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.
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 tha
t 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.
You remind me of the late Lord Kevin who insisted that the earth could not be more than 20 million years old because oxidation combustion could only allow the sun to burn for tens of millions of years….Your premises all balance on the knife’s edge of what is currently the accepted wisdom of the herd;something that is almost always wrong.
The herd is buying Tesla at $29 per share and engaging in EV happy talk. I’m as far away from the herd as one could possibly imagine.
I don’t deal with premises. I deal with facts. When the facts change so do my opinions. Until the facts change I have no qualms about calling a pig a pig.
This point is a little bit hard to prove wrong, not because you make such a strong case, but because you make assumptions without mentioning or referring to numbers on which you base your assumptions such as MPG, mi/year or Wh/mi.
Not a science major I assume??
The back articles contain copious disclosure of the underlying assumptions and links to the independent third party reports that are the source for those assumptions.
Criticizing without first doing your homework to ascertain the facts is more than a little lazy.
Not much for due diligence are you?
#10 – agreed. This is why I advocate for the electrification of mass transit, not personal cars.
#9: Incorrect. You ignore the inherent efficiency of electric drive vs. ICE. Electric drive converts 90% of the energy into motive power, ICE only (I think) 25%.
#8: A different version of point #10. The automobile culture is wasteful in both its ICE and EV incarnations.
#7: Agreed. See points #8&10.
#6: Agreed. EVs make the most sense for heavily used vehicles. Hybrids make more sense for ordinary drivers, while low mileage drivers are best off with ICE. EVs are niche, but is that bleeding edge?
#5: As I’ve argued, $190/bbl is an overestimate given the other advantages of EVs. And given when I think oil prices are going, I’d say $150/bbl is a good value.
#4,#3 Agreed. We should not bank on rapid technological advance, but rather using the tech we already have more effectively.
#2. Incorrect. To the extent that better MPG is the result of better aerodynamics and smaller vehicles, and other non-engine improvements, the cost of EVs will also fall, leading to an overestimate of the cost of fuel saved. That cost will go up (due to improvements which are not shared with EVs.) Further, the cost of ICEs will increase in order to realize the engine-based gains. All of this leads to a massive overestimate on your part.
#1. The natural buyers of EVs are not greens, but technophiles. Buying an iPad cannot be justified on the basis of price/performance either. People buy iPads because they provide a better user experience. I expect EVs to follow the same path, although I agree they adoption rate will be not nearly as high as most EV advocates believe.
As usual, you overstate your case.
When JP and TK disagree, we learn the most. Thanks to you both.
I’m wondering, if EV batteries are recharged often and used heavily (thus wringing out maximum value) how does that affect their lifespan?
#9 Your assessment is only correct if you ignore all inefficiencies in electricity generation upstream from the electric motor. By the time you include charge and discharge inefficiencies on the batteries, transmission and distribution inefficiencies on the electric grid, energy conversion inefficiencies in power plants and the upstream energy consumption for fuel used in power plants electricity doesn’t come off much better than gasoline.
#8 I agree with you, but there are many who would think both of us crazy.
#5 The $190 figure was the Bernstein Ricardo estimate. I got to $200 by comparing the prices of a Prius and a Leaf. When bottom up and top down estimates match within ±5% they seem pretty sound to me.
#2 You’re absolutely correct and I wasn’t trying to make an estimate as much as demonstrate an issue. Increases in ICE efficiency will raise additional economic challenges for electric drive.
#1 We have no idea at this point who the natural buyers of EVs are. We know that high-tech ultra fuel efficient vehicles have historically commanded a 3% market share. Until we have facts that point to a change all we can do is assume continuation of the status quo. When the facts change my opinions will change with them.
In all honesty, I think it’s impossible to overstate the fundamental business risks that preclude adoption of electric drive at relevant scale. When that many face cards are showing in the hands of other players at the poker table, the only rational thing to do is fold.
Wow, some of your points are quite easy to refute.
#9 – Electric drive is not truly clean or green.
Coal-fired electric plants are much more efficient at generating the same amount of energy as a single gasoline engine. That efficiency translates to less pollution, even if you’re talking about coal.
#8 – Energy resources are scarce, but non-ferrous metals are far scarcer.
Yes, but you only use the metals once, when you’re building the engine. Energy you continue using throughout the life of the vehicle.
#7 – Lithium-ion batteries are a recycling nightmare.
Recycling ideas and options never surface before a technology begins wide-spread use. But they come massively once the technology begins common usage. It’s like saying we can’t use solar panels yet because we don’t have a solar section in the energy museum yet. It’s a backwards argument.
#5 – The up-front cost of electric drive…
The cost comparison is oft-cited, but not true total-cost-of-ownership. Risk is worth money. If I can hedge against the risk of an oil price shock (which seems pretty likely in the next 3-5 years) I will pay money for that risk reduction. Comparing sticker price of Nissan Leaf to Prius doesn’t capture the whole picture.
#1 – The green in consumers’ wallets…
Yes, true. However I think the value of the insurance policy against oil shocks will come into play shortly after the next oil shock. 🙂
Thanks for this article. You do make several good points, which I appreciated reading.
D Lane (www.facebook.com/profile.php?id=576480530), you are right that heavily used EV batteries will decay faster (chronologically) than less heavily used batteries. The details are unclear, and will very greatly with the battery in question, but at least some of Li+ battery decay comes from being in the fully charged stte, not charging/discharging.
Hence, even if intensive use reduces battery life, it won;t reduce battery life so much to reduce the overall benefit to 0.
I happened to visit an automotive battery researcher yesterday. I mentioned point #4 to him (rapid advances in battery technology are unlikely). The researcher looked at me quietly while I spoke. When I was done he said “I think that blogger’s smoking crack.” At which point he proceeded to show me the advanced made in battery technology in the past 10 years in development of the land-speed record holding Buckeye Bullet electric vehicle.