Plug-In Electric Vehicles: In Search of the Mass-Produced Hybrid

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

Plug-In Electric Vehicles: In Search of the Mass-Produced Hybrid

by David Fessler, Advisory Panelist

Saturday, June 27, 2009: Issue #1028

We found out that Tesla Motors joined the growing list of automakers receiving federal funds this week. It locked up $465 million to develop and produce battery-powered vehicles.

But as we know too well, large government checks are hardly ever the answer to our problems. And one of the biggest right now is that we're seeing gas prices climb slowly higher.

While $147-a-barrel oil served as a wake-up call for the car-driving consumer, it was also the catalyst that shifted the plug-in electric vehicles industry into high gear (pun intended).

I've talked about Plug-in Hybrid Electric Vehicles (PHEVs) before, and I've heard a lot of reader comments on the hybrids on the market right now. So let's take a look at some of the major car companies' efforts so far, as well as what lies ahead for consumers and, more importantly, for investors...

GM's Escalade - An Implausible Hybrid SUV

Starting with the ridiculous, GM has a hybrid version of the Cadillac Escalade that seats eight...

  • While a miniscule market for large SUVs still exists, these $70,350 base-price behemoths aren't exactly flying off dealer lots in this economy.

  • Even if you're willing to choke down the expensive sticker price, the hybrid version of the Escalade gets a mere 21 MPG on the highway... and that's only 10% better than its non-hybrid brethren (19 MPG).

  • Incidentally, that difference amounts to a paltry $1,506 savings in fuel over the life of the vehicle, assuming a vehicle life of 100,000 miles and $3.00/gallon gas.

Compare that to the new five-passenger Honda Insight that gets 50-plus MPG and comes with a $19,000 price tag, making it the most affordable high-mileage hybrid on the market.

Gasoline-Electric Hybrid Cars: Don't Believe The Hype

While gasoline-electric hybrids are a small improvement over straight internal combustion engine-based vehicles, they've been over-hyped by the media and the car manufacturers.

Sadly, many consumers have the perception that gasoline-electric hybrids are the answer to our oil import problem. Getting a feeling of deja vu?

You should be: Corn-based ethanol was going to seriously put a dent in our oil imports, too. Of course, it's turned into one of the biggest government-sponsored boondoggles of the 21st century.

Like all other large, successful, problem-solving exercises, this one is going to be solved by private industry. The government's role will (hopefully) be limited to providing tax incentives for the manufacturers, as well as similar incentives for the buying public. The wheels are already in motion on both fronts.

Let me make a bold prediction: In the next 10 years, gasoline-electric hybrids will go the way of their fossil-fuel predecessors. The automobile market is rapidly moving to all-electric vehicles, and it's going to happen faster than anyone can possibly imagine. Here's why...

  • The problem with the two gasoline-electric hybrid vehicles mentioned at the beginning of this article - and all hybrids, for that matter - is that they are just that: hybrids. You still have to visit the gas station, just not quite as often. (Although with the Escalade, you'd be hard-pressed to notice the difference in your wallet.)

  • There's only one reason hybrids have been so popular the past few years: The federal government - and public pressure - has forced the car companies to come up with something to give the perception of reducing our oil imports. Voila: the $70,000, two MPG-less Escalade hybrid.

The problem is that the amount of premium paid for these vehicles as a whole negates the miniscule benefit derived by the slightly better mileage. Clearly a better solution is needed.

Plug-In Electric Vehicles: Passing By the Pump... Permanently

Fortunately, the automobile industry is hard at work on one. Coming right behind the hybrids are PHEVs. These all-electric vehicles have no internal combustion engine. Instead, they sport a large bank of batteries that store power and feed it to an electric motor that powers the car.

Now if you're thinking it will take you forever to accelerate to highway speed, think again:

  • Electric motors have fantastic torque characteristics that translate into neck-snapping acceleration when they're integrated into a vehicle's drive train.

  • Electric vehicles will ultimately out-accelerate their fossil-fuel predecessors, and leave nothing in the atmosphere in the process.

  • The driving public won't have any trouble making the transition from their old gas-guzzling clunkers.

PHEVs have other advantages as well. Braking can actually be accomplished in part by turning the motor into a generator, and dumping the generated power into the battery bank.

This technique - referred to as dynamic braking - puts a load or drag on the motor/generator and slows down the vehicle. Diesel/electric locomotives have used dynamic braking for years to help to slow down freight and passenger trains.

PHEVs - A Potential Game-Changing Technology

While PHEVs are a potential game-changing technology, efforts up until this point have been essentially relegated to the automakers' development labs and display stands at auto shows.

All that's about to change:

  • Nissan (Nasdaq: NSANY) just announced that it will be mass-producing PHEVs for sale in 2012. That's a few short years away.

  • Mitsubishi (NYSE: MTU) has unveiled a PHEV, but it comes with a $48,000 price tag.

  • Of course, the newly restructured GM introduced the Chevy Volt with much fanfare. It remains to be seen, however, if GM can pull it off - and how much the restructuring process will affect its introduction schedule.

  • And there are other PHEVs that will be announced over the coming months, as no major manufacturer wants to be left out of the game.

The bottom line is that car buyers in the next few years will have a number of PHEVs to choose from, with prices starting in the $20,000 range. This puts them squarely in the high-volume, mass-produced car market.

Your choices as an investor are directly related to your appetite for risk. At the high end of the risk scale, we have the restructured General Motors. At the low end, Nissan, Ford and perhaps Mitsubishi represent less risky ways to play a surge in PHEV sales.

To put it in perspective, however, any investment with PHEVs as a focus should be viewed with a three- to five-year time-frame. It will take at least that long for the sector to flesh out the winners from the losers.

For investors, it represents potential long-term gains that could rival anything the auto sector has produced to date. I'll be following the space on a regular basis, and will report on all of the interesting developments right here.

Good investing,

David Fessler

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