Electric Cars: Opportunity of Which Decade?
Hardly a day passes without some talking head breathlessly describing electric vehicles as the opportunity of the decade. The fine point most investors miss, however, is that the decade they're describing won't begin until 2020 and for the next seven to ten years electric vehicle manufacturers like Tesla Motors (TSLA) and lithium-ion battery manufacturers like Ener1 (HEV) and A123 Systems (AONE) will hemorrhage cash as they try to traverse the trough of disillusionment that runs through the cruel black heart of the valley of death.
The following graph is a stylized view of the valley of death from Osawa and Miyazaki with a red overlay that highlights the trough of disillusionment. This is the most difficult period in the life of a product when its manufacturer must identify and eliminate any defects, optimize manufacturing processes, minimize production costs, establish a market presence and earn market share. For big-ticket items like cars, the failures and mediocre performers outnumber successes by a wide margin.
Today we're witnessing the first product launches for the Tesla Roadster, the GM Volt and the Nissan Leaf. Despite their gee-whiz glamor and sex appeal, the crushing economic reality is that it takes $46 of incremental capital investment to save a gallon of gasoline per year with a plug-in while it only takes $24 of incremental capital investment to save the same gallon of gasoline per year with an HEV. Under those circumstances, the tyrannical laws of economic gravity dictate that the time between the "Product launch" and "Success as a new product" will be five to seven years under optimal conditions and a decade or longer under likely conditions. Let's be honest, an 8-year payback on an HEV premium is nothing to write home about but a 15-year payback on a plug-in vehicle premium is absolutely atrocious.
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