I've been a bit of a blogging slacker for the last month as I focused on preparing my keynote presentation for next week's European Lead Battery Conference in Paris, but it's been a quiet time in the battery and electric vehicle space and there hasn't been much to talk about.
That all changed yesterday when the Congressional Budget Office reported that plug-in vehicles are not ready for prime time, Smith Electric Vehicles cancelled its IPO, and I discovered critical modeling errors in two research reports on Tesla Motors (TSLA) from first-tier investment banking firms.
Before discussing the latest developments, I want to mention an important article I found earlier this month in APS News, a bi-monthly newsletter from the American Physical Society, which asked "Has the Battery Bubble Burst?"
The author's conclusions were no surprise: current lithium-ion batteries aren't good enough for electric vehicles and better batteries are at least a decade away. What impressed me was his explanation of why there's no "Moore's Law" for batteries:
"… electrons do not take up space in a processor, so their size does not limit processing capacity; limits are given by lithographic constraints. Ions in a battery, however, do take up space, and potentials are dictated by the thermodynamics of the relevant chemical reactions, so there only can be significant improvements in battery capacity by changing to a different chemistry."
It's the clearest, simplest and most elegant answer I've ever seen.
While yesterday's report from the Congressional Budget Office didn't use the phrase "not ready for prime time," it did conclude that the US government will spend between $3 and $7 of taxpayer money for every gallon of gasoline "saved" by consumers who drive subsidized plug-in vehicles. The most important conclusion, in my mind, was:
"Because of their other, indirect effects, however, the tax credits will have little or no impact on the total gasoline use and greenhouse gas emissions of the nation's vehicle fleet over the next several years. As a result, the cost per gallon or per metric ton of any such reductions will be much greater than the amounts described above."
While the CBO's report on plug-in vehicles is pretty damning, things may not be as bleak as they appear at first blush because sales of plug-in hybrid electric and battery electric vehicles have been weaker than anybody expected. The following graph is based on monthly tracking data from hybridcars.com and shows how quarterly sales of PHEVs and BEVs from all automakers combined have ramped over the last seven fiscal quarters. My third quarter estimate for this year is based on average sales during July and August.
The thing I find most intriguing about the graph is the shape of the BEV curve. It peaked in the second quarter of last year and has been on a gradual downhill slide ever since. My current impression is that consumers who wanted a particular car greeted each new BEV launch with enthusiasm, but interest rapidly waned. It will be fascinating to see whether the initial peak of interest in EVs from Tesla exhibits a similar short-term ramp to 5,000 cars a quarter followed by a long slow decline as the market becomes saturated.
Last night, Smith Electric Vehicles reportedly scrapped its $80 million IPO because investors were unwilling to buy the shares at a high enough valuation. I had been looking forward to the Smith IPO because I'd hoped it would help restore a modicum of common sense to a market that's thrown caution to the wind when it comes to the high-flying stock of Tesla Motors.
Smith had planned to sell about 4.5 million shares to the public at a price of $16 to $18 per share, which would have given the company a market capitalization in the $370 to $415 million range. While Smith's products don't have the raw sex appeal of the Tesla Model S or the Fisker Karma, the commercial applications of electric drive are far closer to being economically sensible than passenger car applications.
Yesterday, I published an article on TheStreet that described critical modeling errors Merrill Lynch and Morgan Stanley made in their recent analytical reports on Tesla Motors. The errors were simple. Both firms accounted for expected Model S sales and expected new reservations during the second half of the year, but neither firm properly accounted for the fact that reservation payments and cash will decline by $40,000 for each Model S Signature Edition and $5,000 for each regular Model S Tesla delivers this year.
A quick back of the napkin calculation suggested that the impact of the error could be as high as $95 million using the Merrill Lynch scenario of 5,000 vehicle deliveries this year and a more modest $81 million using the Morgan Stanley scenario of 2,230 vehicle deliveries this year. Angry commenters quickly took me to task with assertions that Tesla would only deliver 1,200 to 1,424 Model S Signature Editions this year and the true magnitude of the errors could be closer to $66 million and $52 million, respectively. Frankly, I don't care what the "true" number is and I'm far more concerned that modeling errors resulted in the overestimation of Tesla's year-end cash balance by 100% to 200%. That strikes me as an issue that might adversely impact their otherwise bullish risk analysis.
I've been astounded as I watched Tesla's financial statements deteriorate over the last nine months because I know that investors bring sharp pencils and brass knuckles when they're negotiating funding terms with companies that are teetering on the edge of solvency. In 2009 I consented to a forced conversion of preferred stock to facilitate a private placement at $.57 for the stock of a former client that was trading in the $1.60 range. I hated the price, but it was the best management could negotiate under the circumstances and without the cash the company would have gone under. Heck, a few weeks ago, Knight Capital took an 80% hit on emergency financing. While I don't expect Tesla to take a 65% to 80% hit on its next financing round, I've been in the trenches long enough to know that it can happen and no company is immune or exempt when its back is against the wall.