November 9, 2010

Better battery financing for Better Place won't help mostĀ EVs.

Better Place is working with GE to finance purchases of batteries for its switching stations and electric car system. But since most EVs come with the batteries built in, the financing won't be a panacea for the pricey new cars.

The electric vehicle industry's major hurdle these days is the exact same piece of hardware that's supposed to power it. Batteries for electric cars can cost up to $10,000 a piece. That's almost a third of the price of some of the new EVs -- like the Nissan Leaf -- that are starting to hit the market.

In this first round of electric vehicle rollout, manufacturers will most likely take a loss, thanks largely to the pricey battery. But that's not a concern for them right now -- Nissan, GM and the other electric manufacturers will benefit from rolling out electric cars even without profiting off of them immediately.

Carmakers probably won't sell huge numbers of new electric car models in the first five years anyway, according to a report from J.D. Power and Associates. With current technology, battery-fueled electric vehicles can cost up to two times as much as a comparable regular car. That higher cost significantly deters customers, according to the report, such that electric car sales won't live up to the hype when customers actually have to fork over more cash for smaller products. 

And that may be O.K. with the car makers themselves. Since consumer adoption of EVs has an upper limit -- the high price and skepticism of most car buyers -- there's also an upper limit to how much money GM or Nissan could lose by selling electric vehicles at a loss. But selling a small number at a loss now will give them a chance to continue working on improving efficiencies of scale, technology and production, so that as the adoption curve for electrics rises, they can (hopefully) start turning a profit.

The other way to finance the operation is to sidestep paying for the battery by leasing it or getting it financed by another company. Nissan considered leasing the battery for its Leaf car, which will hit the market in 2011, but ultimately rejected the idea because it became too complicated for customers when the battery was treated as a different entity from the car.

That's not an option for Shai Agassi's Better Place. GE recently partnered with Better Place to help finance the batteries in the 10,000 cars that Better Place plans to release in Israel in Denmark by the end of 2011. Because Better Place is aiming to develop an entire network of electric vehicles -- battery switching stations, charging posts around town, purpose-built cars and the high-tech computers to make sure drivers are never too far from a station or outlet to risk running out of juice -- it has to find a way to buy the batteries that go in its cars, since technically, car buyers won't own them.

Better Place won't make cars, they're simply connecting the carmaker—which happens to be Nissan's partner, Renault—with the battery maker, a Japanese company called Automotive Engine Supply Corporation . Then Better Place connects all those players to GE, the company that's cutting the checks.

The details are still being worked out, but Better Place is getting what's called Accounts Receivable Financing from GE. Essentially, GE finances Better Place's battery purchases, in exchange for the years of future revenue that those batteries will generate as part of Better Place's network. Better Place drivers will be charged for battery usage by the mile, and since each battery has a given capacity, it's almost as easy as long division to determine how much revenue each battery in the system will throw off.  The financing allows Better Place gets to keep its cash in the bank or use it for other growth. GE gets a predictable revenue stream to put on its books for the life of the batteries.

Along with financing batteries, GE is also discussing collaborating on switching stations with Better Place, and raising awareness. "What's critical here is the continued emphasis on deployment of electric vehicles," says Dave Searles, director of GE's Ecomagination program.

It works out as a good advertising move for GE, says Menahem Anderman, founder of a private California battery consulting firm called Total Battery Consulting, Inc. He believes that GE does stand to benefit from its various investments in the initial wave of electric cars, even if they don't end up selling well. "I don't see GE using that project as a major strategic move to grow their business," he says. "They're talking about pilot project and awareness."

Most companies in the auto industry besides Better Place will probably be left to make electric cars with expensive batteries that they have to finance themselves. That's the case regardless of how the companies eventually pay for the batteries, Anderman says. "When your battery price is three times the benefit to the customer, financing is not the question."

More than a financing strategy, Anderman says that the electric car industry -- the one without swappable batteries -- needs the price of gas to hit between eight and ten dollars a gallon for its products to be competitive. But initially, at least, companies investing in electric vehicles, saddled with the battery cost, should expect to take a loss.

And the loss is looking justifiable. If the price of gas ever does spike, companies like Nissan and Chevy will be ahead of everyone else by having products—the Leaf and the Volt, respectively—on the market. Already, investing in electric cars has gotten both companies good press. That could be especially key for GM, which got doused in the 2006 documentary "Who Killed the Electric Car” for suppressing data about consumer demand when it ended its EV1 pilot program and destroyed all the cars in it.

No company making electric cars would turn down a profit, but according to the J.D. Power report, either tax breaks or a "substantial breakthrough in green technologies that would reduce costs and improve consumer confidence," is likely needed in the near term to make electric cars competitive with their gas burning counterparts. Until then, carmakers in the electric sector are likely stuck paying for the batteries twice: once up front, then again later, with incentives and "cash on the hood," to move the cars off of the lot when they stay too long. (It is worth noting that at least for now the Volt and Leaf both have waiting lists for prospective purchasers.) Meanwhile Better Place and GE are betting their substantial breakthrough in battery financing will help them leapfrog the electric cars that will live outside of Shai Agassi's switching station network.

Written by Shelley DuBois