Some years ago while touring Israel; I had the opportunity to visited Better Place headquarters on the outskirts of Tel Aviv. It was almost like a museum where you could sign up, see a video while sitting in recycled car seats, as an LCD screen of then Better Place CEO Shai Agassi (since resigned) popped up and he talked about "sustainability" and show us all a cheesy 15 minute clip about global warming and how electric cars will save the planet. There was a little about the business model, battery switching stations and installing chargers in parking lots of major Israeli cities. The kicker was that Better Place wasn't selling the car. It was selling the mileage. Then I got to test drive one.
There was one major problem that nagged at me, but I put it out of my head because deep down, I wanted the company to succeed. What nagged me was the fact that I hadn't seen a single car charging station in any parking lot anywhere. Indeed, that has since caused some problems. Better Place isn't exactly in the Fortune 500. It is contracting globally, trying to regroup in Israel, and likely headed for bankruptcy.
The way I see it, Better Place had the right idea in the division of labor, but it didn't go far enough. It knew that manufacturing the cars would be doomed to failure. What it didn't know is that selling the mileage and building the charging stations would be doomed just the same.
If we think about this logically in terms of pure market economics, the gasoline car market does not work by car companies owning their own branded gas stations or oil rigs or anything having to do with the gasoline industry. There is no Toyota (NYSE:TM) gas station or Ford (NYSE:F) gas station or oil rig or tanker; because such models are not practical or even profitable. For one company to manage both the fuel and the cars would mean it has to manage to separate industries, two supply and demand curves to balance simultaneously. If it messes up in one, which it most certainly will, it infects the other like a systemic financial cancer.
The division of labor allows for the industries to develop independently. Maybe gas station owner puts a gas station in the wrong area and he goes bankrupt. Maybe BP (NYSE:BP) invests in an oil field that turns out dry or a rig blows in the Gulf. Does Toyota care? The answer is absolutely not. That's the gas station owner's problem and Toyota couldn't care less about BP's latest fiascos. But if Toyota owned the gas station, or an exploding Gulf of Mexico oil rig, the loss of revenue would certainly infect the car side of the business. The situation can spiral out of control quickly if Toyota does not suddenly find a perfect equilibrium point between stations and cars and manage it flawlessly. It cannot. The free market based on division of labor and industry allows the car and gasoline businesses to equilibrate based on supply and demand of cars and gasoline. Failure in one does not infect the other. In the case of Better Place, it just couldn't get the charging stations up in time and that killed the mileage selling side of the business. It was that simple.
When the electric vehicle (EV) market finally develops, it will do so in the same way that Ford and Rockefeller developed the Model T and Standard Oil respectively: completely independently. But there's another huge problem for EV investors, and it rhymes with "movernment." Back in the late 19th century when Henry Ford and John D. Rockefeller were getting off their feet, there were no regulations on cars, gasoline, emissions tests, drilling, safety, octane levels, minimum ethanol content, gasoline taxes, mileage. There was just cost/benefit analysis, so each did what he had to do in order to make money and avoid losses, whatever that was. And voila, a market developed for cars and gasoline and new companies, indeed an entire industry, was born.
This time it's not going to be so simple. Running naturally, markets tend to find one another and equilibrate quickly. But with municipalities, states, and the Feds all intervening at different points, the race becomes somewhat inverted. Meaning, the ones trying to expand most aggressively will run into the most roadblocks and lose money. Who knows how hard Better Place tried to install charging points at parking lots but failed because it couldn't coordinate with all the bureaucracies responsible for allowing such a thing, who couldn't coordinate with each other either.
Some may retort that the government also gives money to new companies and that this helps and offsets the damage. I could go into all the reasons why it doesn't work, but it's easier to just list examples of government loans gone bad. As you'll see in this progression, as the government loans increase, the situations only get worse.
- ECOtality (ECTY), EV charging company, $100M in Department of Energy money. So far, the company has an accumulated deficit of $112M, so that money is functionally gone. 76% of its revenue last quarter was DOE money (see page 20). ECOtality continues to subsist off of government money, but its future is cloudy.
- Fisker Automotive: $528.7M of which the company drew down $192M at the point when the loan was suspended because the company couldn't meet milestones. The company's founder, Henrik Fisker, resigned last month. It is unclear if it will survive.
- Solyndra: $535M, all gone. Bankrupt.
- Federal National Mortgage Association, AKA Fannie Mae (OTCQB:FNMA), yes, it still trades. How much did it get? Pretty much the entire US mortgage market. This is even worse than bankruptcy, as this government sponsored enterprise continues to drain taxpayers in a post death zombie state.
Given all these minefields, what can the EV investor do? I like to think of the scene in Forrest Gump where Gump had the only surviving shrimping boat after a storm wrecks the entire shrimping industry and then founds Bubba Gump Shrimp to become a multimillionaire. The answer is to look for the company that understands the two fundamentals described here. One being, understand the necessity of division of labor and don't try to manage two industries at once like Better Place did. Two being, keep a low profile and don't take too much government money thinking it'll propel you to success. It won't.
As I mentioned in an earlier article, one company following such a conservative model is the small $54M Miami-based micro-cap Car Charging Group (OTCQB:CCGI). The company has since acquired Beam Charging for $500K, and currently operates 226 charging stations at 139 different locations around the country (see page 3). That may not seem like a lot, but that is precisely the point. This puts CCGI at the extremely conservative ratio of 1.6 EV charging stations per location, with each station costing an average $3,000 each (see page 4 above). Management is not exactly splurging. The key is keeping costs ultra low while increasing presence and the number of locations from which the company can expand once the market materializes.
Its acquiring of Beam for $500,000 gives Car Charging an additional 400 parking garages in New York already under contract for charging stations. In other words, CCGI nearly tripled its locations at a very reasonable price, making it the strongest EV presence in New York. It has also announced an intent to acquire 350Green, another charging company with strong presence all along the west coast, Illinois, Utah, Colorado, and Maryland especially. See this map for a full spread of 350Green charging locations soon to be part of CCGI.
The biggest challenge to CCGI will be the same challenge that all the other EV companies have, be they car manufacturers or charging companies, and that is, staying alive until the market materializes. From that angle, if you are willing to risk capital on the EV industry, then aside from the safety of Toyota or Nissan (OTCPK:NSANY) in the Prius and the Leaf, CCGI is a much better pick than a new company taking millions from the government.
A word on financing: CCGI's balance sheet is admittedly sparse, the reason being that its charging stations, which bring in revenue by rev share with real estate owners through usage, don't make much money yet as the market has not materialized. However, when looking at its finances, keep in mind that the company just raised $2.5M in a private (not government) equity offering last month. CCGI is not a trade. It won't be profitable for a while. But tuck it away for 10 years and you may be pleased.
One final word on the total absurdity of the government loan situation to EV companies especially. The following sentence is from CCGI's latest quarterly report (emphasis mine):
Currently, our main source of revenue is derived from the electric charging services, with pricing set as an hourly rate or on a per kilowatt hour rate as permitted by state regulation. As more states adopt electricity deregulation, we will be in a more advantageous position to competitively price our service vis-a-vis refueling at home.
In other words, while the government is out flinging millions around to these companies, it is at the same time forbidding them to actually be able to survive by preventing home owners from installing these charging stations in their homes. I don't care if the government gives the entire EV industry a TARP sized $700 billion gift on a whim. If it makes business impossible, it won't mean a thing.
The question is, which companies survive by the time governments figure out that they should allow companies to do business if it wants them to succeed. My feeling is CCGI will be on that list. With any luck, it'll turn into the Bubba Gump Shrimp of EV charging companies.