Better Place in wrong place at wrong time

Dubi Ben-Gedalyahu

The idea is right: carmakers, including those that gave Better Place a chilly reception, are investing serious capital in long-term plans to develop electric cars.

For several months it has been clear that electric car venture Better Place has reached the end of the road in its present format as an independent company. It reached its current woeful state for a range of reasons, both domestic and global, but if it has to be eulogized in one line, it would be that it was "the right idea at the wrong time in the wrong place."

The vision is still right

Shai Agassi's vision that led to the founding of Better Place is the right one for today and was right five years ago. There is a real need to find an alternative to the internal combustion engine used in the world's vehicles. The contemporary car, despite all the technological developments of the past century, is still anti-environment, burns non-renewable fuels, pollutes the atmosphere, and harms our health.

Nobody has any doubt that sooner or later fuel reserves will be used up. While the global recession keeps the price of oil at a reasonable level, if the rapid rise of living standards of a billion people in the developing world continues as it has done over the past decade, the demand for gasoline will soar as will prices. We must not forget that a few years ago oil prices reached $150 per barrel and $200 per barrel is inevitable.

Air pollution and global warming continue to be a serious problem despite the prolific efforts by energy industry lobbyists to remove the topic from the agenda.

The fact is that the world's major carmakers, including those that gave a chilly reception to Better Place at its inception, are currently investing serious capital in long-term plans to develop electric cars. We are not only talking about Renault-Nissan, Better Place's partner. Even German automaker BMW, for example, considered a very conservative technological company, will launch a broad- dimensional project in the coming months for an advanced electric car with national level recharging solutions. Mercedes, GM, Toyota, and others are also working on long-term electric car projects.

So why hasn't the electric car conquered the market

Because the technology has still not matured. If there was currently on the market a compact and light battery at a reasonable price that could provide cars with a driving range of 400 kilometers, then the electric car would become a global hit. In practice, the presently available batteries for electric vehicles are enormous, weighing the same as two passengers, and require advanced cooling solutions to prevent them from exploding, consume a rare raw material (lithium) and exotic technologies with a limited lifespan costing the price of half a car.

Moreover, fully charging batteries on the home grid takes many hours and a "rapid" charging, which takes 30 minutes, requires an industrial installation, which creates a heavy load on the national grid, and can wreak destructive power on the battery. The existing electric batteries and engines greatly limit use of electric passenger cars compared with regular gasoline cars and provide a range of 150-200 kilometers in the most optimal conditions. Driving uphill and operating an air-conditioner can reduce that range by up to 30%. This is reasonable for in-city driving and those traveling familiar routes, but for a regular driver needing more flexibility and multi-purpose vehicle use, the limitations are too many. Better Place, which always stressed technology as its strong suit, found a solution for range limitations, and proved it could create a technological system for exchanging batteries swiftly in a production-line manner. The company also proved that it could manage an infrastructure to serve these cars on a global scale, and even smartly integrate it into a country's national electricity grid.

Yet despite the technological applications, Better Place's solution had and still has one main problem. It is prohibitively expensive. Setting up and managing a chain of battery exchange stations requires a huge investment in an infrastructure, which grows in proportion to the geographical area to be covered. It can perhaps be done as a government project but for a private company this solution requires very deep pockets and investors with stamina for the long run, and the belief that the revenue will eventually cover the expenses. Shai Agassi found investors like this to begin with, but they did not last the course.

From the point of view of the car industry, developing a car with an exchangeable battery is fundamentally expensive. It is a far more expensive solution than converting an existing car into an electric car with a fixed battery. Carmakers are currently saving on "bread and butter" items to stay profitable and thus there was not much enthusiasm for Better Place's solution.

Israel was not the right place

On the one hand, it is easy to understand why Agassi chose Israel as a beta site to globally "prove the feasibility" of Better Place. Israel is a small country with high population density, low speeds on its roads, a large percentage of high tech employees, a supportive regulator, with flexible capital-government controls.

On the other hand, Israel is almost certainly the least suitable western country for a project like that of Better Place, and an inability to grasp that fact was the main conceptual failure made by Agassi and Better Place. Let's put aside for the moment, other small matters, like a harsh climate requiring air conditioning for most of the year, endless jams, and an aggressive and wasteful style of driving.

However, the main problem is that the new vehicles market in Israel has the highest percentage of cars in the world belonging to fleets. One out of every two new cars sold in Israel in the past decade has been purchased as part of a car fleet.

Better Place's concept believed that Israel's fleet distorted market would be an advantage, allowing a concentrated and swift sale of a critical mass of cars, which would generate major revenue for the company from the sale of electric kilometers. Everyone recollects the declarations by Better Place two years ago that it would sign its "main agreements" for the purchase of electric cars with dozens of fleets that together owned over 70,000 cars.

In terms of the end user customers for vehicle fleets, the meaning of having a company car means complete indifference to the price of gasoline and the amount the vehicle is used. In terms of an electric car with a limited range and problematic use that may save money for the boss but costs the employee the same amount, clearly this is of no value. And to all this must be added the indifference of Israelis to emissions and pollution, and the decision making in the leasing market, which comprises six or seven major leasing managers with closely connected businesses (in some cases ownership connections) with vehicle importers for whom the "junk value" - the value of the car after its leasing period - is the holy grail.

Marketing mistakes

Better Place took too long to figure out the rules of the game in Israel's leasing market and it did so using "trial and error." At first, with the feeling of self-confidence that Agassi exuded, the assumption was that the "fleets would wait in line to receive their cars." Thus the company launched its grandiose plan with too high a pricing for the vehicle and recharging costs, and too small compensation to customers for the loss of value.

In the end, after several changes, the company found a very generous pricing formula that succeeded in generating some sort of sales momentum to leasing companies and individuals in the past few months (about 100 cars per month give or take). But this method created substantial losses for the company on every car sold and it came too late. The resignation of Agassi, and the endless shake up in the company's senior management and the doubts about its continued existence increased the sense of risk among customers and created almost irreversible damage to the company's marketing operations - thus accelerating losses.

What now?

The declaration by Minister of Environmental Protection Amir Peretz "Save Better Place" might create the impression that there could be a "government bailout" enabling the company to survive independently. But at the present juncture, with even vital economic and social interests facing cuts, there is a slim likelihood of the ministry of finance opening its shrinking coffers and absorbing public fire, for a private company in the private car marketing sector with a future shrouded in uncertainty.

Better Place currently holds patents for smart electricity grids and telematics, and it is reasonable to assume that there is a demand for these in one way or another, perhaps even in China. Israel Corporation (TASE: ILCO) currently owns 30% of Better Place so that bankruptcy could be a swift solution for diluting the holdings of other investors and taking control of the hard technological core of the company.

What about Better Place's customers?

About 1,000 Renault Fluence ZE electric cars have been sold since Better Place began marketing operations in Israel and their owners fall into two categories: leasing companies and individuals. Leasing customers are protected by their leasing companies and in the event of services being halted it is reasonable to assume that that the car will simply be replaced by a standard car by the company. Two or three large leasing companies, which bought cars from Better Place, may absorb a loss of several million shekels in this instance. However, most of the cars were bought as part of commitments for repeat purchases against guarantees and in the case of Better Place's liquidation, it is doubtful that the guarantees will cover the damage.

What about those enthusiastic individuals that bought electric cars from their own pocket at the full price out of an ideological commitment to the environment? Theoretically, in the case of halting the company's services they could remain with a lump of useless metal without any value. Remember that the battery is not their private property but belongs, legally, to Better Place or its creditors, and at $10,000 per battery this is not property that will necessarily be abandoned. But that was the risk that each customer took in trying to push the technology curve forward. Idealism has a price.

Published by Globes [online], Israel business news - www.globes-online.com - on May 26, 2013

© Copyright of Globes Publisher Itonut (1983) Ltd. 2013

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