The first thing every securities lawyer learns is that technology is a two edged sword. On the leading edge, developers of cheap innovations that ramp rapidly over a few years build thriving businesses that deliver market beating returns for investors. On the bleeding edge, developers of expensive technologies that can't be implemented at relevant scale for years morph into financial black holes that suck the lifeblood out of portfolios and teach a new generation of investors about an insidious market phenomenon the Gartner Group refers to as the hype cycle.
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The second thing every securities lawyer learns is that business risks are cumulative, and a lot like a leaky roof – unless you can locate and patch every hole, the ceiling will end up in your lap.
Hope is a timeless virtue, but it's a horrible investment strategy.
Last week I traveled to Stockholm and spoke at the Annual Partners Conference for CTEK Sweden, a global leader in smart battery chargers for conventional cars, trucks and motorcycles. It was a different kind of audience that wanted a better understanding of the path their business would take over the next few years. They wanted a high level overview instead of deathless analysis of techno-trivia. After making the presentation, it dawned on me that investors who want to build bullet proof portfolios for the next five years deserve nothing less. So instead of drilling down into the detail like I usually do, I'll focus today on ten fundamental business and economic forces that will leave electric drive stranded on the bleeding edge of transportation technology for decades.
The bottom line is the mainstream media, our fearless political leaders, rainbow legions of Eco-zealots and starry-eyed investment analysts all have it wrong when it comes to electric drive. No matter how badly we might want a clean green transportation alternative that frees us from the tyranny of imported oil, electric drive is hopelessly uneconomic and will continue to be a financial black hole until each and every one of the following problems are overcome.
Since many of these ideas have been discussed at length in other articles, the top ten list contains several links back into my author's archive.
#10. Rich vs Poor. For most of human history 90% of the world's population lived in crushing poverty and ignorance, but as long as the poor were kept ignorant, the other 10% could consume the lion's share of global economic output with impunity. Our last industrial revolution changed everything because cheap and ubiquitous communications taught the world's poor that there's more to life than deprivation. Now they all want a piece of the comfortable lifestyle that the 10% have always considered a God-given right. The only way that the 90% can have a place at the global economic table is if the 10% change their worst habits and make room for the new well-informed poor. Gluttony, over-indulgence to the point of waste, has long been viewed as a capital vice or cardinal sin. The idea that people in advanced economies can afford to waste anything is an inexcusable relic of a barbaric past that has no relevance to humanity's future.
#9. Electric drive is not truly clean or green. The amount of energy needed to move a given mass a given distance at a given speed is a constant. It makes no difference whether the energy comes from a gallon of gasoline or a lump of coal. In a country like the US where the substantial bulk of night-time power comes from coal-fired plants, EVs may be marginally cleaner than internal combustion engines but they're dirtier than HEVs that cost $12,000 less and conserve energy instead of simply substituting one dirty fuel for another dirty fuel. I've heard the fervent arguments that EVs can be powered from alternative energy sources, but the arguments all fail for one simple reason. The virtue of green electrons lies in their generation, not their use. Once green electrons exist, it makes no difference whether they're used to power an EV or a toaster oven. One will be cleaner and the other will be dirtier. There is no double credit.
#8. Energy resources are scarce, but non-ferrous metals are far scarcer. Last year the planet produced 1,920 kg of energy resources for every man, woman and child on the planet, but it only produced 8.4 kg of non-ferrous metals. Those metals are essential in most of the necessities and little luxuries of modern life. There are no spare metal supplies lying around looking for a user. For decades metal prices have been as volatile as energy prices, but most of us don't notice because we don't buy metals in minimally processed form. If we used all of the planet's metal production to build energy saving machines, we couldn't make a dent in energy consumption. Panacea solutions that can't be implemented at relevant scale are nothing more than a cruel hoax.
#7. Lithium-ion batteries are a recycling nightmare. At $500 per kWh and 125 wh/kg, automotive grade lithium-ion cells cost about $28.50 a pound to manufacture. Unless you're evaluating a cobalt based chemistry, the material values that can be recovered through recycling are less than $1.00 per pound. Since the recycling process uses a lot of energy, net disposal costs for lithium ion batteries are estimated at $0.75 per pound plus collection and transportation charges. There is no such thing as a cost effective recycling process for old lithium-ion batteries. They're a use it once and throw it away technology. Anybody who claims otherwise is lying. The media is full of optimistic stories about second-life uses for old EV batteries. Since there is no proof that those batteries will survive a 10-year first life, the stories are premature. Moreover, chemical systems deteriorate with age, so using new batteries to simulate the performance of old used batteries is little more than a side-show to deflect the attention from the wasteful single-use reality.
#6. The marginal returns from bigger batteries are terrible. The Prius from Toyota Motors (NYSE:TM) uses a 1.5 kWh battery pack to save about 160 gallons of gasoline per year. In comparison, the Leaf from Nissan Motors (OTCPK:NSANF) uses a 24 kWh battery pack to save about 400 gallons per year. While the Prius battery saves about 107 gallons of gas per year for each kWh of battery power, the Nissan Leaf only saves 17 gallons per kWh. This shocking example of the diminishing marginal utility of batteries is generous when you consider that Tesla Motors (NASDAQ:TSLA) will only save 9.5 gallons of gasoline per kWh of batteries in its flagship Model S.
#5. The up-front cost of electric drive is roughly $200 per barrel of avoided oil consumption. Bernstein and Ricardo recently published a cost-walk analysis that pegged the cost premium of an electric vehicle at $19,800, or roughly $190 per barrel of avoided future oil consumption. You can get to a similar result with a simpler comparison. The Nissan Leaf costs $12,000 more than a Prius and it will save the equivalent of 60 more barrels of oil per vehicle over the span of a decade. The net premium per barrel of avoided future oil consumption is $200. If you work from the bottom up like Bernstein and Ricardo did, or work from the top down by comparing the difference between a Prius and a Leaf, you end up at the same place. Saving a $100 barrel of oil with an electric vehicle that costs $200 is a deal that can only appeal to the philosophically committed and mathematically challenged.
#4. Rapid advances in battery technology are unlikely. The phrase is an oxymoron. In 1883 Thomas Edison complained to a reporter, “The storage battery is one of those peculiar things which appeals to the imagination, and no more perfect thing could be desired by stock swindlers than that very selfsame thing. Just as soon as a man gets working on the secondary battery it brings out his latent capacity for lying." We were spoiled by the information and communications technology revolution where performance doubled every 18 to 24 months and costs plummeted. That phenomenon was unique in technological history because different science made it possible to do more work with fewer resources. That science is meaningless in the fields of transportation and chemistry. A hundred years ago Edison built batteries that had specific energy in the 30 wh/kg range. Today's best automotive battery packs can't top 150 wh/kg. In a century when electronic technology saw billion-fold gains, battery technology improved by a factor of five. Expecting that century old trend to change is irrational and ignorant, not reasonably optimistic.
#3. Electric drive technologies have already reaped their economies of scale. New industries and technologies often give rise to significant economies of scale as manufacturers improve production processes and supply chains become more mature and efficient. The battery industry has had decades to optimize its production processes and supply chains. The same is true for electric motors. There may be modest savings as production rates for a specific SKU ramp, but the underlying industries have already squeezed the economies of scale out of their products and the margin for additional improvement is negligible. This is not a case where flat panel TVs are replacing CRTs. It's more like an upgrade from a 30" flat panel to a 36" flat panel, or from a five pound box of laundry detergent to a ten pound box.
#2. Increasing fuel efficiency will make EV economics worse. The calculation that electric drive costs $200 per barrel of avoided future oil consumption is based on the 2012 CAFE standard of 29.7 mpg. Using the 2016 standard of 34.1 mpg the marginal cost of electric drive will be closer to $230 per barrel of avoided future oil consumption. If you push the analysis out to 2025 and use a targeted fuel efficiency of 55 mpg, the marginal cost per barrel of avoided oil consumption will be $360. As the world's automakers continue to improve their core vehicle technologies, the marginal cost of electric drive will become increasingly hard to justify.
#1. The green in consumers' wallets is more important than the green in their cocktail conversations. Everyone wants to be clean and green, but they don't want to pay for it. Green products that offer comparable performance at a comparable price are usually a hit. Green products that command premium prices frequently fail. In the US auto market, 3% of the population has demonstrated a willingness to pay a premium price for ultra-high efficiency. That percentage has been stable since 2006 and shows no signs of changing. Nobody wants to suffer for the sake of saving the planet and the most fervent EVangelicals are those who think that buying a high-performance EV from Tesla is a capital idea. These are not useful products for adults, they're high-end toys for the self-absorbed who care nothing for the economy, the environment or common sense as long as they can spend somebody else's money on eco-extravagance. They don't understand the difference between buying a $200 Optimus Prime toy from Hasbro and buying a $70,000 Sub-optimus Prime toy from Tesla.
At heart I’m an incurable optimist who believes that “In America we get up in the morning, we go to work and we solve our problems.” But I know those problems cannot be solved by exotic electric drive constructs that are stranded on the bleeding edge and promise facile but economically impossible solutions to incredibly complex problems.
When I consider the number and variety of business risks that stand between electric dreams and commercial success I'm shocked at the market values of companies like Tesla Motors which is hemorrhaging cash while catering to the new eco-royalty. I see the odds of commercial success as remote beyond reckoning and believe the best historical analogs are companies like Ballard Power (NASDAQ:BLDP) which lost over 99% of its peak market value when hydrogen fuel cells hit the skids, Pacific Ethanol (NASDAQ:PEIX) which generated comparable losses in the ethanol space, and Ener1 [HEVVQ.PK] which was a DOE favorite in 2009 but was driven into bankruptcy by an ill-advised effort to revive the thrice-failed Th!nk Motors. The history of investor catastrophes that flowed from unworkable panacea energy policies is long and colorful. Investors who refuse to learn from the past are condemned to repeat it.
Will Rogers once observed, "There are three kinds of men. The one that learns by reading. The few who learn by observation. The rest of them have to pee on the electric fence for themselves." If Will were alive today, he'd have a field day with electric drive.