Better math

Lease pricing will be a crucial problem for Better Place.

At the beginning of the week, electric car venture Better Place announced a second fund-raising round, in which it raised $350 million. About a third of this sum came from Israel Corp. (TASE: ILCO) and from Ofer Brothers Group private company Ofer Hi-Tech, $125 million from HSBC, and the rest from private funds and investors.

At the end of the week, Israel Corp. made a more detailed announcement to the stock exchange on the structure of the investment, in which it revealed several new and interesting details. For example, Better Place is no longer termed a project or a company but "Better Group", structured as a holding company, with independent subsidiaries in various countries, a separate subsidiary for research and development, and another subsidiary that holds the intellectual property. The group now employs over 200 people in the US, Israel, Australia, Denmark, and Japan.

Another interesting detail mentioned in the document is a milestone that the company must pass by the end of September 2010, failing which its share price will be substantially reduced. We don’t know what is supposed to happen by that date, but a reasonable guess is that it is the beginning of practical trials at strategic customers for the electric vehicles in their final format the electric powered Renault Fluence cars with exchangeable batteries.

The great challenge

Who are these strategic customers? According to the document, the company's first main target will be "vehicle fleets that have heavy vehicle usage and can therefore benefit from a larger positive cost gap in switching to the use of an electric vehicle." In other words, leasing fleets.

There's no doubt that the Israeli vehicle fleet market does have a critical mass of nearly 300,000 vehicles, most of which do a lot of kilometers. However, the Israeli leasing market also has some problematic characteristics for a vehicle with new, experimental technology, and for a company with no experience in routine maintenance and service.

For example, in the fleet market there is a high rate of mechanical breakdowns, and accidents causing damage to bodywork. Leasing users are considered an indulged group that demands individual service (down to changing a wheel after a puncture), around the clock, countrywide.

Therefore, the projections of service costs and of vehicle value after three years represent a critical element in the monthly pricing of leased vehicles. The financial statements of leasing companies in recent years show that the costs of maintaining vehicles and selling them at the end of the lease period hurt revenue and generate losses.

To reduce the risk, the leasing companies have adopted a policy of high monthly lease charges for models with problematic or uncertain servicing and sales records. This pricing carries considerable weight in the vehicle procurement decisions of the large companies, because the monthly leasing charges (as opposed to fuel expenses, where the electric vehicle has the greatest advantage) come out of the employee's pocket, not the employer's.

Assuming that the cost to the consumer of the electric car (without the battery) is similar to that of a regular Japanese of Korean family car, the pricing of the service and of the vehicle's end value is liable to send the contract price up sharply, and make it very hard to persuade leasing users to pay more than from their net salaries for such a car. Better Place will therefore have to choose one of two alternatives: to subsidize the cars from its own pocket, or to persuade employers that the saving in fuel expenses justifies subsidizing the monthly leasing costs to the employees. All this is before we have even considered the leasing companies, which will also want a slice of the profits.

Published by Globes [online], Israel business news - www.globes-online.com - on January 28, 2010

© Copyright of Globes Publisher Itonut (1983) Ltd. 2010

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