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 (NYSE:TM) where Toyota confirmed its commitment to NiMH battery technology for hybrid drive and fuel cell technology for electric drive. It's 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 of years to work out the manufacturing glitches and bring quality control up to 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.