3 Reasons to Invest in Early-Adopter EV Companies (and 3 Reasons Not To)

Last Updated Jun 7, 2010 3:12 PM EDT

There are good reasons to invest in battery makers and EV startups, and some equally good ones to wait and see. You may find the positive arguments presented here more persuasive if you're already inclined to like EVs and want to help jumpstart the market. There are always equally valid reasons not to take the plunge.

The tea leaves can be read various ways. Battery maker A123 (supplier to Fisker, among others) excited the market with its IPO, whose value soared 50 percent on the first day, far exceeding expectations. But then reality set in and a stock that had gone over $20 settled down around $9. Tesla Motors is working on a $100 million IPO now, amid reports of CEO Elon Musk's personal financial problems. But Tesla is glamorous enough that its public offering will probably succeed, despite any questionable fundamentals. In the best-case scenario, Tesla could be the Microsoft of tomorrow -- the company everybody wishes they'd seen coming.

Nearly all EV and battery companies are seeking private investors, and some are starved for cash as they head into the final countdown to manufacturing.

And then there's the thorny question of whether EVs will actually sell, and thus increase shareholder value. I've been surprised to discover that I know probably six or seven people who have taken the plunge and put money down on the electric Nissan Leafs that are coming at the end of the year. Admittedly, I travel in green car circles, and all of these people live in California (where a $5,000 state rebate brings the car's cost down to $20,000), but it is a nice anecdotal evidence of a market developing. Bolstering that impression is the 13,000 $99 reservations the company took in the first few weeks, leading CEO Carlos Ghosn to say the company was sold out.

Green Light Ensuring a future. By no means is the electric car a foregone conclusion. Many of the startup companies coming out with plug-in vehicles -- Tesla, Coda, Wheego, Aptera, Fisker -- are wholly dependent on early adopters to provide cash flow and take them from tentative and localized steps to a broader impact on the market (and thus on carbon emissions and local smog). You probably don't want to be swayed by this as an investor, but my guess is that emotional decisions rather than bottom-line considerations will drive a lot of early investment in this specialized space. It's an altruistic choice, sure, but so is the one taken by a surprisingly large number of environmentally oriented consumers who opted to pay extra on their utility bills for green power.

A better car. EVs could take off in the marketplace, confounding early negativity (or at least uncertainty) because early adopters will discover that concerns about "range anxiety" and new technology melt away. For many Americans, plug-in EVs will actually suit their lifestyles better than even the most frugal gasoline vehicle. Who hasn't wanted to just sail past gas stations? Who isn't tired of idling away $3 a gallon gas while stuck in traffic jams? If your commute is 60 miles or less round-trip (and, crucially, if you have a garage), an EV could prove very easy to own. Although the cost premium will likely mean you won't see savings right away, some state subsidies are strong enough to (when combined with a $7,500 federal tax credit) virtually erase that premium. And battery EVs cost only about two to five cents a mile to run, compared with up to 50 cents a mile for gas cars.

Plugging into the future. Utilities really want EVs to succeed, and they are putting a lot on the line to help make it happen. This is big investment that this still-small industry can leverage. The EV will be, right from the outset, intimately tied to the electric grid and uniquely suited to interact with information technology, from the cell phone to the home computer. While your car today is as dumb as a Model T --want to know how much gas is in it? Turn the key and check the gauge -- the EV's current state of charge will be a click or a text message away. From wherever you are, you can use your phone to find an available station, or schedule a late-night charge. This kind of interactivity is the future of mobility. GM's EN-V cars at the World Expo in Shanghai show one way forward: They're capable of talking to each other and driving themselves.

Red Light They hype fades: people will pay more, and get less. There's no guarantee of satisfied customers passing on positive consumer messages, and sales could be a fraction of the optimistic predictions from interest groups like the Electrification Coalition. Without a doubt, early adopters will pay a price to be at the head of the line -- just as people who can't wait for iPads do. The high cost of batteries is at the heart of the EV price equation, and they won't come down without significant volume. If you don't include the subsidies I mention above (again, some are only available in a few states) you'll pay $30,000 for a Corolla-sized car with about half the range. This could prove an insurmountable barrier to sales, especially if the Obama Administration continues to issue mandates for carmakers without providing the kind of direct reimbursement subsidies favored by the Chinese government (which is offering as much as $8,800 cash back).

The public grid is underdeveloped. Only Southern California has any kind of plug-in network today, and it's embryonic even there. Cities like New York, with apartment living and little possibility of street charging, have barely begun to think about what shape their public grid will take. Big box stores, which might eventually offer free charging in their parking lots, aren't really engaged with the issue yet. EV proponents claim that 80 percent of charging will be at home, but that's just a theory untested in the real world.

Dead-end technology. Daily, I'm told of breakthroughs with fuel cells and low-cost hydrogen, with biofuels such as cellulosic ethanol, with ultracapacitors, that could make the early EVs obsolete before they're even on the road. Fuel cells may have been 20 years away for the last 50 years, but Toyota will have one on the road in 2015, and an East Coast entrepreneur, Tom Sullivan, is building a Maine-to-Miami "hydrogen highway" (and trying to convince the world with full-page ads in the New York Times). Fuel-cell cars offer greater range than battery EVs, and hydrogen is an unlimited source. I personally don't expect the EV to be eclipsed anytime soon, but it is a possibility.

Maybe, in the end, investors will have to take something of a leap of faith here. It could have rich rewards, but EVs are, one has to say, a speculative investment.