Wednesday, 28 May 2008

Industry Structure - Alternative Powertrains - EValuating EV's EVolution

As the trend to ULEvs and ZEVs slowly progresses under a tide of PR stories and financial press reporting, investment analysts are scratching their heads in deep thought. Both the Sell-Side & Buy-Side functions of the Equities equation aswell as Fixed Income and High Yield analysts continue to ruminate as to which of the industry's old and new players look to have positioned themselves most advantageously, and indeed carry the weight and will, to truly drive vehicular and mobility consumption change.

It seems that rightly hard-headed analysts are being persuaded to the potential of what are presently theoretically modelled commercial ventures, but they still recognise there is a great chasm to get from 'Vision to Reality'. The ability to create, and critically deliver, a credible business plan is everything.

On paper at least, the best personally 'connected' regards funding, commercial and political relationships appear to hold better hands of cards, but such political-economic sway must be supported by a well constructed business jigsaw, based upon consumer adoption reality.

Converse to ordinary practice, where an analysts' predictive jigsaw is heavily biased toward the 'bottom-up' numerically based guidance of a host of financial ratios gained from P&L, Balance Sheet & Cash Book, when it comes to previewing what is a nascient, young and dynamic dimension to a previously rigid and cyclical predictable sector the 'top-down' macro picture takes precident. And unlike the orthodoxy of accounts based and sector trends forecasting for matured and stable sectors and companies, the electric vehicle prospect injects a high degree of uncertainty and possibly volatility given that investment research departments must greatly rely upon said 'top-down' reasoning of PESTEL factors and far more in the way of company management transparency to seperate [to be blunt] "the bounty from the bollocks".

As mentioned, the ecological technology snowball (and showboat) now has undeniable momentum so constructing a sense of a realistic, probable outcome from the 'babble and blurb' is fundamental to investment future-casting. Individual technology/company/business model potentiality and a host of inter-dependencies combine to create the jigsaw pieces that need to be mapped, measured and calculated so as to logically clear the hype and rumour fog.

Probably the greatest discussion taking place at present is the debate regards battery development; the pros and cons and real-world applicability of proven Nickel Metal Hydride powerpacks versus more advanced yet unproven Lithium Ion.

The industry's electrical engineers and informed observers are understandably split into 2 camps. This in turn is reflected in the developmental philosophies and R&D agendas of different automakers' approach to their Hybrid and Pure Electric vehicle plans. So mixed opinion dominates the investment debate, most evidently demonstrated by Honda's 'play-safe' exploitation of Ni-Hyd for its expanding range of Hybrids set against GM's presently optomistic stance regards a transition from Ni-Hyd to L-ion by 2012, publicly assuring it can overcome the reliability (thermal runaway), productionisation and life expectancy problems of L-ion.

But perhaps its the recent announcements from Daimler, GM and Renault-Nissan that best demonstrate that 'reality-gap' regards L-ion.

Deiter Zetsche & Mercedes are due to launch the L-ion assisted S400 BlueHybrid luxury car in Q209; an initiative that we recognise as a veritable low-volume, high margin, well-serviced technology test-bed exercise. In direct contrast, GM's Rick Wagoner states that only a year later the L-ion powered, expectedly high volume, medium sized mainstream 'Volt' model is to appear - with an adaption of L-ion for 3 other vehicles. Thus, these 2 vehicles represent the polar opposites of the new technology's introduction. Daimler's at first appears the more considered, a low-key combine of 'tech & spec' with a 'belt & braces' back-up of pinnacle-level service. GM's seems positively 'gangbuster', but then it does have the advantage of greater R&D capabilties and has been monitoring the many Ni-Hyd Hybrids it currently has running around the USA.

Perhaps the most prominant claim regards the commercial power of ULEVs and EVs comes from R-N and Carlos Ghosn, stating that the new vehicles will play a prominant role in the corporate growth plan by 2015. How that translates from recent 'confidence boosting' powerpoint presentations to roll-out reality is yet to be seen, but the R-N & Project Better Place JV focused in Denmark and Israel will provide a certain amount of guidance, even if the early adoption case study modelling derived is heavily biased by government fiscal pressures and social expectation pressures that will not be as directly powerful in regions beyond the more orchestratable Scandinavian and Middle Eastern countries.

Stiching together a credible picture of how the ULEV and EV future will play-out will be key for Goldman Sachs, Lehman Bros, Morgan Stanley, JP Morgan et al, the host of institutional and 'large-play' non-activist and activist private investors, aswell as the ever interested rebounding PE groups looking buy into VC exit strategies.

Much will come down to said investors own vested interests and 'connections' to leverage different pieces of the jigsaw. And this begs the question "could a struggle develop between different partisan individuals and groups allied to different solutions and outcomes?". The Prof John Nash "win-win-win" game-theory scenarios will have surely been discussed well before now.

Recent investment banks and asset managers research notes proffer that the future looks rosy given rampant oil price escalation now at $135 p/b and a GS forecast looking to $200 p/b by EoY thanks to geo-political unrest, ravenous eastern demand, limited extraction volumes and restricted refining capacity not easing within the foreseeable future.

However, the good news stories still require critical analysis to truly appreciate who look to be the winners and losers in the EVolutionary path of the automobile.