Confessions Of An EV Pioneer Turned Heretic

Includes: GM, NSANY, TM, TSLA
by: John Petersen

Most readers don't know that I used to drive an EV every day. The epoch was the late '60s and my EV was a three-wheeled snow-cone truck with a brass bell on the hood. It was a great business for a teenager in Phoenix and even with a couple hundred pounds of shaved ice in the cooler my EV was a snappy performer as long as I stuck to my route and didn't push my luck by trying to travel more than 10 miles on a charge. The cool kids snickered when they compared my hard-working EV to their muscle-car dreams, but I had the last laugh - a pocket full of cash from a profitable business.

I guess that makes me an EV pioneer of sorts - I was electric when electric wasn't cool.

Forty-five years later, the cool kids are giddy with excitement about EVs while my focus remains firmly fixed on profitable businesses. That difference in focus seems to be the source of my most vitriolic reader comments. The cool kids invariably babble on about the toys they own or plan to buy with somebody else's money while I just want to talk about the wisdom of owning stock in a toymaker. The gulf between the two perspectives is wide, deep and cold.

Before I started blogging about investing in energy storage and vehicle electrification, I spent several years working as a battery industry executive. I know how difficult, time consuming and expensive it can be to take a new battery technology from a Eureka! moment to a commercial product. I also know how hard it is to reduce prices in an industry where 60% to 70% of product cost is raw materials and components. These aren't impossible tasks, but they're very difficult tasks. When a management team succeeds in bringing a new battery technology to market or reducing product costs; its first, last and only duty is improving returns to the stockholders who bore the risk in the first place. Battery manufacturing is a business, not a charity, and a sustainable business cannot buy for a dime, sell for a nickel and make it up on volume.

The battery industry has been around for over a century and the leading manufacturers have always enjoyed a robust market for their products. While the competition can get pretty cut-throat among manufacturers of commodity batteries, top quality batteries have always commanded a premium price. Applications come and go, but the industry thrives on its own merit.

Over the last few years a quirky urban mythology has emerged - that the battery industry is somehow dependent on the success or failure of electric drive. That mythology has led to a widely held but specious belief that battery manufacturers can and should subjugate the interests of their stockholders to some greater good as vaguely defined by demagogues who think electric cars are swell despite their crippling inefficiency.

The mythology is 180 degrees out of synch with reality. Battery manufacturers will do just fine with or without electric cars. Electric cars, on the other hand, can't exist without plentiful supplies of powerful, safe, durable and dirt cheap batteries. At the end of the day, the one question "EVangelicals" can't answer is "why would any sane businessman even try to cater to the absurd price and performance demands of the electric car market?" The performance demands of would-be EV buyers are insatiable and their unwillingness to pay a fair price for a highly sophisticated product is laughable. So why bother?

A Toyota (NYSE:TM) Prius uses a 1.4 kWh battery pack to save the average driver about 160 gallons of gas per year. A General Motors (NYSE:GM) Volt uses a 16 kWh battery pack to save the average driver about 300 gallons of gas per year. A Nissan (OTCPK:NSANY) Leaf needs a 24 kWh battery pack to save the average driver about 400 gallons of gas per year. Depending on the buyer's range anxiety quotient, a Tesla (NASDAQ:TSLA) Model S will use a 40, 60 or 85 kWh battery pack to save the average driver about 400 gallons of gas per year.

The hard reality is that the marginal utility of batteries plummets the instant you add a plug. I understand that there are differences between the batteries used by different manufacturers, but those differences can't justify the marginal utility cliff in the following table.

Battery Fuel Savings
Vehicle Capacity Savings Per kWh
Toyota Prius 1.4 kWh 160 gal. 114 gal.
GM Volt 16 kWh 300 gal. 19 gal.
Nissan Leaf 24 kWh 400 gal. 17 gal.
Tesla Model S-160 40 kWh 400 gal. 10 gal.
Tesla Model S-230 60 kWh 400 gal. 7 gal.
Tesla Model S-300 85 kWh 400 gal. 5 gal.

It doesn't take a degree in economics to recognize the inherent waste of adding a plug to a car. Heck, it doesn't even take passing grades in elementary school mathematics. I grew up in an era when indulgence to the point of waste was considered sinful, and I still live in a society where conspicuous consumption is considered vulgar.

Can anybody explain why this conspicuous inefficiency is embraced by markets and subsidized by governments?

Next week Tesla is expected to report a first quarter loss in the $72 million range. A loss of that magnitude will cut its stockholders equity to about $150 million and should give rise to frank discussions with the auditors about the need for a financial statement footnote expressing uncertainty over Tesla's ability to continue as a going concern. The expected loss will also take Tesla's $3.5 billion market capitalization up to a staggering 23 times book value as it launches a heavily subsidized and obscenely inefficient product line for Eco-royalty.

I can't begin to imagine the amount of additional working capital Tesla will need as it transitions from building a factory to manufacturing cars, but I'm certain they'll be forced go back to the equity markets in a big way since no rational banker would lend against the balance sheet. That could be a serious challenge if there's a going concern footnote.

Everything may work out just fine, but Tesla is not a stock that I'd want to own when the brass band stops playing and the business realities become obvious.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.