In The Battle For The Post-Oil Auto, Big Investors Are Shooting The Moon

Edward Niedermeyer
by Edward Niedermeyer

As Bertel pointed out earlier today, peak oil is here: the graph above is not from some fly-by-night EV firm, but Toyota, an auto industry giant. What years of environmental and security arguments failed to communicate, economics is now explaining with little difficulty. Namely, that demand for oil is growing faster than supply, forcing developed economies to look beyond oil for future growth. And, as you might expect from a conservative player in a conservative industry, Toyota argues that the solution to this growing disconnect is a portfolio of drivetrain technologies. But what if, instead of trying to adapt an existing business model to the new oil reality, you built a new business model from the ground up? That’s exactly what Project Better Place is trying to do, and the contrast between its approach and that of Toyota is fascinating to anyone interested in the future of the automobile.

Toyota’s approach to a world of constrained oil supply in the incremental manner that one would expect from a giant company selling millions of cars each year. In the words of Satoshi Ogiso

To control this gap, we must go multi track. We must improve gasoline and diesel engines. We must increase the number of hybrid models. We must produce the plug-in hybrid. We must develop city commuter electric vehicles. We already started small production of fuel cell vehicles. We must do all these improvements at the same time.

That approach seeks to serve the entire global marketplace for cars, and places a huge demand on R&D efforts, requiring a company of Toyota’s size to execute the strategy. Better Place’s approach on the other hand couldn’t be more different. Rather than taking a multi-technology approach, BP is focused on one technology: EVs. And rather than building cars itself, BP is focused on providing the services, infrastructure and grid management tools to make EVs viable for more than “city commuter vehicles.” In short, whereas Toyota seeks to evolve, BP is attempting to create the circumstances under which EVs are the natural choice of technology for all automakers.

These vastly different approaches to the same problem have, at their cores, a conflict over philosophy. Toyota, along with the rest of the car industry, is trying to maintain the market for cars as best it can, while slowly introducing new technologies at higher prices which will then trickle down throughout the lineup. As conditions evolve, the market will demand different technologies from Toyota’s toolbox in different amounts. On the other hand, markets are notoriously bad at foreseeing and managing energy price spikes, as witnessed by the crazy segment fluctuations during and after the Summer of 2008. In contrast, rather than promising a steady evolution towards oil independence, BP offers the opportunity for a quantum leap. Its basic mechanism is the government, rather than markets, which can better prepare a nation for the future rather than relying on often-painful,inefficient market mechanisms. And with demand unlikely to drop below supply any time soon, Better Place is the only option for governments with enough political consensus to preemptively force themselves through petroleum-based transport withdrawals.

But just because Better Place is more fundamentally dependent on government assistance than its alternatives in the auto business does not mean it’s another Solyndra. In fact, Better Place has raised some $750m in equity financing, including a $200m round that was announced at the end of last week. Its backers now include, HSBC, Vantage Point, Lazard, Morgan Stanley, UBS, GE, and Israel Corp… none of which are blue-eyed dreamers. And their fiduciary reasons for backing BP appear to be well-grounded: although the company is “pre-revenue,” its valuation (post money valuation on a fully diluted basis) is now $2.25b. That’s an 8x increase for the first round of investors, who would have been hard-pressed to find a stronger return over the 2007-2011 period. So, where does all this value come from if there are no revenues yet? According to the firm’s communications director, Joe Paluska points to

the uniqueness of our model (i.e., investor confidence that we can unlock a hyper growth category for affordable electric cars) and the major trend lines of oil forecast to go up and battery prices continuing to decline with the delta being our operating margin.

Better Place also has another secret weapon that’s sure to attract investors: its CEO, Shai Agassi. The former software maven who created Better Place after being passed over for CEO of SAP, Agassi is one of those rare people who can communicate an idea as complex as Better Place’s network of battery swap stations, its decoupling of the EV and its battery, its under-covered grid management capabilities, and the macroeconomic backdrop that he insists will make it all work. Having met a number of brilliant and intimidating luminaries of the auto industry, it’s safe to say that none of them made quite the impact on me that Agassi did when I met with him earlier this fall. Between the sheer scope of his ideas, and his flinty, intellectual-street-fighter demeanor, it’s safe to say that Agassi is the closest to a truly historical figure that I’ve met in my years covering the auto business. And with the auto industry stuck in the model of slow technological evolution exemplified by Toyota, Agassi embraces the revolutionary approach that a clean break from the past is not only possible, but necessary.

When I ask Agassi if he wanted to “destroy the auto industry,” a charge often leveled against him by industry executives, he smiles and answers with another question:

Did Jeff Bezos want to destroy the publishing industry? Because that’s what he did. But he did it because he saw the potential for an entirely new business model with the Kindle. In effect, the world’s biggest bookseller killed off its existing business, selling paper books, in order to create an entirely new business in digital media.

No wonder then, that Better Place faces such resistance from the established forces in the auto industry, despite the market’s clear optimism for his approach. Thus far, only Renault has signed on to partner with BP; elsewhere, Agassi says the industry is deeply resistant to the idea that infrastructure can make electric cars viable for the majority of the auto market. He sketches a quick graph showing total cost of ownership over 300,000 miles: the cost of a car, gas and maintenance on one side, and the cost of a car, several batteries and electricity on the other. With battery prices near $500/kWh and headed downwards while gas heads upwards, he points to the difference and says

I don’t want to destroy the car industry, I want to destroy the oil industry. I want to share this money with the car companies. When was the last time they got a check from the oil companies?

It’s a question that’s as provocative as Better Place’s business plan, and the fact that it doesn’t convince the automakers shows how deeply conservative the industry is. But then, why get in bed with a plan that aims to kill off your entire gas-powered business when Better Place can’t even prove that there’s a market for their model?

That’s the challenge Better Place faces right now. Its first networks, in Israel and Denmark, are being built up as we speak, ahead of a slow rollout next year of the Project’s services and vehicles. And says Agassi, the first year will be slow and there will be problems. Like what kind of problems? Agassi smirks slightly and says

We’re going to find out. Imagine the first guys to install gas stations… you think they didn’t run into a few unexpected problems?

But it seems that Better Place’s problems thus far have little to do with implementation and everything to do with the fact that big ideas are scary and draw knee-jerk reactions. For example, take a recent Wall Street Journal [sub] piece which cites the concerns of one Moni Bar, chief executive of Budget Rental Cars Israel-Domicar Ltd. For example:

Mr. Bar said that he fears vehicles with switchable batteries might lose as much as 70% of their original value in four years

An interesting complaint, but one one that seems borne of paranoia rather than reality. After all, one of Better Place’s key advantages is that you don’t buy an EV battery, but just the car. The battery is owned by BP, which you then buy a mileage plan from, allowing you to swap batteries at will and insulate yourself from the 70%-range depreciation that will afflict EVs where you do have to buy the battery. Though BP does not have a buy-back scheme to maintain resale values, it insists that the 70% depreciation number is way off. And with its new Fluence EVs selling for less than the Mazda3 (Israel’s most popular car) and offering a 20% improvement in Total Cost of Ownership (including gas and maintenance), it’s not too surprising that 400 of Israel’s largest corporate fleet owners have signed up to switch their fleets over to Better Place (the majority of new car sales in Israel are made through fleets). As Agassi puts it

We don’t have a demand issue, we have a rollout issue. The first year we are going to take care to have a carefully controlled rollout.

Getting that rollout right is the major challenge for better place, a it is not evolving an existing product to changing times, but is rather attempting to change entire parts of the world all at once. Today it’s Israel and Denmark, next it will be Australia (which Agassi describes as “two and a half Israels, linked by a freeway). Perhaps someday it will be the San Francisco Bay Area, a market Agassi also compares to Israel. Like everyone else, Better Place needs to build scale in order to bring prices down to the point where unlimited-range, limited-depreciation EVs can compete on pure economics; unlike everyone else, BP can be patient while it rolls out its first networks. After all, it doesn’t need to spend huge amounts researching multiple solutions… it just needs for gas prices to march ever upward and battery prices to keep dropping. And when the next big gas price spike arrives, you can bet that a number of governments with overnight mandates to solve, not “work towards solving” oil dependence, will be calling up Agassi. After all, if you want to “shoot the moon” in the race free private mobility from oil dependence, Better Place seems to be the only option out there.

Edward Niedermeyer
Edward Niedermeyer

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  • Fred schumacher Fred schumacher on Nov 15, 2011

    In The Collapse of Complex Societies, a case study of three civilizations (Imperial Rome, Lowland Maya, and Gran Chaco), Joseph Tainter emphasizes that when complex societies can no longer marshall sufficient sources to drive them, they begin to collapse. They literally run out of energy. Hoe societies run on human power. Plow societies ran on animal, wind, and water power, until the 19th century, when coal power was truly harnessed. The 20th century belonged to oil. The 21st century needs another paradigm shift in power, one that relies on sustainability. Globalization will not go away. It began with the development of sailing ships that could go upwind. The freak effects of WW II, which destroyed nearly all of the developed world except for isolated America, created an unsustainable situation for the U.S., but it brought most of its population up into the middle class. It would seem obvious that our present trajectory is unsustainable. Without energy, our lifestyle is unsustainable. Energy efficiency and development of sustainable energy and transportation should be the prime task of the 21st century, but we have a deep inability to think and act systematically. We need systems change, but we peck around the edges in an ineffective fashion. In this country, we are stuck with dysfunctional politics and the best political system that the 18th century could provide.

  • Davidrose Davidrose on Nov 17, 2011

    "Operating a battery recharge station would require a lot of space for the batteries, plus a labor pool trained to deal with the batteries. That cost structure pretty much torpedoes this before they’ve even started". Actually you do not need a lot of space for the batteries, the completed stations in Israel all have a relative small underground storage area, where depleted batteries undergo cooling and recharging, and filled batteries await the cars for switching. The labor pool for the stations is pretty much non-existent as everything is done roboticly. Any technical service/repair will not be provided by station service personnel (one person per station), cluster manager and regional managers - all customer service oriented), but rather by existing Renault service personnel who are undergoing training, therefore avoiding the need to inflate costs, the labor force is already in place.

  • Lou_BC Ironic, the Honda Ridgeline, a truck that every truck guy loves to hate is in 6th place.
  • 28-Cars-Later I keep forgetting I own it, but the space look on the ext cab reminds me of my 'Yota pickup of the same model year. I'm pretty sure there is some vintage of Hilux which features the same looking ext cab window (maybe '88?) its a shame these things are mostly gone and when available are $1,000,000,000 [INSERT CURRENT CURRENCY].
  • Sayahh Imagine if Ford had Toyota design and build a Mustang engine. It will last over 300k miles! (Skip turbo and make it naturally aspirated.) Maybe Yamaha will help tune it...
  • Sobhuza Trooper Isuzu's crime was to build some damn good trucks.Shame on them.
  • El scotto Listen, unless you were Lord Headly-Stempmoor or such when you got off the off the boat, boot in Canada, you got the short end of the stick. People got on the boat, these days a plane, to escape famine, becoming cannon fodder in yet another stupid war, or the government thought it was A-OK to let soldiers kill you. Juneteenth is just a way to right one of the more bad ideas in the American experiment. Instead we have commenters who were buying tater chips and diet soda at Wal-Mart and got all butt-hurt because they heard someone who wasn't speaking English. I'm going to go fix a couple of frankfurters with salsa and guacamole and wash them down with a lager or three