Buffett should Buy this Company

[Myth465]

I really like the CEO, and would love to buy stock in this company. I think the Israel move will be a success.

 

http://www.charlierose.com/view/content/11323

 

[Guest ValueCarl]

Myth, this was really exciting! I became a little confused with the way that they're going to "subsidize" the battery portion of this venture, however. Seemed like Charlie Rose might have been straining a tad too, although I could be wrong.

 

Do you have a handle on how this whole business proposition works to the consumer? tia!

 

Here's their website showing the battery depots with demonstrations on the switching of batteries which occurs.

 

http://www.betterplace.com/the-opportunity   

[Myth465]

I didnt follow that as well. It seems like they will own the battery and you the car. My guess is the rates for battery power will be only slightly cheaper then oil / petrol power.

 

The guy is a genius. I have never seen such a clear understanding of the consumer before. I would short GM, I dont think the Volt will work because he is right. The average car is 8 years old and very few people buy $40k cars. You need an electric car thats faster and cheaper then a gas one. He gets it.

 

What idiot thought it was a good idea to sell something for 1.5x its competition and then you make it up in savings overtime. When has that worked with the American consumer? If I had to guess the cars costs $24,000. He takes the costs for the battery on, bringing the costs down to $16,000. He then charges you for the fuel and collects the spread. The fuel is much cheaper then gas, but you only pay slightly cheaper and he gets the difference overtime. He also captures all improvements in the battery overtime increasing his ROIC.

 

Thats what I picked up.

[Guest ValueCarl]

Nice job, Myth, I think you're spot onto their business proposition. The young man must do a better job simplifying his message about the "consumer proposition,"  as you did. Basically, they're an "electric battery recharging depot" who makes money on the "energy spread" for operating the electric vehicles, as well as the "delta" on lower cost "batteries" over time.     

 

At first glance, a few things ring out in my feeble mind, especially since tight fisted Israel balked on deploying its own capital into this venture. They seem reluctant to use their own citizens' funds for this enterprise opportunity.

 

I guess that Renault is going to "manufacture the cars" in addition to help fund the "recharging depots" X Israel's landscape as well as other regions of the globe. With so much infrastructure required, this sounds like an expensive, capital intense proposition in advance of "critical mass" being ascertained.

 

If it's such an economically viable proposition being blessed by Israel's PM, why no public/private partnership?

 

I notice your reference to Buffett buying in, but wouldn't the Chinese electric battery/car company, BYD, he is already capitalizing, potentially be selling batteries to them, and potentially be in a position to replicate or "cross license" use of their recharging stations wherever they end up being established moving ahead?

 

Can Renault build a cheaper electric vehicle than the Chinese BYD? Isn't BYD the leader of "battery technologies"? Are all "electric battery" sizes standard for all "electric vehicles"? Standardization seems crucial for their one minute exchange platform to hit critical mass.       

 

 

 

 

 

[PlanMaestro]

More detail on his plans including the "island" strategy. Impressive guy, disruptive model.

 

[Guest valueInv]

I didnt follow that as well. It seems like they will own the battery and you the car. My guess is the rates for battery power will be only slightly cheaper then oil / petrol power.

 

The guy is a genius. I have never seen such a clear understanding of the consumer before. I would short GM, I dont think the Volt will work because he is right. The average car is 8 years old and very few people buy $40k cars. You need an electric car thats faster and cheaper then a gas one. He gets it.

 

What idiot thought it was a good idea to sell something for 1.5x its competition and then you make it up in savings overtime. When has that worked with the American consumer? If I had to guess the cars costs $24,000. He takes the costs for the battery on, bringing the costs down to $16,000. He then charges you for the fuel and collects the spread. The fuel is much cheaper then gas, but you only pay slightly cheaper and he gets the difference overtime. He also captures all improvements in the battery overtime increasing his ROIC.

 

Thats what I picked up.

 

I'm not sure I understand. Here's an excerpt:

 

"    CHARLIE ROSE: What’s wrong with hybrid cars like the Volt?

 

 

    SHAI AGASSI: There’s nothing wrong about it. But again looking at a lot of the cars coming into the market right now at about $35,000 to $40,000. That takes away a lot of consumers from even considering that car.

 

 

    And what you need to be in the range of $15,000, not in the range of $40,000. If you look at the average car in America, it’s not the $20,000 SUV you see in commercials. The average car is an eight-year-old drive. The average American drives an eight-year-old car.

 

 

    That car doesn’t costs $20,000, it costs $5,000. You tell them you’ll drive a $40,000 green car, it’s not even a consideration. We have to get $15,000 and down to $10,000 to switch the country from oil."

 

 

There is a substantial market for cars at $40,000 and plenty of companies with successful businesses selling them. When you  buy a car at $40,000, you are buying a status symbol represented by the brand. "Green" is a status symbol for many buyers just like leather seats are. So while a $40,000 car may not be for the mainstream market, it does not mean the car will fail.

 

The average car may be 8 years old and may cost $5000 but there are no new cars that you can get at that price. How is that relevant to GM selling the Volt? They are not trying to sell used cars. I'm guessing that GM generates more revenue from selling $40,000 SUVs than $15,000 entry/mid level cars.

 

I haven't heard the full interview but his logic from the excerpt sounds like marketing to me.

 

 

 

 

 

[Myth465]

I would say listen to the Interview or the Ted.

 

His logic makes perfect sense. Green cars are worse cars, but greener. People want better cars, he was saying to move it from a Fad lefty trend (most would call me a lefty), to a revolution - It has to be better in most respects and cheaper than the average vehicle at the competing price point.I would say the sweet spot for car sales is $15k - $25k. Not that people dont buy cars more expensive. Just that the critical mass isnt at $40k.

 

I also feel as though he is looking at it from a world perspective, and if that's the case then his numbers really begin to make sense. Keep in my this is backed up by absolutely no data  :), and is just one mans assumptions.

 

Thanks for the TED.

[DynamicPerception]

Super Interesting Stuff

Thanks for sharing.

[lethean46]

I watched the original conversation with Charlie Rose.  Fascinating stuff.

 

If I remember correctly?  He said electric cars already have superior performance which surprised Charlie Rose.  Increased speed/acceleration advantage in the two ranges that matter to people.  He named them.

 

Price AND convenience are key.  Given those?  target years were given for % saturation of the market in Israel.  90% in 8 years or so?  I forget the year given ...

 

There is already an international standards organization.  With many different companies now working on this?  Some things need to be the same ... from company to company. 

 

My thought, too, was ... how does BYD fit into the picture? 

 

An awesome conversation/interview.

 

ML   

 

 

[shalab]

Not sure where he gets his eight year number from - according to this article, avg life of a car in the US is twelve years. The newer models should last longer - hopefully they will run 300-400K miles without too many headaches.

 

http://articles.moneycentral.msn.com/SavingandDebt/SaveonaCar/CarsThatLastAMillionMiles.aspx

 

 

[ERICOPOLY]

Not sure where he gets his eight year number from - according to this article, avg life of a car in the US is twelve years. The newer models should last longer - hopefully they will run 300-400K miles without too many headaches.

 

http://articles.moneycentral.msn.com/SavingandDebt/SaveonaCar/CarsThatLastAMillionMiles.aspx

 

 

 

He said something different (I think) -- I believe he said that the average American drives an 8 year old car.  He did not comment on the average life of cars.

 

 

[lethean46]

Yes.  He said the average age of cars on the road in the US is 8 years. 

 

ML

[shalab]

He said something different (I think)

 

Can't find the link to the article which said average car on the U.S is 10 year old.The below article in 2008 talks of the avg vehicle in use as being 9.4 years old. This is citing 2008 data and if anything that number went up.

 

http://www.autoblog.com/2009/03/04/study-median-age-of-cars-in-u-s-increases-to-record-high/

[txlaw]

Thanks for posting this video, Myth. 

 

I'm actually quite wary of the Better Place proposition.  Shai Agassi is clearly a visionary businessman and a phenomenal salesman, but whether Better Place is the right way to go for consumers is not clear to me.

 

As I understand it, Agassi is proposing a telecom model for personal transport where you buy a car/battery at cost or slightly above cost and get locked into buying miles from Better Place battery exchange stations and charging spots for X years.  Although it appears that you will be able to charge Better Place-compatible cars at home or at other company's charging stations, because you are paying a low price for the equipment, you must sign a subscription contract with Better Place.

 

In the same vein, NRG is working with other electricity generators, Hertz, Best Buy, Walgreens, HEB, and other companies to create a network of charging stations in Texas, with Houston being the first place where they will start the buildout.  You will be able to charge up at these places by paying a certain amount per month.  The consumer is not locked into buying electric miles from the consortium, as they can always go to another charging spot or charge at home.  However, to charge up at these often-visited places, you will have to purchase a subscription -- you won't be able to pay per mile or pay for the cost of electricity used plus markup. 

 

The problem I have is that there shouldn't be a network effect business model for buying electric miles.  You don't have to pay a monthly fee to charge up your vehicle at Exxon branded stations.  You can go to any gas station to buy up miles in today's world.  If I go to HEB (a grocery store chain in Texas), I don't want to have to sign up with a particular network to charge up as I shop.  I would much rather pay as I go, charge up using whatever sort of electricity generation I choose, and charge up overnight at home.

 

Better Place and the NRG consortium will probably ask for tax subsidies and government mandated use of its network (for taxi fleets, for example) to guarantee an acceptable rate of return on their build out.  Or they will probably have standards and regulations put in place that limit the number of consortiums that put in place a network of charging stations/battery exchange stations so that there is an oligopolistic market like in the telecom sphere.  There's nothing necessarily wrong with that, but it's a bit disingenuous to imply that the build out is completely funded by the private sector.

 

The other question I have is why do we assume that battery technology stays static such that convenience and affordability requires an expensive battery exchanging network that requires customers to be locked in?  If electric miles do follow Moore's law and batteries get better and better, we may be able to plug in anywhere, especially if the holy grail of quick charging batteries comes to fruition.  At some point in the next decade or two, we could have electric car batteries that can be charged up in less than 10 minutes -- I believe MIT is working on that.  If that happens, wouldn't consumers want the flexibility of buying their electric miles from a market full of competing electricity generators?  Or maybe our cities supply energy charging stations as a utility.  Austin Energy (I live in Austin) is going to do that.

 

And won't the cost of hybrid electric/gasoline or electric/nat gas vehicles get cheaper over time?  It's true that current EVs and hybrids are more expensive than normal cars.  However, this could just be the new tech/early adoption paradigm that we are seeing.  For example, when Apple came out with the original iPod, it was really expensive, a bit clunky, and only first adopters bought it.  The next generation iPod was pretty cool, and well off people started to buy it.  Eventually, the price got cheap enough to where anybody could buy an iPod.  The same thing is happening with the iPhone, although most of us are financing our iPhones through locking ourselves into AT&T.  Just like Better Place is proposing to do with EVs. 

 

I don't know.  I'm just skeptical of what the right business model is here.  I'd much rather be the battery manufacturers (not designers).  I want to be the Foxconn of batteries.  Hopefully, BYD is that company.

 

[Myth465]

LOL I just read a sumzero GM Long which said the average car right now is 12 years old. I guess everyone has a different number, but I think we get the idea.

 

TX I think your concerns are valid and correct. I believe BYD makes battery technology and the cars so they are in a different space. I honestly think the winner will be the one who is larger and gets the biggest buy in. I think Better place stands a good chance if they can find the right backer. They need someone like Buffett with what he did with Netjets.

 

Given his experience with Netjets I doubt he is up for something like that again. Endless cash expenses to try to dominate an industry.

 

What I like about Agassi is he gets it. People want to help the envirnoment as long as it helps them in the long run.  Why fight consumers and nag them into buying your product when you can just offer them a better product. Everyone I know would buy an electric over a Ford Fusion or Honda Civic if the electric card had 2x the pickup, made no noise, was slightly cheaper per recharge, and was about $1000 cheaper.

 

Whoever can deliver that will take all in this market in my opinion. The only issue is the distance, and for that to work you need some sort of charging station. I prefer the battery swap model to charging. Perhaps a battery rental model, similar to kegs could work. When you have to take a trip you rent a battery and leave your CC as a deposit.

 

I dont think charging by mile will work. Consumers arent used to that. I would hate it. I hate filling up but like that for about a week its "free" to go where I want. I would hate to view my car as a bus and wouldnt want to pay a few per mile.

 

 

Interesting stuff, I think he is going in the right direction. Honestly I would forget the US and focus on the rest of the world. It would be quite easy to dominate Europe, Isreal, and a few other smaller countries.

 

The US is another can of worms. The infrastructure is a nightmare inmo. You would need most of the Southwest, Southeast, or the Northeast to agree on a system to make it viable. Consumers will not play the HD vs Blue Ray game, and will likely wait to see who wins. Why go through all that. Lets pick a standard or a model and move on. I would hate to live in China, but a Dictatorship has its advantages.

[ERICOPOLY]

I suppose they need to lock you in because they won't make any money from the initial batteries.  Their plan is to start making money when battery prices get cheaper.  

 

No lock in... you'd be taking a free ride for a time while it is cost effective, then when prices get cheaper you'd just buy your own battery.

 

 

[Guest ValueCarl]

txlaw, fantastic analysis on your part.

 

Does this business model on a larger scale not resemble the "propane gas" model, whereby, I buy my "tank" from "Blue Rhino," for example, and am tied to their 3rd party distributors, including Lowe's, so I must bring my tank back to only their facilities in exchange, and am "locked in" to their "propane gas" pricing?

 

I reluctantly adopted this model, but I hated the fact that depending upon how "propane gas" is priced by competitors including Walmart distributing for a competitor like Amerigas. Actually, my kids bought the propane tank as a gift to the family, after the original barbecue was purchased, and forgot to consult with me.  ;D 

 

Since my # of turns/exchanges yearly is small, and they were smart enough to buy Blue Rhino's tank with a fifty percent "rebate," I held my nose. 

[txlaw]

Very interesting, ValueCarl -- I never heard of Blue Rhino until you mentioned it.  The analogy is a good one.

 

Myth, when I say pay per mile, what I really mean is pay as you go for charging.  So, just like we fill up our gas (petrol) tanks as we need to and pay only when we fill up, we would charge our car batteries the same way in an ideal world.  Even better, though, we could charge up at far more places, including at our homes.  But maybe you're right -- people might rather pay for an all you can eat plan for charging up.

 

As for picking a standard, that's not always a bad thing, but there's too much technological/economic uncertainty here.  Maybe the right thing to do is transition from mostly gasoline powered cars to mostly hybrids and finally to mostly EVs.  While the transition is happening, engineers will work to optimize battery/charging technology for an all EV world and will also work to transition to lower cost renewables and nuclear.  Or maybe it will be a good idea to have Better Place and NRG jumping into these markets because even if it's not as profitable as they think it will be, it will more quickly transition us to EVs. 

 

Too difficult to tell. 

[elltel]

Israel Corp (which is listed on the stock exchange) owns around 30% of Betterplace.

 

http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9NDI4ODh8Q2hpbGRJRD0tMXxUeXBlPTM=&t=1

 

 

[Myth465]

Thanks for the link. I will have to check them out in Jan when things slow down. Still working on Q3 updates.

[CR]

Good points all around. One to add to the conversation:

 

With how car demand works, are the switching stations viable?

 

What I mean by that is let's take an SUV and a sedan. They require different batteries because one wants power and the other wants comfortability. You can continue this and look at sports cars with speed, etc. Basically there's a barometer for all of these attributes and the battery requirements are different dependent on where each barometer set.

So a battery for an SUV is different than a battery for a sedan. How are the switching stations going to be able to carry such a wide variety of batteries? A gas station only yields 3 different types.

Who is going to demand of the car companies that all of the batteries and all of the cars fit some modular physical description so that they can accept the switching station's input? And even if they did that in terms of physical interpretations, how are they going to do that in terms of car needs? This last question leads to the overall gist of my post:

 

How will there be more than just a few models of cars? And if by some magic we forced all of the car companies to one standard, who is going to decide that standard? BetterPlace does not seem like the logical answer to the 2nd question. 

[txlaw]

Watched a video posted by Shai Dardashti that hits on a lot of our questions about what the EV infrastructure really needs to look like.

 

David Sokol is on the panel, and he talks about BYD.  

 

Interestingly, David Crane of NRG asks a question to the panel at one point.

 

Check it out: http://valueinvestingresource.blogspot.com/2010/11/panel-discussion-electric-cars-mass.html

[CR]

An article referring to the problem that I mentioned:

 

http://gigaom.com/cleantech/where-tesla-better-place-dont-agree/

[Myth465]

Thanks for the links. I will watch the video this weekend, and read the article just now. I think Better Place will have to focus on locking up small markets. They can pull off Israel (one car / company, small population)  and some European countries but will have trouble in the US. I think it will be too expensive to stock a battery for every car type, so they would have to have some sort of standardization. Quick charge would also quickly destroy their business model and it will happen at some point (hell cell phones charge in 20 minutes it seems now).

 

Its a shame I think their model makes alot of since. When you rent a keg you dont care what kind of keg you get as long as it works and you bring it back in decent enough shape. I could see batteries being the same, you pickup a spare on your way out or swap it out when it runs out. If you got the spare for a trip you could return it on your way back in. A keg is only $100 though, not sure how you would feel comfortable letting someone take a $8k battery. I am also sure on the swap outs you could get into a situation where people swap out cheap Chinese batteries or something like that.

 

A lot of kinks to work out. I would focus on small markets and dictatorships.

[username]

Approximate fees for Better Place's service in Israel were published today.

1,300NIS\month (around 370USD), for 26*1000[Km]/year.

3 years ago, in a presentation I attended to, Mr. Agassi said that the costumers would only pay that monthly fee. As far as I understood from the paper, the clients would actually buy the car.

 

Well, paying 35K$ for a car that might appear to have no market after a few years, when one wants to sell it... sure. :P