Better Place is facing an unknown future


The European financial crisis could negatively affect electric car sales.

Shai Agassi's electric car venture Better Place LLC tends to polarize the Israeli public. On one hand, there are enthusiastic supporters who view the project as an audacious business-environmental vision, with a return that is many times as large as the investment. On the other hand are people who see it as an adventure at best, or view it less generously as another connection between capital and government whose goal is to milk the customer with the encouragement of the state.

But it is important to remember that for Better Place, the 200,000 or so Israeli car market is essentially an experimental laboratory that will prove the project's practicability. The company's main goal is to reach the global market of 30 million new cars annually. So long as the global players cooperate, and are ready to invest huge amounts of money in the project, public opinion in Israel is no more than a local nuisance.

Therefore, the raising of $200 million that Better Place announced this week is of little relevance to the Israeli market, and the timing of the official announcement to the media in Israel - 10:00 pm on a Friday night - indicates this well. The Israeli public has been exposed to very little information about the project, and there are more questions than there are answers. For the benefit of readers who might be wondering, we will try to provide some answers, though they might be limited.

1. What is the significance of the recent $200 million fund raising?

Raising of $200 million is without doubt a respectable achievement, especially during a period in which many cleantech companies are fighting to survive and some of them, especially in the US, are going bankrupt. It testifies to investors' confidence, or at least willingness, to strengthen the company's current position.

But everything must be kept in proportion. Despite the fact that the amount sounds big, with respect to the amounts needed to implement the project, this investment is just a drop in the ocean, or at least in the puddle. For this amount, a total of 200 battery replacement stations can be built for this amount (Israel alone will have 50 such stations) or company operations can be financed for 10 quarters, if we assume that the current cash burn rate continues. This rate, according to Israel Corporation (TASE: ILCO) reports, is around $20 million a quarter. The previous financing round raised $350 million. Moreover, despite "large placements" that were mentioned in connection with the current financing round, according to the well-accepted tradition of name-dropping, we don't exactly know how the investment was utilized and what the conditions for their implementation are.

2. What is happening in Israel in the meantime?

In the announcement about a financing agreement from this past weekend, we ran into the regular difficulty of deciphering murky data of sales and orders from the Israeli market. In fact, they were much more vague than data published from the Danish market in the same announcement. The mantra remained almost unchanged: "We see a strong demand in the market from car fleets, as well as from private customers. More than 400 organizations that represent a potential 80,000 company cars, signed letters of intent to start changing over their fleets to Better Place when the cars and service become available."

The fact is that six months after the official publication of prices and service package costs for private car owners, and two months after the opening of the sales office, we would have expected to see more concrete information about the number of people joining, and more exact forecasts. The main problem is the comparison between expectations and what is actually happening. Currently, it seems that the date for the introduction of electric cars on the roads has been delayed by at least one quarter according to the timetable that we heard last year (last quarter of 2011) and the sales forecast for 2012 is for a few thousand units only. A company that takes it slowly at the start should be admired, so that all the sharp corners can be smoothed and all the infrastructure prepared properly, but we must also take into consideration that as time passes, background conditions change - especially in a volatile country like Israel.

For example, in the last few months, the business atmosphere in the entire automobile market has worsened as a result of threats and pressure on the market by the Zelicha committee, which among other things is examining the progression of the electric car in Israel. Growth projections in the market are falling, and it is best not to talk about the security situation. Also, the Ministry of Finance originally offered a concrete and specific window of opportunity for tax benefits when purchasing an electric car, and this window will close in 2015. In short, delaying the time-to-market has its price.

3. What role do the leasing agencies play?

80,000 cars are currently being leased in Israel by six or seven leasing agencies that aggressively control the market. Many of these cars are in a category of cars that are smaller and cheaper than the electric Fluence. So far, only one Israeli car leasing company - Albar - has officially signed a supply agreement with Better Place, and this is for a few hundred cars only.

The other large players are not on board yet. From an informal survey that we conducted in the market, it appears that they are approaching the issue diplomatically and very carefully. Their actions are stronger than words: in the second half of 2011, leasing agencies purchased 55,000 standard mid-sized cars, which will fulfill the needs of their customers at least until the end of 2014. The very same 400 organizations that Better Place is referring to are among the leasing agencies' customers. This is not the behavior of companies that expect a dramatic change in the market.

4. What is going on with the French?

Renault, the engine behind the electric car venture and the sole supplier in the meantime of cars to Better Place, is continuing to officially promote the electric car technology as a strategic partner. But with all due respect to Israel, to Denmark, and even to Australia, what Renault mostly cares about is the European market, and like all the car manufacturers, it is anxiously watching the depressing developments in the eurozone, and even panicking a little.

Renault was already hit hard in the 2008 financial crisis, and it knows all too well the ramifications of an austerity plan in Italy, a recession in Spain and Portugal, and maybe even a rate lowering of France's state bonds. In times like these, all the car makers hope to increase liquidity, or in other words, to lower expenditures, and to focus on activity that is highly profitable in the short run. Investing in the electric car is exactly the opposite: a huge investment in the short-run that will bear fruit in the long run - maybe.

This is before taking into consideration that some central European countries have tightened their budgets and decreased the generous tax breaks currently being granted to people who purchase electric cars. These benefits are critical for the successful integration of the electric car into markets.

Initial results of the effect of the economic crisis on the venture are already visible in France. Well-known French agencies have reported that the initial number of lithium batteries being produced by Nissan will be 25,000 units, about half of the original forecast.

5. How has the European crisis affected Better Place?

From Better Place's point of view, the timing of the European debt crisis is extremely problematic. It could cause its financing costs to rise, hamper additional financing rounds, cause competitors to cut prices, and create pressure to lower worldwide gasoline prices, which would decrease companies' readiness to purchase electric cars.

The crisis could also negatively affect Better Place's relationship with Renault. Renault is promoting electric cars in Europe, but only the ones with permanent batteries that recharge quickly. From Renault's point of view, the production of Fluence models with the replaceable battery is a unique, one-time project with only one customer: Better Place. This worsening of economic conditions could cause Renault to offer Better Place less flexible commercial conditions. For example, Renault could request cash, or at least concrete guarantees.

6. Where do the Chinese come into the picture?

One positive light for Better Place, at least in the long run, is Israel Corporation's (TASE: ILCO) Cherry Quantum project to produce cars in China. The project will be officially launched in China at the end of November, and the Chinese media has reported that details about Israel Corp.'s plans to manufacture electric cars with replaceable batteries will also be announced. If and when such cars will begin being manufactured, Better Place will then have an additional supplier on hand and a serious base from which to enter the Chinese market.

The problem is that in the meantime the Chinese are promoting the national electric car project differently than Better Place is. A survey that was recently published states that 30 Chinese cities have already chosen the option of cars with the quick-charge batteries, and have begun building charging stations. China's large electric company, National Grid, has begun building a network of "smart" charging stations throughout the country that is based on quick-charge spots. It is worthwhile to listen carefully to the proclamations from the launching ceremony, which will take place on November 28. Cherry Quantum senior executives, along with Idan Ofer, will be speaking and who knows - maybe they will announce new initiatives.

Better Place declined to comment.

Published by Globes [online], Israel business news - - on November 15, 2011

© Copyright of Globes Publisher Itonut (1983) Ltd. 2011

Twitter Facebook Linkedin RSS Newsletters גלובס Israel Business Conference 2018