At the 2010 World Economic Forum meeting in Davos, Shai Agassi, founder and chairman of the Better Place electric vehicle venture, was interviewed by the Israeli media. A few days earlier, Better Place announced the closing of a $350 million financing round at a $1.25 billion company valuation, led by the HSBC investment bank and with participation from some of the most respected names in the investment sector.
Agassi radiated self-confidence during the interview, citing enormous numbers and giving larger-than-life predictions. He said that the company's value was projected to grow by billions of dollars, with a 40-50% profit margin, and spoke of plans to deploy 70 battery replacement stations in Israel, big dividends for investors, and so forth.
When the interviewer bore in on Agassi and asked him whether we had already reached a stage at which the consumers themselves were demanding electric cars, the answer was unequivocal: "You should ask the same question at Davos 2014. Then you'll know that it works… and you'll ask why all the companies aren't already making electric cars."
The outcome is known, of course. After burning through hundreds of millions of dollars, undergoing a series of management upheavals, and selling fewer than 1,000 electric cars, Better Place closed down in early 2013.
Better Place: The wrong place at the wrong time
From a historical perspective, Better Place was a typical case of a good idea in the wrong place at the wrong time. Despite several strategic mistakes by the company, such as an attempt to build a revenue model based on electricity sales marketed to consumer at higher rates that those of Israel Electric Corporation, the vision of switching from gasoline-powered vehicles to electric vehicles on a global scale augured the future, and contributed to shaping it to some extent.
It is a fact that just in the past 12 months, 2.2 million electric cars went on the roads, mostly of them in China. Tesla is now selling more cars in the US than Mercedes-Benz. All of the global auto manufacturers, including the popular low-cost ones, are in a race to make their models electric.
Agassi's prediction that the travel ranges between charging would soar within a few years, while the price of batteries would shrink, has come true. Even the idea of putting up road stations to replace batteries, which seemed odd at the time, is materializing, with the largest electric vehicle manufacturer in China making a huge investment. It can therefore be assumed that had this project begun five years later, perhaps accompanied by fashionable autonomous driving technology, it would have achieved the company value that it was seeking.
The world is getting ready to charge cars
Timing, however, was not Better Place's only problem. The location selected to launching the pilot for the global project, the Israel vehicle market, made a decisive contribution to the company's collapse.
The main reason that Better Place chose Israel was not the size or advanced state of the local market; it was the heavy taxes imposed on vehicles in Israel. The company hoped to take advantage of the huge and artificial difference in taxation between gasoline and diesel fuel-powered vehicles, on which taxes in Israel were among the highest in the world, and electrically-powered vehicles, which the government already granted an almost complete exemption from purchase tax. On paper, this gap made it possible to price Better Place's electric vehicles the same or slightly lower than gasoline-powered vehicles, while the R&D costs could be rolled over, leaving large profit margins for the manufacturer and the marketers.
Today, 10 years later, this taxation gap still exists in Israel, and will continue to exist for at least the next three or four years. Furthermore, the Israeli and global vehicle markets will face a flood of new electric vehicles and charging ventures in 2020. The big question is therefore what has changed since Better Place failed. Is the Israeli customer more willing in 2020 to adopt the electric vehicle revolution than at the beginning of the decade?
Vehicles and batteries: Compromises are necessary
When Better Place began, the modern electric vehicle was still at the pre-birth stage. The supply of regularly produced electric vehicles was negligible and charging technology was primitive. The really big problem, however, was that battery technology was not ready.
The batteries used by Better Place were among the most advanced in the world, but in today's terms, they were awkward, added hundreds of kilograms to the vehicle, and provided an almost unacceptable theoretical travel range of 160-180 kilometers between charging of the battery, and less than that in practice. They were reliable and stable, but as the company's loyal customers learned, the range provided by the batteries fell steeply between charging.
The technology and the supply are now very different. There has been a breakthrough in battery technology that now makes it possible to give a "normal" electric vehicle a theoretical range of 300-600 kilometers. Battery weight is now tens of kilograms less than the batteries used by Better Place, and the batteries are mass produced by a several global supplies at prices 80% less than early in the decade. The price per KwH, the accepted measure of battery capacity, from which the potential range between charging is derived, is around $200, and is now projected to fall to $100 or even lower by the middle of the next decade, subject to achieving balance between supply and demand. As of now, surplus demand is preventing prices from falling.
Electronics has also made great strides. The advanced management systems in the electric vehicle make it possible to recycle far more kinetic energy than previously, and to increase range.
But, and it is a big but, even the most advanced electric cars of today still require compromises. The most efficient models in the market consume around 14 KwH for each 100 kilometers according to a stringent world harmonized light-duty vehicles test procedure (WLTP) standard, which also does not precisely represent real driving conditions (traffic jams, extreme temperatures, steep ascents, working air-conditioners, etc.).
In other words, in order to attain theoretical range of 400 kilometers, a vehicle must be equipped with a battery with at least 50-55 KwH. This means adding tens of thousands of dollars to the production cost, which is only partly offset by the omission of special components for gasoline and diesel fuel-powered vehicles.
For this reason, a large proportion of the electric vehicles with long ranges are still luxury cars. Almost with exception, the more popular models still depend on the beneficial regulation and tax benefits in order to avoid deviating from the logical location in the permutation matrix for money. Even then, the prices are still not attractive, and the manufacturers' profits margins, if any, are very small.
Many are waiting for a drop in price for electric vehicle models made in China, which enjoy government support there, have access to mass-produced batteries, and have low manufacturing costs. Even the Chinese cannot create miracles, however.
Here is an actual case: the ZS electric car made by SAIC Motor, which will soon be available in Israel and offers a range of 263 kilometers between charging, costs almost 25% more in Israel than the price of the same brand with a gasoline-powered engine, despite a tax advantage of almost 60% for the electric model over the gasoline model.
Charging infrastructure: Dependence on government subsidies
At the time, Better Place was well aware of the chicken and the egg problem in the electric vehicle market. There is no way to sell mass numbers of electric vehicles without large-scale public charging infrastructure, and it is not financially worthwhile to build and operate such charging infrastructure without masses of customers owning an electric vehicle.
The company tried to solve this problem with its own resources, and suffered losses in the process that substantially cut back its original deployment plans. The state is now trying to solve the problem by providing tens of millions of shekels in funding for construction of public charging stations, which has encouraged entrepreneurs to begin deploying charging stations, including high-speed stations costing hundreds of thousands of shekels per unit.
This still amounts to a gamble, however. Government and municipal budgets are limited, and it is still for all intents and purposes a business whose long-term existence depends on large-scale penetration of the private and institution markets by electric vehicles. If a critical mass of vehicles does not appear within a reasonable time, the expensive charging infrastructure is liable to suffer the same fate as Better Place's battery replacement stations.
Another limitation of batteries is that complete charging of 40-50 KwH batteries at home from the electrical grid, assuming that the customer has access to such charging, takes 8-11 hours. This is fine for people who have a night charging wall at home or at work, but it is less suitable for people driving long distances, work vehicle fleets, and people taking long leisure trips.
In order to make electric cars more attractive and useful, the auto and infrastructure industry is promoting high-speed charging solutions a commercial stations of 100, 150, and even 200 KwH. These can add several dozen kilometers, or even several hundred kilometers, to the effective travel range of an electric car in just tens of minutes, and substantially shorten the waiting period.
The auto manufacturers are now putting more and more electric cars that support high-speed charging on the market. This charging method, however, is not ideal for the battery's lifespan. BJEV, a major Chinese electric vehicle manufacturer, recently alleged that frequent high-speed charging could shorten the battery's lifespan by up to 30%. This is liable result in a serious problem for the manufacturers, who grant long-term warranties for the batteries in electric cars. As of now, however, this is not the biggest problem. In short, the current state of affairs in electric vehicle charging is better than when Better Place was in business, but covering Israel with public and/or high-speed charging stations is liable to prove a no-less-expensive gamble than it was early in the decade, unless the state provides long-term support for the venture.
The customers: Loyal to maintaining value
The 2020 Israel vehicle market is very different from the market in which Better Place operated early in the decade. The supply of vehicle has grown substantially, the question of engine volume has been eliminated, and the market share of hybrid vehicle has shot up to over 25%, compared with less than 5% early in the decade. Many customers, both private and institutions (people with company cars), are being exposed to the experience of driving electrically and the potential saving of plug-in vehicles that can travel several dozen kilometers on electricity in complete silence.
The institutional market is not psychologically wedded to inflexible "usage value" groups, as was the case early in the decade. There are companies, especially technology companies, that actively encourage their employees to buy environmentally friendly vehicles. The selection available to hundreds of thousands of people with company cars is significantly greater than it was, and the price range is wider. Furthermore, the interest rate is substantially lower, and financing for buying a vehicle is far more available than it was a decade ago.
There are still several background market factors that have not changed, however, above all three basic features that Israeli customers look for in their new vehicles: marketability (preservation of value, which is directly related to a reputation for reliability), usability, and in recent years also status. The status of an electric vehicle is not likely to prove a barrier, due to the large number of electric vehicles with SUV configurations - the configuration preferred by Israeli status-seekers - and due to Tesla's success in becoming a status symbol among the global financial aristocracy.
Usability is still a marketing stumbling block. Many people in Israel living in apartment blocs have no access to home charging stations, even if their home has a registered shared parking lot. This fact alone eliminates hundreds of thousands of potential electric vehicle customers in Israel.
The third feature, preservation of value, is a major problem. On the one hand, electric cars guarantee their owners lower operating costs and greater reliability than gasoline and diesel fuel-powered vehicles, because they require less mechanical handling and have few mechanical parts that are liable to malfunction.
On the other hand, as of now, there are too many causes of uncertainty pertaining to preservation of the value of the electric cars used in Israel: the rapid expiration of the batteries, the price lists policy on this category, the number of secondhand customers who will be looking for used electric vehicles in the future, and especially concern that the trend towards electric vehicles will vanish. Many people still remember how Better Place vehicles became virtually worthless after the company collapsed.
All of the above is true for private customers, and is even more applicable to the vehicle leasing companies, for whom preservation of the scrap value is a critical element in their balance sheet and profits. Better Place tried to solve this problem at the time by singing contracts with leasing companies in which it undertook to repurchase the cars at the end of the leasing period, thereby ensuring them a larger profit.
However, even if the leasing companies are persuaded not to exclude electric vehicles from their fleets - this is a possibility, given the business dependence between these companies and the importers - they still cannot force people with company cars to abandon a "safe" gasoline-powered vehicle in favor of an electric vehicle with limited usability. This was one of the main mistakes that caused the collapse of Better Place.
In the bottom line, despite the development and progress in the Israeli vehicle market in the past decade, we are still not Norway or California. Air pollution is at the bottom of the priorities of average Israeli consumers, and a large proportion of vehicle fleet customers enjoys free fuel, which makes them indifferent to the cost of operating the vehicle. They are definitely not indifferent, however, to the value of monthly usage, which will be higher for electric vehicles, despite the NIS 1,000 monthly benefit.
The extent of battery charging infrastructure depends on the Ministry of Finance's caprices, and the usability/price ratio is still in favor of gasoline-powered vehicles. It is therefore doubtful whether Israel is currently a better place for mass distribution of electric vehicles than it was in 2010, and that is without mentioning the problem of hostile regulation.
Published by Globes, Israel business news - en.globes.co.il - on October 28, 2019
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