This past week was an exceptionally bad one for electric vehicle (EV) companies. An international electric car company named Better Place has finally closed shop and filed for bankruptcy. After several years of operation and various financing rounds led by Morgan Stanley and HSBC, investors simply grew tired of the company and threw in the towel. Approximately $1.2 billion of invested capital evaporated over night. Now that Better Place has provided a fabulous example of value destruction, the question now remains whether other visionary electric vehicle manufacturers are bound to meet the same fate.
Is there anyone else?
Back in 1997, Toyota unveiled the world’s first commercially mass-produced hybrid car (the Prius). With mounting fears of environmental pollution and over- dependency on Arab oil, the new vision of electric vehicles was quickly embraced by many politicians and investors alike. And Better Place wasn’t doing it alone. Tesla Motors Inc (NASDAQ:TSLA), went head first and became the first IPO of an American car manufacturer since 1956. Even Berkshire Hathaway Inc. (NASDAQ:BRK.A), led by Mr. Buffett decided not to stand on the sidelines of this mega green trend. Buffett purchased a 10% stake in BYD Company for about $232 million in 2008 through Berkshire Hathaway Inc. (NASDAQ:BRK.A)‘s subsidiary MidAmerican. The purchase made MidAmerican the fourth largest shareholder in the company.
It’s just hype… or is it?
The main concern over any “green” investment is whether it’s more environmental or more profitable. In other words, there are always looming doubts regarding the future cash generation capabilities of the new venture. Even BYD, Buffett’s Chinese jewel, has caused him a great deal of disappointment at first. From 2008 to 2011 BYD’s net profit decreased 89% to 275 million yuan in the first half of 2011. For the full year, the total number of cars sold slipped 13.3% from 2010, which the company attributed to a downturn in the domestic automobile market and a decline in the overall market share of domestic brands. The year ended with revenue down 0.8% and profit down 44%. Tesla Motors Inc (NASDAQ:TSLA) has been having tough times as well. The inventor of the Model S has lost an aggregate of $800 million in the years 2010 – 2012 alone. And that’s not even counting its first years of operation. These massive losses led many investors to believe that electric vehicles are nothing but smoke and mirrors.