Editors' Note: This article covers micro-cap stocks. Please be aware of the risks associated with these stocks.
The recent announcement by Ecotality (ECTY) that it is on the verge of bankruptcy has been a shocker. This is especially because of the constant series of positive news coming from the Electric Vehicle (EV) and its ancillary industries. With Tesla reporting a profit in two consecutive quarters, BMW announcing its first mass produced electric vehicle, the sale of EVs doubling in the U.S. in the first half of 2013, there have been plenty of examples to vouch for the brightening prospects of this niche segment.
The question that is on everyone mind is why did Ecotality fail? The company was hailed as a forerunner in the EV battery charging industry and a leading provider of charging station solutions, granted over $100M by the Department of Energy. In this article we will see if we can find an answer to this question.
Ecotality has three primary business lines (page 3) - 1) the Blink line of Electric Vehicle Service Equipment (EVSE) or "charging stations" for passenger EVs 2) the Minit-Charger line for industrial use mainly in material handling and airport ground support, and 3) testing and consulting services.
The company is primarily an infrastructure company that is engaged in selling and installing charging equipment. It is most well-known for partnering with US Department of Energy's EV project for setting up public charging stations for passenger electric vehicles.
It had received approval for a $99.8 million grant from the DOE in 2009 and another $15 million in 2010. With that grant money, it set up around 12,500 charging stations over the past couple of years in 18 US cities.
Flaw in business model
Ecotality's revenue model is a little difficult to comprehend. Theoretically, its revenue was to come primarily from selling charging hardware (page 12). In addition, the company was to receive charging fees from its commercial installations.
But according to the mandate of the EV project, roughly three quarters of the installations were residential, which precluded any steady revenue stream in the form of service fees. It was not even manufacturing the equipment, which was done by Roush Enterprises, with global power and technology firm ABB, Inc.
Hence, in effect it was just the project manager of DOE's EV project and nothing more. It did try sending out its direct sales force in the first half of 2013 to convince private site owners to "purchase" charging equipment, but that was too little too late. Its efforts fell flat.
Ecotality, therefore, did not have any meaningful revenue generation. The past revenue increases were nothing but government subsidies. In 2011, the company's "sales" leaped 107% to $28.4 million and in 2012 by another 93% to $54.7 million. But, out of this $54.7 million, $39.6 million came from the DOE's EV project alone (page 26).
The company was under investigation by SEC for insider trading and by the Labor Department for possible violations of the Fair Labor Standards Act and the Davis-Bacon Act. Yet it continued to receive grants from DOE during that time. Its actual troubles started earlier in the month when it was not able to secure additional funding for its business and DOE suspended its payments and began digging deeper. This led Ecotality to inform DOE that it would not be able to complete its obligations under the EV project unless it received a subsidy, so the DOE promptly stopped all payments. When two thirds of your revenue is coming from one source, when it stops, the game is pretty much over.
Getting revenue was not the only problem for Ecotality. Since 2012, a manufacturing and design flaw had been detected in some 12,000 charging stations which had caused overheating or in extreme situations melting of the connector plug. A number of EV makers even notified their customers to stop using Blink charging stations to avoid the issue.
So, now without any meaningful revenue generation, without additional funding, without the cushion of government subsidy, and now with its charging stations becoming possibly inoperable, very little remains of the company. While ECTY is still looking for restructuring or sale, the possibility of a bankruptcy is looming.
EV industry will continue to grow
ECTY is not the first one in the EV space to have run into trouble. There is a long list of companies that have blown millions and filed for bankruptcy. These include names like Fisker Automotive, CODA Motors, Aptera, A123 Systems and many more. But, these failures are in no way indicators of the future of the EV industry. When bankruptcies happen, capital does not suddenly vanish. It goes into better hands at cheaper prices and somebody else takes the baton.
We can get some glimpses of the future of the exciting EV marketplace in a recent study by MJ Bradley & Associates, commissioned by the Regulatory Assistance Project and the International Council on Clean Transportation. According to this, the U.S. and China are looking to have 1 million EVs each on the road by 2015. Germany wants another 1 million by 2020, while Spain wants to add 250,000 by 2014.
According to Transparency Market Research, the global EV industry is projected to register a compound annual growth rate of 18% between 2012 and 2018. Plug-in hybrids may have a CAGR of 80% while regular hybrids are slated to grow at a CAGR of 19%.
Even in the field of EV battery charging there are other operators with better business models, which can provide investors with more sound propositions. One such operator is ECTY's Miami-based rival Car Charging Group (OTCQB:CCGI).
Car Charging Group has a better model
CCGI also provides charging solutions but instead of trying to convince people to spend heavily on buying its hardware, its business model is that of a revenue sharing service provider. It owns its charging equipment, enters into partnerships with site owners for installing the same at their premises, and splits the service fees received with the site owners. This assures a steady stream of revenue from each installation without heavy investment from either side once the market materializes.
The site owners are more amenable to the proposition as they do not have to sink their own dollars into the venture and yet stand to gain from the service fees received, or merely the presence of the station on their property, which can serve as an attraction in itself. This is in stark contrast to Ecotality's model which involved selling costly equipment in a nascent market and having no recurring revenue stream.
Next, CCGI does not have the cushion of government funding with the exception of small municipal and state grants, nor the massive government interference in its operations beyond existing regulations. Unlike Ecotality, it has avoided residential installation and has its chargers at multi-family residential properties and convenient public places like parking lots, supermarkets, hotels, shopping malls, retail outlets, etc. These encourage people to charge their vehicles while carrying out their daily chores. CCGI has around 85 strategic partnerships (page 2).
Meanwhile, it has received only $10.5K in government grants (page F2) to date, so it is more self-reliant and commercially attuned. Whatever revenue increase it has generated has been real and its trends have been quite positive, though obviously the market has not developed enough for CCGI to be anywhere near net positive at this point. Nevertheless, in 2012, the company has grown its revenue by 400% to $258K (page F3). Though it has lost $6M in the past two years, it has acquired three of its competitors in equity deals including evPass, Beam and 350Green. Perhaps Ecotality, or at least certain of its assets, are next.
Parting thought for investors
Ecotality's plight is a result of a faulty business model rather than being indicative of the future of the EV segment as a whole. Some company or companies will absorb the capital it has built and the industry will simply shift management until it finds the right people. The EV industry carries tremendous possibilities and investors who choose to believe in this emerging industry and invest wisely and cautiously can expect good future rewards. Though EV is, as ever, a minefield. Capital will not disappear, but companies will until the market matures. Look for especially conservative business models as EV is only in its infancy. Watch out for signs of big government grants that represent nothing more than the dreams of politicians looking for votes and look for signs of entrepreneurs who are risking their own skin for what they really believe in. That is, after all, how America became great: through risky entrepreneurship, not government subsidies.