Alice in EVland; six impossible things

Alice In EVland; Six Impossible Things John Petersen

Many of my regular readers know I'm a working securities lawyer, ahumble scrivener who writes reams of deathless prose that privatecompanies use to raise money from investors, and public companies filewith the SEC in the form of registration and proxy statements, andannual, quarterly and current reports. I've spent a couple years as anoil company executive and a few more as board chairman of an advancedlead-acid battery technology developer. The balance of my 30-yearcareer has been devoted to natural resource and technology-based businesses that neededsomebody elses' money to pursue their plans and had to pass through agatekeeper like me to get it.

It's a fascinating job because I need to develop an encyclopedicunderstanding of a client's business, operations, technology andindustry before I can begin to offer sound advice on importantbusiness, financial and tactical decisions. In The Devil'sAdvocate, Al Paccino described a law degree as "the ultimate backstage pass." Themovie line may be a slight exaggeration, but like most of my brethrenI've learned that ambitions, optimism and bold plans are universal, failure ismore common than success, and mediocrity is more common thanexcellence.

Along the way I've developed a kind of sixth sense for business modelsthat will or will not work. While I haven't seen every fatal error abusinessman 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 hisbusiness model can't fly, I'd rather ride my bicycle for free than get paid forworking on a deal that violates my "life is too short" rule.

I started blogging a couple years ago because of a love haterelationship with my own profession; one that always informs but oftenfails to communicate because full and fair disclosure of all materialfacts in compliance with the rules can never do a good job of explaining a business strategy andintegrating the facts in a way that maximizes comprehension. My goalwas to share my knowledge of the energy storage sector and helpcontemplative investors understand where the sector is going as cleantech, the sixth industrial revolution, unfolds.

Over the last year I've gottenbogged down in a series of absurd arguments with philosophically committedEVangelists 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 LewisCarrol's Throughthe Looking Glass,

Alice laughed. "There's no usetrying," she said, "one can't believe impossible things." "I daresay you haven't had muchpractice," said the Queen. "When I was your age, I always did it forhalf-an-hour a day. Why, sometimes I've believed as many as siximpossible things before breakfast."

I'm going to borrow John's theme and identify six impossible thingsabout electric vehicles that most investors choose to ignore or simply don'tunderstand.

Impossible Thing #1 – Zero Emissions

The gold standard of vehicle electrification is the Prius from ToyotaMotors (TM). With anadmirable ten-year history of user satisfaction, a base price of$21,000 and a design that maximizes fuel efficiency by using a1.3 kWh NiMH battery for hybrid drive functions, the Prius delivers acombined city/highway fuel economy rating of 48 mpg, which is twice the2011 model year combined fleet CAFE standard of 24.1 mpg.

According to Toyota, the 2011 Prius has tailpipe emissions of 143gramsof CO2 per mile, which is 3 grams per mile LESSthan an electric car plugged into the average US utility. While asimple comparison based on average emissions shows thatthe Prius has a slight edge over every EV, the reality is even bleakerbecause EVs with theoretically be charged at night and most off-peak power comes fromcoal fired generators, while about half of daytime power comes fromnatural gas.I've never seen a study that analyzes the CO2emissions differential between peak and off-peak power, but I'll givelong odds that an EV charged with off-peak power is considerably dirtier than a Prius.

Impossible Thing #2 – ConsistentMarginal Returns

Like all things in life, electric vehicles are subject to the law ofdiminishing marginal returns, which states that the first unit of avariable input yields the greatest benefit and each additional unityields a progressively smaller incremental benefit. Frankly, I can'timagine a better proof of that economic law than a quick comparison offour vehicle electrification options.
The Toyota Prius uses 1.3kWh of batteries to slash fuel consumption by 50%;The GM Volt usesanother 14.7 kWh of batteries to save the next 30%;The Nissan Leaf uses another 8 kWh to save the last 20%; and
The Tesla Roadster uses another 29 kWh to satisfy the rangerequirements of people who have a commute of more than 30 miles, themaximum that Nissan recommends for potential Leaf purchasers.
There may be a "PHEV-light" alternative like Toyota's planned Plug-inPrius 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 canfind a way to repeal the law of diminishing marginal returns.

Impossible Thing #3 – Available RawMaterials

Like all things in life, electric vehicles are subject to rawmaterial constraints. Each year our planet produces a few kilograms ofaluminum and copper and a few grams of rare metals per person. It isimpossible for more than a handful of politically favored elites to usehundreds of kilograms of highly refined and processed metals to reducetheir personal consumption of oil, which is produced at a rate of 616kilograms per person.

Impossible Thing #4 – Assured BatterySafety

The green press is full of happy stories about the improvingsafety of lithium-ion batteries. At the same time, Federal regulatorsare focused on arecent 747 crash in Dubai that was caused by spontaneous ignition oflithium-ion batteries during shipment. While EVangelists thinkmommies and daddies across the land should place their child safety seatssecurely on top of the battery pack, the Federal government is preparing toimpose sweeping restrictions on the transportation of those samebatteries on US cargo planes.

Impossible Thing #5 – Assured Recycling

EVangelists invariably assume away battery recycling issues withblithe assurances that somebody will solve the problem before usedbattery packs become a disposal problem. However, nobody has been able todemonstrate a cost-effective lithium-ion battery recycling process. Theprimary recoverable materials are steel, aluminum, copper and some raremetals. While these materials were highly refined when they went intothe batteries, they lose the original processing value in recycling andthe 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 batterypacks that have outlived their usefulness in transportation.

Impossible Thing #6 – Economic Payback

Even EVangelists acknowledge that the incremental investment in anelectric vehicle will not be recovered over the life of the vehicleunless oil prices soar to levels that would crush the global economy.Most investors are concerned with return on investment. A businessmodel that can't offer a return of investment is worrisome.

Any one of these six impossible things should be enough to give acontemplative investor pause. In combination they spell disaster forinvestors in electric car manufacturers like Tesla (TSLA),Fisker Motors and Th!nk, and nothing but trouble for batterymanufacturers like A123 Systems (AONE) andEner1 (HEV)that are devoting immense resources to the electric car dream. Thereare a wide variety of rapidly evolving and lucrative markets forlithium-ion batteries, but companies that chase this White Rabbit down thehole 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 everreally cometogrips the unappetizing corollaries that:
Unless you're the leader the view never changes; andIf you follow a big enough herd, you'll spend a lot of timewallowing in manure.Disclosure: I'm a formerdirector of Axion Power International (AXPW.OB)and have a substantial long position in its stock. I don't believe thatAxion's advanced lead-carbon PbC® battery will be a contender inthe plug-in vehicle space because it's a power battery rather than anenergy battery. Accordingly, the success or failure of electric carswill be irrelevant to my finances. With any luck, this will be the last timeI focus on electric cars because there are important business opportunities todiscuss and I'm not willing to waste any more time debating makebelieve with the folks who slept through Economics 101.