Nearly everyone watching the electric vehicle, or EV, market has been disappointed by the industry's ramp-up. President Barack Obama pinned his hopes on 1 million vehicles on the road by 2015 and at one time investors thought that number didn't seem all that crazy. Tesla Motors (Nasdaq: TSLA), A123 Systems, and even Polypore International (NYSE: PPO) have taken their turns being the next hope for investors in the EV market, but hope is fading for investors.
But the question is what should we really be expecting from EVs? They're so new that few consumers are accustomed to the advantages and drawbacks, and the infrastructure is still in a fairly early phase.
Nearly everyone jumped on the bandwagon early, unlike with hybrids, so capacity doesn't seem to be the issue. In fact, it may be one of the problems right now. The industry built so much capacity and demand ramped so slowly that companies were left with massive losses on unproductive equipment. This drove Ener1 to bankruptcy earlier this year and by the look of it A123 Systems may be next. Battery makers aren't the only companies involved in EVs, but they're more dependent than most on their success so they're a good proxy for the industry.
The problem, so far, has been demand. But should we really be surprised in the current economic environment that few people can afford to buy vehicles that have very real range limitations? In a day and age when the financial argument for a hybrid is questionable, those who buy EVs are going to be those with some extra cash and an eye on the environment, not a desire to save money.
Maybe this is a good thing
There are a few good things that may come out of the industry's turmoil. Companies that go bankrupt aren't liquidating like they are in other emerging industries, such as solar. This is because it isn't usually the technology that's led to their demise, it's the balance sheets companies built by ramping capacity faster than needed. Ener1's bankruptcy was unfortunate for investors, but the company doesn't have any plans to leave the market. From a competitive standpoint, bankruptcy may help lower costs and help the company become profitable.
The industry has also learned a lot about what works and what doesn't. Tesla Motors appears to have massive successes with both its Roadster and Model S, paving the way for EVs, but few others have taken a similar strategy. General Motors and Nissan tried to make EVs for everyone with the Volt and Leaf, respectively, only to find buyers unwilling to spend the extra money on a vehicle that had little appeal outside of its efficiency. Ford's (NYSE: F) Focus Electric appears to be on a similarly disappointing path, but it's too early to call its electric version dead on arrival.
What we have learned is that the buyers willing and able to purchase EVs, at least early in the adoption cycle, want an efficient vehicle, but they also want something sexy and inspiring, hence the success of Tesla and the disappointment over the other vehicles. Fisker is another example of a company that had great demand for a high-cost, sexy product that is the high-end version of the Chevy Volt. Fisker was brought down by its own inability to get the Karma into production.
The industry is learning and adjusting on the fly and that has led to some successes and some failures. If our expectations weren't so high maybe we could see this for what it is, a normal growth spurt that weeds out the real competitors from those who were bound to fail.
One foot in front of the other
The industry has been in something of a chicken-egg conundrum on infrastructure as well. You need a large infrastructure of charging stations to make EVs truly competitive on a national basis and that's just rolling out. AeroVironment (Nasdaq: AVAV) and General Electric (NYSE: GE) are rolling out large networks of chargers, but our fueling infrastructure wasn't built overnight and neither will an EV infrastructure.
Manufacturers will also learn from their mistakes early in the process. The Focus Electric looks more appealing than earlier models, Tesla has built an attractive second model, and manufacturers like BMW are just starting to dip their toes in the water. This is a normal progression, something that hybrids went through, and we shouldn't be surprised that there have been bumps in the road. Did we really expect a home run right away?
Foolish bottom line
Our expectations were high for EVs, both as a country and as investors, but the industry is still chugging forward. Tesla appears to be turning into a more stable carmaker capable of weathering the current questions the industry is facing.
Polypore is also taking a long-term approach and still has high hopes for the EV market. After releasing first-quarter earnings, management said that demand for EV products should pick up in the second half of the year, so maybe, just maybe, the growth everyone was looking for is just around the corner.
Ener1 and A123 Systems may be casualties, but when you set your sights so high there's a long way to fall. One million EVs by 2015 appears to have been overly optimistic, but the bottom line is that even though we'll fall short of that number, EVs aren't dead yet.
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