Plug-in Vehicle Hucksters are Doing P.T. Barnum Proud

David Hannum was right! There’s a sucker born every minute and they’re all waiting with bated breath for the low-cost plug-in electric vehicles that are coming soon to a dealership near you; if they’re not quietly cancelled first.

It’s the most insidiously appealing idea of our age: replace those nasty gasoline burning engines with cheap batteries that recharge in minutes and save a fortune on fuel while you “See the USA in Your [electric] Chevrolet.” It’s so appealing in fact that it ranks right up there with free lunch.

P.T. Barnum would have been proud.

Listen up America – It’s a scam! The emperor has no clothes! There is no such thing as a cost-effective electric vehicle that will carry a family of four at highway speeds. But the cautionary if not downright conservative analysis from sources as diverse and credible as the Department of Energy, the White House and Carnegie Mellon University somehow manages to get lost in a media sideshow that focuses on scientific breakthroughs that promise a 5-minute recharge time for batteries nobody can afford to buy.

I hate to be a buzz-kill and point out the brown object floating in the punch bowl but this graph comes from the DOE’s brand new Annual Energy Outlook 2009 and shows their best estimate of the market penetration rates for various classes of hybrid electric vehicles over the next 20 years. In this chart, the PHEV-10 and PHEV-40 categories are the only cars with plugs. Everything else is either a full hybrid (HEV) or a mild hybrid (MHEV).

So while your future car is very likely to have modest hybrid capabilities, there is almost no chance it will have a plug or need a charging station. For people like me who think numbers tell a more compelling story, the following table presents some detailed forecast data that I’ve gleaned from the Supplemental Tables to the Annual Energy Outlook 2009.

With due respect for emotionally committed carbon activists who sincerely believe plug-ins are the only way to save our beloved planet, the DOE estimates that cars with plugs will be 0.0% of the new car fleet in 2010, 1.1% of the new car fleet in 2015, 1.3% of the new car fleet in 2020, 1.8% of the new car fleet in 2025 and 2.3% of the new car fleet in 2030. In simpler terms, plug-in vehicles are not the Greatest Show on Earth and the three ring circus we fondly refer to as the auto industry would close the sideshow if it wasn’t such a big draw for children of all ages (including government) that bring fat wallets.

We’ve all been buried in press releases and reports about carmaker plans to introduce plug-in hybrids over the next few years. These are PR stunts, not business decisions. They remind me of a controversy that erupted in the mid-1800s when an entrepreneur named George Hull had the Cardiff Giant carved from a block of gypsum, aged and buried in a field. He then found the treasure while digging a well and promptly sold a two-thirds interest to a credulous investor syndicate managed by a banker named David Hannum. After the sale, Hannum’s syndicate moved the Cardiff Giant to Syracuse and increased the entry fee to $1, which was serious money in the 1860s. Things really got rolling when P.T. Barnum tried to lease or buy the Cardiff Giant and was unable to do so. At that point Barnum had a plaster of paris copy made and promptly began denouncing the original as a fake. In newspaper stories about the dispute, Hannum was quoted as saying, “There’s a sucker born every minute” in reference to the people who were paying to see Barnum’s fake giant instead of the original giant that his syndicate had bought from Hull, which was also a fake. While it’s not entirely clear whether Hannum was a sucker or a huckster, they all ended up in court where Hull confessed that the Cardiff Giant was a hoax and the judge ruled that truth was an absolute defense to the syndicate’s lawsuit against Barnum.

There is an immense difference between announcing plans to manufacture a product and actually hitting the start button on an assembly line. I am certain we will see a huge variety of one-off prototypes, concept cars and limited production test vehicles over the next couple of years; but unless the DOE’s analysts are as clueless as some vocal critics believe them to be, substantially all of the PHEV programs that are being announced today with great fanfare will be quietly axed before too much money is wasted on politically popular ideas that don’t make a bit of economic sense.

The headline news out of China is that BYD is introducing a cheap PHEV-62. The truly impressive story is that China built and sold an estimated 23 million electric two-wheeled vehicles (E2W) last year. Collectively, these E2Ws used enough battery power for a million American style PHEVs; all of which leads to a couple of interesting questions for the PHEV crusaders. First, what do you think the chances are that 23 Chinese will give up a little battery power so that one American can squander a lot of battery power? Second, who do you think will have the greater buying power if it comes down to price competition in a resource constrained world, 23 thrifty Chinese or one profligate American?

Li-ion battery developers have access to the same reports I do and they know the PHEV frenzy is a scam. But its a scam where they can let somebody else wildly exaggerate the economic potential of PHEVs and then use baseless auto industry PR to justify building government subsidized factories that do not make sense under any reasonably foreseeable future conditions.

With a simple Google search anybody can learn that Ener1 (HEV) is seeking $480 million in Federal loans to build battery plants with capacity for 600,000 HEVs by 2011 and 1.2 million additional HEVs by 2015. A123 Systems is seeking $1.8 billion in Federal loans to build battery plants with capacity for 5 million HEVs per year. The National Alliance for Advanced Transportation Battery Cell Manufacture is seeking another $2 billion in Federal funding to build one or more manufacturing and prototype development centers that will be shared by the fourteen NAATB members. While I actually believe the NAATB proposal has considerable merit because it includes giants like 3M (MMM), Enersys (ENS) and FMC (FMC) along with emerging companies like Altair Technologies (ALTI), the nagging question that simply will not go away is “Who is going to buy batteries for over 6.8 million HEVs a year when the DOE’s demand forecast i
s less than half of that number?”

Will we ultimately see those same manufacturers back before Congress demanding HEV and PHEV mandates like we saw with ethanol?

I’ve written a series of articles on how Li-ion technologies stack up against the competition once you move away from the idea of a PHEV-40 that needs an immense amount of stored energy to move a family of four at highway speeds. The entire archive is available on my Seeking Alpha author’s page.

Li-ion is a wonderful technology for portable electronics, E2Ws and personal transportation applications where the vehicle weight to passenger weight ratio is less than about five. It is nonsensical when the goal is to move four passengers and a couple thousand pounds of steel and composites at highway speeds. To date the only rational PHEV proposal I’ve seen is a gas-guzzler to dual-mode EV conversion initiative that’s being developed by Axion Power International (AXPW.OB). The raw end user economics are not as attractive as I would like them to be, but the existing fleet of gas-guzzlers is a far larger problem than the new car fleet will ever be. Since my parents always taught me to focus on the big problems first and leave the petty stuff for later, I have a hard time arguing with a proposal to slash gasoline consumption by almost a billion gallons a year for every 1% of the existing gas-guzzler fleet that’s converted into gas sipping EV-50s. Everything else is just a sideshow.

Mark Twain once said, “history doesn’t repeat itself but it does rhyme.” Like the Cardiff Giant, PHEVs are an appealing bit of fiction that everybody wants to believe. Like the Cardiff Giant there are hucksters prowling the land claiming they have the real deal. In the final analysis, the losers will be the investment syndicate members and the suckers who pay their dollar to see the fake giant.

The DOE’s Annual Energy Outlook 2009 makes it perfectly clear that PHEVs are irrelevant for normal people who worry about things like budgets, monthly payments and retirement plans. Fortunately, there are many real energy storage solutions from real companies that actually deserve our attention. I may revisit the PHEV loony bin from time to time to poke a little fun at the true believers, but I’m basically done with this topic.

Disclosure: Author is a former director and executive officer of Axion Power International (AXPW.OB) and holds a large long position in its stock. He also holds small long positions in Exide (XIDE) and Enersys (ENS).

John L. Petersen, Esq. is a U.S. lawyer based in Switzerland who works as a partner in the law firm of Fefer Petersen & Cie and represents North American, European and Asian clients, principally in the energy and alternative energy sectors. His international practice is limited to corporate securities and small company finance, where he focuses on guiding small growth-oriented companies through the corporate finance process, beginning with seed stage private placements, continuing through growth stage private financing and concluding with a reverse merger or public offering. Mr. Petersen is a 1979 graduate of the Notre Dame Law School and a 1976 graduate of Arizona State University. He was admitted to the Texas Bar Association in 1980 and licensed to practice as a CPA in 1981. From January 2004 through January 2008, he was securities counsel for and a director of Axion Power International, Inc. a small public company involved in advanced lead-carbon battery research and development.