Green Machines
John Rubino

A few months ago, I interviewed Michael Potts, CEO of the Rocky Mountain Institute, a Boulder-based green think tank, for a magazine article. As is usually the case with magazines, a lot of Potts' most intriguing ideas ended up on the cutting room floor because of space constraints. This, for instance:

Right now this is the first time since the 1930s that there are real plausible new car companies going out and raising money, because the technologies available to transportation are just so groundbreaking. A lot of investors are speculating that the old-line companies are just too stuck in their ways. Right now there are six or seven real start-ups that are getting funding. All have interesting niches and very innovative technologies, in an industry that's been dominated for years by huge multinationals. Some big money is backing them, and there will be a couple of IPOs within eighteen months.

Tesla Roadster

Now, that's cool. Carmaker start-ups bringing out slick new electric cars that challenge the conventional wisdom of internal combustion, mile-long-assembly lines, and dealership networks. No doubt most if not all of these guys will lose out to Toyota and BMW, but that they're getting funded at all implies that some smart money sees a very big opening here, both in terms of business model and technology. So maybe they won't all fail, and among the DeLoreans and Tuckers is a future Porsche. Here's an overview of the start-ups with the most interesting business models:

Tesla Motors

The grizzled veteran of this bunch, Tesla Motors was founded in 2003 and by late 2007 had raised $105 million from mainstream venture-capital firms and tech entrepreneurs like PayPal co-founder Elon Musk (now the company's chairman) and former eBay president Jeff Skoll. Instead of following the Japanese example of starting at the low end of the market and working its way up, Tesla is emulating the early introduction of cell phones and microwave ovens by building an expensive piece of must-own hardware aimed at people with big bucks and a taste for new toys. Its $98,000 Tesla Roadster is a very fast, very slick, two-seater. With a carbon fiber body and a top speed of 130 mph, it's a sports car first; the fact that it's electric is icing on the cake. As such, it has star power. George Clooney and Matt Damon have reportedly put down deposits, and a lot of other big names will follow if the car lives up to expectations.

Addressing the Achilles heel of today's electric cars - heavy batteries that nevertheless deliver inadequate power and range - Tesla bundled 6,831 lithium-ion cells, each about the size of a AA battery, into a 950 pound pack that the company claims delivers a range of 200 miles and takes only 4 hours to recharge. The initial response was so positive that Tesla announced plans to start selling the battery packs to other carmakers.

Not surprisingly, the trip from concept to commercial launch has been rocky. In August of 2006 the Roadster flunked a 30 mph side-impact crash test, necessitating design changes. In September Tesla cancelled plans to sell its battery pack, and pushed back its production schedule into 2008. In December Tesla announced that because suppliers had failed to deliver the "dual-speed" transmission that would give the Roadster the promised zero-to-60 in four seconds acceleration, the early version won't be that fast. Fixing the transmission will cost another $40 million.

The media's breathless accounts of Tesla's genius have morphed into a more healthy sketpticsm. Here's a representative article. But this is all par for the course out on the bleeding edge. Look for huge buzz to accompany the launch of upgraded Roadster when the real transmission is ready towards year-end.

Phoenix Motorcars

Cucamonga, California-based Phoenix Motorcars is acting as general contractor in the production of a line of electric cars, the first of which will be the Phoenix SUV. It starts with a ‘glider' or complete vehicle minus the power train and fuel system, from a Korean carmaker. Then it buys power plants and batter packs from outside suppliers and contracts with an engineering shop to turn the parts into a working vehicle.

The result is a cool looking little SUV/pickup with moderate acceleration, a top speed of 100 mph and a range of 130 miles. One interesting twist is the battery pack, from lithium titanate pioneer Altair, which can charge in 10 minutes with a high-power commercial rapid charger. This is irrelevant for homeowners, but intriguing to large companies that operate vehicle fleets and can afford the specialized hook-ups. One cab company is said to have ordered 20, while San Francisco–based utility PG&E has ordered.

Here again, the delivery schedule has been bumped back from late 2007 to "early 2008" due to delays in getting the cars through California's air quality certification process.

Think Electric

Back in 1999, Ford bought a Norwegian electric car startup called Pivco, renamed it Think Nordic and pumped $150 million into it in an attempt to build a viable electric car. Like all previous EVs, this one failed. Enter Jan Olaf Willums, a venture capitalist in search of new frontiers, who for $15 million bought Think's assets, including the design for its next car, called the City.

Think Electric's car and its business model are both radical departures. Instead of building cars and stocking various showrooms, Think will build cars to order. Instead of operating a single huge assembly line, it will place a number of small factories near target markets, where technicians will build Citys from prefab parts. Every City will be Internet-and Wi-Fi enabled, allowing drivers to access the Internet - and to communicate back and forth with the car itself. A City will email its owner, for instance, when its battery is running low. Because the battery is the most expensive part of an electric car, Think will sell the car but lease the battery. Take the battery out of the equation, and the car might go for as little as $17,000, with a "mobility fee" of $100 to $200 a month that might also include services like insurance and wireless Internet access. Production of Citys began in Norway in late November and testing is now underway. The current plan is for a full production run of maybe 7,000 cars by year-end.

Zero Motorcycles

Scotts Valley, CA Zero is bringing out a line of lithium-ion battery powered motorcycles that it says are high-performance and price-competitive. The first model, Zero X, is a $7,500 dirt bike with that goes 40 miles on a charge. Next will come bigger street bikes.

These bikes are silent, a big plus from a lot of different angles. As one reviewer noted, the same technology applied to snowmobiles would eliminate the controversy of those vehicles in national parks. But silence has one amusing drawback. Test riders didn't know when the bike is on, so they had a tendency to get off and walk away without turning it off. In response, Zero added a safety bracelet that attaches to the bike and cuts off the engine when removed. According to the company, the first run of Zero X bikes has sold out.

Better Place

Now consider the world that the above implies. Electric cars gliding silently around town, running low on juice and looking for a plug, much the same way today's drivers seek out gas stations. There's a market here, but not necessarily for plugs, since recharging a battery takes an unacceptably long time. What if instead of charging them, tomorrow's "filling" stations simply replace a car's batteries? The idea is that you pull in, they pop the hood, swap your old batteries for newly-charged batteries, and send you on your way.

That's the idea behind a new start-up from former SAP software executive Shai Agassi. He's raised $230 million and begun to staff up to build a network of battery charging/swapping stations. "The thinking has been, the battery is part of the car," Agassi told a reported recently. "Actually the battery is like the new gasoline." Doing it this way makes the car cheaper - since batteries are a big part of the initial sticker price - and solves the slow charge problem. Better Place plans pilot projects involving a few dozen cars in 2008, and then a gradual roll-out in 2009.

Fascinating ideas all around. But will any of them succeed? The way things normally work with bleeding edge industries, there are four possible scenarios:

1) They fail for various reasons, most commonly bad execution, and disappear within the coming year. Probability: 70%.

2) They succeed until they draw the attention of Toyota and Honda, which steal their ideas, cut prices, and crush them, much the way Microsoft used to eliminate pesky software upstarts. Probability: 20%.

3) They succeed and draw the attention of the big guys, and GM buys a bunch of them out for a nice premium. Probability: 9%.

4) They succeed brilliantly, becoming big enough to go head-to-head with the established automakers. A decade of fast growth makes their early shareholders very rich. Probability: 1%.

Which is why their investors are early-stage venture capitalists with deep pockets rather than individuals and mutual funds. Still, that this discussion is even possible illustrates the impact that new battery tech is having. A little more range, a little less weight, and the electric car will be ready for prime time.

www.greenstockinvesting.com

***