Is General Motors the Buy of the Decade? PHEVs Part Two...

David Fessler
by David Fessler, Energy & Infrastructure Strategist, The Oxford Club

Is General Motors the Buy of the Decade? PHEVs Part Two...

by David Fessler, Advisory Panelist

Monday, February 23, 2009: Issue #941

Who would have thought an article on the future of the automobile would have roused so many skeptics and naysayers from their winter hibernation? Certainly not me.

But the one I wrote a few weeks ago on Plug-in Hybrid Electric Vehicles (PHEVs) has kept our Customer Service department working overtime... fielding the firestorm of responses, both positive and negative.

Clearly Americans feel this is a hot topic and, being the glutton for punishment that I am, I decided to move from the frying pan into the fire and revisit it.In my first article, I dismissed an investment inĀ General MotorsĀ - or any other car company for that matter - as financial suicide. However, I'm going to eat a little crow for breakfast.

The Death of the Combustion Engine

Let's cut to the chase, and I'll drive a stake in the ground right away: The internal combustion engine is dead.

I know that's a bold statement. Perhaps shocking to those among us who have rebuilt one - all the while marveling at its internal workings - or have driven a pocket-rocket powered by one, reveling in the raw power.

But I think time will prove me correct. And oddly enough, it's a car company - General Motors (NYSE: GM) - that's helping to hasten its demise.

It's going to be a slow death, to be sure. After all, gasoline and diesel engines have been around for over 100 years, powering ships, cars, trucks, motorcycles, battle tanks, generators, bulldozers and weed whackers.

Engineers will continue to redesign it, tweak it, shrink it... and attempt to squeeze every last drop of efficiency and power out of it. But it's as good as dead.

General Motors & Plug-in Electric Hybrid Vehicles

Just ask Tony Posawatz, General Motors' PHEV Vehicle Line Manager. It's his responsibility to bring the Chevy Volt into production - and more importantly, into dealers' showrooms - by the end of 2010.

The irony is that as his employer struggles for survival, it's betting the farm - and its future - on a segment of the industry that it all but ignored for nearly a decade: Energy-efficient cars, led by the game-changing Chevrolet Volt.

The Volt represents a paradigm shift in automobile technology. It's the result of desperation - combined with stark reality - that finally overcame business as usual.

Unfortunately for Tony, the odds are stacked against him. It's an almost perfect storm of roadblocks designed to keep PHEVs from gaining traction (no pun intended).

Just consider:

  • Car buyers have been running for the exits... making do with what they currently drive.

  • Dealers are laden with gas-guzzling SUVs that they're having trouble selling regardless of the price.

  • Credit markets - an essential element in the car-buying process for most customers - are still very tight, making it difficult for many would-be car buyers to get a loan.

  • Gas prices have been cut in half in the last six months, wreaking havoc on the economic argument for going green.

  • Battery technology needs to improve to make the economics more viable, regardless of the price of oil.

All these issues aside - and that's not to trivialize them - the Volt will be the very first, widely available car powered by plug-in technology. And while there are other manufacturers not too far behind them, it's clearly a leadership opportunity for GM.

In order for the world's largest car company to make it happen, Tony's engineers, designers and mangers had to think outside the box - way outside. And they had to do it faster than they ever did before.

Lithium Batteries Hold Most Promise for PHEVs & GM

Starting with battery technology: Lithium is the current technology that holds the most promise. And after GM evaluated dozens of potential battery manufacturers, it decided the best solution was to get into the battery business itself.

Why? Because in Tony's words, "When we get a battery pack delivered to the car line, it has to be the absolute best battery pack available anywhere... and it has to work."

So what about the doubting Thomas' and the naysayers that don't think GM will ever be able to pull this off?

Tony's not worried: "Certainly there is the element of gasoline savings associated with the car, but when prospective buyers get in and drive it, they will find it to be such a unique and pleasing experience, we'll hook them right then and there."

And based on the provisions contained in the recent Economic Recovery and Reinvestment Act of 2009, you better get in line fast if you want a tax break for purchasing one of these pump-passing beauties. After any one manufacturer first sells 200,000 PHEVs, the $5,000 individual tax credits will disappear.

Of course, by then, the prices will likely be comparable to their fossil-fuel gulping cousins, and the oil lobbyists will be redeployed schmoozing politicians for battery-technology improvement money, or something else associated with the electric car business.

Can General Motors Be King of the Hill Again?

Bottom-line: GM, if it can survive, could quickly find itself at the top of an automotive heap that will be shedding the internal combustion engine faster than anyone thinks is possible today.

And at $2 a share, investors could find themselves sitting on a 10- or 20-bagger just as quick (and I would be eating crow for the rest of my life).

Here's to American ingenuity and GM's survival. And to the vision of Middle East oil sheiks, scrambling to sell their oil to some other country... for peanuts.

Good investing,

David Fessler

PS. If you'd like to add you opinion to this discussion, please add it to the article comment section.

Today's Investment U Crib Sheet

With all of this talk about plug-in hybrids, it's probably appropriate to give a quick overview of some of the main classifications of PHEVs.

  • Full Hybrid Vehicles describes a vehicle that can move from a braked or stopped point at low rates of speed without using gasoline.
  • Mild Hybrid Vehicles can move from stopped position only if the internal combustion engine is engaged. The electric motor engages to support the gas engine only when extra power is needed. All hybrids, Full and Mild, require use of the gas engine to reach speeds over 25 mph

Mild hybrid systems can broken down into subcategories:

  • The Stop/Start Hybrid system shuts the engine off when it would otherwise idle and restarts it instantly on demand.

  • The Integrated Starter Alternator with Damping (ISAD) Hybrid system allows the electric motor to move the vehicle in addition to providing stop/start capability.

The Integrated Motor Assist (IMA) hybrid system is similar to the ISAD but has a larger electric motor and more electricity, it helps propel the vehicle better.

It's important to understand that these categories aren't black or white, but rather shades of grey. Every hybrid is within the spectrum of both mild and full hybrid, depending upon its battery, weight and resistance.

It's why engine performance is so important to these vehicles and why it's impact "weighs heavily," (pun intended) on its clasification.

Plug-in-Hybrid Vehicles don't actually have to be able to plug in to be called PHEV - although many models do have that ability. The PHEV gives its owners to run on electricity for most of the time, and use gasoline as a back up as the battery charge dwindles or high rates of speed are required.

Again, this is a brief overview. You can find more information at Hybridcars.com and Wikipedia.

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