One Million Electric Vehicles by 2015? Well, It’s a Start.

In the State of the Union address President Obama announced a goal of 1 million electric vehicles on the road in the United States by 2015.  Part of that plan involves continuation of some existing incentives such as the $7500 credit on a purchase, but some new incentives and actions as well—incentives to communities for vehicle fleet conversions, HOV access and other steps. In addition the GSA will purchase 40,000 alternative fueled and fuel-efficient vehicles as replacements for aging vehicles in its fleets. 1 million sounds like a nice number, and we have to start somewhere, but let’s hope the number is significantly larger.

There are over 240 million vehicles on the road in the US now, and a replacement of 5-7% of those vehicles a year. Those vehicles average about 20+ miles per gallon.  Replacing 0.4% of the fleet with vehicles averaging, let’s say, 100 miles per gallon equivalent, under the most optimistic assumptions reduces our oil-equivalent consumption by about 12 million barrels a year and CO2 consumption by about 4 million tons.  Unfortunately, we import 9 million barrels of oil a day.  However, it’s a start! It also has the effect of stimulating activity in electric vehicles and associated and competitive technologies.  Importantly, it will stimulate activity on increased fuel efficiency of all types.  In my view, this is where we need to focus—set very aggressive targets on average fuel efficiency for each manufacturer selling in the US with a goal to getting the whole fleet—all 240 million vehicles–up to 60 miles per gallon or better in 25 years. That does start making a big dent in CO2 emissions and our dependence on foreign oil. I have written about this in earlier posts, (see TRADE DEFICITS, ENERGY INDEPENDENCE AND, OH YES, CO2 EMISSIONS—November, 2009).  In other words, provide incentives for fuel efficiency in general.  With electric having the potential for the highest efficiency, the credits and other specific incentives there will drive the rest of the industry, but lets get more explicit on very aggressive fuel efficiency targets.  The competitive juices and the resulting innovation will get us there.  President Obama talked about out-competing and out-innovating the rest of the world. That has to start with competition and innovation at home.  More to come.

 

Fuel Cells: Maybe they aren’t 10 years away…….

Up until a couple of years ago I have been in the camp that “fuel cells are 10 years away,” which is where they have been for the last 30 years. However, as I commented in a recent tweet that is no longer the case. After that tweet commenting on Katie Fehrenbacher’s post on GigaOm.com  re test driving the Mercedes Fuel Cell vehicle I got a reply from Ron Glantz. Ron, who for many years was the number one ranked auto analyst on Wall Street and a successful money manager, has forgotten more about the auto industry than most people actually know.  While he claims he truly has forgotten almost everything and has not kept up on the industry, his email to me belies that point and raises some interesting questions. I have copied it below:

“While automakers are still working on fuel cells, apparently they have given up on generating hydrogen in cars by processing gasoline. (I had previously sent you a note saying that the problem was the cost of the platinum used in the catalyst.) Instead, they are counting on hydrogen refueling stations:

  • The Nikkei says that the Japanese government is supporting an initiative to draw hydrogen from oil refining. Oil refining uses hydrogen to remove sulfur from oil. The hydrogen used in this process doesn’t have to be high quality, 90 percent pure suffices. Fuel cells expect 99.9 percent pure hydrogen. The sponsored project aims to produce high purity hydrogen, based on “industrial” hydrogen technology”. The Japanese government will bear half the cost of a cheap project. It is estimated to cost 500 million yen ($ 6.15 million) over a three-year period.  It wants to be ready before 2015. Why 2015? Japan’s Ministry of Economy, Trade and Industry (METI) expects a “wide adoption of fuel cell vehicles by fiscal 2015” and “seeks to secure a steady supply of high-purity hydrogen.” Again: Why 2015? It just so happens that Toyota is dead set on selling its first mass-produced fuel cell car by 2015.
  • In Korea, Byung Ki Ahn, general manager of Hyundai-Kia’s Fuel Cell Group, said recently: “There are already agreements between car makers such as ourselves and legislators in Europe, North America and Japan to build up to the mass production of fuel cell cars by 2015.” Indeed, if you go through the many files produced in Brussels, you find that in Europe “car manufacturers are getting ready for the commercial production of hydrogen vehicles by 2015.”

So, now you have a “chicken and egg” problem — how can you sell cars before there are refueling stations; how can you justify building stations before there are cars?”  -Ron Glantz, 01/01/11.

Of course this is not a problem for a country that is building into a growth market, e.g., China, India. If one has to build service stations for a growing population of vehicles, anyway, they can just as easily be hydrogen, or natural gas, and, maybe as an interim step, battery recharging or replacement stations.  This is an oversimplification, but it highlights the problem facing the developed world when it comes to a new paradigm. Most innovations applied in the developed world are as replacements, not necessarily meeting new demand. A different economic equation which the developed world has to accept or be left behind.

Cash for Clunkers is a bit of a Clunker

On one level “Cash for Clunkers” (CfC) is viewed as a big success. The first $1 billion was used up in a month and 245,000 new cars, 45% from the US car companies,  were purchased.  Congress looks like it is adding $2 billion more to the program, which the government now believes will be spent in another month.  This compares to its initial forecast that the first billion would not be spent fully until November, when the program was scheduled to end.  The seasonally adjusted annual rate (SAAR) of sales in July was 11.2 million. According to Reuters, 994,000 new cars and light trucks were actually sold in July, down 12.1% from a year ago, but up 30% from the previous month.

Without going into great detail, here is a shorthand review of the CfC program. If one trades in a car less than 25 years old that gets a rated 18 miles per gallon or less, one can get a reduction in the price of $3500 if the car purchased gets at least 22 miles per gallon and the pickup in mpg is 4 to 10 mpg. If it’s over 10 mpg the reduction is $4500. One can further negotiate with the dealer on the value of spare parts in the car.  The actual engine block and other critical parts of the car have to end up in the scrap heap. The dealer has to certify a number of elements of the transaction before receiving the rebate. The money is being diverted from a loan program related to green energy.

This seems like a pretty good deal for a new car buyer, particularly if he or she was preparing to trade in or sell a used car anyway. It’s an easy calculation to determine whether the CfC provides a better deal than a straight trade-in.  11.2 million SAAR of sales is about at the minimum replacement rate for scrappage one would expect from the existing fleet of about 240 million cars and light trucks. No doubt, this did accelerate some car sales, likely borrowing from the future but reducing inventories—some might say too much—, providing traffic and cash flow to the dealers, preserving some jobs and boosting the economic statistics. Combined with some other factors, such as better employment stats, maybe this provides a boost to consumer confidence, which is an important factor in getting the economy moving in the right direction. I’m just not sure that the numbers really add up. Let’s look at a few.

If you want to see a very good analysis of many of the metrics on this program you can read Matthew Wald’s piece in the August 8, New York Times, “Doing the ‘Clunker’ Analysis”: http://www.nytimes.com/2009/08/08/business/08clunker.html?scp=1&sq=doing%20the%20Clunker%20calculus&st

I will paraphrase some of what he says and add a bit to it.  It looks like the stats on the clunkers are that they averaged about 16 mpg while the new cars purchase averaged close to 26 mpg. If, on average, these cars were driven 12,000 miles per year there would be a savings of about 280 gallons of gasoline per car. That’s about 1.6 million barrels of gasoline a year for the 245,000 cars or maybe $202 million less spent on gasoline (at $3/gallon x 42 gallons/barrel). Since a gallon of gasoline emits about 20 pounds of CO2, the 67 million fewer gallons of gasoline consumed reduces CO2 emissions by 670,000 Tons per year. Over a 25 year life that would be 16.75 million Tons of CO2.  Without taking into account the cost of money over 25 years that still comes out to about $60/Ton of CO2 that was eliminated from the atmosphere. Is this the target price for cap and trade or a tax? Granted, as discussed above, this program is doing more than just reducing CO2.  But, ultimately, at the lowest cost possible, reducing CO2 emissions is what has to happen. We found that the program worked better than expected.  Why not raise the bar to a bigger spread between the clunker and a new purchase.  Every purchase done today will be producing emissions for close to 25 years.  What if the spread would have been 15 mpg rather than ten?  Of course, at that spread the US car companies would not have gotten 45%.

I did have an interesting e-mail dialogue with a terrific car dealer in Wisconsin, Frank Hallada, who has both GM and Ford dealerships.  His experience is anecdotal, but somewhat telling.  I will quote him direct:   

“The “Cash for Clunkers” has certainly spurred interest in the car business.  The incentive is to the consumer with the clunker….. We have been giving the customer credit for the monies, much like a rebate.  We have currently delivered 13 new vehicles and have yet to receive an approval status from the government.  The paper work is the responsibility of the dealer and the dealers are finding it to be a bit complicated.  We have been told that we would receive payment in 3-7 business days of an approved claim.  We have 7 claims that are a week old and are still in the under review status.  I spoke with 3 dealer friends on Saturday and none of them have received payments.  We will be required to trash the motor of the clunker 7 days after payment from the government.  We will then sell the vehicle to an authorized salvage yard for no more than $50. 

I believe the program could have been successful with a $2,500 rebate.  All but two of our clunkers have a value of $1000 or less.  The demand has slowed in the last few days.  I think the biggest problem with continued success,will be the availability of new vehicle inventory.  I have sold out of the most popular models at both the Ford and GM store.”

I am not sure that the program is really accomplishing what it was expected to. It has been a nice gift to those with clunkers, particularly if Frank’s experience is typical. But, it is truly replacement demand, not new demand.  And, it probably means that the buyers took on additional debt to buy the new car, or used a substantial amount of cash that might have been available for other uses. $60/Ton of CO2 reduction, at best, seems a high price to pay, particularly if the loan program, which was primarily for capital stock which results in real growth, is not replenished.  If the additional $2 Billion is used up in this quarter, it will make the quarter look quite good, but the fourth quarter will look less good.  Another example of unintended consequences. And, no real step forward in true carbon reduction.

Unintended Consequences

So Chrysler has filed. Suppliers and dealers are scrambling for financing. Dealerships and plants are shutting down. This is all just a mini-preview of what would happen if GM had to file. In a shaky economy where there is some evidence the downtrends are decelerating, this would be an almost certain way to print a negative GDP in the third and fourth quarters and to raise the risk of a much more extended recession. At that point it will be difficult for this administration to say, “don’t blame us.”

Other news: Toyota loses $7.74 Billion in its latest fiscal quarter, more than the $6 Billion loss GM incurred for the same period. As we said, no one can make money at the current auto sales rate. Now, in addition to the GM debt holders being obstinate, the politicians are concerned that GM might add manufacturing capacity outside the US over the next five years, possibly taking the percentage of cars made elsewhere and sold in the US from 15% to 23%. Therefore, maybe we shouldn’t lend GM money if it is going to invest a portion of that for factories and jobs outside the US. As Robert Reich puts it (no longer a politician but an academic), “…it raises fundamental questions about the purpose of bailing out these big companies. If GM is going to do more of its production overseas, then why exactly are we saving GM?” Well, maybe it has something to do with the 77% that will be manufactured and sold domestically as well as the dealer networks that will be involved in 100% of the sales. It may have something to do with the efficiency of production that is sold not just in the US, but in local and growing markets elsewhere. It might have to do with the possibility that if GM isn’t making those cars to satisfy a segment of the US car buyers, someone else–probably not a US company–will.

Maybe it has something to do with having a large enough company with the design and engineering capability to be a leader in the next generations of electric and other non-fossil-fuel vehicles. This will be one of the first decisions in which this administration is involved where it has to take full responsibility for the consequences—intended or unintended.

China and Electric Cars: The Stakes Have Been Raised

Warren Buffett was ahead of the curve when Berkshire bought 10% of BYD, one of the leading Chinese battery companies, last September. Ironically, that was at the same time his Colbert-titled op-ed piece, “Buy American. I Am.,” appeared in the New York Times. Today, the Times had a front page article on China’s plan to become one of the leading producers of hybrid and all-electric vehicles within three years, and very quickly becoming the world leader in electric cars and buses soon thereafter. The article states the case very well, http://www.nytimes.com/2009/04/02/business/global/02electric.html?hp.

I don’t need to repeat it here.

 

China has the advantage of not having to replace a fleet—there are maybe 30 million vehicles on the road there—but selling into a first-time car-buyer market as its per capita income rises.  If China follows the rest of the world in automobile penetration vs. GDP per capita, that 30 million, or 21 cars per 1000 people, becomes 80 cars per 1000, or 123 million by 2020 and possibly 250 million by 2030.  At that point the penetration is still only about 150 cars per 1000.  The US is about 860 cars per 1000 today.  As I have been saying for a number of years, heaven help us if most of those vehicles are powered by internal combustion engines. It will be bad enough that the electricity to charge these cars still will come primarily from coal-fired plants. But my guess is that China will be ahead of us, as well, when it comes to clean coal production and alternative energy sources.

 

This raises the stakes on what will be the structure of the US auto industry after we come out of this economic downturn. In my view, a bankruptcy of GM, in particular, would 1) extend the economic downturn and 2) set back the US auto industry’s participation in the new world of non-fossil-fueled vehicles. It may come to that if the UAW and the bondholders don’t blink.  A blink by the UAW is likely even though it will be painful for real people.  I am not so sure about the bondholders, many of whom are traders who have bought these positions on a speculation that there won’t be a bankruptcy, probably hedged against the possibility of one, and won’t blink until the very last minute, if at all. The real bond investors would likely go along with any agreement that avoids bankruptcy since they are running other portfolios that would suffer dramatically from an extension of the downturn and the re-pricing of corporate fixed income paper reflecting the willingness of the administration to use bankruptcy as a part of its bag of tricks.

 

China’s plan is a wake-up call, but not just on the urgency of an aggressive plan for the auto industry. It is a loud alarm bell, showing China’s recognition that both energy independence and reduced emissions are important to political stability and economic growth. In addition, developing and owning the technology that goes along with a ContraCarbon world will enhance its economic and geopolitical future.

The Auto Loans: Will Obama’s Threat and Wagoner’s Departure Bring the Other Stakeholders to the Table?

Rick Wagoner has announced that he is stepping down from GM, and President Obama has announced that the industry has not taken sufficient steps to get “there,” wherever that is. He is putting the onus on GM and Chrysler to cut deals with the suppliers, employees and bondholders to put the companies in a position to come out the other side of this economic downturn in a position to thrive.  The alternative would be to let these companies file for bankruptcy. My guess is that Wagoner has taken this as far as he can and he is stepping away to allow another person to go back the stakeholders and move to the next level. The President has to leave the possibility of bankruptcy on the table to get the stakeholders to move.  Is this a question of who blinks first or are the stakeholders simply negotiating to get the best deal they can before they blink? I think it is the latter. Unfortunately, everyone knows that bankruptcy can have severe consequences for the overall economy and should be out of the question for this administration.  On the other hand, sometimes the President has to be unpredictable.  Would he really allow bankruptcy to take place? I don’t think so, but the stakeholders may not be so sure.

 

I don’t know about Chrysler, but GM is getting into a position to come out the other side of this as a successful player, possibly leading the industry to the next level. I will say again, there is no reason for anyone to buy a car today unless a car has to be scrapped. No one will make money at today’s sales levels, which are likely to continue until 1) the economy recovers and 2) autos provide a better value proposition. It does mean a bigger check will have to be written to get through this.

 

It is too bad that Wagoner won’t be leading the effort at GM.  Maybe some day he will get the credit he deserves for repositioning the behemoth that could lead the industry to the next level.  Unfortunately, at today’s sales levels, the cash is disappearing quickly. There isn’t much time. I give the President credit for the way this has been positioned.  This is really up to the bondholders and the employees now. I think this is the most critical part of the economy on the table at the moment. How this plays out will determine how quickly we come out of the economic mess we are in, and the role US transportation will play in the lower carbon world of the next several decades.  

 

The Day of Reckoning for the Auto Industry is Nigh

March 31 is supposed to be the deadline on decisions regarding loans to the auto industry.  Unfortunately, the industry is setting itself up for failure by using a forecast for sales this year of 11.2mm.  That number is problematic given that the current sales rate is closer to 9mm.  While that is below the normal scrappage rate, cars are being repaired not scrapped. This ripples through the food chain resulting in good results for the Autozones of the world, but lousy results for the major auto companies. No one, not even Toyota, can make money at 9mm cars per year. The federal government needs to be prepared to lend sufficient funds to keep the industry alive until sales approach 12 or 13mm cars annually. GM, for example, assuming they sell 25% of the new cars, would fall 500,000 cars short of its forecast if sales stay at 9 vs. 11mm.  500,000 times a wholesale selling price of, say, $25,000, would be a revenue shortfall of $12.5 Billion and missed contribution to overhead of maybe a third of that. At some point, sales will return to a normal scrappage level at least, but probably not until mileage improves substantially on new cars and the consumer’s balance sheet looks better.

 

Don’t blame the auto industry for today’s sales rate. If you need to have someone to blame focus on the financial services industry.  However, do realize that at this critical juncture it is particularly important that the US auto industry continue to operate without having to fight through the intended and unintended consequences of bankruptcy and the ripple effects of that on an already struggling US economy. A disruption of the improvements wrought by the design and engineering efforts surrounding the Camaro, the eVolt, and Ford’s work on hybrids would set the whole global auto industry back in its contribution to reduced CO2 emissions.  I know that sounds like a stretch, but the Camaro at 29mpg, winning kudos for design and engineering and the eVolt following next year as a real game changer in power trains, can start making a difference. The Camaro is not the best car for today’s environment.  Lutz did a great job shaking up the design and engineering efforts at GM but his vision of where the world was going with fuel consumption fell short. Nobody’s perfect, but the direction is right. We don’t need the risk to the momentum of the US position in the industry and to the overall economy of a bankruptcy right now. And don’t believe that Ford will be unaffected just because it doesn’t file immediately.

 

Don’t let the anger with AIG and the financial services industry affect the political will to preserve an important manufacturing and consumer industry in this country. The unintended consequences on CO2 emissions will be severe.