Friday, December 12, 2008

California Leading the Revolution...again?

It's been no secret, we here in Cali love to flex our green credentials. Even our republican governator can get behind strict government regulation to stop the bad stuff from warming us up. But many have called the latest ruling by our state Air Resources Board as going too far.

Which is it? Give a comment, let us know.

Also, what about Europe?

Saturday, December 6, 2008

Is what's good for GM good for the revolution?

Let's continue with cars, since they seem to be in the news and in the air, so to speak, so much these days.

We've already heard the old version of the phrase; and according to many prominent economists, it still holds true, as any failure by the big three would directly or indirectly touch 2.5 million jobs. Ouch. But let's try to think long term and long green.

Give the big three a chance.

Let's not forget that despite having a pitiful market cap, the big three have a powerful reach into engineering, marketing and manufacturing muscle. It could be easily argued that had the big three had enough insight and kaizen, they would have been much better positioned to provide the world's best and most fuel efficient cars. Think about it: the big three have now been in the business of transportation for almost a century, they have some great thinkers, and they have (had) the cash to spend on significant R&D. Sounds like the right ingredients for an alternative energy revolution to me. But what happened?

As any successful VC partner will tell you, a company is only as good as the people who lead it. Clearly, this is where the big three had the most trouble. Short terms profits and complacency were emphasized despite having almost three decades of significant market share taken away by leaner competitrors. Sure, there have been turn around plans, and ways forward, and private equity leveraged takeovers, but we now see - it simply did not work. The blame lies squarely in the executive suite. While shareholders have been hurt the worst, executives continued to receive million dollar salaries and bonuses while their businesses lost billions. Thank goodness I don't own any of that toxic stock.

But now we have to deal with reality: while Ford stands a little bit healthier, we might not be talking about a big three in Detroit for much longer. I do not worry about their failure because my family depended on a middle class lifestyle back in the day, or about the millions of jobs tied to the auto industry, rather, I worry that an extensive manufacturing process, great intellectual capital, and years industry know-how will be lost with a failure. This is sad because all the significant work put into creating these bohemoths will be simply lost instead of having it focused on the revolution. So I say let's give them a chance. Not necessarily from the government, but from someone. I believe in the great American company as I believe in the great American dream. But as we have seen with this outgoing administration, incompetency at the helm will drive away dreams faster than a Tesla roadster. And so I hope against hopes that all is not lost.

But would I give a multibillion dollar loan to GM if I had the cash? Hell no! Not with those clowns still leading.

Monday, December 1, 2008

Due Diligence: Is It time to Call the Tow Truck on Tesla Motors?

Could the world's favorite clean car company be sputtering to an end? In continuing with my theme of alternative energy for transportation, I will perform a quick "due diligence" on Tesla Motors.

Tesla Motors is in trouble; or so it appears. They are now on to their fourth CEO, Elon Musk, since its founding in 2003. Perhaps even more troubling is the fact that it claims it needs $100M more in financing in order to release its model-S sedan which is promised to turn the company into an automotive powerhouse by offering an (more) affordable vehicle that will appeal to middle America in both initial and lifetime cost. After taking in $146M in financing already, having a revolving door to the executive sweet, and firing a number of employees, there remain a lot of doubts as to whether this pre-crowned cleantech king will rightfully take its place among Silicon Valley greats.

Recession-term demand for Tesla's cars might actually be pretty solid given the car's position among high-priced automobiles. For a quick comparison, Ferrari sales are down just 3% through October, Maserati is up 10% and Rolls Royce is up 32%. The industry as a whole is down 14% through the same time period. If Tesla can successfully market to the newly rich in emerging economies, it could easily reach these anti-recession figures as well.

Musk has gone on record saying that gas prices are bound to hit $7 a gallon and soon. That might be a bit aggressive, but he has the general idea correct. The real question is how long will it take to reach $7 a gallon? Even Goldman's oil hawk Arjun Murti has said that $40 per barrel in the near term is likely. However, this 'under $2 a gallon' stuff will be over at the quickest sign of an end to the recession. Nymex futures currently have light crude at $61 at the end of 2009, $70 in December 2010, peaking at $94 a barrel in 2015. These figures are bound to rise as prices currently reflect recession demand; however, they serve as a good guage reminder that in the short term, Americans will probably be more or less content with prices at the pump. However, if demand rises again (as it will) and supply is constrained (already is) at the same time as Tesla releases its Model S and Blue Star, there could be some fresh demand from consumers looking to escape pain at the pump.

Along with Tesla's recent woes, was its announcement that the model S would not be released until one year after the Chevy Volt's release in 2010. With GM placing all its bets on the Volt's release, the company is likely to come out firing, aiming to gain traction with green-minded consumers in Tesla's price range (the Volt is expected to retail at just over $40K while the Model S is expected to cost around $60K). Add to that Carlos Gohn's commitment to introduce an electric vehicle by 2010 and mass-produce by 2012, and Tesla no longer looks like a market leader in electric vehicles. Given that we know that the Volt will still partially rely on a combustion engine and Nissan's "Save-the-world-from-exploding" vehicle is only talk right now, Tesla has a real chance to win based on a superior technology.

The EPA currently lists 84 two-seat cars in its database. These cars average 16.1MPG in the city and 23.1 MPG on the highway. Talk about green competitive advantage for the roadster. In the mid-size category, the EPA has 141 models on the books averaging 18.2MPG in the city and 25.9MPG on the highway. A more crowded field for the Model S and still a great gas advantage. For the Blue Star we have 126 models averaging 19.0 and 26.6 MPG respectively. Again, a tough crowd, but no one comes close to touching Tesla's $0.02 per mile efficiency.

Product price, however, may again have the final say in who wins in this market. Based on manufacturing and technology developments, the preliminary prices for these vehicles are sure to change. Tesla should concentrate on making sure that it can generate significant cash from the model S in order to develop its planned "Blue Star" (actually affordable) vehicle that is set to release in 2012 at a price tag of around $30K. Given that the current roadster apparently "just gained profitability," the $30K price in 2012 would mean lowering similar manufacturing costs by over 27% per year to achieve profitability for the Blue Star. Even the Model S' goal of a $60K car would mean a reduction of 18% per year in manufacturing costs. These cost reductions simply cannot be gained by falling technology prices. More on this later.

There is little question about market demand for the current roadster. Every hip 50-something VC partner in the Valley absolutely has to have one. With less than 100 deliveries and a fan website alive and thriving, Tesla passes all check marks with regards to customer satisfaction, except, perhaps forcing extremely rich to wait for something for the first time in their lives.

The roadster is sleek (looks like a Lotus), fast (0-60mph in 4 seconds), and green (as if electric wasn't already that much better than combustion, Musk is apparently planning a solar product exclusively designed for the roadster that will deliver 50 zero-emmision miles at every top-up).

The concern remains with Tesla's next products. The Model S is supposed to compete with BMW's 5-Series and Audi's A6. There is little question that Tesla will win again the fast and green department's here, but the company will now come up against very loyal customers to BMW and Audi. Tesla will have to pay very close attention a-la-Toyota in order to steal away any kind of share from these companies. The Blue Star will likely see even more difficulty in finding customer traction in an even more crowded field.

With the manufacturing cost concerns I outlined earlier, there is clearly a lot riding on the new manufacturing center in San Jose. The center will have to serve as a fast and lean focal point for assembly where parts and labor flow together like Wal-Mart (or like clockwork if you prefer). Technology prices will not come down sufficiently on there own for Tesla to begin making a good profit on every vehicle, so the process will have to be smooth and quick as well as realize a number of effiency gains. It will also have to be scalable. Tesla's current pace is putting it on track to deliver a million cars by about 2573. All joking aside, it is now clear how critical operations will be for this stage. Musk has the proven leadership skills (Paypal, SpaceX, etc.), let's hope that he has (or kept) the right people around him to execute this critical manufacturing facility in San Jose.

But the facility is still not off the ground! There is still not enough financing. For the financing, Tesla is waiting for a government loan. For the government loan to pass, there has to be an environemental buy-off from the guys with the check. Who was it that said government was bad at doing business?? Oh well, the point is, it's not good to wait. The government loan will not cover 100% of the financing Tesla needs to kick out the Model S in 2011. 90% of focus should be on making sure this happens. 10% should be on growing the newly profitable drive-train business. This line will help ease creditors/investors minds about the cash this company generate today.

In the end, we should not forget about the original GM EV1, electric car gone-by of the late 90s. It was estimated to cost GM about $1B to develop when all was said and done. And that was with an existing R&D and manufacturing infrastructure in place. At about 1/4 of that development cost, Tesla seems to be doing a lot better and producing much better technology than any other, all while doing the whole thing from scratch. But this next two years is critical. For the Tesla models to catch on, they absolutely must be competitive with all other vehicles and customers. Otherwise, the company will never truly reach its goal of creating a global car company and someone will again have to ask, who killed the Tesla??

Note: All info for this entry was gathered and analyzed via publicly available information on the web.

China leading the revolution?

China, in showing that it has the ganas to lead the revolution, is about to enact a fuel tax reform which includes an increased gasoline tax for refiners. Economists in China argue that the measure will ultimately benefit consumers as the state may simultaneously lower state-controlled gasoline prices which now stand much higher than current international standards.

Bravo China.

Although there are many different aspects to the Chinese gasoline market (including price controls on pretty much everything!), the government is showing leadership in this arena. Economists in the US and elsewhere have long argued that there is a de facto subsidy on gasoline because of its many negative externalities which are hardly covered by existing gas taxes. Higher taxes could help close this gap while also reducing demand for a proven green house gas emitter.

Furthermore, lower gasoline prices worldwide mean that governments will have a narrow window to raise gasoline taxes while not being burdened by protests that were so apparent just seven months ago and before prices inevitably sky rocket yet again. Particular innovation is shown by the Chinese by implementing higher taxes on the refining process - rather than at the pump - thereby forcing the industry to bare the brunt of the tax increase before they reach the consumer. This move in the United States or elsewhere could mean that refiners and distributors are forced to accept lower margins in order to compete; hence, saving the consumer the full brunt of a tax hike.

Although this kind of thinking is gaining traction worldwide, the usual suspects are taking the first steps, leaving the US and others to continue polluting and continue under-funding our national transportation infrastructure while giving a "sigh of relief" at gas prices. Let's move fast, America. Pretty much all transportation-related alternative energy solutions have not yet met parity with the economics of middle class families. Moving the gas curve to the right will help as Silicon Valley and others continue to move the curve left.

Hat Tip: Green Inc.


Welcome to the alternative energy revolution. Here on this site, I will reflect and analyze the revolution as it evolves in front of us. Taking a "bird's eye view" approach, I will seek to identify trends from an economics/business perspective because - let's face it - if the revolution does not make anyone any money, it will simply not occur.

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