The Electric Car Industry: The Pros and Cons of Investing in Hybrids

by Tony D'Altorio

The Electric Car Industry: The Pros and Cons of Investing in Hybrids

by Tony Daltorio, Investment U Research

Thursday, July 8, 2010

There was a lot of buzz surrounding the recent IPO of Tesla Motors (Nasdaq: TSLA). The electric-powered sports car maker became the first U.S. car-maker to take that route since Ford (NYSE: F) went public in 1956.

Investors loved it too. Tesla had to raise the number of initial shares from 11.1 million to 13.3 million. And it even upped the original $14 - $16 price tag to $17.

Individual investors weren't the only ones to like what they saw. In May, Toyota ADR (NYSE: TM) signed on for a $50 million stake in Tesla. And it agreed to cooperate with it on building cars.

Daimler also bought into it, at just under 10% of the company last year. It did go on to sell 40% of its stake to a fund controlled by Abu Dhabi's government. But Tesla still supplies the German car-maker with battery packs and chargers for the electric version of its Smart Fortwo car.

Overall, the IPO did remarkably well for a company that has barely sold 1,000 cars at $109,000 a pop. Tesla has also notably lost over $290 million since its inception in 2003. And it expects that trend to continue as it pushes its Model S.

That so-called mass-market car is expected to cost $50,000 per vehicle. And that's with the government subsidy.

Worse yet, as Tesla moves towards the regular market, the competition gets stiffer.

With all that against it, it seems logical to wonder how the company can ever survive...

Electric Car Market's Charge Is Low

Nearly all car-makers around the globe have an electric or hybrid model in the works.

Yet they mostly acknowledge that those cars' sales will start out modest... at best. Higher costs and lack of widely available recharging infrastructure will keep customers at bay.

Al Bedwell, an automotive technology expert with JD Power, summed it up well: "Ten years down the road, more than 90% of cars will be the conventional cars that we have now. 10% will be hybrids or electric vehicles."

Hardly impressive, especially considering that of that figure, he says, all-electric vehicles will account for a mere 3%.

Naturally, that makes investing in them risky. Especially considering the billions needed to build the lithium-ion batteries to power them.

Wolfgang Bernhart, a partner with Roland Berger Strategy Consultants, doesn't have much confidence in the industry:

"Pure battery-electric vehicles will be a rather small figure: under optimistic criteria, for Europe, less than 5% in 2020. On a global scale, the figure will be even lower."

The Electric Slide or the Electric Ladder

Carlos Ghosn, the chief executive of Renault ADR (PINK: RNSDF) and Nissan ADR (PINK: NSANY), begs to differ. He foresees zero-emission - primarily electric - cars capturing a tenth of the world market by 2020.

And he predicts a shortage of manufacturing capacity for plug-in cars and the batteries needed to power them within two years.

Roland Berger once again strongly disagrees though. Instead, it predicts a costly technology bubble forming around those batteries.

The result: Battery producers now building factories in the U.S., Europe and Asia will end up with twice the capacity needed to supply plug-in cars... conservatively... by 2015.

The company goes on to forecast that, as a result, just six to eight of the 20 or so global players will survive the next five to seven years. And Wolfgang Bernhart cautions specifically, "It's a little bit like some of the Internet hype."

Admittedly, Wall Street bullishly claims that sales of lithium-ion batteries will hit $25 billion by 2015. And by 2020, it expects it to reach $66 billion.

But if Roland Berger got it right, the oversupply would mirror the chronic problems of underused plants among car-makers themselves. That would expose the industry to significant downward pressure on prices and profits.

An Electric - or Electrocuted - Future

Admittedly, the bulls do have one thing going for them in the form of the BP oil spill.

That disaster has roused the electric car industry. Policymakers, investors and consumers suddenly have a renewed interest in alternative energy sources.

So along with Tesla, they have bought up:

  • Battery maker Ener1 (NASDAQ: HEV)
  • Battery maker A123 Systems (NASDAQ: AONE)
  • Lithium-ion battery component company Polypore International (NYSE: PPO)

Still, both batteries and vehicles can't escape the lack of proper infrastructure. Without re-charging stations, both will suffer significantly.

If governments and companies get a move on that, then the industry has a chance. If not though, Mr. Ghosn and his compatriots have a less-than-positive future ahead.

Good investing,

Tony Daltorio

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