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TheStreet Open House

Electric Cars Suffer in Epic Faceplant

Stocks in this article: FTM

NEW YORK ( TheStreet) -- Last week I gave a keynote presentation at Batteries 2012, an important global conference for developers and manufacturers of "advanced technology batteries" including nickel cadmium, nickel metal hydride and lithium-ion chemistries.

The mood was not what I'd call ebullient. In fact, it was downright grim as battery developers and manufacturers come to grips with the cruel reality that electric cars, at least those with plugs, don't have any significant market appeal today and they probably won't be adopted at significant scale for at least a decade despite heroic efforts from governments, automakers and advocacy groups of every stripe.

The reason is simple: The economics of using expensive batteries to replace a cheap fuel tank for the dubious luxury of using coal and natural gas as transportation fuel simply don't work for the majority of consumers who expect to recover the premium cost of advanced vehicle technology in their first four years of ownership.

In his presentation, Ted Miller of Ford showed how stabilized gasoline prices needed to be $5.25 a gallon before an HEV (hybrid electric vehicle) could satisfy a four-year payback expectation and $7 a gallon before diesel could make the grade. He didn't bother including cars with plugs in his payback graph because they can't recover their cost premium in four years unless stabilized gas prices are well over $12.50 a gallon.

A more intriguing presentation from Akihito Tanke of Toyota summarized the results of a 200-unit plug-in Prius demonstration in Europe that focused on user behavior rather than technical potential. The demonstration showed that the 23 km electric-only range of the plug-in Prius was adequate for about 65% of trips, but user behavior was the critical factor in overall fuel economy.

In the demonstration, 25% of users plugged in their cars between 3.5 and 7 times a week, 32% plugged in their cars more than 7 times a week, and 43% plugged in their cars fewer than 3.5 times a week, for an overall average of 0.9 times per day. In comparison, users in Japan's Toyota City plug in their cars an average of 2.1 times per day. So while Japanese drivers use an average 2.23 liters of gasoline per 100 km (103 mpg), the demonstration project drivers used an average of 4.33 liters per 100 km (54 mpg). To put those figures into perspective, Toyota advertises an average fuel consumption of 3.9 liters per 100 km (60 mpg) for the newest plug-free Prius.

I guess there's some merit to the theory that it works better if you plug it in.

The most interesting evolutionary difference between the presentations I watched this year and those common a few years ago was the classification of HEVs. In the days of heady plug-in exuberance, HEVs were lumped in with internal combustion engines and the gee-whiz growth graphs focused solely on cars with plugs. Today, most presenters include HEVs in the electric drive category to camouflage the dismal market outlook for plug-ins. While most graphs still predict electric drive penetration rates of 6% to 10% by 2020, only a small fraction of those cars will have plugs, and the global battery market will continue to be dominated by lead-acid chemistry, just as it has been for decades.

Some of my most interesting takeaways from the conference came from one-on-one discussions with executives who explained their visions for the short- to medium-term future. While major automakers will continue developing hybrid and plug-in vehicles for niche markets, their primary focus over the next decade will be fully implementing proven efficiency technologies like stop-start idle elimination, weight reduction and improved engines and transmissions, since those are technologies customers are willing to pay for.

Materials manufacturers that were gung-ho for lithium-ion cathode materials a couple years ago are refocusing on better NiMH batteries because of their exemplary track record for safety and performance in HEVs from Toyota and others. Even major lithium-ion battery manufacturers are rethinking their strategies and trying to identify non-automotive markets where their products can demonstrate a meaningful cost-benefit advantage over conventional and advanced lead-acid batteries.

For the past four years I've consistently told readers that manufactured energy storage devices are a coming investment mega-trend that will endure for decades. My rationale is simple. Energy storage is a fundamental enabling technology for more efficient transportation, and for abating the dreadful intermittency pollution that wind and solar power force into an antiquated power grid that values stability and reliability above all.

I've also cautioned that the energy-storage industry is still in its infancy and, like any infant, the industry must learn to stand before it can walk, and learn to walk before it can run. Electric cars were an arrogant attempt to circumvent the evolutionary process. The result has been a wholly predictable faceplant of epic proportions. Today's electric vehicles are not consumer products by any stretch of the imagination. They're experimental vehicles and their buyers are basically bipedal lab rats who are willing to pay a huge premium for the privilege of participating in the grand experiment. I admire their dedication to the dream, but question the reasonableness of using taxpayer money to build fairy castles in the air.

Every industrial revolution arose from a new technology that proved its merit in a free market and then went on to change the world. In some cases, government initiatives accelerated the pace of developments that would have happened in any event, but the results have always been catastrophic when government tried to force uneconomic technology into the market.

In the final analysis, business models that can't survive without government subsidies can't thrive with them. They invariably turn into fiscal black holes that need "just a little more help to make it over the hump."

In related news, car Web site Jalopnik reported that 16 Fisker Karmas were caught in the Hurricane Sandy storm surge at a port in New Jersey and a dozen of them caught fire and burned to the ground.

John Petersen, a lawyer and CPA, has specialized in advising companies on corporate finance and business development for more than 30 years. He writes the deathless prose and dire warnings investors read in offering documents and SEC reports. While Petersen has served as a board member or executive officer for a handful of public companies, the bulk of his work is behind the scenes where precision and a passion for detail are essential.

Petersen's investing style is that of "elephant hunter," and nothing grabs his attention like a "multi-bagger" in the rough. His investing time horizon is two to four years. On the long side, Petersen looks for blood in the streets and stock prices that have been beaten down to unconscionably low levels. On the short side, he seeks out high-profile companies that trade at unsustainable levels while hype-intoxicated executives make the same tactical mistakes he's suffered through with clients. Petersen's sector focus is batteries and efficient transportation because he has almost a decade of experience in the industry, including a three-year stint as board chairman of an R&D-stage battery-technology developer. He's convinced these sectors are emerging investment mega-trends.

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