The business equivalent of limb-stretching (see the last scene of "Braveheart" for a good reference) is government loans. Government loans are money that is not regulated by market forces, as they are taken from somebody by force and given to someone else by decree. The purpose of government loans is to massage either the supply side or the demand side of the economy by either giving tax-funded loans to manufacturers or to consumers. The results are almost always bad. The biggest example is Federal Reserve loans to banks in the mid 90s by its artificially low interest rates, which led to the Nasdaq bubble and crash (massage the demand for stocks by expanding the money supply), and then even more Federal Reserve loans to home buyers (massage the demand for homes), which led to the housing bubble and crash.
As far as investment goes, the lesson is steer clear of any sector plagued with excessive government money. It is inherently unstable. Those caught in the Nasdaq or housing boom will tell you that much.
One of the more grey areas is the electric car industry. This sector isn't being hit with nearly the amount of money that the banking sector is, but President Obama's goal of one million electric cars on U.S. roads by 2015, should be setting off some serious investment alarms. With $2.4B in tax money down the drain and the Obama administration planning to double down with another $4.7B, the attempt to stretch the limbs of this industry is nowhere near finished.
There is no need to devolve into a political debate here. It's much easier and less controversial to just look at the numbers and see what's happening. Here's just one example. There are 300 million cars in the United States on the road today. For those 300 million cars, there are 159,000 gas stations. That's roughly one gas station for every 1,887 cars in the country.
For the electric car industry, the story is so completely different that it's almost baffling. According to government statistics, there are 3,472 electric charging stations in California alone. According to research by CBS news, there are about 39,000 electric vehicles on the road requiring charging stations in the entire country in 2012. (See chart below.)
Even if we were to assume that every single one of these 39,000 cars was in California, the ratio of stations to cars would be one charging station for every 11 cars on the road. To translate this into boom and bust terms, there is currently a huge boom in the charging industry in California. But 11 cars per station cannot sustain that business. Government, both federal and state, massaged the supply side so spectacularly with loans, and there is no demand to compensate. In other words, a bubble is about to pop, and there's about to be a big bust.
Government loans have also stretched General Motors' (NYSE:GM) supply of Chevy Volts to such an extent that their surplus required them to actually halt production for five weeks back in March. The only way the government can even out the supply and demand curves is by actually handing out money to people who want to buy the cars. Then it'll be taxpayers paying to oversupply and then paying to stimulate the extra demand required to compensate. If the government wants to help out the electric car industry, then the best thing to do would be to simply stop taxing it for producing the cars, and to stop taxing buyers for buying them. That would give it a natural free-market boost as opposed to an artificial loan-stimulated one. Then it could grow slowly, supply increasing slowly, demand matching slowly, instead of this multi-billion dollar limb stretching that overextends supply and causes Solyndra type-crashes and a company like GM to seriously consider stopping Volt production (see previous link).
But not all is lost for those who want to invest in this industry. Eventually, the government will give up massaging supply or demand, and the market will be able to function normally. In the meantime, for those who still want to invest in this industry, the best bet is to go with a company that does not engorge itself on government money, and can outlast the government's boom-bust meddling with the electric car industry with an iron, conservative business model.
I believe Car Charging (OTCPK:CCGI) may be that company, and for several reasons. This is a $78M company, around since 2009, that contracts with local real estate owners to add electric vehicle (EV) charging stations in a revenue sharing arrangement to things like parking lots in popular malls. The key is that it does not overextend itself, as it knows the market for its stations is not big enough to warrant large investments.
Even though neither the landowner nor CCGI itself will see much revenue from these machines at present, the advantages of an EV station are clear. First, their very presence attracts patrons, as EV stations are "cool," and gives both the site and CCGI name recognition and good press. Many people like supporting venues that further sustainability. Second, once one EV station is installed in a place like the luxurious Aventura Mall in Aventura, Florida, a northern suburb of Miami, CCGI has first dibs on expanding its presence there over other companies. Third, installing the stations has no downside for landowners, since the business model is a rev-share, and CCGI owns and operates the machines.
What CCGI is doing is slowly but surely preparing for a market that is not yet here, but is developing, picking out the highest traffic spots with the most likelihood of electric car adoption, and marking its territory without overextending itself.
The same cannot be said for a company like Ecotality (ECTY). Back in 2009, it was given $99.8M (page 24) by the Department of Energy to map out the largest network of EV charging stations in American history. Sounds great, right? Not at all. When you get that much money from an entity that forces it out of taxpayers, it comes with strings attached and the government wants to see things move. So Ecotality is building these things fast for a market that does not exist yet. Its press releases look nice as it cites revenue increases, but the fact is DOE government money accounted for a whopping 76% of the company's revenue last quarter (page 20 of 10-Q). Stockholders smell the problem, and the stock is down 65% year-to-date.
CCGI knows this, which is why it has kept government grants to a minimum, working mainly with municipalities and small state grants if it involves itself with government at all. One example is a $1M grant from the Pennsylvania Department of Environmental Protection. This is one hundredth of the size of Ecotality's grant from the DOE, and shouldn't do too much damage, if any.
The negatives beyond that are that CCGI has yet to pull a profit, and lost $1.2M last quarter, compared to a $1.6M loss in the same quarter last year. It only made $8,843 in service fees and sales last quarter, compared to an entire $981 same quarter last year. An 800% increase in revenues; but still, you can't get too excited about $8,843. Clearly, CCGI will not be able to make money until the electric car industry starts really taking off and people actually need to charge their cars. That and its stock jumped 19% on November 29 for reasons that are not clear, so be wary of a pullback in the short term.
What's important though is that the word "government" is not mentioned on its quarterly reports. Look at Ecotality's fillings, and government is all over the place. Also, as the real estate that holds CCGI's charging stations appreciates in value, so will the charging stations. It has thereby indirectly linked itself to the real estate market, which has shown signs of bottoming recently and is back on its way up after the big bust.
The electric car industry will eventually get moving. It's only a matter of time. With America forecast to be a net exporter of energy and energy self-sufficient by 2030, the prices of electricity will continue to drop. Technology will finally catch up to the point that demand will catch up to supply, and by that time CCGI will hopefully have one of the largest stocks of car-charging real estate in the country, which will make it much more than a tiny $78M company. It will need to raise more money for a while, which means the stock isn't going to pop any time soon, but its business model suggests it may be a good long-term hold.
At 50 cents a kilowatt hour, it only costs $12 to fill up a Nissan (OTCPK:NSANY) Leaf tank. Soon, people will start getting sick of paying $90 to fill up their gas tank, and the charging company with the smartest survival plan until this market materializes will reap the benefits.