Wednesday, June 30, 2010

A Tale Of Two EV Companies

From CTV

A tale of two EV companies

Jeremy Cato, Special to

Date: Wednesday Jun. 30, 2010 6:21 PM ET

This is a tale of two electric vehicle companies, one profitable the other not.

This week EV start-up Tesla Motors Inc., came to the market with an Initial Public Offering -- the first U.S. car maker to do a public stock offering in 54 years – and almost instantly the shares surged 41 per cent to $24.89 a share (all figures in U.S. dollars).

Tesla raised $226 million, which will be used to pay for factories and possible acquisitions, the company's SEC (Securities and Exchange Commission) filing showed. The money will also help launch the Model S, a luxury electric sedan it planned for 2012 at a price starting at $57,400. The goal is to sell 20,000 Model S cars a year.

Tesla had revenue of $112 million last year, but has burned through $230.5 million in cash and posted losses in every quarter since it was founded in July 2003. So it's a purely speculative investment.

So far Tesla has sold 1,063 Roadsters (through March) at $109,000. The business has been surviving on a $465 million U.S. Department of Energy loan and by the good graces of generous celebrity types and the obscenely idle rich who have the money to throw at a Roadster that runs on a complex array of cell phone batteries.

The medium-term business plan for Tesla depends heavily on various government tax incentives for EV buyers in both the U.S. and Canada. Beware of any business that depends on government handouts for its success.

As for the car itself, I have driven the Roadster and while it's fast and fun in a roller-coaster kind of way, it is also crude as a driving machine. Obviously the EV technology is interesting, but the car overall is a rough jumble of hard plastic, jerky steering and uncomfortable seats. Only the truly committed or the obviously frivolous would by this EV – and even then only as a novelty.

Which brings us to Ford Motor Co., the last American car company before Tesla to do an IPO. That was in 1956.

Yesterday (Tuesday) Ford took a beating in the markets. Its shares fell 55 cents, or 5.3 per cent, to $9.88 and they went as low as $9.75. The shares have recovered a bit as I write this, likely on news that the company is reducing its debt load by about $4 billion.

Ford, unlike Tesla, is profitable and CEO Alan Mulally says the company will be "solidly profitable" in the coming fiscal year. In fact, Ford posted $2.7 billion in net income last year and reported $2.1 billion in net income for the first quarter. Ford's U.S. sales are up 30 per cent this year, and they're up 26 per cent in Canada.

Which brings us to the EV part of the story. Unlike Tesla, Ford's plan is to introduce not one but five new "electrified" vehicles over the next three years: a Transit Connect Electric commercial van, a Ford Focus electric vehicle, two new gasoline-electric hybrids and a plug-in hybrid.

Nancy Gioia, Ford's Director of Global Electrification, says that by 2020, Ford expects somewhere between 10-25 per cent of the new vehicle fleet will be electrified – hybrids, plug-in hybrids, full EVs.

"Today in North America you're talking about a two per cent rate, so that's an enormous shift," she says.

Gioia says Ford believes 75 per cent of electrified vehicles would be full hybrids. Plug-in hybrids will be about 20-25 per cent, and then the remainder will be battery electric like the Model S and the electric Transit Connect.

"The reason is hybrids are the most affordable," she says. "They have the smallest battery and don't require the customer to have access to a plug. They work very well with the other efficiencies that we have coming and they're not range-limited.

Ford thinks full battery electric cars work very well in extremely dense urban areas, but nowhere else. Even at that, they require some new infrastructure, community planning and entirely different driver mindset.

"We also feel quite strongly that there still needs to be significant progress on the battery cell itself -- on its energy density, its temperature performance, the number of charge/discharge cycles in its life, and its costs. The battery cost today simply doesn't provide a rational payback," she says, noting that in the medium term, battery electric cars will not account for about 1.5 per cent of the market.

So an unprofitable Tesla, with one money-losing Roadster and the promise of a $57,400 EV sedan sold in small volumes, is this week the darling of investors. They are gamblers, not investors.

Meanwhile, a profitable Ford, with a range of "electrification" expertise and a realistic vision for "green" transportation, sees its stock hammered even as Tesla's IPO was soaring.

If electrification is a key part of the auto industry's future, which company is the better buy?


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