Many of my regular readers know I'm a working securities lawyer, a humble scrivener who writes reams of deathless prose that private companies use to raise money from investors, and public companies file with the SEC in the form of registration and proxy statements, and annual, quarterly and current reports. I've spent a couple years as an oil company executive and a few more as board chairman of an advanced lead-acid battery technology developer. The balance of my 30-year career has been devoted to natural resource and technology-based businesses that needed somebody elses' money to pursue their plans and had to pass through a gatekeeper like me to get it.
It's a fascinating job because I need to develop an encyclopedic understanding of a client's business, operations, technology and industry before I can begin to offer sound advice on important business, financial and tactical decisions. In The Devil's Advocate, Al Pacino described a law degree as "the ultimate backstage pass." The movie line may be a slight exaggeration, but like most of my brethren I've learned that ambitions, optimism and bold plans are universal, failure is more common than success, and mediocrity is more common than excellence.
Along the way I've developed a kind of sixth sense for business models that will or will not work. While I haven't seen every fatal error a businessman can make, I can spot most of the common ones in my sleep. While part of me hates to tell an bright-eyed entrepreneur that his business model can't fly, I'd rather ride my bicycle for free than get paid for working on a deal that violates my "life is too short" rule.
I started blogging a couple years ago because of a love-hate relationship with my own profession; one that always informs but often fails to communicate because full and fair disclosure of all material facts in compliance with the rules can never do a good job of explaining a business strategy and integrating the facts in a way that maximizes comprehension. My goal was to share my knowledge of the energy storage sector and help contemplative investors understand where the sector is going as cleantech, the sixth industrial revolution, unfolds.
Over the last year I've gotten bogged down in a series of absurd arguments with philosophically committed EVangelists who obviously slept through Economics 101, another violation of my life is too short rule. Since one of my favorite financial writers, John Mauldin, has recently had a lot of fun with the following quote from Lewis Carrol's Through the Looking Glass,
Alice laughed. "There's no use trying," she said, "one can't believe impossible things."
"I daresay you haven't had much practice," said the Queen. "When I was your age, I always did it for half-an-hour a day. Why, sometimes I've believed as many as six impossible things before breakfast."
I'm going to borrow John's theme and identify six impossible things about electric vehicles that most investors choose to ignore or simply don't understand.
Impossible Thing #1 – Zero Emissions
The gold standard of vehicle electrification is the Prius from Toyota Motors (NYSE:TM). With an admirable ten-year history of user satisfaction, a base price of $21,000 and a design that maximizes fuel efficiency by using a 1.3 kWh NiMH battery for hybrid drive functions, the Prius delivers a combined city/highway fuel economy rating of 48 mpg, which is twice the 2011 model year combined fleet CAFE standard of 24.1 mpg.
According to Toyota, the 2011 Prius has tailpipe emissions of 143 grams of CO2 per mile, which is 3 grams per mile LESS than an electric car plugged into the average US utility. While a simple comparison based on average emissions shows that the Prius has a slight edge over every EV, the reality is even bleaker because EVs with theoretically be charged at night and most off-peak power comes from coal fired generators, while about half of daytime power comes from natural gas. I've never seen a study that analyzes the CO2 emissions differential between peak and off-peak power, but I'll give long odds that an EV charged with off-peak power is considerably dirtier than a Prius.
Impossible Thing #2 – Consistent Marginal Returns
Like all things in life, electric vehicles are subject to the law of diminishing marginal returns, which states that the first unit of a variable input yields the greatest benefit and each additional unit yields a progressively smaller incremental benefit. Frankly, I can't imagine a better proof of that economic law than a quick comparison of four vehicle electrification options.
- The Toyota Prius uses 1.3 kWh of batteries to slash fuel consumption by 50%;
- The GM Volt uses another 14.7 kWh of batteries to save the next 30%;
- The Nissan (OTCPK:NSANY) Leaf uses another 8 kWh to save the last 20%; and
- The Tesla (NASDAQ:TSLA) Roadster uses another 29 kWh to satisfy the range requirements of people who have a commute of more than 30 miles, the maximum that Nissan recommends for potential Leaf purchasers.
There may be a "PHEV-light" alternative like Toyota's planned Plug-in Prius that gets to a more optimal point on the marginal utility curve, but the big battery behemoths have all the long-term potential of the Edsel unless someone can find a way to repeal the law of diminishing marginal returns.
Impossible Thing #3 – Available Raw Materials
Like all things in life, electric vehicles are subject to raw material constraints. Each year our planet produces a few kilograms of aluminum and copper and a few grams of rare metals per person. It is impossible for more than a handful of politically favored elites to use hundreds of kilograms of highly refined and processed metals to reduce their personal consumption of oil, which is produced at a rate of 616 kilograms per person.
Impossible Thing #4 – Assured Battery Safety
The green press is full of happy stories about the improving safety of lithium-ion batteries. At the same time, Federal regulators are focused on a recent 747 crash in Dubai that was caused by spontaneous ignition of lithium-ion batteries during shipment. While EVangelists think mommies and daddies across the land should place their child safety seats securely on top of the battery pack, the Federal government is preparing to impose sweeping restrictions on the transportation of those same batteries on US cargo planes.
Impossible Thing #5 – Assured Recycling
EVangelists invariably assume away battery recycling issues with blithe assurances that somebody will solve the problem before used battery packs become a disposal problem. However, nobody has been able to demonstrate a cost-effective lithium-ion battery recycling process. The primary recoverable materials are steel, aluminum, copper and some rare metals. While these materials were highly refined when they went into the batteries, they lose the original processing value in recycling and the recovered metals aren't worth much more than any other scrap metal. Since there is no recycling technology, a discussion of the problem promptly degenerates into "second life" mythology, where electric utilities will become dumping grounds for used battery packs that have outlived their usefulness in transportation.
Impossible Thing #6 – Economic Payback
Even EVangelists acknowledge that the incremental investment in an electric vehicle will not be recovered over the life of the vehicle unless oil prices soar to levels that would crush the global economy. Most investors are concerned with return on investment. A business model that can't offer a return of investment is worrisome.
Any one of these six impossible things should be enough to give a contemplative investor pause. In combination they spell disaster for investors in electric car manufacturers like Tesla, Fisker Motors and Th!nk, and nothing but trouble for battery manufacturers like A123 Systems (AONE) and Ener1 (NASDAQ:HEV) that are devoting immense resources to the electric car dream. There are a wide variety of rapidly evolving and lucrative markets for lithium-ion batteries, but companies that chase this White Rabbit down the hole may be unable to find their way out.
Most of us know that money managers, analysts and investors tend to follow the herd, but few of us ever really come to grips the unappetizing corollaries that:
- Unless you're the leader the view never changes; and
- If you follow a big enough herd, you'll spend a lot of time wallowing in manure.
Disclosure: I'm a former director of Axion Power International (NASDAQ:AXPW) and have a substantial long position in its stock. I don't believe that Axion's advanced lead-carbon PbC® battery will be a contender in the plug-in vehicle space because it's a power battery rather than an energy battery. Accordingly, the success or failure of electric cars will be irrelevant to my finances. With any luck, this will be the last time I focus on electric cars because there are important business opportunities to discuss and I'm not willing to waste any more time debating make believe with the folks who slept through Economics 101.