition. Open the market, innovation will do the rest.
  • The role of the electric vehicle is clear. It is certainly not to entirely replace oil. However, it can add an alternative source of power. This is the only way we can spread demand in the transportation sector across a range of finite natural resources. Plug-in hybrid electric vehicles (PHEVs) in particular when combined with the Open Fuel Standard will allow competition between various forms of liquid fuels and electricity. Let the consumer decide.
  • Greater use of electricty as a clean energy solution also requires that we move towards cleaner technologies in power generation itself. Increased use of natural gas to meet base load requirements, combined with a 33% Renewable Energy Standard such as that in place in California would seem like a reasonable step forward.

What is clear is that the issues of population growth, the spread of income growth to the world’s poorer nations and the resultant demand growth, mean that oil simply cannot continue to play its current role for the rest of this century. The solution is not to force the march on any one single alternative. It is to break down the barriers to entry and allow the free market to provide a range of solutions. This is the only way to deal with the very real problems of resource scarcity that we face in the years ahead.

The Forces Behind Electrification Are Already in Play

Most importantly, it appears that the factors behind the increasing development of various forms of EV alternatives are already in play. The single most important factor has probably been the new CAFE standards here in the States. These will help produce more fuel-efficient vehicles based on the internal combustion engine (ICE). However, automakers appear to have realized that in order to make the grade they will have to innovate and adopt a greater use of EV technology across their respective model ranges.

This has, for example, led recently to a number of announcements in the EV field from General Motors (GM), clearly pointing to the company’s commitment to moving forward:

  • The announcement of a battery pack deal with A123 Systems – see here
  • The announcement of a plug-in hybrid Cadillac ELR, based on the Converj.
  • The announcement late last week of a broadening of the company’s collaboration with LG – see here.


What is becoming clear is that we are likely to see a range of approaches and battery sizes. The most interesting is probably Toyota’s (TM) approach with the plug-in Prius, which will have a small Lithium battery capable of covering some 13 miles or so. Nevertheless, it is competition at the fuel pump. Combined with an Open Fuel Standard, this has the potential to be the car of the future. Or certainly one of them.

Battery Efficiencies and Cost Reduction

Opponents of clean energy and the electric vehicle for some peculiar reason like to show charts of the improvement in disk capacity or CPU speed in the IT industry compared to, for example, battery energy density. The purpose is no doubt to illustrate the point that the laws of chemistry do not allow electric batteries to provide the kind of exponential improvements in efficiency as seen in the IT industry and described by Moore’s Law. Whilst this is true, it is also entirely irrelevant. There is absolutely no reason to expect battery technology to replicate the efficiency gains of the IT world. Most importantly, such efficiency gains are not exhibited by the internal combustion engine nor in any other technology that electric batteries or clean technology actually competes with in the real world. So let’s leave the wonders of the IT industry aside and focus on the realities of energy and the transport sector.

It is nevertheless true that the electric batteries currently in production are certainly expensive and have not in general managed to breach the question of range anxiety without significant cost or a back-up generator. So where will the improvements come from? Let me focus on a few significant points:

  • Any analysis based on the reputed cost structure faced by A123 Systems (AONE), which puts at battery costs at $1,000 per kWh, is not particularly insightful in a discussion of the future of the EV market as a whole. Developments in the overall EV market will clearly be driven by the more efficient producers, of which A123 Systems is currently not one.
  • Tesla’s (TSLA) Model S appears to have significant potential to alter the metrics in the EV market. The company has of course not released cost details of its new battery packs. However, the company has provided literature suggesting that on a $ per kWh basis the battery pack of the Model S is down to 42% of the cost of the original battery pack for the first version of the Roadster. The Roadster Sport had already gotten those costs down to 69%, so the gains continue to be impressive. The further expected gains are no doubt based on the Custom 18650 automotive cell in development with Panasonic.
  • That is why Tesla appears to be able to suggest that when the 300 mile version of the Model S is released next year it will cost somewherearound $75,000. There appears to be a demand for such a luxury EV and those metrics start to offer an interesting option in the luxury car market.
  • Efficiency gains that have been made elsewhere should also be recognized. For example, the new Ford Focus BEV has a 70-mile single-charge range, similar to that offered by the Nissan Leaf. However, the company claims that its 23 kwh battery pack can be charged with a Level 2, 240-volt charger in 3-4 hours - almost twice as fast as the Leaf.
  • Looking forward on a more medium-term basis, potential advances will no doubt come from new innovation related to alternative battery technologies – particularly related to Vanadium for example. Again, it is not necessary to try and pick winners. It’s simply the case that competition will spur innovation. These new technologies are of course a threat to lithium battery specialists such as A123 Systems. However, they are nothing but a potential boon to a company such as Tesla, who is not tied to a particular battery system and who could work with whatever a Panasonic or alternative can provide in the future most cost effectively.
  • Perhaps the most significant point is that further gains, particularly in lower end commuter-orientated EVs and PHEVs, are likely to come from other production advances outside of battery technology. A critical issue is likely to be weight-shedding and related new materials for example. This is no doubt the key to GM’s expanded relationship with LG Group. GM had previously been collaborating with LG Chem on the battery packs for the Volt and the Ampera. However, the company has recently announced that the relationship between the two companies will be expanded to involve LG Group as a whole. This will allow the Korean company to offer its expertise in other areas, particularly related to 'vehicle structures and architectures'. See more detail here. And Tesla of course is already working with aluminum in order to get the weight of the Model S down.
  • Finally, the introduction of Level 3, 480-volt chargers is also significant to the potential growth of the EV market. This will be particularly true once they are installed where they are most needed, across the nation's Interstate highways - as is for example planned with regard to the Pacific Coast Green Highway. These Level 3, 480-volt rapid chargers can provide a 19 kwh charge to a Leaf for example in 30 minutes. Some other EVs can be charged more rapidly. Drving from LA to the Canadian border in a Tesla will be a breeze.

All of this suggests that in fact there is no slow crawl ahead when it comes to overall efficiencies for EV vehicles. Most importantly, such efficiencies in terms of the performance of the cars as a whole will not be limited to efficiencies in battery technology.

What to Invest in: Tesla
  • As discussed above, Tesla (TSLA) is a low cost player in terms of the company's battery power train technology - despite being well placed in the luxury market.
  • The company has developed a significant brand name.
  • When the Model S is first produced in 2012, sales appear likely to go well. The company already has customer orders for some 5,550 units.The company's target of 20,000 unit sales in full year 2013 seems reasonable.
  • Tesla has an ongoing relationship with Toyota and seems likely to play a significant role in the roll-out of Toyota's EV program. The suggestion is that the two companies are currently negotiating over a $1bn deal - more detail here.
In my disclosure below, I have stated that I own no stock in any of the companies discussed. This is simply because, having had a reasonable month in difficult conditions, I decided to use Friday's rally to lock in profits on my clean technology portfolio. I intend to use any weakness into September to buy back my positions in stocks such as Tesla.

Finally, the bottom line is that the global issues discussed above will keep bringing both policy-makers and consumers back to the same questions. There is only one answer. It's time to break oil's monopoly in the transportation sector - and to put our trust in the free market and American innovation.

Disclosure: I have no positions in the stocks discussed.

About the Author: Clean Energy Intel is a free investment advisory service produced by a retired hedge fund strategist who also manages his own money inside a Clean Energy investment fund.

August 25, 2011

It's Time to Kill the Electric Car, Drive a Stake Through its Heart and Burn the Corpse

John Petersen

I was recently invited to prepare a memorandum on the battery industry for the electric mobility working group of the World Energy Council, a global thought leadership forum established in 1923 that includes 93 national committees representing over 3,000 member organizations including governments, businesses and research institutions. Since my memorandum integrated several themes from this blog and tied them all together, I've decided to publish a lightly edited version for readers. To set the stage for the substantive discussion that follows, I’ll start with an 1883 quote from Thomas Edison:

“The storage battery is one of those peculiar things which appeals to the imagination, and no more perfect thing could be desired by stock swindlers than that very selfsame thing. Just as soon as a man gets working on the secondary battery it brings out his latent capacity for lying.”

At the time, Edison was a customer who wanted to buy batteries to improve the reliability of the Pearl Street Station, the first coal-fired utility in North America. An essential truth even Edison failed to recognize is that battery developers don't lie, but potential customers consistently lie to themselves. They hear about gee-whiz inventions, overestimate the practical importance of the innovations and then make quantum leaps of imagination from the reasonable to the absurd. Therefore, the most important task for investors is to critically and objectively examine their own assumptions and avoid hopium induced hallucinations.

Cleantech, the Sixth Industrial Revolution

I believe we are in the early stages of a new industrial revolution, the Age of Cleantech. The cleantech revolution will be different from all prior industrial revolutions because the IT revolution forever changed a dynamic that has existed since the dawn of civilization. It gave the poor and the ignorant access to the global information network, proved that there was more to life than deprivation and sparked a burning desire for something better in billions of people who were once content with mere subsistence. It's long-term significance will be more profound than the discovery and settlement of North America.

The inescapable new megatrend is that six billion people have been awakened to opportunity and are striving to earn a small slice of the lifestyle that 600 million of us enjoy and typically take for granted. If the six billion are even marginally successful and attain a paltry 10% purchasing power parity, global demand for everything must double. Therefore, the most important challenge of our age will be finding new ways to satisfy insatiable demand for water, food, construction materials, energy and every commodity you can imagine.

The first and easiest step will be to eliminate waste in all its pernicious forms to make more room at the economic table. After that, the challenges become far more daunting.

The Everything Shortage

There is a widely held but grossly inaccurate belief that energy prices and CO2 emissions are the most pressing problems facing humanity. The reason is simple – in advanced economies everybody buys energy commodities in minimally processed form several times a month. Each of those purchases reinforces a belief that energy prices are an intolerable burden. While few of us purchase other minimally processed commodities beyond energy and food, the following graph compares the prices of non-ferrous industrial metals with the price of crude oil and highlights an inescapable and highly inconvenient truth that almost nobody understands –

METAL PRICES ARE MORE VOLATILE AND INCREASING MORE RAPIDLY THAN ENERGY PRICES.

6.23.11 Metals vs Oil.png

To compound the problem, global production of energy resources is several orders of magnitude greater than global production of critical metals, as the following table based on data from the U.S. Geological Survey clearly shows.

7.10.11 Energy vs Metals.png

Metric tons per person vs. kilograms per person is an insurmountable disparity.

Most alternative energy and electric drive technologies can’t be implemented without large quantities of scarce metals. All of the metals in the table have critical competitive uses in other essential products and significantly increasing global production of any of them is problematic if not impossible. While improved recycling practices have the potential to help alleviate shortages of critical metals, a recent UN study of global recycling rates for 60 industrial and technology metals found that only 18 had end of life recycling rates over 50% while 34 had end of life recycling rates under 1%. The metals that are most important to alternative energy and electric drive are very difficult and expensive to recycle. So with the exception of lithium, which is a plentiful resource that only represents 5% or 6% of the metal content in Li-ion batteries, the world cannot produce enough technology metals to permit a widespread transition to alternative energy or electric drive.

Any alternative that can't be deployed at relevant scale isn’t an alternative at all. It’s merely an expensive distraction for the masses, a bit like the circus in ancient Rome.

The Diminishing Marginal Utility of Batteries

Once you understand that metal supplies are far more constrained than energy supplies, every evaluation of electric drive becomes a simple exercise in optimizing the fuel savings from each unit of metal used. The five generic levels of electrification and the typical fuel savings at each level are summarized below.

Vehicle configuration Battery Savings
Stop-start systems use lead-acid batteries to eliminate idling while a vehicle is stopped but do not provide any electric boost. 1.0 kWh 10%
Mild hybrids like the Honda Insight use NiMH batteries to recapture braking energy and provide up to 20 or 30 horsepower of acceleration boost. 1.5 kWh 25%
Full hybrids like the Toyota Prius use NiMH batteries to recapture braking energy, offer electric launch and provide up to 80 horsepower of acceleration boost. 1.5˚kWh 40%
Plug-in hybrids like the GM Volt use Li-ion batteries to offer 40 miles of electric range before a range extender engine kicks in to power the electric drive. 16 kWh 75%
Battery electric vehicles like the Nissan Leaf use Li-ion batteries to offer up to 100 miles of electric range under optimal conditions. 24 kWh 100%

While NiMH has been the preferred battery chemistry for mild and full hybrids since they were introduced in the late 90s, it is a terribly resource constrained chemistry because the “M” most commonly used in NiMH batteries is the rare earth metal lanthanum. With per capita global lanthanum production running at a rate of 5 grams per year, significant expansion of NiMH battery production is effectively impossible, which is the main reason that Li-ion is gaining traction for use in electric vehicles. While not free from doubt, many industry observers believe NiMH and Li-ion will be the preferred batteries for full hybrids while mild hybrids will use NiMH, Li-ion and advanced lead-acid batteries.

There are important technical differences between the high-power batteries required for hybrid drive and the high-energy batteries required for electric drive. The differences, however, are relatively insignificant when it comes to raw materials requirements. Therefore, it’s not unreasonable to use battery capacity as a rough proxy for metal consumption in a fuel economy optimization analysis. The following comparisons assume that a new car with an internal combustion engine will use 400 gallons of fuel for 12,000 miles of annual driving. For the sake of simplicity, they assume a total of 96 kWh of batteries are available to reduce societal fuel consumption. The numbers are easily scalable.
  • 96 kWh of batteries would be enough for a fleet of 64 Prius-class hybrids that will each save 160 gallons of fuel per year and generate a societal fuel savings of 10,240 gallons per year;
  • 96 kWh of batteries would be enough for a fleet of six Volt-class plug-in hybrids that will each save 300 gallons of fuel per year and generate a societal fuel savings of 1,800 gallons per year; and
  • 96 kWh of batteries would be enough for a fleet of four Leaf class electric vehicles that will each save 400 gallons of fuel per year and generate a societal fuel savings of 1,600 gallons per year.
This example highlights the fundamental flaw in all vehicle electrification schemes. When batteries are used to recover and reuse braking energy that would otherwise be wasted, a single kWh of capacity can save up to 107 gallons of fuel per year. When batteries are used as fuel tank replacements, a single kWh of capacity can only save 19 gallons of fuel per year and most of the fuel savings at the vehicle level will be offset by increased fuel consumption in power plants.

Using batteries to enable energy efficiency technologies like recuperative braking is sensible conservation.

Using batteries as fuel tank replacements is a zero-sum game that consumes huge quantities of metals for the sole purpose of substituting electricity for oil. Since roughly 45% of domestic electric power from coal fired plants and that percentage will decline very slowly, the only rational conclusion is that electric drive is unconscionable waste and pollution masquerading as conservation.

The Green Power Sophistry

EV advocates invariably paint an appealing picture of EVs being charged by wind or solar power and claim that the combination of the two is wondrous beyond reckoning. Beyond the impossibility of charging an EV from home solar panels and driving it to work at the same time, the reality is that the presumptive virtue of wind and solar power arises from generating green electrons, not using them. Once green electrons exist, it makes no difference whether they’re used to power an EV or a toaster oven. Since green electrons that are consumed in an EV can't be used to clean up a toaster oven, there can be no double counting of virtue. In fact, since wind and solar power impose their own burdens on materials supply chains there's a solid argument that the pretty picture is doubly wasteful.

The Fixed Cost Conundrum

In a conventional vehicle, the fixed vehicle cost is relatively low and the variable fuel cost per mile is relatively high. In electric drive the dynamic is reversed and the fixed vehicle cost is relatively high while the variable fuel cost per mile is relatively low. While few financial metrics are more shrouded in secrecy, intrigue and speculation than Li-ion battery manufacturing costs, A123 Systems (AONE) includes enough hard data in its quarterly and annual reports to the SEC to permit a reasonable estimate. The following graph compares A123’s reported quarterly revenue, their adjusted cost of goods sold (after backing out unabsorbed manufacturing costs) and their gross margin per kWh of batteries shipped.

8.8.11 A123 Graph.png

A123’s direct battery production costs have averaged over $1,000 per kWh for the last two years. By the time A123 adds a reasonable profit margin for its effort and an automaker adds another layer of markup, the only possible outcome is an end-user cost of $1,500 per kWh or more.

Since most advocates insist that battery costs will decline rapidly, I’ll assume end-user battery pack costs of $1,000 and $500 per kWh to keep the peace. I'll also use several other charitable assumptions including stable electricity costs of $0.12 per kWh, no loss of battery capacity over time, no cycle-life limitations and a 15% second-life value. The following graph presents alternative gas price scenarios of $3, $6 and $9 per gallon, and then overlays depreciation and charging cost curves for an EV with a 25 kWh battery pack priced at $1,000 and $500 per kWh. The solid red and green lines show current gas and battery prices. The dashed lines show possible futures that are uncertain as to both timing and magnitude.

6.19.10 Fuel Costs.png

The most striking feature of this graph is the shape of the curves. Where prevailing mythology holds that EVs will be wonderful for urbanites with short commutes that don't need much range flexibility, the curves show that high-mileage drivers who presumably need more flexibility will derive the most value. The reason is simple – spreading battery pack depreciation over 5,000 or even 10,000 miles a year results in a higher cost per mile than spreading that depreciation over 20,000 or 25,000 miles a year. Since the GM Volt has an effective electric range of 40 miles per charge and the Nissan Leaf has an effective range closer to 80 miles, it's clear that high mileage users will need to charge more than once a day to get the maximum benefit. Since nobody has claimed a useful life of more than about 100,000 miles for a battery pack, it seems likely that sustained and frequent recharging will impair the economics for high-mileage users who will need to replace their battery packs more frequently.

Moore’s Curse

The IT revolution set the stage for fatally flawed assumptions in cleantech because we all got accustomed to the phenomenon known as Moore’s Law, which describes exponential improvements in the speed and processing power of electronics. In the Moore’s Law world, electronic devices doubled their capacity every 18 to 24 months while requiring the same or smaller natural resource inputs. As a result, we’ve seen decades of falling prices for exponentially better products.

Unfortunately, Moore’s Law has no relevance to electric drive because the energy needed to move a given mass a given distance at a given speed is constrained by the laws of physics. Likewise, the number of electrons in a given mass of chemically active material is constrained by the laws of chemistry. These laws cannot be violated and in practice the theoretical limits can never be achieved. The best we can possibly hope for is highly efficient systems that take us most of the way there.

In the IT world of Moore’s Law the generational progression was 2, 4, 8, 16 etc.

In the cleantech world of Moore’s Curse the generational progression will be 50%, 75%, 87.5% etc.

The following graph is a bit dated, but it shows that current expectations respecting future advances in battery technology are completely out of touch with historical reality.

8.19.11 Batteries.png

When Edison was bitching about batteries specific energies of 25 wh/kg were common. A hundred and thirty years later specific energies of 150 wh/kg are pushing the envelope. A six-fold improvement over 130 years does not provide a rational basis for prevailing expectations.

Investment Conclusions

It's an Iron Law of Nature – things that can't happen won't happen. The world does not and cannot produce enough metals to permit the deployment of electric drive at a rate that approaches relevant scale. Chinese wind turbine producers are reeling from skyrocketing rare earth metal prices that are scuttling wind power deployment plans. Beijing is backing away from its aggressive vehicle electrification policies. If China can't make the numbers work in a command economy that produces over 95% of the world's rare earth metals, nobody can. The inescapable conclusion for investors is that resource dependent alternative energy and vehicle electrification schemes must fail.

Let's face it folks, it's time to kill the electric car, drive a stake through its heart and burn the corpse.

Companies like Tesla Motors (TSLA) are doomed because their vanity products can't possibly make a difference and have all the environmental and economic relevance of pet rocks. The only companies that stand a chance of long term survival are manufacturers of efficiency technologies that reduce aggregate resource consumption. If lithium-ion battery manufacturers like A123 Systems, Altair Nanotechnologies (ALTI) and Valence Technologies (VLNC) can stop chasing rainbows and focus on sensible applications like electric two-wheeled vehicles that reduce natural resource waste, they may have long and prosperous futures. Manufacturers of fundamentally cheap energy efficiency technologies like Johnson Controls (JCI) and Exide Technologies (XIDE) are certain to thrive in any event. The surprise winners in a resource constrained world will most likely be disruptive innovations like the PbC® battery from Axion Power International (AXPW.OB) which uses a third less metal while promising a ten-fold improvement in battery cycle life to optimize the performance of efficiency technologies like stop-start systems, stationary applications and hybrid drive for everything from passenger cars to freight trains.

This article provides a summary overview of several topics I’ve examined in detail over the last three years. A complete archive of my work is available on Seeking Alpha. Most of the resource materials I’ve relied on are available through the numerous hyperlinks I’ve embedded in my articles.

Given the nature of the investing process I don't expect anyone to accept my logic without independently verifying the facts. I sincerely hope that this article will give at least a few investors reason to question their own assumptions in a hopium free environment. Most of us grew up in a rare period of privilege, prosperity and plenty that has seriously distorted our worldview. If we don't accept the reality that our supply chain assumptions are fatally flawed, we can’t possibly identify realistic solutions that can be implemented at relevant scale.

My perspective is very different from the views held by many alternative energy and vehicle electrification analysts. Some readers will no doubt find my thinking reactionary if not heretical. But even the Catholic Church requires a Devil's Advocate to argue against the canonization of proposed saints and gives that advocate fair and equal consideration before making a decision.

Disclosure: Author is a former director of Axion Power International (AXPW.OB) and holds a substantial long position in its common stock.

August 19, 2011

EVs, Lithium-ion Batteries and Liars Poker

John Petersen

Last week I stumbled across a link that led to a 2010 report from the National Research Council titled "Hidden Costs of Energy, Unpriced Consequences of Energy Production and Use." This free 506-page book takes a life-cycle approach – from fuel extraction to energy production, distribution, and use to disposal of waste products – and attempts to quantify the health, climate and other unpriced damages that arise from the use of various energy sources for electricity, transportation and heat. After studying the NRC's discussion of the unpriced health effects, other nonclimate damages and greenhouse gas emissions of various transportation alternatives, and thinking about what the numbers really mean, I've come to the conclusion that the electric vehicle advocates are playing liars poker with their cost and benefit numbers – emphasizing a couple areas where electric drive is superior and de-emphasizing or completely ignoring a far larger number of areas where electric drive is clearly inferior. The result, of course, is unfounded and wildly optimistic claims of superiority based on four sevens in a ten digit serial number that don't mean a thing if your goal is to evaluate the entire serial number.

The first graph from the introduction summarizes the unpriced health and other nonclimate damages arising from the use of thirteen different vehicle fueling technologies over the entire cycle life of an automobile and quantifies the unpriced mine to junkyard cost per vehicle mile traveled, including well or mine to wheels costs of manufacturing the vehicle and fueling it over its operational life.

8.19.11 Health Damages.png

The thing I found most surprising was the relative consistency of the numbers across all thirteen classes, both for today and for the future, and the fact that many advanced drive train technologies score lower than their conventional cousins because the unpriced costs of manufacturing the vehicle or processing the fuel exceed the claimed operating benefits. When you look at the realities from a cradle to grave perspective there are no clearly superior choices and the values are all clustered within ±15% of a $1.25 average. While I derive some personal satisfaction from the idea that the low cost winners are a Prius-class HEV or an internal combustion engine with a CNG fuel system, and that electric drive is just a smidgen cleaner than a diesel engine burning fuel produced from Fischer Tropsch coal liquifaction, the reality is that none of the advanced technologies are inherently better. They're just more expensive.

The game is simply not worth the candle. It’s certainly not worth the enormous expenditures of public funds that governments worldwide don't have. There’s nothing electric drive can accomplish that CNG and fuel efficiency can’t accomplish cleaner, faster and cheaper.

The second graph from the introduction summarizes the unpriced greenhouse gas damages arising from the use of the thirteen different vehicle fueling technologies over the cycle life of an automobile. While the range of variation around a current average of about 450 grams of CO2 per vehicle mile traveled is a little wider at ±25%, once again it's just not worth getting worked up over inconsequential differences that entail substantial incremental costs.

8.19.11 GHG Damages.png

One of the most intriguing take aways from these two graphs is the inescapable conclusion that the differences today are modest and as technologies mature and improve the differences will become less important, not more. By 2030, plug-ins will have no advantage over internal combustion when it comes to greenhouse gasses and be significantly worse than internal combustion when it comes to health and other nonclimate costs.

Over the years I've suffered endless abuse from commenters who decry my appalling lack of vision when it comes to lithium-ion superstars like Ener1 (HEV), A123 Systems (AONE), Altair Nanotechnologies (ALTI) and Valence Technologies (VLNC) that are certain to drive battery performance to new highs while driving manufacturing costs to new lows and enabling a paradigm shift to electric cars from Tesla Motors (TSLA), Nissan (NSANY.PK), General Motors (GM) and a veritable host of newcomers that are positioning for future IPOs and certain to change the world. While the following graph is a little dated, it shows why the electric pipe dream can’t happen unless some genius in a garage comes up with an entirely new way to store electricity.

8.19.11 Batteries.png

Liars poker can be a fun way to fritter away the hours in Wall Street watering holes like Fraunces Tavern, but it creates enormous risk for investors who hear about four sevens but never hear about the other six characters in the serial number. I've seen this melodrama before. For the period from 2000 through 2003 fuel cell developers like Ballard Power (BLPD) and FuelCell Energy (FCEL) carried nosebleed market capitalizations based solely on dreams. From 2005 through 2007, it was the age of corn ethanol kings like Pacific Ethanol (PEIX). Lithium-ion battery developers have already taken it on the chin and there's no question in my mind that Tesla will be the next domino to fall. Its demise is every bit as predictable and certain as Ener1's was.

It's frequently said that those who do not learn from history are condemned to repeat it. There isn't much I can add.

Disclosure: None. | | Comments (12)

July 31, 2011

Aggressive New CAFE Standards; The IC Empire Strikes Back

John Petersen

Last Friday President Obama and executives from thirteen leading automakers gathered in Washington DC to announce an historic agreement to increase fleet-wide fuel economy standards for new cars and light trucks from 27.5 mpg for the 2011 model year to 54.5 mpg for the 2025 model year. While politicians frequently spin superlatives to describe mediocre results, I believe the President's claim that the accord "represents the single most important step we've ever taken as a nation to reduce our dependence on foreign oil" is a refreshing example of political understatement. After three decades of demagoguery, debate, dithering and delay, meaningful policy change has finally arrived, and not a moment too soon.

The economic impact will be immense – a staggering $1.7 trillion in fuel cost savings that will flow directly to consumers. As those savings begin to work their way through the economy and kick-start secondary fiscal multiplier effects, the boost to GDP will be closer to $7 trillion. I believe Friday's agreement will ultimately be seen as the biggest economic stimulus event in human history.

The following graph from a new White House report titled, "Driving Efficiency: Cutting Costs for Families at the Pump and Slashing Dependence on Oil" says it all.

7.31.11 Cafe Sandards.png

The most surprising aspect of this agreement isn't the aggressive goals; it's the fact that the auto industry has helped forge the goals and plans to achieve them by implementing "affordable technologies that are on the road today." The new goals are not based on the electric dreams of a Tesla Motors (TSLA). They're based on the automaker's hard-nosed evaluation of the cumulative gains that can realistically be achieved with existing ICE technologies like engine downsizing, stop-start idle elimination, turbocharging, optimized cooling, low friction, direct fuel injection and variable valve timing.

Individually the fuel economy gains from advanced ICE technologies will only be baby steps toward energy independence. Collectively they'll give American consumers passenger cars with lower well-to-wheels CO2 emissions than a 2012 Nissan (NSANY.PK) Leaf plugged into the typical wall socket. They'll change the world without a budget busting paradigm shift.

In early July The Boston Consulting Group released a new report titled "Powering Autos to 2020; The Era of the Electric Car?" that evaluated the combined potential of baby-step fuel efficiency technologies and considered their likely impact on wildly expensive and impractical proposals to convert the world's transportation infrastructure from liquid fuels to electricity. In the report BCG concluded that:
  • Conventional technologies have significant emissions-reduction potential, but OEMs will need to pull multiple levers simultaneously to meet emissions targets.
  • Advanced ICE technologies can reduce gasoline consumption by 40% at a cost to the consumer of $50 to $60 per percentage point of reduction – roughly half what BCG predicted three years ago.
  • Advanced ICE technologies are likely to become standard equipment worldwide during the next decade.
  • Electric cars will face stiff competition from ICE and will not be the preferred option for most consumers.
  • Battery costs will probably fall to about $9,600 per vehicle, but become increasingly uneconomic as the potential fuel savings per kWh of battery capacity plummets.
  • In addition to dismal economics, plug-ins will face substantial go-to-market challenges including battery durability concerns and the absence of adequate charging infrastructure.
In my view the BCG report is a must read for investors who want to profit from this fuel efficiency mega-trend and avoid heavy losses in vehicle electrification schemes that will become increasingly uneconomic over time. The fundamental flaw is simple. Today an EV with a fully charged 24 kWh battery pack can save a consumer the equivalent of 3 gallons of gas. By 2025, the savings will be closer to 1.5 gallons of gas. Even with falling battery prices the value proposition can only get more challenging with each passing year.

For the last couple years I've been cautioning investors that gee-whiz vehicle electrification technologies are transitory, a flash in the pan, and the biggest business opportunities in energy storage involve cheap, simple and effective baby-step technologies like stop-start idle elimination that will slash fuel consumption by 5% to 15% for a few hundred dollars. The BCG report and the newly announced fuel economy goals are yet another proof of that principle.

The future is all about getting more from less and has absolutely nothing to do with increasing consumption of one class of scarce natural resources in the name of conserving another.

While I can't identify the component manufacturers that will thrive from the widespread implementation of advanced ICE technologies like turbocharging, direct fuel injection and variable valve timing, picking the winners in energy storage is easy. Johnson Controls (JCI) and Exide Technologies (XIDE) will be the first beneficiaries as automakers upgrade their electrical systems to withstand the strains of stop-start idle elimination. As stop-start systems become standard equipment worldwide and the inherent limits of current AGM battery technology become obvious, more powerful energy storage solutions from emerging technology developers like Maxwell Technologies (MXWL) and Axion Power International (AXPW.OB) will ascend to prominence if not dominance.

The new fuel efficiency standards are not an omen of doom for lithium-ion battery solutions from A123 Systems (AONE), Ener1 (HEV) and Valence Technologies (VLNC) which will no doubt gain a toehold among the 6% to 13% of consumers who say they'd purchase an environment-friendly car even if they had to pay a premium over the life of the vehicle. I'm just not certain how significant that toehold will be in light of the incontrovertible reality that less than 2% of consumers actually buy environment-friendly cars.

On balance I believe that survey-based uptake forecasts will be just another example of a painful lesson I learned in the biodiesel business – that individual buying decisions speak louder than surveys and the green in a consumer's wallet always takes priority over the green in his cocktail party conversation.

For several years the mainstream media, financial press and sell-side analysts have been publishing irrationally optimistic stories and reports about the end of the ICE age and the dawn of a golden electric era. On Friday the Obama Administration and the automakers put the world on notice that IC Empire is striking back and plans to bury the now generation of electric wannabes like it has all of their predecessors.

Disclosure: Author is a former director of Axion Power International (AXPW.OB) and holds a substantial long position in its common stock.

April 15, 2011

Lux Research Confirms that Cheap Will Beat Cool in Vehicle Electrification

John Petersen

On March 30th, Lux Research released an update on the vehicle electrification market titled "Small Batteries, Big Sales: The Unlikely Winners in the Electric Vehicle Market" that predicts:
  • E-bikes and micro-hybrids carry minimal storage, but compensate with high volume. E-bikes show strong unit sales, as they sustain a 157 GWh storage market totaling $24.3 billion in revenues in 2016. Micro-hybrids benefit from increasingly stringent emissions limits, supporting 41 GWh and $3.1 billion in storage sales.
  • Hybrid electric vehicles (HEVs) like Toyota's Prius grow steadily while PHEVs and EVs are at the mercy of external factors. Both PHEVs and EV sales are sensitive to oil prices, but catalyze growth for Li-ion batteries, along with HEVs powering a $2.3 billion market in our base case scenario.
  • Advanced lead-acid batteries will dominate the storage market now and in the future, resulting in a 165 GWh and $16.1 billion market in 2016.  Lithium-ion follows, showing strong growth from 4.1 GWh and $2.7 billion in 2011 to 32.2 GWh and $11 billion in 2016.
Since the report echoes several themes I frequently discuss in this blog, it seems like an opportune time to back away from the minutiae and revisit the broad opportunities for growth in the vehicle electrification sector.

The basic drivers of all vehicle electrification initiatives are the desire to break the economic stranglehold of increasingly expensive petroleum, reduce CO2 emissions and improve air quality in big cities. The major countervailing force is the economic reality that consumers will not sacrifice the flexibility and reliability of internal combustion engines for a more expensive alternative that doesn't offer a compelling value proposition. Governments and EVangelicals are pushing hard for flashy EV solutions with miserable economics, but Lux believes cheap will beat cool over the next five years.

Electric Two-wheeled Vehicles

In Lux's view, the runaway winner over the next five years will be e-bikes – the most energy efficient transportation in the world. It expects battery sales for e-bikes to double from $12 billion in 2011 to $24.3 billion in 2016. While roughly 85% of today's e-bikes use lead-acid batteries because they cost less, Lux expects lithium-ion batteries to garner an 18% market share in China by 2016, which implies a global market share of closer to 30%. As an avid cyclist who understands the impact of extra weight on a bicycle, I think Lux's market penetration forecast for lithium-ion is low. Lead-acid may retain its dominance in China, the world's biggest e-bike market, but I'm convinced that lithium-ion will be the battery of choice in North America and Europe where e-bikes are rapidly gaining ground.

Lux expects a limited market for e-bikes outside of China, but I think it's a market that could surprise people who haven't really considered the mobility needs and transportation budgets of young adults and cost-conscious commuters. E-bikes are not an all weather solution, but on a pleasant day a $1,000 e-bike is far more attractive than alternatives that cost thirty to fifty times more and can't come close in the fun per mile category.

I've been following Advanced Battery Technologies (ABAT) for a couple years and have been impressed by its cost control and business strategy. It began as a low cost manufacturer of commodity lithium-ion batteries and then expanded into e-bike manufacturing. It's growth rates and profit margins are impressive enough that I've often said ABAT is too cheap to be cool. ABAT's stock price recently tumbled by over 40% when Variant View Research, an acknowledged short seller, published three "hatchet-job" articles that were highly critical of its operations, financial reports and corporate governance. Since I don't want to jump into the middle of a dogfight, I'll simply note that ABAT is the only publicly held pure play in the e-bike space and seems to have a bright future as a vertically integrated manufacturer of e-bikes, the most popular electric vehicles in the world.

Micro-hybrids

The second biggest market over the next five years will be micro-hybrids, conventional internal combustion vehicles that simply turn the engine off when the car is stopped and restart the engine when the driver takes his foot off the brake. In an earlier report titled "Micro-hybrids: On the Road to Hybrid Vehicle Dominance," Lux forecast that the micro-hybrid market would grow from three million units this year to 34 million units a year by mid-decade. The primary drivers of growth will be strict new European CO2 emissions rules and ambitious new CAFE standards that will be phased in over the next few years. According to Lux "micro-hybrids sit in an enviable position as a cost effective approach to improve fuel efficiency, since their start-stop and regenerative braking capabilities can be implemented in the OEMs' current stable of vehicles, without the more drastic redesigns needed to create a full EV, PHEV, or HEV." Overall, Lux believes the market for advanced batteries in micro-hybrid vehicles will grow from $495 million this year to $3.1 billion by 2016.

Competition in the micro-hybrid battery space is intense and diversified. Johnson Controls (JCI) and Exide Technologies (XIDE) are both offering a variety of advanced lead-acid batteries for micro-hybrids that range from enhanced flooded batteries to valve regulated absorbed glass mat batteries. With their global manufacturing footprints, established OEM relationships and proven manufacturing competence both companies should benefit from impressive growth in OEM battery sales over the next five years.

While advanced lead-acid batteries currently dominate the micro-hybrid battery market, there is a growing body of proof that advanced lead-acid batteries are ill suited to the demands of micro-hybrids. In a 2007 Journal of Power Sources article, a team of battery researchers from Ford described the problem as follows:

"Charge acceptance, particularly at low temperatures, is a battery requirement that determines the charge balance of the power supply system. The more the battery has to contribute to supplying electrical loads, the more essential it becomes that it can be recharged quickly. ... [A]dvanced HEV applications will require good charge acceptance in a dynamic discharge/charge micro-cycling operation. We call this feature dynamic charge acceptance (DCA). In the particular case of lead/acid batteries, DCA capability is extremely sensitive to the short-term previous charge/discharge exposure of the battery."

At last September's European Lead Battery Conference in Istanbul (the ELBC) Ford and BMW jointly proposed a new battery testing protocol for micro-hybrids. Under the protocol a 60-second engine off cycle will require 39,600 watt-seconds of energy. Of that total, 36,000 watt-seconds will be used to support accessory loads during engine off interval and the remaining 3,600 watt-seconds will be used to re-start the engine. Until the 39,600 watt-second discharge is recovered, the stop-start system will be disabled. Since a disabled stop-start system can't save fuel by turning off the engine at a stoplight, dynamic charge acceptance is rapidly emerging as one of the important battery performance requirements for micro-hybrids, if not the most important one.

The big drawback of using enhanced flooded batteries and AGM batteries in micro-hybrids is that their dynamic charge acceptance degrades over time. While a new battery needs about 30 seconds to recover from an engine-off event, it can take three minutes or more when a battery's been in service for a year. Since city driving typically offers one or two engine-off opportunities per mile, pushing the battery recovery time from 30 seconds to three minutes or more has a very negative impact on fuel economy.

The following graphs come from the BMW-Ford presentation at the ELBC and show how the dynamic charge acceptance of an AGM battery degrades over time. The graph on the left shows what happens if the generator is disabled for seven seconds after restart to maximize the engine power available for acceleration. The graph on the right shows what happens if the generator kicks in immediately. The downward curving blue lines show the amount of current the battery can accept as the number of stop-start cycles increases. The upward curving black scatters with red overlays show the time required for the battery to regain an acceptable state of charge. The simple summary is that both batteries performed poorly and lost most of their dynamic charge acceptance capacity in a matter of months.

4.13.11 VRLA.png

While advanced lead-acid batteries are currently the best available choice for micro-hybrids, their market dominance is vulnerable because dynamic charge acceptance is so critical. As the market matures, I believe automakers will choose batteries for micro-hybrids on the basis of detailed cost benefit analysis that includes lifecycle fuel economy. When all costs are accounted for, I believe emerging energy storage technologies will gain the upper hand.

Three advanced battery developers have disclosed alternative approaches to the micro-hybrid market.

The first design win from Peugeot-Citroën went to a three-component system from Continental AG and Maxwell Technologies (MXWL) that combines an AGM battery and control electronics from Continental with a small supercapacitor module from Maxwell. In this system, the AGM battery carries the 36,000 watt-second accessory load and the supercapacitor picks up the 3,600 watt-second starter load. While this three-component approach will reduce battery strain by shifting the starter load to the supercapacitor, it can't eliminate the gradual loss of dynamic charge acceptance in the AGM battery that does the yeoman's share of the work.

A second design win from an undisclosed OEM has reportedly gone to A123 Systems (AONE), which has been testing a lithium-ion micro-hybrid battery solution for the last few years. Given the charge acceptance characteristics of A123's lithium-ion chemistry, I believe its stop-start solution will perform well and avoid the dynamic charge acceptance issues that plague advanced lead-acid batteries. The big questions will be cost and cold weather performance. Until A123 releases more details on its micro-hybrid solution, it will be hard to assess its competitive position.

The third contender for a share of the micro-hybrid market is Axion Power International (AXPW.OB), which is working with several automakers and has progressed far enough in its relationship with BMW that the two companies made a joint technical presentation at last year's ELBC. While it's not unusual for an automaker to enter into a development contract or supplier relationship with a micro-cap, I'm not aware of another case where an automaker shared the podium with a battery developer at an industry conference. A more surprising development was a brief conference call reference to a grant application under the DOE's Vehicle Technologies Program that Axion filed as a co-applicant with a major automaker. To the best of my knowledge, this is the first time an automaker has joined in a DOE grant application with a component developer. While the details remain sketchy, the DOE plans to make its award decisions by late June and fund in the third quarter.

Axion is not currently producing PbC batteries for commercial sale to customers. It has recently installed a second-generation automated production line for its patented carbon electrode assemblies and is engaged in manufacturing process, quality control and product performance validation activities with potential customers. Until that work is completed, a design win or production contract will remain out of reach.

EVs, PHEVs and HEVs

While Lux forecasts that EVs, PHEVs, and HEVs will command a solid chunk of storage revenue because of their high per vehicle battery costs, Lux doesn't "expect EVs or PHEVs to take the world by storm, and sees steady but not explosive growth from HEVs." Lux said that consumer acceptance of the GM Volt and Nissan Leaf is "anything but a certainty" and noted that early results indicate only 40% of the non-binding pre-orders for the Nissan Leaf are turning into purchases. It cited high battery costs as a major obstacle to making electric vehicles cost effective. Overall Lux believes that light and heavy PHEVs will depend on high oil prices and "EVs will disappoint in all scenarios." As a product class, Lux predicts that battery sales for EVs, PHEVs, and HEVs will grow from $710 million this year to $2.1 billion in 2016. Since there are so many competitors in the EV, PHEV and HEV markets, it's hard to pick likely winners and I'd rather watch from the sidelines.

Heavy Vehicles

The last class of vehicles considered by Lux was delivery trucks, city buses and railroad locomotives. It forecast that sales in the heavy vehicle segment would grow from $110 million in 2010 to $642 million in 2016. A number of energy storage technology developers are active in the heavy vehicle segment including:
  • Maxwell, A123, Ener1 (HEV), Altair Nanotechnologies (ALTI) and Valence Technologies (VLNC), which are actively marketing energy storage systems for hybrid and electric buses and delivery trucks; and
  • General Electric (GE) and Axion Power, which are developing battery systems for hybrid locomotives and retrofit solutions for the existing locomotive fleet.
While there are too many competitors to pick likely winners in the highway vehicle markets, I'll continue watching the railroad market with interest because the existing locomotive fleet includes 24,000 units nationwide and implementing hybrid drive in a train is relatively simple because of the ability to mix and match conventional diesel locomotives and retrofitted electric locomotives to meet the power and recuperative braking needs of a specific load and route.

Disclosure: Author is a former director of Axion Power International (AXPW.OB) and holds a substantial long position in its common stock.

March 18, 2011

Epic Changes Are Coming in the Electric Power, Transportation and Energy Storage Sectors

John Petersen

Epic is the only word I can use to describe an evolving tragedy that killed tens of thousands of people, inflicted hundreds of billions in property damage, destroyed 3.5% of Japan's base-load power generating capacity in a heartbeat and will cause recurring aftershocks in the global electric power, transportation and energy storage sectors for decades. While I'd love to believe the worst is behind us, I fear the times of trouble have just begun.

Since it's clear that Japan will have to turn inward and serve the urgent needs of its own population first, the following direct and immediate impacts seem all but certain:
  • Lost electric power from Japan's ruined nuclear plants must be replaced with oil, natural gas and coal because alternative energy technologies like wind and solar can't possibly take up the slack;
  • Cleanup and reconstruction must increase total Japanese demand for liquid motor fuels;
  • Japanese demand for industrial metals and construction materials must skyrocket; and
  • Crushing limitations on Japan's base-load power generating capacity must:
    • complicate supply chains for equipment, components and materials from Japan;
    • increase the cost of Japanese exports;
    • increase demand for all types of electric efficiency technologies;
    • increase demand for HEVs and other fuel efficiency technologies;
    • increase demand for grid-based energy storage systems; and
    • force utilities to shed non-essential loads and abandon their support for plug-in vehicles.
Some years from now, I expect to see rows of headstones in the EV graveyard that read "Lost to the Tsunami."

While I'm still trying to puzzle my way through the primary, secondary and tertiary impacts, it's a virtual certainty that nuclear power will be immensely unpopular even if things go spectacularly well in Japan. Switzerland has suspended pending applications for two planned nuclear plants and anti-nuclear activists are on the offensive in France. Germany just declared a moratorium on nuclear power and ordered the "temporary" cessation of operations at seven reactors that were built before 1980. Other jurisdictions, including earthquake prone California, can expect immense public pressure to follow suit. In time things will stabilize at a new normal, but that new normal will be very different from the normal that existed two weeks ago.

Some readers will be offended by my offhand dismissal of wind and solar as viable solutions. Others will be enraged by the suggestion that utilities will abandon their support for distributed and inherently unpredictable power demand from plug-in vehicles. All I can say is that reality is inconvenient that way. Japan just lost 7.6 gigawatts of base-load capacity. The German moratorium slashed their base-load capacity by 8.3 gigawatts. As the nuclear dominoes continue to fall, the strain on power grids everywhere will get far worse than any of us can begin to imagine. The last thing the world needs in times of plummeting base-load capacity is rapid expansion of demand. We simply can't have it both ways.

Nuclear power plants typically operate at 90% of nameplate capacity while wind and solar operate at something closer to 25% of nameplate.  The nuclear reactors that have recently gone off-line in Japan and Germany accounted for roughly 125 TWh of electricity production last year. In comparison, global electricity production from wind and solar power in 2009 was 269 TWh and 21 TWh, respectively. In other words, we just lost base-load power that represents 43% of the world's renewable electricity output. The gap cannot possibly be filled by new wind and solar power facilities.

There is no question that Japan will be forced to use conventional fossil fuels to replace its destroyed nuclear plants and unless its residents choose to endure extreme hardship for the sake of principle, Germany will be forced to do the same. Comparable power shortages will arise in every industrialized country that decides the risks of vintage nuclear plants outweigh their benefits. When you start stripping base-load power out of the grid, plug-in vehicles become wildly extravagant. My cynical side is tickled that Armageddon Entrepreneurs will finally be forced to choose between stoking fears over (A) imported oil and turmoil in the middle east; (B) global warming; and (C) nuclear power plants. My practical side foresees an immensely difficult time when reality finally sinks in and people are forced to come to grips with their own wasteful behavior. The panacea possibilities were washed away in the tsunami. Now we have to get serious about conservation and abandon the childish notion that we can waste one class of natural resource in the name of conserving another.

Over the last few months the mainstream media has been abuzz with stories about high-profile demonstration projects that will use battery-based systems to help stabilize the grid and smooth power output from wind and solar installations. As usual, the mainstream is getting it wrong and creating expectations the energy storage industry can't possibly meet.

A classic example of overblown media hype is Southern California Edison's plans to spend $55 million to demonstrate a battery-based solution from A123 Systems (AONE) that will provide 32 MW of power and 8 MWh of energy to smooth power output from the Tehachapi wind complex. The following graph from the California ISO highlights the variability issue that's the bane of alternative energy facilities everywhere.
3.16.11 Wind.png
While the new energy storage system will probably do a fine job of smoothing minute-to-minute variability, it will be absolutely worthless in the context of Tehachapi's average daily power production swing of over 200 MW. Tehachapi needs several gigawatt hours of storage, not a few megawatt hours.

I'm convinced that grid-based energy storage is an immense opportunity, but it won't be in the form of the headline grabbing projects the media is fixated on today. Two weeks ago the Pacific Northwest National Laboratory published a review of "Electrochemical Energy Storage for Green Grid" that describes the need for grid-based storage, identifies the leading storage technologies and explains the baseline economic requirements. Copies of the PNNL review are available from the American Chemical Society for $35. If you own stock in a battery company or are thinking about investing in one, it's the best $35 you'll ever spend.

In their discussion of storage economics, the authors said:

"Cost is probably the most important and fundamental issue of EES for a broad market penetration. Among the most important factors are capital cost and life-cycle cost. The capital cost is typically expressed in terms of the unit cost of power ($/kW) for power applications (e.g., frequency regulation) or the unit cost of energy capacity ($/kWh) for energy applications (e.g., load leveling). The life-cycle cost is the unit cost of energy or power per cycle over the lifetime of the unit.

...  In the authors' opinion, the cost of electricity storage probably needs to be comparable to the cost of generating electricity, such as from natural gas turbines at a cost as low as 8-10 ¢/kWh per cycle. Thus, to be competitive, the capital cost of storage technologies for energy applications should be comparable or lower than $250/kWh, assuming a life cycle of 15 years or 3900 cycles (5 cycles per week), an 80% round trip efficiency, and “zero” maintenance. A capital cost of $1,250/kW or less is desired if the technology can last 5 h at name-tag power. ..."

A123's demonstration project at Tehachapi will cost $1,720 per kW and $6,880 per kWh for a 15 minute solution. It's a highly profitable project for A123, but light-years from cost-effective. The same is true of another high profile project where Ener1 (HEV) will sell power quality systems with a combined capacity of 3 MW and 5 MWh to the Russian Federal Grid for $40 million, or $13,300 per kW and $8,000 per kWh. These projects are great headline events, but they'll never be the basis for a sustainable business.

In February and March of last year I wrote a series of articles that focused on grid-based storage. The first summarized a study titled "Energy Storage for the Electricity Grid: Benefits and Market Potential Assessment Guide" that was commissioned by the DOE's Energy Storage Systems Program and conducted by Jim Eyer and Garth Corey. For that article, I calculated an average economic benefit for each of the 17 grid-scale storage applications discussed in the report and then used those averages to calculate the potential demand in MWh, the potential economic benefit per kWh and the potential revenue opportunity for storage system manufacturers. The following table summarizes my results.



The color coding is simply my attempt to separate high-value applications that need objectively cool technologies like flywheels, supercapacitors and lithium ion batteries from low-value applications that need objectively cheap solutions like flow batteries, lead-acid batteries, compressed air and pumped hydro. The bottom line is that revenue opportunities in grid-based storage will be 90% cheap, 8% cool and 2% in-between. Any way you cut it, the lion's share of the revenue opportunity will flow to companies that manufacture objectively cheap storage solutions. There will be niche markets in the $1 billion to $6 billion range for cool technologies like flywheels, supercapacitors and lithium ion batteries, but those niche markets will pale in comparison to the opportunities for cheap energy storage.

Until last week, I believed global demand for grid-based storage would ramp slowly over the course of a decade. Today it's beginning to look like grid-scale storage will rapidly eclipse all other potential markets. The universe of companies that can effectively respond to urgent global needs for large-scale storage is very small. It includes General Electric (GE), Enersys (ENS), Exide Technologies (XIDE), and C&D Technologies (CHHPD.PK)  in the established manufacturer ranks, and Axion Power International (AXPW.OB) and ZBB Energy (ZBB) in the emerging technology ranks. Companies like A123, Ener1, Active Power (ACPW), Beacon Power (BCON) and Altair Nanotechnologies (ALTI) will undoubtedly have exciting revenue opportunities, but the cost of their products will exclude them from the competitive mainstream.

In November of 2008 I wrote, "what I initially described as a rising tide is now looking more like an investment tsunami as a handful of micro-cap and small-cap companies gear up to compete for $50 to $70 billion of rapidly developing annual demand for large format energy storage systems." While it took a real tsunami to bring things to a head, I'm more convinced than ever that every company that brings a cost-effective energy storage product to market over the next few years will have more demand than it can possibly handle. EVs may be dead men walking but grid-scale storage looks like the opportunity of a lifetime.

Disclosure: Author is a former director of Axion Power International (AXPW.OB) and holds a substantial long position in its common stock.

March 06, 2011

Alice in EVLand – Cracks in the Looking Glass

John Petersen

In his 2006 State of the Union Address, President George W. Bush said:

"Keeping America competitive requires affordable energy. And here we have a serious problem: America is addicted to oil, which is often imported from unstable parts of the world. The best way to break this addiction is through technology."

What a crock of balderdash! If you compare US fuel prices with those in other industrialized countries, gasoline is a screaming bargain and the same can be said for electricity. It's not the energy we use that's a problem. The problem is the immense amount of energy we waste, and that problem will keep getting worse until higher prices force us to change.

The world can't stop using oil without immeasurable suffering. Since we can't simply quit, the best we can do is accept the ugly truth that we're all wasteful petroleum gluttons who need to cut our consumption to more sensible levels. You don't cure drug addiction with better and cheaper drugs, and we can't cure our oil addiction with magic technologies mandated by Congress. We must accept personal responsibility and change our wasteful habits instead of blaming others or looking for a painless solution. In the final analysis, the solution to our problems is visible in every looking glass we pass.

Three weeks ago I wrote "Alternative Energy Technologies and the Origin of Specious," an article that examined the serial failures of panacea energy policies that promised independence without pain. Since then I've seen a number of reports that strike me as cracks in the EVLand looking glass, including:
  • A February 28th earnings release from A123 Systems that reported 69.2 million watt-hours of battery shipments, $73.8 million of battery sales, and $94.3 million of production costs for the year ended December 31, 2010; which pencils out to an average customer price of $1,067 per kWh and an average production cost of $1,363 per kWh.
  • A March 2nd report from hybridcars.com that cumulative sales of the GM Volt and Nissan Leaf for the first two months of this year were a whopping 756 units, as compared to cumulative HEV sales of 42,726 units.
  • A March 3rd Bill Ford Jr. interview at the ECO:nomics Conference where he characterized the Volt and Leaf as "talismanic vehicles" and expressed grave reservations about meaningless sales projections, the lack of charging infrastructure and the grid's ability to support electric vehicles if they ever became mass market products.
Many readers assume that I have an irrational hatred of electric vehicles and the companies that make them when in truth my only concern is whether those companies are good investments at current prices. During his recent presentation at the United Nations Climate Change Conference in Cancun, Dr. Steven Chu, the Secretary of Energy, said:

"And what would it take to be competitive? It will take a battery, first that can last for 15 years of deep discharges. You need about five as a minimum, but really six- or seven-times higher storage capacity and you need to bring the price down by about a factor of three. And then all of a sudden you have a comparably performing car; let's say a mid-sized car which has a comparable acceleration and a comparable range."

***

Now, how soon will that be? Well, we don't know, but the Department of Energy is supporting a number of very innovative approaches to batteries and its not like its 10 years off in the future, in my opinion. It might be five years off in the future. It's soon. Meanwhile the batteries, the ones we have now, will drop by a factor of two within a couple of years and they're gonna get better. But if you get to this point, then it just becomes something that's automatic and I think the public will really go for that."

When Dr. Chu tells the world that battery manufacturers won't have a competitive product unless their prices fall into the $300 per kWh range and A123's annual earnings release reports that their production costs overshot that goal by a whopping $1,000 per kWh last year, I don't see a lot of upside potential. When a poorly capitalized company like Tesla Motors trades at 11.5 times book value and 20.4 times last year's sales I wonder what the markets are smoking. When more than half of Ener1's equity is in mushy balance sheet categories like intangible assets, goodwill and investments in money losing subsidiaries, I can't help but think back to the asset impairment charges that crushed C&D Technologies last year. I'm completely baffled by the valuation disconnect at Valence Technologies which is upside down to the tune of $67 million but sports a $243 million market capitalization.

I hate to be the bearer of bad news, but these companies are just starting their journey into the valley of death. They may survive the trek, but their bloated stock prices can't. The EV dream may be beautiful, but for the next decade EV investments will be ugly as sin.

Each of us knows that we need to go on a petroleum diet, but none of us is willing to starve in the process. For the next decade, at least, the only real solution will be aggressive steps toward increasing fuel efficiency. Observant investors saw the writing on the wall when the EU and the US adopted stringent new CO2 emissions and fuel economy regulations that will start taking effect this year. I saw the impact last week in Geneva where the press headlines gushed over grand plans for plug-in cars but the vehicles on display proved that manufacturers are turning to diesel and natural gas fuel systems, direct fuel injection, dual clutch transmissions and stop-start systems as their mass market solutions. We all know that actions speak louder than words. I'm here to tell you the automakers' actions don't have plugs.

Two weeks ago I identified a list of five fuel efficiency stocks that should outperform the market by a wide margin over the next couple years because the die is cast and the solutions are being implemented today. To keep things interesting, I'll use last Friday's closing prices to formalize that list in a hypothetical $25,000 long portfolio structured as follows:

Company Symbol Shares Investment
Johnson Controls JCI 121 $4,998.51
Enersys ENS 139 $4,984.54
Maxwell Technologies MXWL 281 $4,993.37
Exide Technologies XIDE 431 $4,995.29
Axion Power AXPW.OB 6,172 $4,999.32
Cash

$28.97
Total


$25,000.00

I'll also use last Friday's closing prices to formalize my long-standing and oft-repeated position on vehicle electrification with a hypothetical $25,000 short portfolio structured as follows:

Company Symbol Shares Investment
Tesla Motors TSLA -200 -$4,990.00
A123 Systems AONE -599 -$4,995.66
Ener1 Inc HEV -1,428 -$4,998.00
Altair Nanotechnologies ALTI -1,953 -$4,999.68
Valence Technology VLNC -3,144 -$4,998.96
Cash

$49.982.30
Total


$25,000.00

In coming months I’ll revisit both hypothetical portfolios on a regular basis and either gloat or eat crow as the circumstances dictate. It will be fascinating to see whether the cracks in the looking glass spread or heal themselves.

Disclosure: Author is a former director of Axion Power International (AXPW.OB) and has a substantial long position in its common stock.

February 28, 2011

Kandi Technologies (KNDI) Revisited

Company Delivers Electrifying Performance But Stock Gets Shocked.

Arthur Porcari

What’s that old Wall Street saying. “No Good Deed Goes Unpunished”?  Well, management and shareholders of US listed, China based, always profitable uncontested leader in Electric Vehicle (EV) manufacturing and “Quick Battery Exchange” (QBE) development, Kandi Technologies (NASDAQ-KNDI), know the feeling well. As of now, five months after I published my first article on KNDI, the stock, which subsequently more than doubled on incredible volume, has now made a full round trip and is back to where it started. This in spite of significant business advances and a total absence of negative news. Even more incredulous is the 20+% drop last week at a time when oil prices surged above $100bbl, PRC raised gas prices to a record of over $4.30 a gallon, and Beijing had the following revelation:

Beijing air worse than 'hazardous'

 Bloomberg News February 25, 2011 3:10 AM

Beijing's air quality early this week was worse than "hazardous," the lowest rating on an index used by the U.S. Embassy in the Chinese capital to measure conditions, and was classified as "Beyond Index."
Heavy fog and the addition of almost 900,000 automobiles to Beijing's roads last year have contributed to the deteriorating air quality…”
If there every was a positive “Perfect Storm” brewing for a Company, KNDI, now having begun sales in China of its line of three PRC approved (two, full road speed and subsidies eligible) pure EV’s selling for $6-10,000 before subsidy, should be in the “eye” of it.
Five months ago as a Wall Street unknown, KNDI stock was quietly resting in the low 3’s.  At that time I published a multi-part article which was quickly picked up by EV Internet news services and blogs around the world introducing KNDI. As you can see from the chart below, the effect was immediate and significant to the stock price.

Let me again make my position clear as I have on past articles. Though since my first writing, I have personally visited the company and management in Jinhua China, I do not have, nor do I care to have any access to information not available to anyone who takes the time to do good due diligence.  Aside from what I, along with four other investors saw when we visited the Company last November, (which did not include any restricted information), what I publish is made up of public information in the form of past filings, press releases, active use of Google’s on-line translation features scouring Chinese websites, and of course my opinion.

Exceptional Company Execution

If you are new to KNDI, or need a refresher, I strongly suggest you read my past Seeking Alpha articles on KNDI which can be accessed through the links below. It now appears that my revenues and earnings prognostication for 2010 year end stated in my September article will apparently prove to be too high. This miss is primarily due to a few months delay in State Grids’s (China’s dominant electric utility and KNDI partner) completion of its Main Battery Charging Farm in Jinhua.  This in turn delayed initial sales to only the last five weeks of the year. I think you will find that most other speculations I made have not only come to pass, but in many cases were far exceeded.

This chart shows a chronology of events that have taken place since my first article. I have created a corresponding letter on the chart for each published event to the headlines below. Several of the headlines are from Seeking Alpha articles I wrote giving my “take” on prior events. These articles are annotated by the (SA) after the date. Articles annotated (AES) first appeared on AltEnergyStocks.  My point in listing these events is twofold; one to show there was no negative event to cause the drop in the stock price and two to give the reader quick reference to advances made.   

Annotated KNDI chart


Why Electric Vehicles must succeed

Rapidly growing China with its 1.3 billion population may rank second to the US in World Purchasing Power as seen from the table below, but the following comparison of motor vehicles per capita shows a disparity, which based on “Peak Oil” assumptions leaves little room to even noticeably “close the gap” let alone allowing a catching up with internal combustion (ICE) vehicles. With China’s massive coal and hydro resources along with aggressive building of Nuclear Power Plants, there is no reason they must rely on ICE’s.


Top 10 Countries, as listed by PPP GDP
Ranking Country Approximate GDP- Purchasing Power Parity
1 United States of America $13,860,000,000,000
2 China $7,043,000,000,000
3 Japan $4,305,000,000,000
4 India $2,965,000,000,000
5 Germany $2,833,000,000,000
6 United Kingdom $2,147,000,000,000
7 Russia $2,076,000,000,000
8 France $2,067,000,000,000
9 Brazil $1,838,000,000,000
10 Italy $1,800,000,000,000
Source: Economy Watch

China vehicles
US vehicles
Source:TradingEconomics-US


The tables above compare as of 2008 China to the US in per capita motor vehicle ownership (cars, trucks, buses and freight but not 2-wheelers), China on top with 32.2 motor vehicles per thousand population as compared to the table on the bottom for the US with 819.8. On this basis, stunningly, China stands in 2008 where the US stood in 1915.  Considering China’s current population exceeds the US by four fold, it should clearly be evident, even ignoring the rest of the rapidly growing emerging economies, that alternative energy vehicles will soon be mandatory in China, (for that matter, every country irrespective of the price of oil). Thankfully China understands and has made it quite clear it intends to be the world leader in vehicle electrification. A realistic situation made easier for the country since it has totalitarian control over its infrastructure for “refueling solutions”, plenty of cash for initial subsidies and an emerging middle class that can grow into EV’s, rather then be coaxed away from gas powered vehicles.

US Stock Trading Comparisons

As of this writing, there are really only three relatively pure EV US traded stocks for US investors to speculate on this rapidly emerging potential trillion dollar pure EV space.   Listed on NASDAQ is Tesla Motors (TSLA) and (KNDI), and ZAP which trades on the OCTBB (ZAAP).

The table below shows a general comparison I put together of some key numbers of the three companies. TSLA’s numbers came from filings, press releases and a JP Morgan research report; ZAAP’s from recent press releases and SEC filings; and KNDI from press releases and SEC filings. Estimates for ZAAP and KNDI were derived by me based on information gleaned from press releases.  

TSLA ZAAP KNDI

US based TSLA’s current market cap puts it at around 23 times JPM research 2014 estimate of $1.07 a share. Now this report was put out late last Summer, about the same time BYD (BYDDF.PK) was sure it would sell at least a few thousand of its e6 EV’s between China and the US by the end of 2010. As it turns out, KNDI’s sales of 20 KD5010’s on the first day of sales in China surpassed the total number of BYD e6’s sold through the end of October. And, though some $10,000 cheaper then TSLA’s $50,000 after tax subsidy Model S, BYD has now skipped a year and doesn’t plan on bringing the e6 to the US until 2012. Thus, bringing it more then a year behind schedule.

Lets call a spade a spade. TSLA is trading at its lofty levels for two main reasons. It’s charismatic CEO, Elon Musk, knows how to spin a story and there are a whole lot of “Green” funds that were formed after President Obama took office and promised a plethora of Green companies would soon be blanketing the country. This hasn’t happened, so those Funds have to put their money somewhere. Though in an excellent space, my bet is that TSLA is going to give a big shock to a lot of wallets in the not distant future.  The fact that “money pit” TSLA has a market cap twenty times always profitable KNDI is, IMO, incredulous.   

California based ZAP (ZAAP) is probably a company that most don’t realize is now a possible “contender” in the EV space, both in the US and China. But for those who do, I suspect they don’t truly realize how expensive this entry was. I can’t imagine how this stock can currently be trading with diluted market cap of $385 million. And this is well down from the over half billion market cap it had in early January right after it completed and announced a multi-part macro private share placement at around $.24 a share with a lot of $.25 warrants totaling some 200 million shares. The placement was used to raise $30 million to buy 51% of a Jonway Automobile a Chinese gas powered carmaker who had supposed revenues last year of around $77 million.

As stated in their Jan. 25 PR, “With ZAP’s electric vehicle (EV) technology expertise and international experience, the combined company intends to build the necessary production platform to address the Chinese EV market,” they plan on taking their 16 years as a “pioneer in the electric vehicle industry since 1994, engaging in the design, development, commercialization and distribution of 100% pure electric vehicles and power systems,..” and teach this Chinese company how to convert their gas powered cars to EV’s.  Who knows? After generating some $4 million in revenues in 2010 and accumulating a deficit of $143 million over the years developing their “expertise”, maybe they have finally learned a secret or two to teach the Chinese about EV’s.

OK, so back to KNDI. KNDI, like all players in this new EV space doesn’t have a heavy EV track record. But they have sold close to 4,000 mini-ev’s over the past couple of years. Know any other near pure play company in the space that can make such a claim? As seen by his short bio, KNDI’s  CEO, while not high profile, does have an impressive EV background in China. Take this excerpt:

 “From October 2003 to April 2005, Mr. Hu was the Project Manager (Chief Scientist) in WX Pure Electric Vehicle Development Important Project of Electro-vehicle in State 863 Plan.”  

Incorporated in “State 863 Plan” was the genesis of China’s current push to be the world leader in EV technology. The “WX” in the above quote is Wanxiang, China’s largest diversified EV Company, the same Wanxiang that caused Ener1 (HEV) stock to jump 65% on 21 million shares on Jan. 18th on an announcement of a joint venture between the two.  But enough on history, let’s look to the future.

A potential major win for KNDI

For those who have not been following KNDI, but clearly evident in Company announcements going back to the January 2010, KNDI has been leading a coalition of energy giants in China for a “Quick Battery Exchange” (QBE) solution whereby the consumer pays only for the car, and effectively “rents” the expensive battery.  The “rent” is effectively paid by a small surcharge each time the battery is exchanged. This model was put into limited commercial operation by KNDI through the Joint Venture with State Grid in Jinhua in late November, 2010 as an experimental alternative to just plugging the car into a charging post and waiting several hours for recharging. KNDI was at the forefront of this potential paradigm shift due to its ownership of several patents as can be seen by this State Grid announcement on its website.

In January of this year, through subtle but telling comments by PRC owned State Grid, it now appears that QBE has been selected as a major “Standard” for re-electrification of China EV’s. To date KNDI has been silent as to this potentially monumental Company event, in wait for a more definitive announcement by the PRC. Currently it appears there are two QBE models in operation. There is of course KNDI’s “side slide” model as can be seen by this video clip that was taken with a cell phone on my trip to the Company in November, and the second “rear load”, that can be seen in this video clip. The significance to KNDI is not that the Company expects their mode of QBE to be selected exclusively; it is that the concept of QBE seems now to be a chosen “standard” which in turn gives KNDI’s model already in operation with State Grid a major advantage over future competitors.

Valuation

With its current $100 million market cap, the stock is currently trading around replacement cost of just its land and buildings, plus $25 million working capital excess which should soon be apparent with the soon to be released 10k. The current market is giving no value for its always profitable and growing legacy business, let alone value for its China potential. Let’s look at that potential.

Non-China legacy business should reach $50 million in sales in 2011. That should generate non-GAAP net of $.35-.40 a fully diluted share. Each 5,000 cars they sell in China should add another $.30-35 per share. Considering the cost to a consumer after subsidy will only be around $3000, this should not be an unrealistic number and could just as easily be a multiple with some government or fleet orders.

If and when they reach the 100,000 car per year level, which would still make them a minuscule player in a 20 million car a year market, per share earnings would be in the $8-9 a share level. Put whatever PE you want on that type of growth.

Bottom Line

If the market has taught us anything over the last couple of years, EVERY stock is a speculation, no matter how blue chip. Each investment should be looked at from a risk/reward point of view. Based on its 9 year history (3.5 trading in the US) KNDI management has done an exceptional job of growing the Company in spite of the stock price.  The current “disconnect” between the current business and China potential has, IMO, created an incredible upside with negligible downside leaving me confident that KNDI will reward its shareholders with a multi-billion dollar company irrespective of who the shareholders are when that milestone occurs.  

DISCLOSURE: Long KNDI

Arthur Porcari is a retired former regional stock brokerage firm President with 37 years stock market experience. His finance background includes, three years a stockbroker, ten years a brokerage firm President, an OTC Market Maker, twenty three years an Investment Banker to include 14 years as Managing Consultant to Corporate Strategies, Inc. a firm specializing in advising young public companies and companies about to go public on the “Ways of Wall Street”. He blogs on Seeking Alpha under “Corstrat” and has been an on-air guest as well has a guest host on Business Talk Radio Network.  His passion and expertise is for small cap emerging growth companies.

February 16, 2011

Alternative Energy Technologies and the Origin of Specious

John Petersen

Thanks to a recent comment from JLBR, I've found a new hero in Dr. Peter Z. Grossman, an economics professor from Butler University who cogently argues that government attempts to force alternative energy technologies into an R&D model that was created for the Manhattan Project and refined for the Space Program will always result in commercial disaster because "the goal of the Apollo Program was the demonstration of engineering prowess while any alternative energy technology must succeed in the marketplace." In a recent article titled "The Apollo Fallacy and its Effect on U.S. Energy Policy" Dr. Grossman summarized the problem as follows:

"The Apollo fallacy has been detrimental to the development of effective energy policies in the US [and] instead of asking what kinds of programs might be useful, the government holds out the promise of a technological panacea to be delivered simply by an act of Congress. The prospect of an energy panacea actually has some political benefits. It allows politicians to claim that they can provide simultaneously the two outcomes most Americans seek from energy policy: low energy prices and energy independence. In fact, with conventional resources these goals are mutually exclusive. To get low prices, the government should provide incentives to drill for oil and gas not just in the US but also in places where they might be exploited more cheaply – of course making the nation more dependent on outside sources. To lessen dependence (true energy autarky is not a feasible goal) on foreign resources, the only method government can use with conventional resources is to raise prices through taxes. But a new technology presumably can to both at once: provide cheap, US-made energy. Unfortunately, the history of energy programs argues that the pursuit of a technological-commercial panacea will fail."

In a 2008 white paper titled "The History of U.S. Alternative Energy Development Programs: A Study of Government Failure," Dr. Grossman started with the Eisenhower Administration's wildly optimistic plans to commercialize nuclear fission reactors for civilian electricity and offered a brief history of serial energy policy failures including:
  • The Nixon and Ford Administrations' support for synthetic fuels from coal and oil shale;
  • The Carter Administration's support for synthetic fuels, nuclear fusion and ethanol; and
  • The Clinton Administration's "Partnership for a New Generation of Vehicles" that failed miserably while privately funded initiatives from Toyota and Honda were remarkably successful.
My additions to Dr. Grossman's list would include Bush the Younger's support for fuel cells, the hydrogen economy and corn ethanol, and the Obama Administration's support for vehicle electrification and alternative energy in general.

These ambitious energy policies all shared three fatal flaws:
  • An inability to distinguish between the technologically possible and the economically desirable;
  • A belief that intervention can force innovation and overcome technical challenges on time and within budget; and
  • A failure to recognize that generous subsidies invariably lead to increased demand for more generous subsidies.
The end result has always been grandiose, unrealistic and extravagant mandates that resulted in catastrophic losses for naive and credulous investors who bought the hopium.

For over sixty years, the government has consistently and predictably failed to understand that industrial revolutions arise from technologies that are perfected by entrepreneurs and prove their value in a free market. The government can accelerate advances in basic science and engineering when cost is not an object, but it can't make technologies cost-effective or ignore the realities of a resource-constrained world. The following cartoon from Jan Darasz appears in the most recent issue of Batteries International Magazine and may overstate the problem a bit, but only a tiny bit.

2.16.11 Daraz Cartoon.png

During the "Sputnik moment" discourse in his recent State of the Union Address, President Obama promised to spend billions of taxpayer dollars to put a million plug-in vehicles on the road by 2015. Back in the business world, Johnson Controls (JCI) and Exide Technologies (XIDE) are spending their own money, together with a $34 million ARRA battery manufacturing grant, to build factories that will make AGM batteries for 14.7 million micro-hybrids a year by 2014. The President's plan will save up to 400 million gallons of gas per year by 2015. The 56 million micro-hybrids that will be built during the same time frame using AGM batteries from JCI and Exide will save 1.6 billion gallons of gas per year. Last time I checked, spending millions to save billions of gallons of gasoline was more sensible than the inverse.

I've frequently argued "Alternative Energy Storage Needs to Take Baby Steps Before it Can Run." A favorite quote from William Martin's novel "The Lost Constitution" says it all – "In America we get up in the morning, we go to work and we solve our problems." Unfortunately government programs never use the tools that are readily available to do the work. Instead they impede sensible actions like using compressed natural gas instead of gasoline and let urgent problems fester while new, exotic and politically popular technologies are invented and refined, but never commercialized. A cynic might suggest that it's a great way for a politician to kick the can down the road while deferring blowback from policy failures and unintended consequences until his successor takes the oath of office.

We have 60 years of experience that proves well intentioned but ill-conceived government alternative energy technology initiatives aren't doing the job. Investing $46 of capital to save a gallon of gasoline with a plug-in vehicle is foolish when you can save that same gallon of gasoline with a $24 capital investment in an HEV. Taxing Peter to underwrite the cost of Paul's new car will impoverish the masses instead of empowering them. Using imported metals to make non-recyclable batteries for the purpose of conserving more plentiful petroleum has all the intellectual integrity and economic appeal of using cocaine as a weight loss supplement.

There are solid growth opportunities in the domestic energy storage sector. JCI and Enersys (ENS) both trade at about eighteen times earnings while Exide trades at about twelve times earnings. In the more speculative small company space, Axion Power International (AXPW.OB), ZBB Energy (ZBB) and Beacon Power (BCON) all present intriguing value propositions as they emerge from the trough of disillusionment and begin to build industry relationships and revenue by proving the value of their products one baby step at a time.

I'm convinced that every manufacturer of energy storage devices that brings a cost-effective product to market will have more business than it can handle as dwindling global energy supplies make storage more cost-effective than waste. That conviction, however, does not extend to market darlings like Tesla Motors (TSLA), A123 Systems (AONE) and Ener1 (HEV) who owe their high profiles and huge swaths of their balance sheets to government largess and glittering promises of an all-electric future once they prove that their wonder products work in the hands of normal consumers and learn how to manufacture better than Toyota Motors (TM), Sony (SNE), Panasonic (PC) and a host of lesser industrial luminaries that have proven their capabilities with decades of successful execution.

Over the last several months I've become convinced that a transition from gasoline to compressed natural gas may be one of the great opportunities of our age. Natural gas is abundant and clean, and an easy domestic substitute for imported oil. While I don't know as much as I'd like to about fiscal multipliers, I have to believe a massive shift from imported oil to domestic natural gas would reduce energy costs to consumers, slash CO2 emissions, generate trillions in additional GDP and go a long way toward ameliorating the looming deficit spending crisis many observers predict.

Just yesterday, the 2011 Honda Civic GX, a conventional vehicle with a CNG fuel system, tied with the all-electric Nissan Leaf for top honors in the American Council for an Energy-Efficient Economy's list of the Greenest Vehicles of 2011, a position it's held for eight years in a row. The Toyota Prius came in fourth, well ahead of the GM Volt, which came in seventh. I can only imagine what the ACEEE ratings would look like if Honda added a hybrid drive to the Civic GX or Toyota added a CNG fuel system to the Prius.

Mark Twain observed that "history doesn't repeat itself but it does rhyme." When it comes to specious and ill-conceived alternative energy technology initiatives that originate on the banks of the Potomac and rapidly mutate into bad investments, I can't help but wonder whether we're just hearing another chorus from the same old song – 99 Bottles of Energy on the Wall.

Disclosure: Author is a former director of Axion Power International (AXPW.OB) and holds a substantial long position in its common stock.

February 13, 2011

Distinguishing HEV Efficiency from Plug-in Vehicle Waste

John Petersen

Over the last couple years I've frequently argued that plug-in vehicles are inherently wasteful on a micro-economic and a macro-economic level. Unfortunately complex economic proofs are hard to grasp at a glance and my biggest challenge has been finding a simple proof for a patently obvious truth that can't be distorted by flimsy assumptions or misconstrued with rosy forecasts. I hope today's article will drive a stake through the undead heart of plug-in vehicle efficiency claims.

To keep it simple, I'll use the Camry Hybrid from Toyota Motors (TM), the Leaf from Nissan Motors (NSANY.PK) and the Roadster from Tesla Motors (TSLA) as examples.

The Camry Hybrid has an EPA fuel economy rating of 31 mpg city and 35 mpg highway while its conventional sister has an EPA fuel economy rating of 22 mpg city and 33 mpg highway. The Leaf and the Roadster both have EPA fuel economy ratings of 99 mpge. To achieve their fuel economy ratings, the Camry uses a 1.3 kWh NiMH battery pack, the Leaf uses a 24 kWh lithium-ion battery pack and the Roadster uses a 56 kWh lithium-ion battery pack.

If we assume that all three vehicles will have a 10-year life and be driven an average of 12,500 miles per year, the following table summarizes the electric drive miles achieved per kWh of battery capacity.


Camry Leaf Roadster
10-year mileage 125,000 125,000 125,000
Gasoline miles 88,710 0 0
Efficiency miles 36,290

Electric utility miles

125,000
125,000
Battery Pack kWh 1.3 24 56
Electric miles per kWh 27,916 5,208 2,232
Fuel saved per kWh 931 174 74

The first point that merits attention is that electric miles in a Camry come from using gasoline more efficiently. In contrast, electric miles in a Leaf or a Roadster come from an electric power plant that consumes coal, natural gas or uranium to make the juice that dives the wheels. Electric drive is more efficient than internal combustion if you start your analysis at a full gas tank or battery, but most of that advantage evaporates when you carry the analysis back through the supply chain and factor in all emissions and inefficiencies starting with the oil well or coal mine.

The second point that merits attention is that for every kWh of battery capacity, the Camry is 5.4 times more efficient than a Leaf and 12.5 times more efficient than a Roadster. Batteries are most valuable when they're worked hard and cycled often. From the perspective of a battery, going to work in a Camry is full-time employment on an assembly line, going to work in a Leaf is a part-time job in a donut shop, and going to work in a Roadster is retirement on a beach in Belize.

The reason is simple. HEVs are an efficiency technology that uses a small battery to save 40% on fuel consumption. Plug-in vehicles, in comparison, are fuel substitution schemes that use batteries to substitute electric power for gasoline and replace the fuel tank at a capital cost of $3,750 to $7,500 per equivalent gallon of capacity.

Regardless of chemistry, advanced batteries are terrible things to waste because they require prodigious inputs of scarce mineral resources and are difficult, if not impossible, to recycle economically. They perform wonderfully when they're used to improve fuel efficiency in an HEV, but they perform poorly when they're used as fuel tank substitutes for a plug-in vehicle.

Future gas prices and battery costs will not change the fundamental truth that batteries are five times more efficient in HEVs than they are in plug-in vehicles. Batteries in HEVs eliminate the use of fuel while batteries in plug-ins can only add long tail pipes that substitute a mix of coal, natural gas and nuclear power for gasoline.

In the final analysis, plug-in vehicles are a luxury no nation and no investor can afford.

Disclosure. None

February 06, 2011

Electric Vehicles and the Natural Resource Cliff

John Petersen

We all love to whine and complain about oil prices because we buy gasoline regularly and that makes the price changes obvious. To solve this overwhelming problem, myopic visionaries with rose colored glasses propose a simple solution – convert personal transportation from vehicles powered by oil to vehicles powered by clean, free and renewable electricity from the wind and sun. Like most fairy tales, it can't happen in real life which means it won't. This is not a technology issue. It's a raw materials issue and electric vehicles cannot solve the problem.

In the first three quarters of 2010, the world produced an average of 86 million barrels of crude oil per day. That works out to 0.65 metric tons, or 200 gallons per year, for each of the planet's 6.6 billion inhabitants. There's no doubt about it, oil is a scarce resource – at least until you compare it with metals that are two to five orders of magnitude scarcer. To put oil in its proper perspective, the following table summarizes global production data for several critical natural resources.

Natural
Global Production
Per Capita
Resource
(Metric Tons)
Production
Crude Oil
4,282,736,000
648.9 kg
Iron & Steel
2,400,000,000
363.6 kg
Aluminum
41,400,000
6.3 kg
Copper
16,200,000
2.4 kg
Lead
4,100,000
0.7 kg
Nickel
1,550,000
0.2 kg
Rare Earths
130,000
20 g
Lithium
25,300
4 g

For every thousand pounds of global oil production, we produce ten pounds of aluminum, four pounds of copper, one pound of lead, six ounces of nickel, a half-ounce of rare earth metals and a tenth of an ounce of lithium. No thoughtful investor can compare per capita production of oil and essential metals and rationally conclude that we can increase metal consumption in the name of conserving oil. The resource sophistry can't work in anything beyond technical puppet shows for lazy, impressionable or childish minds.

To make matters worse, metal prices are anything but stable. We ignore changes in metal prices because they're usually buried in the cost of other products. That doesn't mean that metals are a bargain compared to oil or that their prices are any more stable. The following graph tracks market prices for oil and three of our most important metals over the last 20 years. The trend lines are remarkably similar.

2.6.11 Commodity Prices.png

If we even try to significantly increase metal consumption in an effort to conserve oil, the inevitable supply and demand imbalances will quickly eliminate any advantage and simply make the situation worse. In the final analysis, any energy policy or business model that increases metal consumption in an effort to conserve oil must fail. We've already seen the disastrous results of using food to make ethanol for fuel. There will be blood if we follow the same foolish path with metals.

I am a relentless and unrepentant critic of plug-in vehicle hype and propaganda because any plan to use hundreds of pounds of metal to replace a fuel tank must fail. There aren't enough metals in the world to make a dent in global oil consumption and using scarce metal resources to make non-recyclable components like batteries and motors for plug-in vehicles can only make the problem worse. It's sabotage masquerading as a solution.

The only transportation technologies that stand a chance of survival in a resource-constrained world are those that use tiny amounts of metals to conserve large amounts of oil. Electric two-wheeled vehicles work as long as the empty vehicle weight is less than twice the passenger weight. For automobiles, resource effective technologies range from simple stop-start idle elimination at the low end to Prius class HEVs at the high end, although even these technologies can be marginal if the primary components are not easily recycled. The instant you add a plug the resource balance goes to hell in a handbag along with the investment potential.

All the political will, good intentions and happy-talk forecasts in the world cannot change the ugly facts. We’re driving toward a natural resource cliff at 120 mph and fiddling with the dials on the navigation system.

With the exception of Advanced Battery Technologies (ABAT) and Kandi Technologies (KNDI), which have the common sense to focus on entry-level two- and four-wheeled electric vehicles with minimal natural resource inputs, the entire electric vehicle sector is a bug in search of a windshield. It doesn't matter how cool the products are if there will never be enough affordable raw materials to make them in meaningful volume.

Several companies that I follow have no chance of survival when their business models are analyzed from a resource sustainability perspective. The list includes Tesla Motors (TSLA), Ener1 (HEV), A123 Systems (AONE), Valence Technologies (VLNC) and Altair Nanotechnologies (ALTI). In each case their products have extreme natural resource requirements and little or no end-of-life recycling value. They will compound our problems, not solve them.

Several other companies that I follow have good resource sustainability profiles because their products can make major contributions to oil conservation without putting undue strain on global metal production. My list of sustainable companies includes Johnson Controls (JCI). Enersys (ENS), Exide Technologies (XIDE), Beacon Power (BCON), ZBB Energy (ZBB) and Maxwell Technologies (MXWL). In each case their products have moderate resource requirements and high end-of-life recycling value.

There is only one energy storage company that can offer better performance and lower resource requirements in the same product – Axion Power International (AXPW.OB). Its serially patented PbC battery technology uses 30% less lead than a conventional lead-acid battery, boosts cycle life and dynamic charge acceptance by an order of magnitude, and retains the recycling advantages of lead-acid batteries, the most recycled product in the world. The unique performance characteristics of the PbC technology are proven and the principal remaining risk is further refining fabrication equipment and processes for Axion's carbon electrode assemblies. When Axion's equipment, processes and products complete the final stages of validation testing by its principal potential customers, the technology can be easily ramped to a global footprint within a few years for a fraction of the cost of other emerging energy storage technologies.

Axion has never been a stock market darling because its management speaks in the past tense and focuses on challenges overcome, milestones passed and goals accomplished. As a result of its low key approach to the financial markets, Axion carries a $54 million market capitalization despite the fact that its disclosed industry and customer relationships include East Penn Manufacturing and Exide Technologies, the second and third largest lead-acid battery manufacturers in North America, Norfolk Southern (NSC), the fourth largest railroad in North America and BMW, one of the most highly regarded automakers in the world. Any time a tiny company with a transition stage technology can quietly build relationships with several world-class companies, astute investors should pay attention.

Seven years ago I believed Axion had an honest shot at the big leagues. Today I think I may have set my sights too low. The progress I expect won't happen overnight, but it will happen long before we see a million plug-in vehicles on the road in the United States.

Disclosure: Author is a former director of Axion Power International (AXPW.OB) and has a substantial long position in its common stock.

January 27, 2011

Electric Vehicles – The Opportunity of Which Decade?

John Petersen

Hardly a day passes without some talking head breathlessly describing electric vehicles as the opportunity of the decade. The fine point most investors miss, however, is that the decade they're describing won't begin until 2020 and for the next seven to ten years electric vehicle manufacturers like Tesla Motors (TSLA) and lithium-ion battery manufacturers like Ener1 (HEV) and A123 Systems (AONE) will hemorrhage cash as they try to traverse the trough of disillusionment that runs through the cruel black heart of the valley of death.

The following graph is a stylized view of the valley of death from Osawa and Miyazaki with a red overlay that highlights the trough of disillusionment. This is the most difficult period in the life of a product when its manufacturer must identify and eliminate any defects, optimize manufacturing processes, minimize production costs, establish a market presence and earn market share. For big-ticket items like cars, the failures and mediocre performers outnumber successes by a wide margin.

1.26.11 Valley of Death.png

Today we're witnessing the first product launches for the Tesla Roadster, the GM Volt and the Nissan Leaf. Despite their gee-whiz glamor and sex appeal, the crushing economic reality is that it takes $46 of incremental capital investment to save a gallon of gasoline per year with a plug-in while it only takes $24 of incremental capital investment to save the same gallon of gasoline per year with an HEV. Under those circumstances, the tyrannical laws of economic gravity dictate that the time between the "Product launch" and "Success as a new product" will be five to seven years under optimal conditions and a decade or longer under likely conditions. Let's be honest, an 8-year payback on an HEV premium is nothing to write home about but a 15-year payback on a plug-in vehicle premium is absolutely atrocious.

My optimistic self wants to believe that plug-in vehicles will eventually offer a sensible value proposition for the average consumer, but my rational self knows that it won't happen quickly because paradigm shifts never do.

In 2000 Toyota introduced a new fuel efficiency technology to the US market called a hybrid electric vehicle, or HEV. The idea was to improve fuel economy by capturing braking energy and immediately reusing it for electric launch and acceleration boost. While HEVs didn't require drivers to change their driving habits or their behavior, they were met with polite skepticism until they proved their value and performance over a period of several years in the hands of consumers. The following graph summarizes annual HEV sales by manufacturer from 2000 through 2010.

1.26.11 HEV Sales.png

In 2010, HEVs accounted for a miniscule 2.4% of light-duty vehicle sales in the US. It took eight years to sell the first million units because an eight-year payback was hard for consumers swallow and manufacturers were fighting a constant uphill battle with the laws of economic gravity. It took Toyota six years to top the 100,000 vehicle a year mark. Last year Toyota booked 69% of domestic HEV sales, Ford and Honda each booked 12%, GM and Nissan each booked 2.5% and the rest were insignificant. The only HEV model that can fairly be classified as a commercial success is the Toyota Prius.

President Obama may dream of a million plug-ins on the road by 2015, but a 15-year payback will be a non-starter for most buyers. Unless and until the technology premium falls to a point where the incremental capital investment per gallon of annual gasoline savings is competitive with an HEV, plug-ins will only appeal to a niche market of philosophically committed and mathematically challenged buyers.

The crucial fact that talking heads fail to grasp is that plug-in vehicles are not an incremental advance in automotive technology. They're a paradigm shift that will force consumers to change their driving habits and their behavior. Those realities bring human inertia into play along side the laws of economic gravity. It's not an easy market dynamic.

Since paradigm shifts are very rare, it's hard to find a current and directly comparable example. Instead we need to study historical paradigm shifts to see how they unfolded and how long the process took. One of the best examples I could find was the paradigm shift from draft animals to tractors on US farms. In that paradigm shift, the new technology was clearly superior to the legacy technology. The only real drawbacks were higher capital costs and less flexibility. Even so, this graph from Wessels Living History Farm shows that the paradigm shift occurred very slowly and it took 35 years for the new technology to earn a dominant market position.

1.26.11 Horse Tractor.jpg

The decade from 2020-30 may prove to be a golden age for plug-in electric drive if reliability, performance, consumer behavior and cost issues can be overcome during the next 10 years. Until then, the knock down drag out marketing battles will focus on direct competition between HEVs and plug-ins because it's extremely unlikely that electric drive will be cheap enough to compete head-to-head with internal combustion engines before 2020.

Under all reasonably foreseeable scenarios, the major business opportunity for the next decade will be improving efficiency for the 90% to 95% of new vehicles that won't have electric drive. In Europe, existing regulations require automakers to achieve an average fuel economy of 42 mpg for gasoline engines and 48 mpg for diesel engines by 2015. In the US, existing regulations require automakers to achieve an average fuel economy of 37.8 mpg for passenger cars and 28.8 mpg for light trucks in the same time frame. Stricter rules are already being discussed for 2020 and beyond. The specific fuel saving technologies automakers choose to meet these new fuel economy standards will not be offered to consumers as options. Instead they'll be standard equipment. Given a choice between relying on marketing and relying on government regulation, I'll bet on government regulation every time.

While emerging mechanical efficiency systems are a bit out of my depth, the leading electrical efficiency system for the next decade will be stop-start idle elimination. If you think about it for a second, it's the most sensible idea around - turn the engine off while your car's stopped in traffic. For simple systems that improve fuel efficiency by 5% the cost is only a couple hundred bucks. For more complex systems that improve fuel efficiency by 10%, the cost is still under $1,000. The one thing that both types of stop-start systems need is better starter batteries, which sets up a wonderful business dynamic for old line lead-acid battery manufacturers like Johnson Controls (JCI) and Exide Technologies (XIDE) and emerging lead-acid technology developers like Axion Power International (AXPW.OB). They may not sell any more batteries, but they'll sell better batteries that have higher prices and higher profit margins. Once you understand that an estimated 34 million new cars a year will need better batteries by 2015, the top line revenue impact and the bottom line profit impact will be stunning. It's a bird in the hand and nobody's paying attention because the application isn't sexy.

I've spent the last 30 years working as securities counsel for companies that were trying to traverse the valley of death. While it's always a miserable time for management teams, it's a disastrous time for investors and it's not unusual to see equities lose 90% of their value before the price begins to recover. Despite the media hype, investors in electric drive are in for a decade of unrelenting pain as plug-in vehicles experience slow uptake rates and have to compete with simpler and cheaper HEVs for market share. With slow plug-in vehicle uptake rates, it will be at least seven to ten years before widely heralded but vaguely defined economies of scale kick in.

If we learned anything from Microsoft and Apple, it's that the objectively cheap technology is the place to be for the first ten to fifteen years of a technological revolution and the objectively cool technology is only a reasonable investment when they figure out how to make cool cheap.

Disclosure: Author is a former director of Axion Power International (AXPW.OB) and hold a substantial long position in its common stock.

January 24, 2011

The Market Slowly Catches on to the Good News at Electric Vehicle Company Balqon

Tom Konrad CFA

A recent financing transaction dramatically changes the outlook for heavy-duty electric vehicle company Balqon (BLQN.OB).

Last summer, I mentioned Balqon Corporation (BLQN.OB) as one of ten electric vehicle (EV) and hybrid vehicle stocks as part of my Best Peak Oil Investments series.  At the time, I thought that Balqon's short-haul electric trucks were a better fit for EV technology than electric cars, but that Balqon's constant need for investor funds made the common stock a bad investment because of probable dilution.  Overall, I thought the stock was worth watching, in case the funding situation changed.

At the time, Balqon was in desperate need of funds.  Like many other small (and large) companies in the years following the financial crisis, Balqon had difficulty raising enough funds to execute their business plan effectively.  According to the company's third quarter filings, Balqon delivered only one EV during the first nine months of 2010, despite having a backlog of 11 (now 10) EVs under an existing contract with the City of Los Angeles for the Port of LA.  Balqon was able to deliver nine EVs under the same contract in the 18 months leading up to December 2009, so working capital seems to be the most significant factor holding the company back in 2010.

On December 20, the funding picture changed.  Balqon announced a $5M private placement of stock and warrants at $0.63 cents a share.  That $5M is enough to eliminate the company's working capital deficit, and allow the production of the remaining electric trucks for the Port of Los Angeles by the company's March 31, 2011 target date, and also enable the company to begin work on the order of 10 electric yard tractors for Ford's Michigan Assembly Plant.

This deal also brought Balqon distribution rights and a closer relationship with China-based Winston Battery Limited.  Distributing Winston's lithium-ion phosphate batteries and high voltage charging systems should not only give Balqon some valuable additional revenue, but it will probably also lower the cost of the batteries used in their EVs, which should significantly improve the economics of their vehicles. 

Company Overview

Balqon designs and manufactures heavy-duty, short haul electric vehicles for the transportation of heavy loads at a variety of industrial and transportation facilities.  Their technology includes electric drive systems and motor controllers suitable for extremely high torque applications.  They've also developed a proprietary battery management system customized to their particular types of applications.

Balqon's hardware and software works with existing internal vehicle communications protocols, which enables them to work with existing heavy-duty vehicle OEMs to fit their drive systems into vehicles that potential customers will already be familiar with, and allowing them to piggyback on the product development efforts of existing heavy-duty vehicle OEMs. 

So far, Balqon has sold vehicles to the Port of Los Angeles (as discussed above), the Southern California Air Quality Management District, and has signed an agreement to provide them to Ford's Michigan plant.  The nature of these contracts makes it clear that, although Balqon's EVs promise much lower operating costs and maintenance costs, their customers so far have been motivated at least in part by the non-monetary benefits of EVs.  For Ford, the move helps them burnish the green image of a prominent consumer brand, while the Southern California buyers are primarily motivated by the need to meet strict air quality standards.

Heavy duty EVs make much more economic sense than electric passenger cars because the economics of EVs relative to fossil fueled vehicles improves the more frequently they are used, and the more they are charged.  Further, the limited range of electric vehicles is not a significant issue for vehicles that operate in a single industrial facility or closely clustered group of facilities.  Another large advantage for this sort of EV is idling reduction.  Short haul trucks naturally spend a much higher proportion of their time waiting to be loaded or unloaded, during which time a fossil fuel vehicle will waste energy and incur wear idling, but an EV need not idle at all and will still be ready to move at a moment's notice.

Perhaps the part of their business with the highest growth potential (due to relatively low working capital requirements) is providing their drive systems to other manufacturers of heavy duty electric and hybrid electric vehicles.  Because of my long-term belief that buses will play a significant role on our response to Peak Oil, I was very interested when Balqon received a $490,000 order for drive systems intended for electric buses in China.

Valuation

Balqon's stock price has been slowly sinking with minuscule volume under the weight of successive rounds of dilutive financing for the last two years.  Each financing was relatively small, and was only large enough to keep the company running (and looking for more financing) until the most recent financing in December 2010.  That transaction consisted of stock and warrants at $0.64 a share, but did not receive immediate investor attention, most likely because of complete lack of coverage of the stock, and the Holidays.  

This January, that lack of attention is going to change.  An article discussing the financing on TheOTCInvestor began to draw attention on January 12th, and quickly moved the stock from the 70-80 cent range to the $1.40-$1.50 range.  The article you are currently reading is the beginning of an attempt by Balqon to raise their profile (see disclaimer below.)  Given the tiny market cap of the company ($36.6M at $1.42 today,) it will not take much additional interest to drive the stock significantly higher.

The $.64 price of the recent financing transaction was in the context of the company desperately needing money to restart production.  Now that the company has sufficient capital for its medium term needs, Balqon will be in a much stronger bargaining position, and be able to raise funds on a much more advantageous basis. 

However, given the company's recent history of dilutive financings, I thought it wise to see if the outstanding warrants and convertible bonds might dilute the stock further at higher strike prices.  The chart below shows the approximate number of shares that are likely to be created at various strike prices.


Share Dilution by conversion/exercise price

As you can see, nearly all the potential dilution is already locked in at 64 cents.  This is because the most recent financing was by far the largest, and also because the outstanding convertible bonds contained an anti-dilution provision which reset their conversion price to $0.64 when that financing took place.  Hence it makes most sense to analyze this stock as if 41 to 43 million shares were already outstanding, while the debt and derivative liabilities are removed from the balance sheet.  Balqon can also reasonably expect to receive an additional $3M investment as warrants are exercised in 2012 and 2013, and an additional $7.25M in 2015 so long as the stock price does not fall back too much from current levels.

Future Revenues

Balqon's future revenues will have little relation to 2010 revenues because of the working capital deficit last year.  Instead, I'll look at the outstanding orders.  If the company can deliver the balance of the Port of LA order in the first quarter as they expect, that will create approximately $2M in revenues.  Assuming that they continue to operate at that capacity for the remainder of the year (some of which will go to supply the Ford orders and some of which must come from future deal flow), I arrive at a guess of $8M in revenues for 2011, but it could easily be twice that, if they find more customers and continue to ramp up production. 

For comparison, their closest competitor, electric drive system supplier UQM Technologies (UQM), trades at about 8 times expected 2011 revenues.  If Balqon were to trade at the same multiple on current shares, a fair value would be $2.50.  If Balqon were to trade at a multiple of 8 with fully diluted shares, a fair stock price would be $1.50. 

Balqon should be given a discount relative to UQM because Balqon trades over the counter, while UQM is listed on the AMEX, but I used a conservative 2011 revenue estimate, and did not check to see if there are significant outstanding UQM warrants which would dilute that company's stock.  Hence, I think a share price range of $1.50-$2.50 is a reasonable expectation for the coming year.

DISCLOSURE: This article is paid research.  AltEnergyStocks.com was paid a flat fee by Balqon Corporation for the research, writing and publication of this article.  The opinions expressed here are the author's own, and neither payment nor publication could be withheld based on those opinions. 

The author also holds a long position in Balqon stock purchased with his own funds before this article was commissioned.


DISCLAIMER: The information and trades provided here and in the comments are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

January 19, 2011

Alice in EVland Part III; Cost Benefit Analysis For Dummies

John Petersen

Sometimes I think bloggers like me are the real dummies. We spend so much time delving into the minutiae of a stock or sector that we manage to obscure the big picture with too much detail. I've certainly been guilty of that particular flaw over the last couple years and want to offer an apology to readers I've confused rather than enlightened.

Yesterday a reader sent me a copy of a presentation that Exide Technologies (XIDE) used in its December 2010 Investor Meetings. The slide on page 6 of the presentation did a great job of separating the wheat from the chaff on the subject of vehicle electrification and clarified my thinking on several points I've been trying to make for a long time. Using Exide's presentation data as a guide, I'm going to see if I can finally nail down the economics in terms everybody can understand. I'm sure we'll hear from those who don't want to understand in the comment section.

The following table summarizes the operating capabilities, incremental costs, expected fuel savings and expected CO2 emissions abatement of the leading vehicle electrification technologies. For the baseline case I used a new car with 30-mpg fuel economy and anticipated usage of 12,000 miles per year, which works out to a basline gasoline consumption of 400 gallons per year. The numbers aren't spot-on accurate, but they're certainly in the right range. Since subsidies distort comparisons by shifting the cost of consumption from the buyer of a plug-in vehicle to the taxpayers who pay for the subsidies, I'll ignore them for purposes of this article.

1.20.11 Electrification Table.png

My next graph uses the table data to show the comparative capital cost of leading vehicle electrification technologies per gallon of annual fuel saving and per kilogram of annual CO2 abatement. You can download an Excel file with the calculations here.

1.20.11 Cost Graph.png

It doesn't matter whether you use fuel savings or CO2 abatement as your preferred metric. Vehicles with plugs simply can't deliver anywhere near the bang for the buck that their simpler and cheaper hybrid cousins offer.
  • In the four hybrid categories, the average capital cost per gallon of annual fuel savings is $24 and the average capital cost per kg of annual CO2 abatement is $2.24.
  • In the two plug-in vehicle categories, the average capital cost per gallon of annual fuel savings is $46 and the average capital cost per kg of annual CO2 abatement is $7.25.
Cars with plugs may feel good, but until somebody repeals the laws of economic gravity they will never be an attractive fuel savings or emissions abatement solution.

Lead-acid batteries from Exide and Johnson Controls (JCI), supercapacitors from Maxwell Technologies (MXWL) and lead-carbon batteries from Axion Power International (AXPW.OB) are the only rational choices for stop-start systems and micro-hybrids. Lux research has recently forecast global production of up to 34 million vehicles per year by 2016. Since the growth of stop-start and micro-hybrids is being driven by pollution control and fuel economy regulations in Europe, the US and elsewhere, it's as close to a bird in the hand as most investors will ever find.

Mild and full hybrids have historically used NiMH batteries for their electric drive functions and lead-acid batteries for their starters. Unfortunately, the "M" in NiMH is the rare earth metal lanthanum and production restrictions in China will limit global ability to ramp NiMH battery production until alternate sources of lanthanum come on line. Due to the rare earth metal crisis, I'm convinced that mild and full hybrids will be a competitive market where lead-acid and lead-carbon batteries vie for a share of the down-market offerings while lithium-ion batteries and supercapacitors vie for a share of the up-market offerings. Since design and production decisions will ultimately be made by the automakers, I won't even try to forecast potential market penetration rates for the competing technologies.

Lithium-ion batteries from A123 Systems (AONE), Ener1 (HEV), Altair Nanotechnologies (ALTI), Valence Technology (VLNC) and a host of foreign manufacturers are the only technically feasible choice for plug-in vehicles. Since the basic economics of plug-in vehicles don't make sense to me, neither do the basic economics of their manufacturers and battery suppliers. I'm sure we'll hear from commenters who hold different views.

Disclosure: Author is a former director of Axion Power International (AXPW.OB) and holds a substantial long position in its common stock.

January 18, 2011

Plug-in Vehicle Subsidies; Taxing Peter To Buy Paul's New Car

John Petersen

Industrial subsidies have been an important feature of the American economic landscape since the late 19th century for one simple reason – they work. After the steam locomotive proved its ability to quickly and cheaply move people and cargo long distances, the government launched a massive effort to span the country with steel rails and bring the benefits of a rapid, safe and reliable national transportation system to all its citizens. After electric lighting proved its merit, the rush was on to build a national infrastructure and bring the benefits to all. After the internal combustion engine proved its merit the rush was on to build better roads and highways, increase oil production and make automobiles a luxury all men could afford. After advances in communications and information technology proved their merit, we were off to the races again. In fact, it's hard to name an industry that hasn't been richly rewarded by our long tradition of subsidizing the rapid implementation of proven technologies through the creation of productive assets that make the nation richer.

Over the last decade, however, there's been a subtle erosion of subsidy theory that most observers have failed to notice. In addition to traditional subsidies that create productive assets and make the nation richer, we're seeing a proliferation of consumption subsidies that enrich individuals while providing no meaningful benefit to society. The poster child for this unconscionable rape of the treasury is the $7,500 tax credit for buying a plug-in electric vehicle. The government is quite literally taxing Peter to buy Paul's new car.

The credit will be available for the first 200,000 qualifying vehicles sold by a manufacturer at a direct cost of $1.5 billion per automaker. On the positive side of the ledger, Paul's new plug-in will reduce national oil consumption by about 100 barrels over its useful life at a cost of $75 per barrel. On the negative side, Paul's State, city, utility, employer and favored merchants will have to spend their own money adapting to Paul's increased demand for electricity and Paul's desire for a convenient charging infrastructure. I have to wonder if it wouldn't be cheaper to just give Paul a 10-year free gas coupon.

At this juncture I'm not sure which thought is most apropos, Everett Dirkson's quip, "a billion here, a billion there, and pretty soon you're talking real money;" Ayn Rand's bleak warning that "No private embezzlers or bank robbers in history have ever plundered people's savings on a scale comparable to the plunder perpetrated by the fiscal policies of statist governments;" or the bandit Calvera's self-absorbed arrogance in The Magnificent Seven, "If God didn't want them sheared, he would not have made them sheep!"

In December Vinod Khosla surprised cleantech investors when he called for an end to corn ethanol subsidies, which Al Gore characterized as a mistake motivated by presidential aspirations and the importance of the farm vote. While I agree wholeheartedly with their conclusions about corn ethanol subsidies, I have a very hard time buying into the argument that "subsidies should be a short-term, and not a permanent measure, used for five to seven years after a technology first starts scaling in order to allow it to transition down the cost curve until it can compete on its own merits."

No industrial revolution has ever flowered from a technology that did not first prove its merit to a skeptical, competitive and inertia bound market. Subsidies can accelerate the adoption of cost-effective innovations, but they can't make a silk purse out of a sow's ear. The harsh reality is that a business model that can't survive without subsidies can't thrive with subsidies.

While reasonable men can argue the pros and cons of every subsidy, the historical justification has always boiled down to the fact that subsidies encourage domestic economic activity, create domestic jobs and increase the national wealth. Even the much-maligned corn ethanol subsidies were paired with tariffs on imported ethanol to protect domestic producers. But when it comes to plug-in vehicles, domestic productive capacity and economic activity are irrelevant. The credit doesn't add a single brick to the nation's productive capacity and it doesn't even distinguish between foreign and domestic products. Regardless of where the vehicles are built the batteries that will account for 25% to 50% of their total cost will be manufactured overseas, or made in the US using imported equipment, components and supplies.

We've quite literally gone from sending jobs overseas to subsidizing job creation overseas.

In my adult lifetime, every government sponsored energy independence program has failed because the core technologies were not cost-effective. The schemes that were ultimately disastrous for investors include:

28 years ago Methanol
18 years ago Electric vehicles
13 years ago HEVs and Electric vehicles
8 years ago Hydrogen Fuel Cells
5 years ago Ethanol

Does anybody see a pattern besides me? Have investors who are paying ten times book value for Tesla Motors (TSLA) failed to learn anything from the experience of Ballard Power (BLDP) and Pacific Ethanol (PEIX)? What about battery manufacturers like A123 Systems (AONE), Ener1 (HEV), Altair Nanotechnologies (ALTI) and Valence Technologies (VLNC) who have no meaningful protection from foreign competition? Does anybody really believe a feel-good program that taxes Peter to buy Paul’s new car will, or for that matter should, survive looming Federal budget battles?

Albert Einstein defined insanity as "doing the same thing over and over again and expecting different results." Once again we've hared off on a tangent and tried to force uneconomic technologies on a skeptical, competitive and inertia bound market. In the process we've made a mockery of more than a century of sound industrial subsidy theory to enrich individuals while making the nation poorer.

Disclosure: None.

January 08, 2011

EIA Electric Drive Forecasts – Running in Reverse Since 2009

John Petersen

The hardest part of blogging on subjects like energy storage and vehicle electrification is synthesizing the mass of data that's generated every year. While I'm not an engineer and don't have any special technical expertise beyond the lessons I learned as a director and officer of a small battery technology developer, my training as a lawyer and accountant stand me in pretty good stead when it comes to reviewing statistical forecasts and comparing the current version of a forecast with earlier versions of the same forecast.

Every year the US Energy Information Administration, a unit of the DOE, publishes the Annual Energy Outlook, a comprehensive statistical report and forecast that covers all sources and uses of energy in the United States and runs to a couple hundred pages. The supporting data for the reference case includes 128 Excel tables that lay out the detailed assumptions underlying the report. One of the most interesting tables for guys like me is Table 57, Light-Duty Vehicle Sales by Technology Type for the United States, a 25 year forecast that breaks light-duty vehicle sales down into cars and trucks, and then subdivides each category by drive-train and fuel. If you've ever wondered where the government's long-term vehicle production forecasts come from, the answer is Table 57.

Last month the EIA published the Early Release Overview for its Annual Energy Outlook 2011. When I pulled up the latest version of Table 57, it struck me that the forecasted ramp rates for electric drive technology seemed more conservative than they'd been in 2010. Since unanswered questions tend to keep me from focusing on other matters, I went back to the 2010 forecast and did a quick comparison that showed about a 30% across the board decline in forecasted electric drive penetration rates. Since big changes invariably lead to more questions, I decided to pull copies of Table 57 for the years 2007 through 2011 and do a detailed five-year comparison to see how the forecasts changed over time.

Frankly I was amazed by the results. Except for pure electric vehicles, which will apparently remain a quirky niche market for the next 20 years, the Department of Energy's forecasted ramp rate for electric drive vehicles has been running in reverse at breakneck speed since 2009!

For those who prefer numbers, the following table shows the DOE's forecasted sales of HEVs, PHEVs and EVs for 2010, 2015, 2020 and 2030 in the Annual Energy Outlook for each year since 2007.

1.5.11 EIA Table.png

For those who prefer graphs, the following 3-D presentation summarizes the same data.

1.5.11 EIA Forecast.png

In December I used a graph from the Electrification Coalition's November 2010 Fleet Electrification Roadmap that highlighted the differences between the 2010 EIA numbers and comparable forecasts from consulting firms and sell-side investment analysts. Since the DOE has been quietly backing down its forecasted ramp rates for electric drive since the last Bush Administration forecast was updated to include the expected impact of American Recovery and Reinvestment Act of 2009, I'd be more reluctant than ever to rely on optimistic reports from hopium dealers.

12.29.10 Forecast Range.png

The EIA is a single data source and the EV faithful will almost certainly disagree with its forecast, but when the White House and its political operatives say, "we love electric drive and plan to push policy in that direction" and their own analysts and statisticians say, " there's no way it will happen that quickly," I tend to believe the staff.

Tesla Motors (TSLA) is the 2010 poster child for hype-induced overvaluation that bears no rational relationship to financial statements, business fundamentals or economic potential. It will be bleeding cash for years, just like A123 Systems (AONE) and Ener1 (HEV). These stocks may provide fun trading opportunities for professionals, but I wouldn't want to be holding their shares when the music stops.

Disclosure: None.

January 05, 2011

Plug-in Vehicles and Their Dirty Little Secret

John Petersen

Over the last few months I've had a running debate with some die-hard EVangelicals who insist that plug-in cars will be cleaner than simple, reliable and relatively inexpensive Prius class HEVs. Since most of my readers have enough to do without slogging through the comments section, it's high time we lay the cards on the table and show why the myth of zero emissions vehicles is one of the most outrageous lies ever foisted on the American public.

The following graph comparing the life-cycle CO2 emissions of conventional, hybrid and plug-in vehicles comes from a March 15, 2010 presentation by Dr. Constantine Samaras of Rand Corporation. It clearly shows that HEVs and PHEVs are equivalent emitters of CO2 if you take the analysis all the way back to the black earth and base the comparisons on national average CO2 emissions from electric power generation.

1.5.11 GHG PHEV.png

While the graph suggests that there is no meaningful air quality advantage to plug-in vehicles, the reality is much worse because the specific power generation assets that will be used for night-time charging of plug-in vehicles are dirtier than the national average.

The following table is based on data extracted from US Energy Information Administration's recently released "Electric Power Industry 2009: Year in Review." It lists high emissions power from fossil fuels in the top section, zero emissions power from conventional sources in the middle section and "clean power" from renewable sources in the bottom section. Since the data was pulled from different parts of the report, estimates of total power generated from specific renewable sources can't be provided. Since renewables as a class are inconsequential to national power production, I don't think the missing data is relevant.

1.5.11 US Power.png

The most intriguing facts in the table are the capacity utilization rates for both natural gas and hydro power facilities. Natural gas facilities operated at 25% of capacity in 2009, which works out to a national average of six hours per day. You see the same thing with hydro power facilities which operated at 40% of capacity in 2009, or about ten hours per day. While some natural gas and hydro power plants run 24/7, the nation tends to operate both types of facilities as peak power providers rather than baseload power providers. We turn off the clean hydro power and natural gas at night.

The two baseload elements of US power production are nuclear, which usually runs at a steady state 24 hours a day, and coal, which can be ramped up and down within a limited range to help match supply and demand. During night-time hours, the prime time for electric vehicle recharging, the vast bulk of electric power nationwide comes from nuclear and coal because operators want to conserve their more flexible resources including natural gas and hydro power for high value peak demand periods. As a result, coal accounts for a higher percentage of night-time power than it does day-time power or 24 hour power. There's just no avoiding the reality that electricity produced at night is significantly dirtier than the national average while electricity produced during the day is cleaner than the national average.

As you shift the US average emissions line in the Rand graph to the right to reflect the differences between day-time and night-time power, plug-ins become seriously sub-optimal. The conclusions are inescapable when you study the data.

I have searched without luck for a scholarly technical analysis that quantifies the emissions differential between relatively clean day-time power, which has a high proportion of variable hydro power and natural gas, and dirtier night-time power, which has a much higher proportion of coal. If you know of a credible study, I'd love to have a reference.

The dirty little secret of plug-in vehicles is that they'll all charge their batteries with inherently dirty night-time power and be responsible for more CO2 emissions than a fuel efficient Prius-class HEV that costs a third less and doesn't have any pesky issues with plugs, charging infrastructure or range limitations.

News stories, speeches and press releases can only maintain the zero emissions mythology for so long. Sooner or later the public is going to realize that it's all hype, blue smoke and mirrors, and that plug-in vehicles have little of substance to offer consumers. When the public comes to the realization that plug-in vehicles:
  • Won't save their owners significant amounts of money;
  • Won't be as efficient as HEVs when utility fuel consumption is factored into the equation;
  • Won't be as CO2 efficient as HEVs when utility emissions are factored into the equation; and
  • Are little more than feel-good, taxpayer subsidized eco-bling for the politically powerful elite,
the backlash against EV developers like Tesla Motors (TSLA), General Motors (GM) and Nissan (NSANY.PK), together with battery suppliers like Ener1 (HEV) and A123 Systems (AONE), could be unpleasant.

Disclosure: None.

December 27, 2010

Why Cheap Will Beat Cool During The Next Decade Of Vehicle Electrification

John Petersen

Last Friday I received my copy of the presentations from September's European Lead Battery Conference in Istanbul. Most of the presentations were written for a technically astute audience and don't offer much in the way of concrete guidance for investors, but an overview presentation from Ricardo PLC, a global leader in engineering solutions for low carbon, fuel-efficient transportation, included three slides that merit serious investor consideration and show why I'm convinced cheap will beat cool for the next decade of vehicle electrification. I've posted a copy of the Ricardo presentation here.

Technology Timeline

The first slide is a simple timeline that answers the eternal question "When are the technological wonders we read about on a daily basis likely to become profitable business reality?"

12.26.10 Timeline.png

Lead-acid batteries have been the dominant energy storage technology for the last century and the global manufacturing footprint is immense. As vehicle electrification becomes more commonplace and energy storage requirements increase, leading lead-acid battery manufacturers including Johnson Controls (JCI), Exide Technologies (XIDE) and Enersys (ENS) are seeing a pronounced shift in demand patterns. Users who once bought inexpensive first-generation flooded batteries are now buying premium second-generation AGM batteries. Concurrently, lead-acid technology innovators like Axion Power International (AXPW.OB) are finishing development and testing of third-generation devices that will bring the power and cycle-life of lead-acid batteries up to a level that's comparable with NiMH batteries at a reasonable cost. The bottom line for investors is that lead-acid battery technology is rapidly improving and barring a seismic technological shift, manufacturers can only get more profitable over the next decade as global demand for cost-effective mass-market energy storage products surges.

Nickel Metal Hydride, or NiMH, has been the battery chemistry of choice for HEVs since Toyota (TM) introduced the Prius in 1997. Over the last decade HEVs have earned an enviable reputation for efficiency and reliability. Unfortunately, the "M" in NiMH batteries is the rare earth metal lanthanum, which is only produced in small quantities and primarily mined in China. While material supply constraints have not limited NiMH battery production in the past, China has recently announced plans to limit rare earth metal exports in the future. Therefore looming supply constraints will limit the scalability of current HEV technology and most observers believe future HEVs will have to accommodate a lateral substitution of advanced lead-acid batteries and accept a slight weight penalty, or accommodate an upgrade substitution of lithium-ion batteries and suffer a substantial cost penalty.

For several years, dreamers, politicians and environmental activists have shamelessly portrayed lithium-ion batteries as a silver bullet solution to the planet's energy storage needs. From Ricardo's perspective, however, large-format lithium-ion batteries are just beginning to emerge from the prototype stage and enter the early commercialization and demonstration stage. Nissan (NSANY.PK) and General Motors (GM) have recently introduced the Leaf and the Volt and publicized ambitious plans to expand EV production. Those plans, however, will depend on mass-market acceptance of expensive products that haven't been adequately tested under real world conditions by people who just want reliable transportation. I've always believed the ramp rate for plug-in vehicles would be slower than the historical ramp rate for HEVs because users will inevitably have problems with dead batteries, range limitations and other performance issues. As the problem stories spread through the grapevine, the only possible outcome is reduced demand. Ricardo believes it will take at least six years before EVs begin to make the transition from the bleeding edge of early commercialization and demonstration to the leading edge of mass production. I think ten years is more likely.

Application Requirements

The second slide compares the energy and power requirements of various vehicle electrification technologies with the energy and power characteristics of today's leading battery technologies.

12.26.10 Requirements.png

There's no question that plug-in vehicles will need the energy and power of lithium ion batteries if they hope to penetrate the mass-market. Nevertheless, HEVs have built an enviable track record over the last decade using NiMH batteries that were only slightly more powerful than first- and second-generation lead-acid batteries. Since third-generation lead-acid battery technologies promise far higher power and tremendous cycling capacity, I tend to believe that lithium-ion will be viewed as overkill for all but the most demanding HEV applications.

Economic Comparisons

The most intriguing slide from the Ricardo presentation is a simple table that shows the economic performance of their HyTrans micro-hybrid in commercial door-to-door delivery cycles using a variety of energy storage solutions. The table excludes the mechanical elements and control electronics, so it doesn't reflect total system cost. It does, however, highlight the striking economic differences that arise from a decision to use an objectively cool technology to do the work when an objectively cheap technology can do the same work for less money.

12.26.10 Economics.png

For the average consumer the only reason to consider vehicle electrification alternatives is to save money. The Ricardo table leaves little room for doubt on the question of which energy storage technology wins the cost efficiency crown.

What It Means For Investors

Over the last few years a slick, carefully coordinated and beautifully executed PR program from the lithium-ion battery sector has convinced many wishful thinkers that the IT model will carry over to electro-chemistry; that economies of scale will conquer all despite the fact that material and component costs for lithium-ion batteries are four times greater than comparable costs for lead-acid batteries; and that modest size and weight differences will somehow dictate the design and performance of a 3,000 pound car.

As a result lithium-ion battery stocks sell at substantial premiums to their lead-acid peers.

If Ricardo is right, most lithium-ion battery developers can plan on another six to ten years of losses before they turn the corner to profitability. In my experience that's not a healthy business dynamic for investors who worry about details like capital preservation. On the other hand it's equally clear that the next decade will be very good for both lead-acid battery manufacturers and lead-acid technology innovators who are certain to be the first major beneficiaries of the trend toward increasing vehicle electrification.

In another decade, the business dynamic may be different if lithium-ion battery developers can meet their aggressive cost reduction goals and prove a compelling value proposition for plug-in vehicles. Until that happens, however, the safest energy storage investments for investors who want superior portfolio performance are in lead-acid batteries.

I frequently remind readers that I've been a Mac user since 1988 and always believed Apple had superior technology. My opinion didn't change the fact that compared to Microsoft; Apple was a poor market performer until 2000. It only goes to prove that in the gritty world of investments, being right too early is no better than being wrong.

Over the last year the four lithium-ion battery stocks I track have lost an average of 22.2% of their value while the three lead-acid battery stocks I track have gained an average of 15.1%. I don't expect that dynamic to change any time soon.

Disclosure: Author is a former director of Axion Power International (AXPW.OB) and holds a substantial long position in its stock.

December 07, 2010

Kandi Technologies – An Intelligent Vehicle Electrification Plan

John Petersen

The last thing regular readers expect from me is an article praising a vehicle electrification plan, but I've seen one that overcomes most of the problems I've been writing about for the last couple years and is simply too intelligent to ignore. It's a uniquely Chinese solution to their particular problems, which means it might not work in the U.S. or Europe, but the potential in the target market could be huge.

Kandi Technologies (KNDI) has developed the "KD5010" a two-passenger electric vehicle for city dwellers that looks a lot like a stretched Smart Car. Earlier versions of the KD5010 include a 60-unit plug-in fleet that Kandi delivered to the China Postal Service last summer and the Kandi-Coco, a shorter plug-in “neighborhood electric vehicle” that Kandi's distributors are offering in the U.S. for $10,600 (before subsidies). From left to right, the following picture shows the China Post version, the KD5010 and the Kandi-Coco.

12.6.10 Kandi 3.jpg

The KD5010 costs about $6,000 in China (without batteries and before subsidies) and has a 150-kilometer (100-mile) range with a top speed of 52 mph. Unlike its sexier cousins from Nissan (NSANY.PK), General Motors (GM) and Tesla (TSLA), the KD5010 doesn't have a plug. Instead, it draws the needed power from six flat-profile lead-acid batteries that slide into horizontal slots under the driver and passenger doors and can be changed in minutes with simple and inexpensive equipment. Without batteries, the KD5010 tips the scale at 1,000 pounds. With batteries the total vehicle weight is closer to 2,000 pounds.

12.6.10 KD5010 Battery.png

The genius of the KD5010 lies in the absence of a power cord and plug. Instead of giving the owner the ability to decide when and where he wants to recharge the batteries, the KD5010's plug free design requires the owner to drive to the nearest battery swapping station and pay about $6.00 to have the discharged batteries replaced with fresh ones. The process only takes a few minutes and should a KD5010 run out of power on the road, an emergency roadside swapping service is available for a modest premium. Discharged batteries are then returned to a smart central charging facility with a high capacity grid connection that can adjust its demands as needed to optimize overall grid efficiencies.

The swapping stations and central charging facility are operated by a three-party joint venture between Kandi (30%), Tianneng Power International, China's largest lead-acid battery manufacturer (30%), and Jinhua Bada Group, a unit of State Grid Power, a company that provides 91% of China's electricity and ranks as the seventh largest corporation in the world. Kandi launched its unique vehicle electrification and battery swapping station plan in late November with its first sales to retail customers in the city of Jinhua, China, but it's easy to predict a wider rollout if the demonstration is successful.

The principal end-user advantages of Kandi's approach to vehicle electrification include:
  • Offering automotive transportation to users who have no preconceived notions;
  • Offering an electric alternative that's cheaper and lighter than a conventional car; and
  • Offering a battery swapping system that's comparable to a quick fill-up with $3 gasoline.
The advantages to Kandi and its charging infrastructure partners include:
  • Conducting battery charging in a dedicated facility that can optimize battery life and performance;
  • Centralizing battery charging to eliminate infrastructure build out costs and grid stability issues;
  • Facilitating the recycling of old batteries while alleviating raw material supply chain issues; and
  • Generating recurring long-term revenue from battery swapping operations.
The battery-swapping plan is just plain smart. Since the KD5010 uses lead-acid batteries, the battery cost of roughly $1,500 per vehicle includes about $1,000 in lead and $500 in manufacturing costs. Once the lead is in the first KD5010 battery pack, it can be recycled over and over, reducing the consumable cost of the batteries to about $500. Even if the batteries only last for a few hundred cycles before they're returned and recycled, the net battery cost per charge-discharge cycle will be in the $1 to $2 range, plus electricity for recharging and labor to operate the swapping infrastructure. With an end-user swapping fee of $6.00, Kandi and its partners should profit handsomely.

The following table presents summary income and cash flow data for the last twelve months, summary balance sheet data at the last reporting date, and market valuation metrics for Kandi and BYD Co. Ltd. (BYDDF.PK), the best-known Chinese automaker.

12.6.10 KNDI-BYD.png

Kandi's historical financial statements do not reflect major electric vehicle operations, I think its fair to expect substantial revenue growth over the next few quarters.

BYD has been a market darling since Warren Buffet's Mid-America Holdings bought a 10% interest in 2009. The big difference between the two is Kandi is just starting out with a pair of extremely powerful partners while BYD is trying to grow a mature business. When I consider problems inherent in growing any business, I have to believe it will be easier for Kandi to ramp sales by a factor of ten than it will be for BYD to double sales. I've always taken a very conservative "wait and see" attitude when it comes to vehicle electrification in the U.S. and Europe, but when it comes to capitalizing on emerging vehicle electrification opportunities in China I have to believe that Kandi's approach will be a hands-down winner.

In the final analysis, it's a lot like the business dynamic that might have developed if Henry Ford had partnered with John D. Rockefeller or one of the other oil barons in the early 1900s.

Disclosure: None.

December 01, 2010

Alice in EVland Part II; The Hall Of Mirrors

John Petersen

Mark Twain reportedly said that "Figures don't lie, but liars figure." Truer words were never spoken.

On November 22nd the EPA issued an official fuel economy sticker for Nissan's (NSANY.PK) Leaf that shows an impressive electric drive equivalence of 99 MPG. Two days later it issued an official fuel economy sticker for General Motor's (GM) Volt that shows a comparable electric drive equivalence of 93 MPG, a gasoline drive fuel economy of 37 MPG and a combined equivalence of 60 MPG. Both stickers were heralded as the dawn of a new age in transportation. Unfortunately, they were outrageous lies that account for the distance a car can travel on a kilowatt-hour of electricity but ignore the energy needed to make a kilowatt-hour of electricity in the first place.

To arrive at their magical fuel economy numbers, the EPA started with the scientific fact that 1 kWh of electricity contains 3,412 BTUs of energy and 1 gallon of gasoline contains 124,238 BTUs. After calculating a base energy equivalence of 36.41 kWh per gallon, they adjusted that value to show a 7.5% energy loss in the battery and arrive at a final value of 33.7 kWh per gallon. In the words of autobloggreen "Since the Leaf has a 24 kWh battery pack and can go, officially, 73 miles, then, the EPA says, it could theoretically go 99 miles if it had a 33.7 kWh pack."

Now let's talk about what really happens.

To get a gallon of gasoline we have to drill a well, produce the oil, refine it and transport it to a gas pump near you. Overall, the production, transportation and refining consumes about 20% of the raw energy the crude oil contained at the wellhead. So if we back the entire process up to mother earth, each gallon of gasoline had an initial energy value 155,300 BTUs.

To get a kWh of electricity from sources other than water, wind and solar, we have to consume fuel to create heat in a generating plant and then turn that heat into electricity. The conversion process is very inefficient. According to the Energy Information Administration, it takes 10,378 BTUs of coal energy, 11,015 BTUs of petroleum energy, 8,305 BTUs of natural gas energy or 10,453 BTUs of nuclear energy to make 1 kWh of electricity. In other words, about 2/3 of the raw energy extracted from mother earth is wasted. If we include electricity from water, wind, solar and all other sources, the US consumed an average of 8,775 BTUs of raw energy last year for every kilowatt-hour of electricity it produced. By the time we account for transmission and distribution losses on the electric grid, the energy inputs for each kilowatt-hour of electricity delivered to a wall socket near you is about 9,375 BTUs.

When we track all the numbers back to mother earth, the energy equivalency ratio between gasoline in a car's tank and electricity in an EVs battery is 16.6 kWh per gallon – not 33.7 kWh per gallon.

The EPA's official sticker for Toyota's (TM) venerable Prius shows a respectable combined fuel economy rating of 50 MPG. Since the Prius only burns gasoline but does so very efficiently, we have to extract 3,106 BTUs of energy from mother earth to move the Prius a mile. In comparison, we have to extract 3,388 BTUs of energy from mother earth to move the Leaf a mile and we have to extract a whopping 3,873 BTUs of energy to move the Volt a mile.

The bottom line is all the efficiency talk for plug-in vehicles is based on a fundamental deception that ignores the energy required to produce electricity in the first place, the same way it ignores the emissions impact of producing electricity. As a result, all of the arguments in favor of vehicle electrification have the intellectual integrity of a no peeing zone in a public swimming pool.

William Martin wrote that "In America we get up in the morning, we go to work and we solve our problems." We don't delude ourselves by creating a hall of mirrors where unconscionable waste can masquerade as conservation. We can do better, but not until we take our heads out of the sand and recognize the problems.

Disclosure: None.

November 17, 2010

Vehicle Electrification And The "Too Good To Be True Rule"

John Petersen

One of the first lessons investment professionals learn is that if an investment proposal sounds too good to be true, the proposal is probably materially false and misleading. On November 15th, the Electrification Coalition released its Fleet Electrification Roadmap and once again proved the wisdom of the "Too Good To Be True Rule." I know that lobbyists are supposed to take a policy position and make the best case they can; but when their case is based on deliberate distortions, somebody has to point out the differences between current realities and bafflegab.

In building the best policy case for the electrification of commercial fleets, the Roadmap used this gee-whiz graph of vehicle emissions by technology and fuel type. The source of the data was a 2007 study by the Electric Power Research Institute.

11.16.10 EC Emissions.png

Unfortunately the 2007 EPRI data that served as a basis for graph is meaningless. The fundamental premise is flawed because the graph assumes well-to-wheel CO2 emissions of 450 grams per mile for a car with an internal combustion engine and 300 grams per mile for an HEV. Unfortunately both estimates overstate current realities by about 50%.

The internal combustion engine values may have been good a few years ago, but they're worthless in light of new CAFE standards that the NHTSB and EPA adopted in April. These standards require the new light duty vehicle fleet to meet or exceed the following increasingly stringent CO2 emissions standards.

Model CO2 Emissions CO2 Emissions
Year
Pump-to-Wheel
Well-to-Wheel
2012
295 grams per mile
369 grams per mile
2013
286 grams per mile 358 grams per mile
2014
276 grams per mile 345 grams per mile
2015
263 grams per mile 329 grams per mile
2016
250 grams per mile 313 grams per mile

Similarly, the HEV values may have been good a few years ago, but they are meaningless in light of the fact that the 2010 Toyota Prius has pump-to-wheel CO2 emissions of 89 grams per kilometer, or 143 grams per mile, and well-to-wheel CO2 emissions of 179 grams per mile.

If you reduce the Roadmap's 450 gram per mile ICE estimate to comply with the regulatory mandate of 313 grams per mile by 2016, PHEVs lose much of their appeal. If you reduce the HEV estimate to the current 179 grams per mile performance of the Prius, the only plug-in that can honestly claim parity, much less superiority, is one that's equipped with a dedicated wind turbine.

I wholeheartedly support the Electrification Coalitions desire to "disseminate informed, detailed policy research and analysis," but think that they should consider adding "accurate, current and balanced" to the desiderata. If any of the CEOs that support the work of the Electrification Coalition published this kind of nonsense in their SEC reports, there'd be hell to pay.

Disclosure: None


September 18, 2010

Kandi Technologies (KNDI) Stock Valuation

Part IV - KNDI's Stock Valuation

Arthur Porcari.

This is the last installment in a four-part series on Kandi Technologies (KNDI)Part I was an introduction, Part II took a look at Kandi's Business, and Part III looked at the company's financial condition.

What’s With The Stock Price?

KNDI, like most US traded China stocks is currently trading approximately 50% below its January high for the year, and 60% below its 2008 all time high. Unlike most, it's numbers are growing dramatically. Perhaps not too a-symptomatic when one considers how little Wall Street knows about this company brushing it with the broad China Stock brush.  The Company currently has approximately 21.7 million shares with the CEO owning 12.3 million. At the current price of $3.25 a share, it is obvious that either the stock has yet to be taken seriously, or the “market has little clue” as to what is about to happen with the opening of China sales this current quarter, or perhaps both. I suspect “both” is the correct answer. 

Short Interest

While the reported short interest has dropped significantly to the recently reported 904,000 from  month ago high of 1.18 million shares, so also has the volume. In January when the stock hit its high of the year,  average daily volume (ADV) was in excess of 550 thousand shares. A month ago the ADV was around 175 thousand shares. This past two weeks it has dropped to under 50 thousand shares per day. With the solid base that has been built in the low “3’s” and the decreasing short position, it appears that the short sellers are now beginning to realize that this Company “just might be real”. But with the declining volume and still very large percentage of shares short, a question could be raised, did they wait too long to start covering?  It is very likely that the Average "Days to Cover" could jump to 20 or more days when reported on Sept. 24th. As an old OTC Market Maker of ten years, years ago, who worked with a number of "old, but no longer bold" short sellers, I can attest that shorts don't give up easy. But in a rapidly performing company, they do give up. Voluntarily or involuntary, in most cases, not until they are squeezed. 

As in the case of most China stocks, KNDI's short began with it's large run-up late last year, accelerated when they announced their $10 million funding, and further accelerated with the sharp downturn in virtually all US and Shanghai Composite China stocks. IMO, the major difference in KNDI's case is the, to date, almost total lack of hedge fund longs, leaving most of the float+ in the hands of long term investors who have done their homework and continue to patiently hold or add to their positions with each bear read attempt. At no time is this more telling in KNDI then by watching the stock action after one of their several very positive press releases or outside published articles. After their first PR of the year on January 4 which caused the stock to gap open at $.45 hit an inter-day high of $6.16 and close at $5.72 on all time single day record volume of 1.84 million shares, virtually every PR since, no matter how strong, has been met with aggressive raids hitting bids.
historical chart
This is a common pattern in any stock that has a major short position in that the short seller will do whatever he can to kill enthusiasm and keep momentum buyers from jumping in and running him over.  This works to a point, but once long funds and institutions start buying, particularly from a low daily volume base, the future quick upside moves can be impressive.  The likelihood of this happening soon is  anyone's guess, but there has been a small but growing institutional interest in the stock, tripling since the beginning of the year. The top five each have positions almost too small to note, but each of these could easily decide on any given day to add a million shares which could be catastrophic to the short seller. Not so far fetched now that China sales are beginning. 

Technical

As can be seen by the chart below, KNDI has strong support in the low $3 area. For the past month it has been trending higher and nudging up to the 50 day moving average at 3.32 and just above the upper Bollinger Band. This is a very similar pattern, but on lower volume, as was seen the month just before the extended heavy volume break-out on no news in early August.  

Value Compared To Other China Auto Stocks

In deference to the short, an unknowing investor might look at the current 30 PE as rich,  compared to other more well known China auto stocks. And if all one were allowed to look at was this number based on history, I might agree. But, let’s throw in another very important factor, “growth”, and look at what comes out. One important variable that should be taken into consideration in comparing other China stocks is; “where was the market for these other stocks during the 2008-9 economic downturn”? We know KNDI was exclusively exporting non-essential “toys for big boys” to the US, so obviously they took a big hit in both top and bottom line.  But most other China stocks were able to ride out the storm selling domestically giving them reasonably good numbers last year allowing for a much lower 52 week PE. 

For comparison sake I will use a modified one year Price to Earnings Growth (PEG) ratio. In the case of the other more well known stocks; I’ll take the current PE for the formula “dividend”, last years earnings and this year’s analysts consensus to calculate the “growth” to be used in the “divisor”. For KNDI since it has no analysts following yet, I will pass on my higher estimate and instead use well known and respected Wall Street pundit Jim Altucher’s estimate published in a recent story of around $.30 per share for the full year (ten times earnings), to be used along with last years earnings to calculate the divisor. Now we know with a PEG ratio the closer the number gets to "1.0" the more fully valued the the stock, the smaller the number, the more undervalued the stock. So let’s run a few  of these modified PEG ratios. KNDI’s PEG ratio with a current 30 PE would be .05. Auto China (AUTC) with a current 7.5 PE, the PEG would be .14. China Automotive (CAAS) with a current PE of 15 would generate a PEG of .36. And Sorl Automotive Parts (SORL) with a current 10 PE would give a PEG of .53. I would have also added Wonder Auto (WATG) with its 12 PE, but since the analyst consensus is flat to negative growth for this year, the number would be meaningless. So using this comparison, each, other than WATG is undervalued, but KNDI is three times more undervalued than AUTC, seven times more undervalued than CAAS and ten times more unvalued than SORL.

A last, but important comment here that may shine positive for getting the KNDI story out to Wall Street. As previously mentioned, Mr. Hu doesn’t speak English. For that matter, neither does any other member of the Management team. Additionally, due to Mr. Hu’s conservative penchant for not putting anything out until it is done, to date, Company guidance has been out of the question. With no one here to field questions in English, there is no wonder no analysts and few institutions are following the stock. (Even the well respected China Analyst website after a recent rally in the price above $4 ranked KNDI as the #2 on it Aug. 8, "Top 10 Rebounding  Auto Stocks" seems to have forgotten that KNDI is even a China stock as can be seen by this ( link.) However, during my last translated conversation with Mr. Hu a month or so ago, I brought up the possibility of the Company bringing a new top level Executive on board that is US based and bi-lingual. To my pleasant surprise, I was told that such a search was already underway. Last week I was further told from a normally knowledgeable source, that such an individual has been chosen and should be announced shortly.

Forecast

Based on my assumption of the second paragraph above, China consumer sales revenues for the second half should be at least $15 million with $2.5 million net profit. Other China Government sales should reach $6 million adding $1.3 million net profit. Historical, conventional export sales, should reach $25 million for an additional $3.1 million net profit. Conservatively total is $46 million in sales and $6.9 net profit or approximately $.31 a share for the second half of the year and $.40 for the full year. 

When one looks at the Company’s prior record year, 2008, on $40.05 million in sales they delivered $4.92 million net (eps $.25).  All of those sales were on much less profitable all export sales requiring shipping costs to the US, plus US Distributor fees for their lower margined off-road recreational vehicles. With what could quickly be a majority of future sales being made in China selling directly to the Government and self distributes to dealers, 2010 margins should increase significantly over 2008 making my last half forecast quite reasonable.

Bottom Line

In my 37 years in the market as both a market professional and investor, I have never seen such an apparently undervalued speculative Company with such a seemingly clear road ahead to potentially be a multi-billion dollar participant in a potential Trillion dollar space. I apologize for the length of this article, but if you have had the interest to get this far, then hopefully you will find as I, that Kandi is a “sweet” story at least worth "putting on your radar".

DISCLOSURE: Long KNDI

Arthur Porcari is a retired former regional stock brokerage firm President with 37 years stock market experience. His finance background includes, three years a stockbroker, ten years a brokerage firm President, an OTC Market Maker, twenty three years an Investment Banker to include 14 years as Managing Consultant to Corporate Strategies, Inc. a firm specializing in advising young public companies and companies about to go public on the “Ways of Wall Street”. He currently blogs on Seeking Alpha under “Corstrat” and has in the past been an on-air guest as well has a guest host on Business Talk Radio Network His passion and particular expertise is for small cap emerging growth companies.

He currently is and has been a shareholder of Kandi Technologies since it was first listed for trading in the US.

September 17, 2010

Kandi Technologies (KNDI) Financial Condition

Part III - Financial Condition

Arthur Porcari.

This is part three of a four-part series on Kandi Technologies (KNDI).  Part I was an introduction, Part II took a look at Kandi's Business, and Part IV will look at the company's stock price, forecast and bottom line.

KNDI recently completed another excellent quarter with an 80% Year Over Year Increase in Revenues and 425% Gain in Net Income. For the six months, Revenues grew 91.5% to $18,166,224 and Net income advanced 383.5% from $(356,525) in the first half last year to $1,010,782. Full year 2009 results showed revenues of $33,827,762, net income of $999,801.  Full year 2008 results showed revenues of $40,513,788, net income of $4,922,078.

I mentioned in Part II that Management took the Company through a major restructuring on two fronts in late 2008 and 2009. Prior to the restructuring KNDI was exclusively an exporter of gas and diesel powered off road recreational vehicles. As can be seen by recent record quarterly numbers by competitor Polaris Industries (PII), this is still a very good and growing business and KNDI will remain a strong participant in this legacy sector. However, a combination of the global economic meltdown causing a dramatic drop in KNDI's legacy export sales, increased fossil fuel costs and a worldwide recognition with China in the forefront that EV's were a wave for the future, created an opportunity for KNDI to reshape its destiny and become a legitimate potential contender in a potential future Trillion dollar market. This type of major shift does not come without cost. As would be expected with any company making such a change, during this time R&D, re-tooling, and marketing costs ramped up considerably. Yet during this time, in spite of the non-recurring spikes in these costs, and 50% or more drops in revenues, KNDI low and extremely flexible labor costs managed to complete the transition suffering only one quarter of a cash loss of only a few hundred thousand dollars. A task the would be incomprehensible to any US manufacturing company. During this time, the Company developed, received approval and initiated sales of four different EV's, two for export and two in China. With the transition effectively completed as is evidenced by the 65% reduction in R&D and 55% decrease in Selling & Distribution expenses, year over year in the recently reported second quarter, and initial consumer sales along with government and municipal sales of EV's in China beginning in this current third quarter, both revenues and net income should be expected to dramatically increase in the second half. More on this later.

But what about the Balance sheet?

At face, a quick review of KNDI’s balance sheet may make one think the Company might be low on cash to grow, particularly using US Company measures. However, a combination of a closer reading of the 10Q, along with an understanding of the way China banks handle their credit facilities and the way Government and Municipal subsidy payments work presents a different story. Particularly when one sees how low the tangible assets are valued on the books. 

Earlier this year the Company completed its first ever outside financing with a $10 million 6.25% convertible note offering convertible at $3.59 a share with two US Institutions which certainly has enhanced their balance sheet.  With that offering completed, let me show why the Company is in excellent financial condition with no foreseeable need for additional equity capital unless of course the stock prices rises to a point that it would be imprudent not to add capital.  With current assets of $49,115,201 and current liabilities of $48,433,030, its small positive  working capital is as strong a financial position that the company has ever seen. A year ago, in the middle of its restructuring, current assets were $29,997,837 and current liabilities were $42,100,705, a negative $12 million yet they completed the restructuring with little problem. A potentially fearful situation if this were a US based Company, but not necessarily so for a China company. Let me explain the difference. 

Most don’t realize, but China Banks typically do not provide long term financing as explained in a footnote in the Company's SEC filings. China banks typically just provide credit facilities for one year with a mutual understanding that aside from adjusting for current rates, as long as the Company stays current, the facility will continue to roll over each year. This Company has been financed this way almost from inception. For this reason the Company has little Long Term Debt. While the balance sheet does show Long Term Liabilities of $5,969,452, $4,791,969 of this amount is a non-cash warrant liability, leaving only $1,177,483 in true long term debt. 

Lets look at the Assets

If this were a US Company, it would have a fantastic looking balance sheet. Why? A US company would most likely have a long term mortgage debt against its primary asset, its modern, ten-building, 2.7 million sq.ft. under roof, 400 acre campus. Due to statutory depreciation this asset is only carried on the books for approximately $11.5 million. This video clip which is a bit outdated and these photos will give an idea of their facilities and capacities. In today’s much increased China Real Estate market, it is unlikely the company could rebuild this facility for less than $80 million. A value considerably more than the current stock market cap of $63 million. Further reading of the most recent 10q, shows they still have some $7.5 million in available untapped Credit facility if needed. They also have almost $10 million in inventory (an almost double from last year) already built out for the quarter ahead. Virtually all of this inventory and available credit facility is for the export side of the business. The China side of the business is being built almost exclusively through innovative use of the China subsidy programs.

Why the China side requires little capital outlay

As mentioned above, the current quarter is the quarter that vehicles for sale in China start showing up on their financials. As mentioned prior, in this second half, they have government approval for subsidies for some 3000 cars to be sold in Jinhua City China alone. This should add some $18 million to the legacy business for the second half. Additionally, more direct Government and Municipal sales are anticipated in the second half. The good part about this business is that the subsidy alone covers more than the actual raw costs of building the cars, and they get paid this subsidy approximately ten days after they sell vehicles to the dealers. So, for example, this is how they can build out this order with very little out of pocket cost. First they build 100 cars which might cost them $300k out of pocket, the then deliver these 100 cars to the dealer and get paid maybe $200,000. They then bill the Government for an approximate $400 thousand for the subsidy and get paid the subsidy in about 10 days. They now have $600,000 to build 200 cars and do the same procedure all over again, then 400 cars and so on. So you can see, they are barely out-of-pocket any significant cash at any time and can make the whole 3000 car delivery in just a few months.

Continued in final Part IV which will look at the company's stock price, forecast and bottom line.


DISCLOSURE: Long KNDI

Arthur Porcari is a retired former regional stock brokerage firm President with 37 years stock market experience. His finance background includes, three years a stockbroker, ten years a brokerage firm President, an OTC Market Maker, twenty three years an Investment Banker to include 14 years as Managing Consultant to Corporate Strategies, Inc. a firm specializing in advising young public companies and companies about to go public on the “Ways of Wall Street”. He currently blogs on Seeking Alpha under “Corstrat” and hn the past been an on-air guest as well has a guest host on Business Talk Radio Network His passion and particular expertise is for small cap emerging growth companies.

He currently is and has been a shareholder of Kandi Technologies since it was first listed for trading in the US.

September 16, 2010

Kandi Technologies (KNDI): The Business

Part II - The Business

Arthur Porcari.

This is part two of a four-part series on Kandi Technologies (KNDI).  Part I was an introduction, and Part III and Part IV will look at the company's financial condition and stock price, respectively.

Kandi was founded by its effectively sole controlling shareholder Hu Xiaoming in late 2002 in Jinhua City, Zhezjiang Province, PRC as a prolific developer and manufacturer of two, three and four wheeled gas powered, mainly off road, recreational vehicles exclusively for the US export market. By 2007 KNDI rose to the status of being China’s largest exporter of high end Go Karts (more like mini-dune buggies) with a impressive15% of the total market. In addition, KNDI also developed and manufactured an array of ATV’s, UTV’s, Trike’s, etc. Unlike most start-ups, KNDI was financed from its inception through the end of 2009 without going to outside equity investors. Also, unlike most startups it has been profitable each year including the last two in spite of an almost total collapse of the export market for non-essential products as KNDI was offering.

With the Energy Crisis of 2008, a window opened for Mr. Hu to make what could now only be looked at as a perfectly timed Company transformation simultaneously on two fronts. He rapidly moved the emphasis of the Company to develop and market mini-electric cars and to develop these cars along with the Company’s legacy products for not just the export market, but also for domestic PRC consumption. Before anyone thinks that the move into EV’s was just the move of a stock market opportunist CEO, I suggest you check out this link for a short bio of his credentials as an earlier pioneer in mini-cars, EV’s and batteries.

Where does KNDI stand today on the EV front?

Exports

For openers, I suspect that most had no idea that KNDI was China’s largest exporter of pure 4 wheeled EV’s to the US with over 3500 mini-EV’s delivered the past twelve months. The initial sales were of a cute two seat convertible called a Coco, followed now by a more powerful hardtop with AC and power windows (Yes that is me in the car). The latter recently arrived at KNDI’s West Coast facility within the past few months and only last week reached its first dealer in my home city of Houston. In fact, thanks to Rick Erhlich of Houston Electric Car Company, Saturday I was able to take a head turning spin through downtown Houston. While both these cars are designated as Low Speed Electric Vehicles (LSEV), meaning they must be speed restricted down to 25mph in any state that doesn’t have its own specific requirements, Texas allows the speed to be set at 35mph. I can assure all; this car without the governor will go well past the 35mph restriction. With the addition of this air conditioned model (better for both hot and cold climates), and the existing and impending tax credits in several states, paired with the federal tax credit of 10%, I can easily see sales of  5,000-7,000 more export units over the next twelve months. These sales should also include the impending opening of their new EuroGroup market.

People's Republic of China (PRC)

Consumer Sales

While the KNDI's legacy export business is profitable steak, what is happening in China beginning this quarter is surely the sizzle. As mentioned above, Mr. Hu is Johnny come lately when it comes to EV’s. Last year the word came out that the China Government was going to go all in with incredible subsidies and grants to make China the Worlds #1 manufacturer and consumer of EV’s. Immediately all of China’s, and a number of other international auto manufacturers came running to the market with their big beautiful $30,000 plus full speed EV entrants. In June, the subsidy plan was unveiled giving PRC subsidies up to the equivalent of $8600 US per sale, additionally local Provinces and Cities also added subsidies. As we now know, this great deal has been about as successful as a Chinese firecracker in a typhoon. Why? The big guys will tell you it is because the subsidy is not enough. “If a buyer can’t afford $30,000, then they can’t afford $22,000 either". True statement, but… that’s not the main reason. There are at least two other more important reasons, and KNDI knew it.

The most important credo in manufacturing is “know your market
. Something the big guys either forgot or ignored. In most of the world, EV’s for years to come will be either a second car, or a novelty market. Not so for China for at least two reasons. In China with its current minuscule cars per family ratio and huge 300 million urban emerging middle class, EV’s are likely to be a first and only car for quite a while. This group is evolving from bikes and scooters, so any economic enclosed vehicle they can step up to for a few thousand dollars is cause for excitement. But additionally, they would like to have the ability to get not just from point A to B, but on to the rest of the alphabet. Let me explain.

KNDI and Mr. Hu know the above is KNDI's market, in the same way Henry Ford with the Model-T and Ferdinand Porsche with the Volkswagen knew their market was for the common man. With most of the above potential consumers living in high rise condos, just finding parking alone will be a universal problem, let alone finding a place to plug in for an overnight recharge. Obviously this is not a good environment for a big expensive sedan. KNDI’s solution; make the car half the length of the sedan, sell it without the most expensive single item, the battery, and forget about plug in recharging (thought the KNDI vehicles do allow plug-in). And, BTW, this will make it a lot easier to get from A to C and beyond without waiting for hours for a recharge IF you can find a place to recharge. KNDI's solution; Build the car with battery quick change access and also build the battery changing stations.

Mid last year while the rest of the auto makers were developing their big expensive cars, ten of the biggest got together and formed a group to address the re-charging issue as can be seen in this article snippet translated from this translated China news story:

“Not only the ‘external environment’ case, even the electric car production camp is also due to the formation of two different charging modes martial. Such as FAW, SAIC Motor, Changan and other domestic 10 vehicle companies jointly established in August 2009 electric vehicle industry alliance to promote plug-in electric vehicles and models of commercial standards.”

Late last year, KNDI, due to it’s ownership of a technological patent for quick battery change, led the formation of its own group. From the same article: (Condi is Kandi after Google translation)

“While Condi is with CNOOC Zhejiang, China Putian, Zhejiang days Battery Co., Ltd. and other energy giants could reach an agreement, set up a ‘Chinese electric car industry Promotion Alliance’, seeks to expand the change battery mode of influence.”

Now the big guys came up with the brilliant idea to set up tens of thousands of plug in terminals all over the country. With current average full charging times of up to six hours, there had better be a good triple feature movie theater nearby.

The KNDI lead group is currently building a series of Changing Stations similar to what Shai Agassi is trying to do internationally with his not yet trading already Billion dollar VC funded A Better Place company. Just drive you car in, let a robot arm change out the battery, and in less than two minutes you are back on your way to point C with a fresh battery. But KNDI’s group is taking the changing station concept to a more advanced level. When you buy your subsided car you buy it separate of the additionally subsidized battery which is leased from their same group for a pittance. Aside from the obvious lower initial cost, always a fresh battery, and ecologically friendly battery recycling, this is also a great deal for the car buying consumer in that his purchase price is cut in half and his resale value will not drastically decline with the age of the battery. 

For KNDI this is an excellent situation in that in addition to selling their cars equipped with the quick change battery feature, they get paid a fee from the battery change alliance each time an exchange is made.

Now as is Not typical for a US company which might take years and millions of dollars to implement such a plan, KNDI, thanks to their contribution of the technology, has no capital requirement towards building out the battery changing infrastructure. The PRC, local Governments and KNDI's partners are covering all costs. And according to this translated China article the first six changing stations and main charging station are scheduled to be completed in October. But what is really big for KNDI is the initial commitment for the City of Jinhua to subsidize an initial 3000 cars of KNDI’s recently Government approved larger mid-speed car, the KD5010XXYEV which can cruise at 80kph with a 160km range between battery changes. After subsidy paid to KNDI directly after each sale to a dealer, the consumer cost at the dealership will be between $2500 and $3000 USD. An entry level that most emerging middle class can embrace. KNDI’s gross margins should exceed 35% on these sales.

Government and Municipal Orders

To date, KNDI has made initial sales for trial purposes to the China Postal Service in both Jinhua City and Hangzhou, cities totaling some 9.1 million in population. The most recent sale of 60 cars which are modified versions of the KD5010XXYEV sold directly by the Company with the batteries was made at approximately $10,000 USD per vehicle. Here is a video clip from a China TV piece aired in June. While it is in Chinese, the video alone shows an impressive operation. The green vehicles with the light on top you see throughout the clip and the plant manager being interview in front of, are the new China Postal vehicles.  Much can be read as to the potential of Government sales through the below excerpt of this recent press release.

This initial order by the Hangzhou Postal Service is for vehicles to be used as a Special Postal Vehicle. Hangzhou, one of China's most prosperous cities, is one of the first five Chinese cities in which the Chinese government will begin to offer significant subsidies and special policy incentive to electric vehicle and hybrid manufacturers as announced by the Ministry of Finance on June 1, 2010. 

The Company added that the initial order by the Postal Service totaled approximately RMB 4,080,000 (US $602,450). It was in response to a widespread call by government officials in Hangzhou for its municipal services to adopt alternative energy vehicles. The Company said the government approved Kandi EV emits no emissions, and meets all of the standards set by the Chinese government. After a finishing touch of green paint, it is anticipated the cars will be shipped and begin to appear on the streets of Hangzhou before the end of July. 

"By improving the environment and raising the standard of service provided by the Postal Service in Hangzhou, we believe this sale will serve as an example of the potential for utilizing electric vehicles for mail delivery throughout all of China," stated Mr. Xiaoming Hu, Chairman and CEO of Kandi. He added, "We will continue to market our EV products to all major government agencies in China.

Continued in Part III

DISCLOSURE: Long KNDI

Arthur Porcari is a retired former regional stock brokerage firm President with 37 years stock market experience. His finance background includes, three years a stockbroker, ten years a brokerage firm President, an OTC Market Maker, twenty three years an Investment Banker to include 14 years as Managing Consultant to Corporate Strategies, Inc. a firm specializing in advising young public companies and companies about to go public on the Ways of Wall Street. He currently blogs on Seeking Alpha under Corstrat and has in the past been an on-air guest as well has a guest host on Business Talk Radio Network His passion and particular expertise is for small cap emerging growth companies.

He currently is and has been a shareholder of Kandi Technologies since it was first listed for trading in the US.

September 15, 2010

Why Wait For Tesla Or, A Better Place? Kandi Technologies is Already a Profitable EV & Quick Change Battery Company

Part I

Arthur Porcari.

Ever hear of China based NASDAQ listed Kandi Technologies (KNDI)? If you haven't, you're not alone.

No financial writers, no analysts, and no significant institutions or funds are interested.  But they should be.  This series will go into the reasons why.

In part II, we'll look at the company's business and history :

  • Kandi is already selling EV mini-cars by the thousands.  
  • Kandi landed a joint venture with three multi-billion dollar Companies for quick-change battery charging, with the first stations opening in November.
  • Owns a mortgage free modern ten building, 2.7 million sq.ft., 400 acre complex with manufacturing potential of over 100,000 vehicles per year. 
In part III, we'll look at Kandi's financials:
  • The first six months 2010 revenues up 91.5% to $18,166,224 and net income up 383.5%  to $1,010,782. 

  • They are sufficiently capitalized and led by a highly experienced and “connected” CEO and 60% controlling shareholder.
In part IV, we will look at the company's current valuation and where I think it will be heading.
  • Kandi's second half 2010 top line should double, bottom line should quintuple.

  • The company is significantly undervalued.
  • They have been continuously profitable and trading under replacement value.
  • The stock is trading  at 50% off its high year to date.
I have closely followed KNDI and have been a shareholder since the day it started trading in the US in mid 2007. This is a company led and controlled by a very conservative non-English speaking, well connected, very wealthy, CEO who even to this day still personally guarantees the majority of its debt. Not because he has to as I will discuss later on in the Asset part of this tome, but because it keeps the cost of money down. (Know of any other NASDAQ CEO’s who only hold 60% of the current 21 million shares and is paid an annual salary of $24,000 a year that has that much confidence in his company? I don’t.) When I say conservative, I am speaking of a man who flies coach, hates to announce anything until it is done and almost always surprises on the upside.

While I have met the CEO once, and spoken to him through a translator a total of three times, I neither claim, nor do I care to have, any special access to information other than what is published both in the US and in the PRC. The latter, thanks to the Internet and Google Translator, I must add is a treasure trove of Company information that we don’t see published in the United States. 


Intrigued?  The rest of this series will be published over the next few days.

DISCLOSURE: Long KNDI

Arthur Porcari is a retired former regional stock brokerage firm President with 37 years stock market experience. His finance background includes, three years a stockbroker, ten years a brokerage firm President, an OTC Market Maker, twenty three years an Investment Banker to include 14 years as Managing Consultant to Corporate Strategies, Inc. a firm specializing in advising young public companies and companies about to go public on the “Ways of Wall Street”. He currently blogs on Seeking Alpha under “Corstrat” and has in the past been an on-air guest as well has a guest host on Business Talk Radio Network His passion and particular expertise is for small cap emerging growth companies.

He currently is and has been a shareholder of Kandi Technologies since it was first listed for trading in the US.

September 14, 2010

The Cruel Realities of EV Range

John Petersen

An English proverb teaches us to hope for the best but plan for the worst. With the imminent introduction of a variety of plug-in vehicles that will begin hitting showroom floors in the next few months, the phobia du jour is range anxiety, an entirely rational terror that an EV will get you to your destination in eco-chic style but only get you home with the help of a tow-truck. Sadly, most people who extol the virtues of electric drive are incurable optimists that have little or no regard for the risks inherent in complex systems and the widely variable needs of individuals. The quick and dirty overview is that every plug-in owner will have to cope with range degradation before the new car smell fades and his problems will only get worse as time passes.

Nissan Motors (NSANY.PK) will soon start delivering its battery powered Leaf, the world’s first production EV. The Leaf will get its power from a 24 kWh lithium-ion battery pack and Nissan's advertising campaign focuses on a showroom floor range of 100 miles. While they include the usual throw-away warnings that "Range will vary with driving habits, conditions, weather and battery age," they haven't been entirely forthcoming with the inconvenient truth that battery packs start to degrade with the first charging cycle and the process never stops.

The following graph comes from a recent National Renewable Energy Laboratory study that examined the long-term effect of local weather conditions on power degradation in lithium-ion battery packs. This particular graph has an upward slope because it's showing the percentage of power loss over 15 years. To show expected vehicle performance, the curve would need to be inverted. While the study's authors warned that their results were optimistic because they didn't include battery degradation from the heat buildup that happens whenever a car is parked in the sun, most potential buyers will find the optimistic numbers shocking enough.

9.2.10 Climate.png

In Minneapolis, an EV-100 will be an EV-90 after one year and an EV-80 after five. In Phoenix it will be an EV-80 after one year and an EV-60 after five. These are not minor differences to people that need dependable transportation to and from work, particularly if they plan for the worst when they make a buying decision.

Other major range penalties that potential buyers must consider include:
  • Cold weather penalties of 10% to 20%.  While heat increases the rate of battery degradation, the widely reported experience of Mini-e drivers has shown that cold weather is a killer. If you live someplace where your dog's water bowl occasionally freezes over, you need to plan on an occasional 10% range reduction, but if your dog's water bowl frequently freezes solid it's better to plan on a 20% reduction.
  • Hilly terrain penalties of 5% to 10%. Hilly terrain is one of those things that most drivers don't consider because logic dictates that the energy used to climb a hill will be recovered on the downhill. In reality the energy used in climbing is far greater than the energy recovered coasting downhill. While this reality isn’t important to drivers, cyclists quickly learn that 500 feet of elevation gain increases the energy expended on a 60-mile ride by about 5%. While cars have better aerodynamics than bicycles, hills are never free and the downhill wheee! is never fair payback for the uphill grind.
  • Stop and go traffic penalties of 30% to 50%. Of all the factors that impact EV range, stop and go traffic is the biggest offender. According to Nissan, the Leaf's range will fall by 40% in 15 mph stop-and-go-traffic at low temperatures and by 50% in 6 mph stop-and-go-traffic at moderate temperatures.
When you put it all together, a three-year old EV-100 will probably act like an EV-50 on a frosty winter's day in Minneapolis. While a foolish consistency may be the hobgoblin of small minds, I think consumers will tend to be very cautious when it comes to choosing between dependable transportation and an eco-chic image.

The simple solution, of course, will be bigger, better and cheaper battery packs. According to popular media and specious political promises, that wondrous day is just around the corner. While I suppose anything is possible, I find it hard to ignore 30 years of hands-on experience with R&D companies and H.L. Mencken's warning that "A newspaper is a device for making the ignorant more ignorant and the crazy crazier."

In August Greentech Media reported that battery prices were plummeting, Project Better Place would pay $400 per kWh for lithium-ion battery packs with a 2012 delivery date and IBM has plans to demonstrate a prototype lithium-air battery pack within two years. The ecstasy was palpable, but wholly irrational.

Better Place has based its business model on leasing batteries as a service instead of selling them as a product and even a modest level of success will give it buying power comparable to a first tier automaker. Better Place is planning on massive government support and at least in the U.S., the subsidies could exceed its capital costs for a time. Under those circumstances Better Place doesn't need to sweat minor details like battery quality, service life and pack degradation because it can simply discard problem packs that were bought with somebody else's money and continue to collect rental charges with little or no capital investment. It should be a hell of a party until the governments get a clue and take away the punchbowl. The hangover, however, may be painful.

As we leave our pleasant dreams of a Better Place and awaken in the real world, the dynamic changes rapidly. Consumers need warranties to protect their investment and companies that write warranties need to cover their costs. While Tesla Motors (TSLA) has been able to get away with three-year battery pack warranties for its roadster, real automakers will have to provide eight to ten year warranties and eventually earn a normal profit on vehicle sales. So even if they start with a battery pack that costs $400 per kWh at the battery factory, the fully loaded cost to consumers with an eight to ten year warranty and a normal markup will be closer to the $750 per kWh Nissan has ascribed to the battery pack in the Leaf.

In a May 2009 report for the DOE, TIAX LLC pegged the current cost of commodity grade 18650 lithium-ion cells at $200 to $250 per kWh, which resulted in pack costs of $400 to $700 per kWh. Despite the happy talk about economies of scale, large format batteries are a good deal more complex than a giant economy-sized box of laundry detergent. While the cost of large-format automotive grade cells may eventually approach the cost of small-format commodity cells, they're not likely to get any cheaper without intervention from the commodity price fairy. By the time you add in warranty costs and automaker's profits, end user battery costs of $400 or even $500 per kWh are a little more than pipe dream unless lithium-air or molten salt technologies make lithium-ion batteries and the factories that make them obsolete.

We've all seen the "hope for the best" stories about how electricity for an EV will cost the equivalent of $1.20 per gallon of gasoline. Those stories, however, assume that like butterflies batteries are free. An optimistic "hope for the best" total cost of ownership scenario looks something like this.

9.15.10 Hope.png

A more rational "plan for the worst" total cost of ownership scenario looks more like this.

9.15.10 Plan.png

I have little or no patience with battery manufacturers, automakers, politicians, journalists and quasi-religious EVangelists who create unreasonable expectations based on hopeful scenarios instead of reasonable expectations based on likely scenarios. A Nissan Leaf may get 4 miles of range per kWh of battery capacity on a sunny afternoon in Florida, but it will be lucky to get half that on a winter morning in Chicago.

EV buyers who pay a filet mignon price and end up eating pork tartar will not be happy. Their lawyers, on the other hand, will be tickled pink.

If the EV and battery industries want to avoid interminable litigation and untold reputation damage they need to get honest with their stockholders and customers. They need to tell potential customers that they might get 4 miles per kWh of pack capacity on a good day, but can't plan on getting more than 2 miles per kWh on a bad one. They need to stop comparing the fueling cost for a brand new EV with the average economics of an aging automotive fleet. They need to stop dividing 12,500 miles per year by 300 days and telling potential buyers that 40 miles of EV range is enough when they know that customers will need at least 80 miles of reliable range to accommodate day-to-day variations and achieve an annual average of 12,500 miles. Instead of bafflegab claims of pennies per mile, they need show more realistic economics based on end-user battery pack costs and reliable ranges in congested traffic and poor weather.

The realities of EV range are a bitch and I'm not the only one who questions whether long-range EVs can ever be cost effective. Industrial revolutions arise from technologies that first prove their economic value in a free market and then seek subsidies to accelerate growth. A business model that can't work without subsidies doesn't make sense because the punch bowl always gets taken away too early, particularly if customers aren’t happy. The green jobs myth of the EV revolution has already proven to be a mirage. The cost effective and reliable transportation myth will be the next to crumble.

The last few weeks have been a busy time in the happy-talk press corps as Ener1 (HEV) arranged $55 million in potentially toxic debt financing to continue its plant construction, Valence Technologies (VLNC) trumpeted a six-year extension of a contract with Wrightbus that may generate a three or four million dollars in annual revenue, A123 Systems (AONE) announced the opening of its new battery manufacturing plant in Livonia, Michigan and Compact Power, a subsidiary of Korea's LG Chem, broke ground for its new battery manufacturing plant in Holland, Michigan. All these events gave rise to great trading opportunities, but there is a wide gulf between progress on the construction of a battery manufacturing plant and profitable operation of that plant.

Every prior generation of electric cars has died of congenital birth defects. While the next generation may not be stillborn, I have no confidence that the outcome will be different. In my view these companies are not equities you want to buy and squirrel away in a safe deposit box for the grandkids. Hope, after all, is not an investment strategy.

Disclosure: None.

August 19, 2010

What Does GM Really Think About The Volt?

John Petersen

I love IPO registration statements because they have to provide full and fair disclosure of all material facts and forward-looking statements must "bespeak caution." The following quote from the risk factors section on page 19 of the prospectus included in the Form S-1 Registration Statement that NewGM filed yesterday says everything you need to know about the Volt and the other plug-in vehicles that currently reign as media darlings.

"In some cases, the technologies that we plan to employ, such as hydrogen fuel cells and advanced battery technology, are not yet commercially practical and depend on significant future technological advances by us and by suppliers. For example, we have announced that we intend to produce by November 2010 the Chevrolet Volt, an electric car, which requires battery technology that has not yet proven to be commercially viable. There can be no assurance that these advances will occur in a timely or feasible way, that the funds that we have budgeted for these purposes will be adequate, or that we will be able to establish our right to these technologies. However, our competitors and others are pursuing similar technologies and other competing technologies, in some cases with more money available, and there can be no assurance that they will not acquire similar or superior technologies sooner than we do or on an exclusive basis or at a significant price advantage."

While I don't hold myself out as being qualified to analyze GM's business there were a couple of line items on its balance sheet that concern me. At December 31, 2008, OldGM had $91.0 billion in total assets, including $46.7 billion in non-current assets. At December 31, 2009, NewGM had $136.3 billion in assets, including $77.0 billion in non-current assets. When I went through and did a line by line comparison the major changes boiled down to three line items that were insignificant on OldGM's balance sheet but massive on NewGM's balance sheet.
  • NewGM reflects $30.7 billion of goodwill where OldGM didn't have any;
  • NewGM reflects $14.5 billion of intangible assets where OldGM only had $0.3 billion; and
  • NewGM reflects $22.0 billion of stockholders' equity where OldGM had an $85.1 billion deficit.
I don't claim to be an expert in fresh-start accounting or the incredibly complex valuation estimates that generally accepted accounting principles require in a bankruptcy reorganization, but it strikes me as more than passing strange that a bankruptcy could create $45 billion in intangible asset values and stockholders' equity that didn't exist before OldGM failed.

Disclosure: None.

July 23, 2010

Battery Cost Forecasts and The Origin of Specious*

*with humble apologies to Charles Darwin
John Petersen

The Oxford Dictionary defines the adjective 'specious' as:
  • Superficially plausible, but actually wrong;
  • Misleading in appearance, especially misleadingly attractive.
The Wiktionary offers a broader definition as:
  • Seemingly well-reasoned or factual, but actually fallacious or insincere; strongly held but false;
  • Having an attractive appearance intended to generate a favorable response; deceptively attractive.
Over the last two years I've patiently analyzed the evolving price and performance forecasts of electric vehicle advocates and lithium-ion battery developers. In the process I've shown them to be possible, but unlikely, and interdependent to the point where a single flawed assumption can level the entire house of cards.

I've also puzzled over the broader question of why supposedly reasonable businessmen would encourage market expectations that are so aggressive that the probability of delays, cost overruns, performance shortfalls and other predictable failures approaches certainty. Everyone knows that the stock market reacts badly to disappointment, so I've never been able to figure out why companies would voluntarily set themselves up for that kind of pain.

I found my explanation last week. The lights went on when I downloaded a new DOE Report titled "Economic Impact of Recovery Act Advanced Vehicle Investments," which just happened to coincide with groundbreaking ceremonies for Compact Power's new plant in Holland, Michigan that will create one new job for every million dollars of capital investment. When I compared the conclusions of this seven-page DOE report with the exhaustive technical discussions in the 380-page Annual Progress Report on Energy Storage Research and Development the DOE released in January, the differences were breathtaking.

Who'd have dreamed an industry could make that much progress in only six months.

The answer fell into place when I noticed that (a) the DOE press release uses a hyperlink to the White House for people who want to read the full text of the Report, and (b) the Report is not even hosted on the DOE's server. Since I've never encountered a situation where the government agency that generated a report left it out of their official record, the clear inference is that the Report is political theatre wrapped in a DOE cover.

Once you understand that The Origin of Specious is political rather than technical, everything else makes sense. Armed with barrels of taxpayer money, the political class has sought out battery developers who will adopt the party line and add technical credence to questionable ideological goals. Faced with a Hobson's choice between needed funding and technical integrity, the developers make the rational business decision and take the money, confident that future apologies will be easier to spin than current failure. Sprinkle in a healthy dose of optimism from journalists who don't bother checking facts and you have the perfect political story for the next five years.

American presidents are supposed to inspire with challenges like putting a man on the moon or tearing down the Berlin Wall. The great ones sometimes succeed. For lesser men, the grand visions of their day target the highest fruit on the lemon tree and bring us wars on poverty, drugs, terror, foreign countries and CO2 that inevitably fall short of the mark while leaving us no wiser, but a little poorer and a little less free.

We all know how well pre-election promises work out. While it gives me no end of comfort to hear presidential assurances that battery prices, healthcare costs and budget deficits will collapse over the next five years, I'm not quite ready to pay a premium price to invest in those outcomes.

At the close of business on Thursday, the electric vehicle complex including Tesla Motors (TSLA), A123 Systems (AONE), Ener1 (HEV) and Valence Technology (VLNC) had combined 12-month revenues of $258 million and sported a combined market capitalization of $3.4 billion, including $900 million in stockholders' equity and $2.5 billion in blue sky premium.

In comparison, the lead-acid battery complex including Enersys (ENS), Exide Technologies (XIDE), C&D Technologies (CHP) and Axion Power International (AXPW.OB) had combined 12-month revenues of $4.6 billion and a combined market capitalization of $1.6 billion, including $1.2 billion in stockholders' equity and $460 million in blue sky premium.

Something is out of kilter when the electric vehicle complex has 6% of the sales and 77% of the stockholders equity of the lead-acid battery complex, but trades at twice the price.

Within a couple weeks, all of these companies will report second quarter results. The electric vehicle complex is likely to report bigger than expected losses - again, and at least for Ener1 and Valence, weak financial condition. In comparison the lead-acid complex is likely to once again report better than expected revenues, margins and financial condition. At some point the market will accept the cruel reality that political promises cannot repeal the laws of economic gravity, we can't waste scarce resources in an effort to conserve plentiful resources, and investments in vehicle electrification are bound to follow the tragic value trajectory blazed by fuel cells and corn ethanol, which have been favorites of the political class since I was a baby lawyer.

It's your money, but at least you understand The Origin of Specious.

Disclosure: Author is a former director of Axion Power International (AXPW.OB) and holds a substantial long position in its common stock.

July 14, 2010

Why Energy Storage Investors Must Understand Resource Constraints

John Petersen

This Saturday marks the second anniversary of my blog, which began with an article titled Lithium-ion Batteries and Centerfolds. Over time my archive has grown to 142 articles on energy storage devices, the companies that make them and their crucial role as enabling technologies for wind and solar power, transportation and the smart grid. While cleantech bloggers usually focus on new technologies that might be game-changers, I'd rather focus on major enhancements to proven technologies from established industry leaders. The reason is simple, hot new technologies have limited investment value if the world can't produce enough raw materials to implement them.

Last month I spoke at the Ecologic Institute's Smart Energy Dialogue in Berlin. Since most people have a hard time internalizing immense numbers like a trillion dollar budget deficit, I used the following table to summarize global mineral production in 2009 and translate the huge numbers to more digestible per capita figures.

Natural Annual Production Per
Resource (Metric Tons) Capita
Crude Oil 4,189,210,000 616 kg
Raw Steel 1,100,000,000 162 kg
Aluminum 36,900,000 5.4 kg
Copper 15,800,000 2.3 kg
Lead 3,900,000 1.6 kg
Nickel 1,430,000 570 g
Cobalt 62,000 201 g
Uranium 42,700 6 g
Lanthanum 32,900 5 g
Silver 21,400 3 g
Neodymium 19,100 3 g
Lithium 18,000 3 g

This is scary stuff for baby boomers like me who grew up thinking surplus and plenty were god-given rights and part of the natural order. Production of minor metals can be increased with enough time, effort and investment. Significantly increasing global production of core industrial metals is a different story altogether.

If you're reading this blog, you used more than your share of last year's global resource production. The only reason you got away with it is that somebody else, actually a lot of somebody elses, used less than their share. That, by definition, is an unsustainable long-term dynamic. The ugly truth is we all have to change our wasteful ways because the world's emerging economies are forcing the issue. The following cartoon from Jan Daraz was published in the last issue of Batteries International and is almost too true to be funny.

7.14.10 BI Cartoon.jpg

The biggest challenge of our age is finding relevant scale solutions to persistent shortages of water, food, energy and every commodity you can imagine. The trick will be finding ways to raise the standard of living in emerging economies without crushing our own. We simply can't dig our way out of this hole.

I'm a strident critic of plug-in vehicles like the Nissan Leaf (NASNY.PK), the Mitsubishi MiEV (MMTOF.PK), the Tesla Roadster (TSLA) and the GM Volt because they use pornographic amounts of highly processed new industrial and exotic metals to save a couple hundred gallons of gas per year. Since it doesn't take more than a cursory glance at the mineral production table to see that the natural resource balance is unsustainable, the only rational conclusion is that plug-in vehicle business models are a catastrophe in the making for investors.

While I've occasionally been harsh with lithium-ion battery developers like A123 Systems (AONE), Ener1 (HEV), Valence Technology (VLNC) and Altair Nanotechnologies (ALTI), my criticisms have focused on their fawning eagerness to support the plug-in vehicle hysteria instead of focusing on applications that need the size, weight and energy density benefits of their products. There's no escaping the reality, lithium-ion batteries are too valuable to waste on plug-in vehicles. The following table summarizes potential uses for lithium-ion batteries:

Device Type Battery Capacity Price Sensitivity
Cellphones & Smartphones 5 to 10 wh Lowest
Portable medical devices 10 to 50 wh Very low
Laptop computers 20 to 50 wh Low
E-bikes and scooters 500 to 1,000 wh Moderate
HEVs
1,000 to 1,500 wh Moderate
PHEVs 10,000 to 16,000 wh High
BEVs 24,000 to 50,000 wh Very high
Utility applications 500,000+ wh Highest

Since I learned in kindergarten that one can't buy for a dime, sell for a nickel and make it up on volume, I have a hard time understanding the logic of a business model that's focused on customers who need a premium product but don't want to pay a fair price. That kind of price pressure may be a good thing for consumers, but it's never a good thing for stockholders of battery manufacturers.

In an effort to milk the plug-in vehicle exuberance for all it's worth, many lithium-ion battery developers wax prophetic on how great things will be once they finish their R&D, build their factories, slash their production costs, find customers that aren't insolvent or teetering on the brink and show Asia how to manufacture efficiently. Until these companies accept their own limitations and develop the business sense to focus on the highest and best uses for their products, they'll continue squandering stockholders' money chasing pipe dreams.

I'm a big fan of lead-acid batteries because the raw materials typically come from recycled batteries and offer a sensible balance between conservation and sustainability. In other words, they're cheap and plentiful. Lead-acid may not be the best technology for all uses, and it certainly won't work in cellphones and other devices where size and weight are mission critical constraints, but for mundane storage applications where costs and benefits matter, lead-acid and perhaps molten salt are the only battery technologies that have a chance of success.

Notwithstanding disparaging gossip that compares the best lithium-ion batteries with ordinary starter batteries, the lead-acid sector has experienced a renaissance over the last few years as new manufacturing methods and materials were used to enhance vintage technology. There's no way around the size and weight limitations, but gains in energy, power and cycle life for the best lead-acid batteries have been impressive. As a result today's advanced lead-acid batteries bear little or no resemblance to common starter batteries and offer extraordinary price performance when compared with other advanced batteries.

Despite impressive product performance gains, the leading lead-acid battery manufacturers like Enersys (ENS), Exide Technologies (XIDE) and C&D Technologies (CHP), along with advanced technology developers like Axion Power (AXPW.OB), trade at a fraction of the valuations for their riskier cousins. Over the next few quarters the valuation disparities will become painfully obvious as growth rates the lead-acid sector soar while the lithium-ion sector stagnates.

Like many observers, I believe these turbulent times are the dawn of the Age of Cleantech, the sixth industrial revolution. I also put a lot of stock in Ray Kurzweil's theory that "we won't experience 100 years of progress in the 21st century—it will be more like 20,000 years of progress." Notwithstanding a firm conviction that we're entering a new age, I'm painfully aware that technology alone cannot change resource production constraints, it cannot change population growth, it cannot change the human desire for something better and it cannot change the laws of chemistry. Unfortunately, investors who believe that Moore's Law and the other rules we learned during the IT revolution apply to cleantech are in for a very rude awakening.

The one factor that makes the cleantech revolution different from all its predecessors is the unbridled arrogance of policy wonks who don't understand things like resource constraints and sincerely believe they can control the direction and pace of technological development by spending money on the pet projects of ideologues. A brief history of the serial failures of our technology du jour energy policy follows:

25 years ago Methanol
15 years ago Electric Vehicles
10 years ago HEVs and Electric Vehicles
5 years ago Hydrogen Fuel Cells
3 years ago Ethanol and Biofuels
Today Plug-in Vehicles
2012 Whither bloweth the wind?

The Spanish poet and philosopher George Santayana wrote, "Those who cannot remember the past are condemned to repeat it." The government's track record of picking energy technology winners currently stands at 0 for 5. Any questions?

Disclosure: Author is a former director of Axion Power International and holds a substantial long position in its stock.

July 10, 2010

Toyota's Straight Talk On Plug-in Vehicles

John Petersen

Most investors know that Toyota Motors (TM) is the world's biggest manufacturer of hybrid electric vehicles, or HEVs. Since 1997, Toyota has sold over two million cars using its Hybrid Synergy Drive® and earned a sterling reputation for fuel efficiency and customer satisfaction. What many don't realize is that Toyota is also the world's biggest manufacturer of advanced automotive battery packs. Toyota entered the battery business in 1996 when it bought a 40% interest in Panasonic EV Energy, a joint venture company that was formed to make NiMH batteries and battery packs for the Prius. Over time, Toyota gradually increased its stake to 80.5% and Panasonic bought a controlling interest in Sanyo. In June of this year, Panasonic EV Energy changed its name to Primearth EV Energy, presumably to reduce confusion over the fact that Toyota made Panasonic branded batteries while Panasonic made Sanyo branded batteries.

Historically Toyota has been quite conservative about the potential use of lithium-ion batteries in vehicles and has unequivocally stood by NiMH for its HEV lines, primarily because of battery cost concerns. Despite its dominant position in the HEV markets, Toyota has been quietly developing lithium-ion batteries for plug-in hybrid vehicle, or PHV, systems and late last year it launched a three year program to deploy and test a 600 vehicle plug-in fleet in Japan, North America and Europe. Last week a reader sent me a link to Toyota's ESQ Communications, an easy to navigate, feature-rich and informative website filled with straight talk and balanced information to help consumers and investors separate hype from reality in the battery and plug-in vehicle space. I think the ESQ Communications website is a "must read" for every investor that's interested in the advanced automotive battery and electric vehicle sectors. It's short on hype, glittering generalities and promises of an all-electric future, but the depth and accuracy will surprise if not shock some of the more ardent EV advocates that frequently comment on this blog.

The first big surprise is that the Plug-in Prius is a PHV-13, meaning that it has 13 miles of electric drive range as opposed to the 40-mile range of the GM Volt, the 80-mile range of the Nissan Leaf and the 200-mile range of the Tesla Roadster. On the FAQ page for the Prius PHV, Toyota explains the reasons as follows:

"Toyota is of the belief that the smaller the battery in a PHV the better, both from a total lifecycle assessment (carbon footprint) point of view, as well as a cost point of view. Research has shown that plug-in hybrid vehicles with smaller batteries, charged frequently (every 20 miles or less) with average U.S. electricity produce less green house gas emissions than conventional hybrid vehicles. (according to a 2009 Carnegie Melon University study). And as battery size increases, so does the battery cost resulting in higher overall vehicle cost."

The second big surprise is that with over two million HEVs on the road, Toyota doesn't believe it knows enough about how PHVs will perform in the hands of ordinary people. So instead of simply launching a product and praying for the best, Toyota plans to conduct a three-year test of clustered fleets in a variety of locations and publish detailed performance data to inform potential customers instead of treating them like lab rats. The FAQ page for the Prius PHV explains the reasons as follows:

"The Prius PHV will come to market in 2012. The PHV demonstration program is designed to gather real world driving data and customer feedback on plug-in hybrid technology. In addition, the program will confirm the overall performance of the first-generation lithium-ion battery technology in a variety of use cases. Toyota must ensure that the vehicle/battery meets customer’s expectations before it is brought to market. The results of this program will make sure that the vehicle coming to market in 2012 will exceed customers’ expectations and meet plug-in customers’ demands."

The third big surprise is Toyota's skepticism over claims that the cost of lithium-ion battery packs for vehicles will fall into the $500 per kWh range over the short-term. The FAQ page for the Prius PHV discusses the issue as follows:

"In summer 2009, Toyota was asked to testify in front of a committee at the National Academy of Science in Washington, D.C., on the current state of plug-in technology, which of course included a discussion on advanced batteries. That testimony is a matter of public record and has been reported on in the media.

During that testimony a Toyota representative was asked Toyota’s opinion on current battery costs and how significantly it might be reduced. What Toyota said then was that the very rough estimate was approximately $1200 per KWH for a complete pack including instrumentation and ventilation systems…and that efficiencies in scale alone will not create major cost reductions in the near term. Significant reductions in cost will require major technological breakthroughs."

There is no question that many electric vehicle advocates will find Toyota's approach to their dream technology overly conservative. The FAQ page for the Prius PHV describes the reasons for Toyota's conservative approach as follows:

Toyota believes that PHVs can be part of a solution to climate change and for energy security,
  • for certain customers,
  • in certain geographic areas,
  • with certain grid-mixes,
  • with certain drive-cycles,
  • and with access to charging.
There will be an important role for PHVs, but it will not be in high volume until there are significant improvements in overall battery performance…and battery cost reduction.

For the last two years I've been an unrepentant critic of lithium-ion battery and plug-in vehicle hype that ignores the short-term challenges while focusing on vaguely defined "long-term potential." It's more than a little gratifying to learn that the world's biggest and most experienced carmaker shares my concerns and is taking a rational baby-steps approach to vehicle electrification that focuses on quality, performance and cost, and may very well result in a PHV that works in the real world of paychecks and monthly budgets, as opposed to the go-for-broke eco-bling approach that GM, Nissan (NSANY.PK), Tesla (TSLA), A123 Systems (AONE) and Ener1 (HEV) are pursuing with government subsidies and stockholders' money.

This article will no doubt draw outraged comment from advocates who will argue Toyota is simply protecting its turf. I think the more plausible explanation is that Toyota is simply telling the unvarnished truth.

Disclosure: No positions

June 24, 2010

Plug-in Vehicles Will Be Dirtier Than HEVs

John Petersen

On June 22nd Scientific American rolled-out a Web-only article titled "The Dirty Truth about Plug-in Hybrids, Made Interactive" that summarizes a January 2008 report from Oak Ridge National Laboratory and shows why plug-in vehicles in the U.S. will, on average, be just a little bit dirtier than gasoline HEVs.

You read that right – dirtier, not cleaner!

I first raised the issue in an August 2009 article titled PHEVs and EVs, Plugging Into a Lump of Coal, where I estimated that plug-in vehicles would be about 25% cleaner than HEVs, but the marginal cost of CO2 abatement with plug-in vehicles would be five times higher than the marginal abatement cost with HEVs. The Oak Ridge report went a couple of levels deeper than my simple calculations and evaluated:
  • Baseload power requirements and generating facilities in 13 regions in the year 2020;
  • The specific types of generating facilities that would be used to charge plug-in vehicles; and
  • The regional CO2 increase or decrease from using those generating facilities to charge plug-ins.
The following graph highlights the comparative CO2 increase or decrease in the 13 regions identified in the Oak Ridge study and discussed in the Scientific American article.

6.23.10 CO2 Graph.png

After accounting for the projected number of vehicles in each region, the national average was a 0.37% increase in CO2 emissions. Given the modest CO2 reductions from plug-in vehicles in regions like the Pacific Northwest and the significant CO2 increases in the industrial heartland, it would be easier, cheaper and better policy to use domestic natural gas in HEVs and forget about plugs entirely. Where HEVs cut to the heart of the CO2 problem nationwide, plug-ins only nibble around the edges in a few select regions.

Last month the American Chemical Society published a similar white paper from Tsinghua University, Beijing, and the Argonne National Laboratory Center for Transportation Research titled "Environmental Implication of Electric Vehicles in China," which concluded that implementing electric vehicles in China would increase CO2, SO2 and NOX emissions. It also concluded that gasoline HEVs are more environmentally friendly, more commercially mature and less cost-intensive. The following graph comes from page 4 of the white paper.
6.2.10 China CO2.png
While the CO2 emissions data from both China and the U.S. is damning, simple calculations prove that electric vehicles like the Leaf from Nissan (NSANY.PK) and the MiEV from Mitsubishi (MMTOF.PK) save an average of 10.4 gallons of gasoline per year for each kWh of incremental battery capacity while PHEVs like the Volt from General Motors save an average of 7.6 gallons of gasoline per year for each kWh of incremental battery capacity.

I'll encourage each of you to run your own discounted cash flow calculations on annual gasoline savings of 10.4 and 7.6 gallons per kWh and then compare your calculated value with current battery costs of ~$1,000 per kWh and projected future costs of ~$500 per kWh. I've run the numbers and am not impressed.

In addition to Tesla Motors, which is scheduled to go public next week at a price of $14 to $16 per share, there are six pure-play battery companies that focus on electrification solutions for transportation. A123 Systems (AONE), Ener1 (HEV) and Valence Technologies (VLNC) are all working on lithium-ion battery solutions for plug-in vehicles. Maxwell Technologies (MXWL) is working on supercapacitor solutions for city bus, stop-start vehicle and HEV applications. Exide Technologies (XIDE) and Axion Power International (AXPW.OB) are working on advanced lead-acid and lead-carbon battery solutions for stop-start vehicle and HEV applications.

The following table assumes the Tesla IPO will go off at $15, the mid-point of the price range, and includes summary balance sheet and market valuation metrics for all seven companies. For both working capital and stockholders equity, the table reflects the dollar amount and the percentage of market capitalization those values represent. The Blue Sky column highlights the spread between market capitalization and stockholders equity.

6.23.10 Value Table.png
It doesn't take much training to see that valuation premiums are much higher for plug-in vehicle companies than for lead-acid companies. In March of this year I suggested that stop-start idle elimination and other vehicle efficiency technologies were the investment equivalent of birds in the hand while plug-in vehicles were a flock of wild geese on the wing. In April I reported that the EPA and NHTSA were forecasting a 42% market penetration for stop-start systems by 2016. Over the last month we've seen important articles in prestigious publications expose the zero-emission myth as urban legend. With Oak Ridge and Argonne Laboratories, the American Chemical Society and Scientific American targeting the wild geese with double-barreled shotguns, I'm more convinced than ever that the market will soon shift to a more rational focus on economic reality and business opportunity.

Disclosure: Author is a former director of Axion Power International (AXPW.OB) and has a substantial long position in its stock.

March 30, 2010

Will Plug-in Vehicles Be Obsolete Before They're Profitable?

John Petersen

Last week I did a 40-minute interview for Hedge Fund Radio, a weekly investment program hosted by John Thomas, the Mad Hedge Fund Trader. While our conversation focused on the unassailable mathematics supporting my contention that plug-in vehicles are wasteful, I was fascinated by John's description of his recent conversations with Toyota Motors (TM) where Toyota confirmed its commitment to NiMH battery technology for hybrid drive and fuel cell technology for electric drive. Its somehow comforting to know that the world's most successful automaker agrees that the first modern plug-in, GM's EV1, died from congenital birth defects and the same flaws will almost certainly doom the next generation of cars with plugs.

The best part of the interview was that it gave me a chance to clarify and crystallize my thinking on the basic problem of using batteries to replace the fuel tank for an average American who drives 12,000 miles per year and would normally buy a fuel-efficient car with an internal combustion engine. The quick and dirty summary is:
  • In a conventional fuel efficient car, a typical user will burn 400 gallons of gas per year;
  • In a $22,500 Toyota Prius, a 1.3 kWh battery pack will save 160 gallons of gas per year, or 123 gallons per kWh;
  • In a $40,000 GM Volt, a 16 kWh battery pack will save 340 gallons of gas per year, or 21 gallons per kWh;
  • In a $44,000 Nissan Leaf, a 24 kWh battery pack will save 400 gallons of gas per year, or 17 gallons per kWh; and
  • In a $110,000 Tesla Roadster, a 53 kWh battery pack will save 400 gallons of gas per year, or 7.5 gallons per kWh.
Economists would call that a rather shocking example of the law of diminishing returns.

The fundamental problem is that we live on a resource constrained planet and it is the epitome of foolishness to believe that wasting one class of natural resources (battery materials) in the name of conserving another (oil and gas) can ever make sense. It all comes back to the premise that sensible industrial policy will rely on currently available technology to harvest the low-hanging fruit and slash fuel consumption with HEV and stop-start systems while emerging technologies like fuel cells that are better suited to high-hanging fruit evolve and mature. In other words, we need to take baby steps.

I'm often accused of being a Luddite for my cynicism over the electric-drive dream. The truth is I'm an incurable optimist who sees no limits to human ingenuity and creativity. I've lived through one of the most transformative periods in history and know that the rate of technological change is accelerating. Therefore, I don't even question the idea that humanity is likely to see twice as much technological change in the next twenty years as it did in the 20th century. Most of us baby boomers bought 45 RPM vinyl, reel-to-reel tape, 8-track tape, cassette tape, digital audiotape, compact disks and MP3 files. In their respective eras, which were usually short-lived, each of these innovations was the latest and greatest thing until something better changed the game. Given the change I've lived through, I have a hard time putting much faith in anyone who believes 10 to 25 year forecasts are possible, much less reliable. There is simply no way to predict what the disruptive changes will be or when they will occur. After all, if changes were predictable, they wouldn't be disruptive.

Lithium-ion battery developers like A123 Systems (AONE) and Ener1 (HEV) are charging forward with their plans to spend hundreds of millions of dollars on new manufacturing plants that will make batteries for electric cars. While the timing of its IPO isn't clear, Tesla Motors just filed an amendment to its SEC registration statement and will probably make a big splash sometime this spring. When you cut through the fog, however, all of the business models foresee nothing but losses for years to come. The factories won't be built till 2012. Once the factories are built, it will take a couple years to work out the manufacturing glitches and bring and quality control up a level that's competitive with the Japanese and Koreans. Once the quality's in place and the products are dependable, it will take additional time, perhaps a long time, to convince a meaningful number of consumers that electric vehicles, which promise cheap fuel from the grid but cost $3,500 per gallon of gas equivalent in 'fuel tank' capacity, make economic sense. I hope someone packs a lunch.

If battery-powered vehicles offered a decent natural resource balance, the promised "economies of scale" were assured and there were no potentially disruptive technologies on the horizon, I might have a different view about the long-term potential of plug-ins. My experience, however, tells me that something better will almost certainly arrive on the scene before the current A-list of electric-drive supermodels turns the corner to profitability.

Products that become obsolete before their manufacturers become profitable are never kind to investors.

Currently the market is valuing battery companies that won't be profitable for years at nosebleed levels while it values the first clear beneficiaries of the cleantech revolution at embarrassingly low prices. I don't know how long it will take for A123, Ener1 or Tesla to turn the corner and report a profit, but I know that Johnson Controls (JCI) and Exide (XIDE) will be selling millions, if not tens of millions, of stop-start batteries per year within a couple of years and nothing boosts profitability like selling higher value products to existing customers without increasing unit volumes. While I can't be certain until ongoing testing by several first tier automotive OEMs is completed, I'm increasingly confident Axion Power International (AXPW.OB) will play a critical role in the emerging stop-start market.

Every industrial revolution in history has been driven by innovations that have proven their ability to do more valuable work with lower inputs of raw materials, capital and labor. Despite lofty aspirations, consumers are far more motivated by the green in their wallets than the green in their cocktail party conversations. Try as they might, governments are never good at planning economic growth or driving uneconomic technologies into the market. I've long advocated the proposition that a business model that does not make sense without government subsidies does not make sense. I've also been forced by experience to shorten my investment horizons from a couple of decades to a few years. While I haven't yet reached the point in life where I refuse to buy green bananas, I don't have a great deal of interest in carving a new plantation out of raw jungle.

Disclosure: Author is a former officer and director of Axion Power International (AXPW.OB) and holds a substantial long position in its stock. He recently sold his other holdings in the energy storage sector for significant gains.

March 16, 2010

Plug-in Vehicles Combine Immense Risk With Insignificant Reward

John Petersen

Albert Einstein once said, "If you can't explain it simply, you don't understand it well enough." So when the editor of Batteries International asked if I could present my analysis of plug-in vehicles in two pages and prove my numbers in a way that any open-minded adult could follow, understand and verify with an Internet search engine, I jumped at the challenge. The article was published yesterday in their Winter Edition. Since the numbers have profound implications for the energy storage sector and an expected flurry of ill-conceived electric vehicle projects like the planned Tesla Motors IPO, I've decided to reprint the article here and then offer some thoughts and observations on what the numbers mean for prudent investors.

The first great fraud of the new millennium
(Reprinted from Batteries International, Winter 2010)

PT Barnum would have been proud.

While hype-masters loudly proclaim that plug in cars will save the planet by slashing oil consumption and CO2 emissions, the numbers tell a different story; that plug-ins are all sizzle and no steak. The result is the industrial equivalent of a snipe hunt, a wild goose chase based on flawed assumptions.

Let me explain how I reached this conclusion. On December 31, 2009 Forbes published an opinion piece titled System Overload that questioned whether the battery industry was overbuilding global manufacturing capacity. The third paragraph noted:

“By 2015 the new factories will have the global capacity to produce 36 million kilowatt-hours of battery capacity, enough to supply 15 million hybrid vehicles, or 1.5 million fully electric cars, says Deutsche Bank.”

While the article went on to question whether there would be buyers for all those batteries, the capacity estimate got me thinking: “In a world that wants to save fuel and reduce CO2 emissions, but can only make 36 million kWh of batteries per year, what is the highest and best use for the batteries?”

I hate unanswered questions. So I fired up my computer and went to work. Within a few minutes, I found myself wondering whether anybody in Brussels or Washington DC owns a calculator and understands grade school math.

The calculations were simple but the answers were amazing — at least to me. The sweet and simple summary is that the venerable Prius-class hybrid is five to six times more effective at reducing global gasoline consumption than its plug-in cousins and, in the US, it's seven to 10 times more effective at reducing CO2 emissions.

In other words, plug-in vehicles are not the effective albeit expensive saviours of the planet that have been sold to credulous reporters and intellectually lazy regulators. They're unconscionable waste masquerading as conservation.

3.16.10 EV Table 1.png
3.16.10 EV Table 2.png

I'm agnostic when it comes to the relationship between CO2 emissions and global warming. I simply don't know enough to have a firm conviction.

I'm not the least bit agnostic when it comes to the fact that six billion people on this planet want a small piece of the lifestyle that 500 million of us have and take for granted.

For all of recorded history, the poor toiled in ignorance and didn't know that there was more to life than subsistence.

Thanks to information and communications technology, the cat's out of the bag and fully half of the world's poor know that there is something better. The biggest challenge of this century will be making room at the table for six billion new consumers.

Accomplishing that without horrific environmental consequences and catastrophic conflict requires relevant scale solutions to persistent shortages of water, food, energy and every commodity known to man.

Using 100% of the forecast global battery production capacity to make plug-in vehicles will save less than five hours of oil production and CO2 emissions per year. I can’t see how any thinking man would consider that scale sufficiently relevant to justify the plunder of far scarcer mineral resources.

In my opinion, the plug-in vehicle industry is perpetrating the first great fraud of the new millennium by using one-on-one vehicle comparisons instead of fleet comparisons.

Yes, indeed PT Barnum would have been proud.

BI Toon.png

Implications for prudent investors

The most fascinating aspect of this analysis is that battery chemistries and costs are irrelevant. The numbers don't work any better if you use NiMH or even lead acid batteries instead of lithium-ion. They also don't work any better if you slash battery costs and make really cheap plug-in vehicles. Those factors might change the cost-benefit analysis for an individual driver or a particular vehicle, but they wouldn't change the cost-benefit analysis for the only planet we have. It is arrogant insanity to believe we can conserve a relatively plentiful natural resource like petroleum by plundering scarcer mineral resources like aluminum, copper, lead, rare earth metals and even lithium to make batteries for plug-ins.

The gaping flaw in the logic of EV evangelists is their insistence that all analysis stop at the fifth step; a point where plug-ins can look reasonable to a casual observer. In the real world, rational energy, economic, and industrial policies compel the sixth step comparison of fleet-wide performance, which is where the house of cards comes tumbling down. Over the next few years, global investments in advanced battery, plug-in vehicle and charging infrastructure schemes will be north of $20 billion. The best possible outcome will be a one or two percent reduction in global oil consumption by 2020.

That dog won't hunt. We can and must do better.

My core philosophy comes from Benjamin Graham, the patron saint of value investors, who observed, "In the short run, the market acts like a voting machine, but in the long run it acts like a weighing machine." While the numbers have convinced me that business models based on the plug-in dream are doomed because the concept is fundamentally flawed; I understand the hype cycle, recognize that markets can be irrational for extended periods of time and know that irrational markets can be alluring to opportunistic traders who are smart enough to enjoy popping corks and go home before the music stops.

For those who can't resist the hype and glitz, my favorite for "Best in Show" honors is France's SAFT Groupe (SGPEF.PK). While I don't write about SAFT regularly because it isn't registered with the SEC, it's a fine company that was the second largest beneficiary of the ARRA battery manufacturing grants President Obama announced last August. Unlike the other ARRA grant recipients, SAFT walked away with a double dip from a $299.2 million award to its U.S. joint venture with Johnson Controls (JCI) and a separate $95.5 million award to Saft America.

SAFT has a diversified revenue base from battery sales to military and industrial customers. As a result, SAFT earned €28.9 million on 2009 sales of €559.3 million and had €306.8 million in stockholders equity at year-end. Despite its solid track record, SAFT carries a relatively modest market capitalization of €730.5 million, which works out to 1.3 times trailing sales, 25.3 times trailing earnings and 1.3 times equity plus anticipated DOE grant funding.

For "Domestic Best in Breed," my favorite is A123 Systems (AONE), which edged out SAFT for the top spot on the ARRA battery grant list at $249.1 million. A123 also plans to borrow up to $233 million under the DOE's Advanced Technology Vehicle Manufacturing (ATVM) loan program.

In the wake of a successful IPO last September, A123 finished 2009 with $528.2 million in stockholders equity and a clean balance sheet, but it lost $85.8 million on sales of $91 million. A123's market capitalization of $1.7 billion works out to 18.2 times trailing sales and 2.3 times equity plus anticipated DOE grant funding. While A123 doesn't offer SAFT class value, it stands head and shoulders above other domestic lithium-ion battery developers, particularly in light of its ongoing efforts to hedge its plug-in vehicle bets with forays into the utility and industrial markets.

Ener1 (HEV) has always struck me as a company that could go either way, but was likely to disappoint investors who bought at inflated prices. Ener1 took fifth place on the ARRA battery grant list with a $118.5 million award. It also applied for loans under the ATVM program, but hasn't completed due diligence. Since the ARRA battery grant requires matching funds equal to 100% of the grant amount and any ATVM loans will require matching funds equal to 25% of the loan amount, management recently cautioned that the company will need $150 million in additional equity before the dust settles.

Ener1 finished 2009 with a $3.7 million working capital deficit and $116.2 million in stockholders equity, but its balance sheet includes $13.2 million of intangible assets and a whopping $51 million of goodwill. Since both values strike me as incredibly speculative in the context of a company that lost $51 million on 2009 sales of $34.8 million, I believe potential investors will probably focus on Ener1's net tangible book value of $51.9 million for analytical purposes.  Based on 30 years of experience with investors who were willing to invest in my clients but wore brass knuckles to pricing negotiations, my big concern is that Ener1 will have a tough time justifying a huge multiple of net tangible book value to large investors who know that its grants and loans can't close without matching funds.

If it successfully completes it's planned IPO, I'd put Tesla Motors a couple tiers below A123 because there isn't a whole lot of  diversification potential for an electric vehicle manufacturer. There may be a couple years of splash and spectacle before the inevitable becomes obvious, but Tesla is not a stock that I'd buy and put in a drawer for my grandkids.

I believe plug in vehicles combine immense risk with insignificant reward, a potentially catastrophic dynamic. SAFT strikes me as a decent investment because its fundamentals are sound without considering any speculative upside from plug-in vehicles. If A123 can diversify into commercial and industrial markets, it may also be a long-term survivor. Until Ener1 solves it's chicken or egg dilemma of not having the cash it needs to absorb future losses and close on its ARRA grant and ATVM loan, I'd be extremely cautious.

Disclosure: I plan to sit this one out.

January 13, 2010

Plug-in Vehicles; Waist Deep In The Big Muddy

John Petersen

Generation specific cultural references can be treacherous ground for bloggers because the flashback effect is usually limited to readers with long and vivid memories. In this case, however, the lessons of history are so relevant that I'll accept the risk and offer some context for younger readers.

In my youth a war wrapped in the liberal ideology of the Kennedy and Johnson administrations and fueled by an underlying concern over who would control oil and gas resources in the Gulf of Tonkin was fought in the jungles of Vietnam, Laos and Cambodia. By current standards, the toll of 47,424 battle deaths was staggering. By the late '60s opposition to the War was widespread and a galvanizing force behind the antiwar movement was music, including an iconic folksong from Pete Seeger, Waist Deep in the Big Muddy.



While my use of an antiwar anthem to make a point about plug-in vehicles is certain to draw howls of outrage from advocates and true believers, I think the analogy is apt because the ideologically inspired road to disaster we trod during the late '60s is frighteningly similar to the path we're on today with plug-in vehicles where the prevailing attitude seems to be "damn the facts, push on."

Our fundamental energy problems are easy to identify – increasing oil prices and increasing reliance on imports. Both numbers have been climbing steadily for decades and consumers have been stubbornly reluctant to change their behavior in response to prices. The burden on the economy becomes heavier with each passing year and if you're willing to extend the current price channel out for another decade, oil price expectations in the $150 to $180 per barrel range don't seem all that far fetched.

WTI Price.png

For as long as automakers have been proposing plug-in electric vehicles, skeptics like me have been noting that fuel savings are unlikely to give consumers a cash-on-cash payback of their incremental cost over the life of the vehicle, much less the three to five year window that consumers typically expect. There are countless vague promises about  economies of scale driving down costs as the industry matures, but at least in the battery sector where raw materials and plant automation are the primary cost drivers and labor is almost a rounding error, I have a hard time banking on a fairy godmother to restrain commodity prices and equipment costs. While the following graph of long-term industrial and precious metal prices from Credit Suisse is a little dated, it certainly has the same general shape and slope as the most recent decade on the oil price chart.

Metals Prices.png

"We were knee deep in the Big Muddy, the big fool said to push on."

For several years realists like Vinod Khosla and others have noted that since the U.S. gets roughly 50% of its electricity from coal and will likely do so for decades to come, the environmental benefits of plugging an electric vehicle into a lump of coal will be few and far between. Last week, I offered a simple comparison of plug-in vehicles with conventional HEV technology (without plugs) that proves plug-ins are about one-quarter as effective at reducing oil imports as cheaper HEVs that can point to a decade of performance under real world conditions.

"We were waist deep in the Big Muddy, the big fool said to push on."

The real flies in the ointment are that plug-in vehicles don't significantly change the energy balance, they're far too resource constrained to make a dent in oil imports, and the fundamental economic premise only works if you are willing to assume that historically moderate trends in retail electricity prices will continue forever.

From an overall energy balance perspective, plug-ins don't change the amount of energy needed to move a vehicle down the road. Instead, they merely move the conversion of fuel to energy from under the hood to a local power station while increasing vehicle cost by 50% to 100%.

Likewise, the batteries that will be used in plug-ins are made from raw materials that are orders of magnitude less abundant than oil. The resource constraint issues go far beyond lithium availability and extend to every component in batteries and battery packs. Those materials all have alternative uses in high value products and from a resource availability standpoint, using batteries to conserve oil is a lot like using gold to conserve copper.

Finally, it's almost impossible to find a newspaper or magazine that doesn't have several articles on the evolution of the electric grid. We're seeing massive investments in wind and solar power installations and the estimated cost of the coming smart grid runs to trillions of dollars. Since the one certainty is that private capital will not finance alternative energy or the smart grid without expecting both a return of capital and a return on capital, it's patently absurd to believe that electricity price increases will remain as benign in the future as they have been in the past.

"We were neck deep in the Big Muddy, the big fool said to push on."

When I was but a lad one of my mother's favorite quips was "use your head for something besides a hat rack." It was her way of teaching me to look beyond my immediate circumstances, consider the factors that led me to a decision-point and reflect carefully on the likely consequences of my actions. When it comes to plug-in vehicles, investors and the general public have been little more than hat racks for too long. Instead of thinking things through and questioning assumptions, they've been placated by "wouldn't it be great if ...?" sound bites. Instead of asking whether crossing the big muddy is possible or the effort worthwhile, they've allowed themselves to be led down the garden path by politicians and activists who vainly promise gain without pain and reward without risk.

If it weren't so damned expensive, I'd describe vehicle electrification beyond the HEV stage as a zero sum game. Given the immense costs that are becoming increasingly clear with each passing day, I'd characterize it as a game where we can't reasonably hope to break even.

Disclosure: No stocks mentioned because we all know who they are.


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