Cleantech Investor

First published in Cleantech magazine, February 2011. Copyright Cleantech Investor 2011

A transport revolution is taking place. Technology innovation is set to wean the road transport industry off its oil dependence.

By Anne McIvor

Transport innovation is taking place in a diverse set of sectors, including next generation biofuels, innovative internal combustion engines and a host of technologies in the broad electric vehicle space, e.g. fuel cells, battery technology, hybrid technology such as range extenders – as well as electric vehicle infrastructure.

Levels of venture capital investment flow can be a good indication of which new technologies have disruptive potential. Based on deal size, some of the largest investments to date have been in technologies for pure battery EVs and related infrastructure.

Electric car manufacturer, Tesla Motors, received funding of over $230 million from high profile venture investors, who included PayPal founder Elon Musk, over a number of years. Last year Tesla raised a further $184 million through an IPO on NASDAQ - a deal which was all the more impressive for taking place amidst tough market conditions. Tesla, which introduced its first vehicle, the Tesla Roadster, in 2008 and plans to release its second, the Model S four-door sedan, next year, is currently valued on NASDAQ at $2.2 billion.

California has been a hotbed of venture funding for electric car companies. Other significant recent venture investments in the sector have included a $76 million round of Series D funding for CODA Automotive. CODA previously raised $25 million in Series D funding in January 2010 and has raised over $200 million in total to date. In addition to its all-electric CODA Sedan, the company is developing lithium-ion battery systems in a joint venture with Lishen Power Battery. CODA’s investors include Harbinger Capital Partners, Riverstone Holdings LLC, AERIS Capital and Angeleno Group.

Also in California, Fisker Automotive closed a $35 million private equity investment to conclude a $189 million funding round in May last year. Fisker plans to launch the Karma electric vehicle and has raised over $300 million since it was established in 2007.

However, in the electric car race it has been an infrastructure company rather than a car manufacturer which has raised the most private funding to date. Better Place, which developed the concept of battery 'switch stations' where drivers can swap their batteries for fully-charged ones, is the target. The company, founded by former SAP executive Shai Agassi, has forged links with Renault, which has designed electric cars with integrated battery exchange mechanisms. California-based Better Place expects to roll out its infrastructure in Israel and Denmark this year, followed by Australia next year.

Better Place most recently raised $350 million in January 2010. That investment round was led by HSBC and brought in Morgan Stanley Investment Management and Lazard Asset Management alongside previous investors which included VantagePoint Venture Partners. Last year’s round valued Better Place at $1.25 billion and pushed it into the ranks of the best funded private companies ever.

But it’s not just venture capitalists backing electric vehicles. An Accenture report, ‘The United States and China: The Race to Disruptive Transport Technologies’, published in early 2011, notes that “significant investment is going into electrification in both markets, as exemplified by the fact that every major automaker has planned or plans to launch an EV or PHEV model. By 2010, in China, five auto manufacturers will have launched PEVs into the market.”

Research and development investment in PEVs in China is enormous. BYD is one of the best known Chinese electric vehicle companies, largely due to an early investment by Warren Buffett - and it was the first to make a major commitment to EVs. According to Accenture, BYD has invested RMB2 billion (US$300 million) in PEV R&D. The Accenture research indicates that Shanghai Automotive Industry Corporation (SAIC) is investing three times that sum, some RMB6 billion (US$ 900 million). However, even the SAIC investment looks set to be dwarfed by the plans of Dongfeng Automobile Co. (DFAC). DFAC is set to invest RMB33 billion – a massive US$4.9 billion – on R&D in EVs over the next ten years.

According to Accenture, the Chinese Government, in addition to consumer incentives for EVs, is planning to invest more than RMB100 billion (US$15 billion) in the next decade, to develop the entire PEV industrial chain.

The business models of Tesla, CODA and Fisker – as well as Better Place – all hinge around full, battery fuelled, EVs (albeit that in the case of Better Place the role is infrastructure provider rather than car manufacturer). It might be easy to dismiss the Tesla Roadster as a niche luxury vehicle – but the company’s fortunes will depend upon the success of the more mainstream Sedan model. So is it significant that venture capital investors – and now stock market investors – are stumping up large sums based on a future for full EVs rather than hybrids?

While virtually all of the major OEMs are also putting their money behind the development of some form of electric vehicle, the pure EV models are, in many cases, limited to niches such as ‘city cars’, such as Daimler’s Smart Electric. The Renault/Nissan Alliance stands out as a pioneer with the launch of mainstream battery EVs, as does Mitsubishi. Nissan’s LEAF has already been launched in some markets.

Honda, meanwhile, has backed fuel cell electric with its Clarity. Toyota, which led the way in terms of hybrid technology with the Prius, is launching a plug-in hybrid vehicle. In terms of alternatives to pure EVs, however, GM looks set to lead the charge with the launch of the Chevrolet Volt plug-in hybrid (which will be the Vauxhall/Opel Ampera in Europe).

Accenture refers to a “large divide between those betting on PHEVs and those betting on full EVs”, referring to the “market debate between Nissan’s EV, the LEAF, and GM’s PHEV, the Chevrolet Volt”. Nissan is targeting initial production of 50,000 vehicles in the first year, while GM is producing just 10,000. Accenture points out that both production targets are conservative and illustrate the uncertainty of consumer demand. It concludes that:

“Following the early bets placed by Nissan and Chevrolet, initial consumer response will ultimately drive the private sector going forward and determine the market winners.”

Cars such as the Volt/Ampera – battery electric vehicles with range extenders – are designed to overcome the current lack of availability of EV infrastructure. The ‘range anxiety’ challenge – the fear of being stranded beyond the reach of a charging point infrastructure (or being required to take the time to wait for a battery to recharge) – is perceived to be a significant barrier to adoption of EVs in markets such as the US and Europe. And some investors are focusing on developments which can overcome this problem, such as innovative range extender technologies. Examples include the mini jet turbine range extender technology being developed by Bladon Jets, in conjunction with Jaguar Land Rover/Tata.

Shai Agassi of Better Place comments that, while cars with range extenders, such as the Volt, may be “good for early adopters,” they are “not needed long term”. Time will tell.

One certainty is that ‘range anxiety’ won’t pose much of a challenge in China. The majority of Chinese have been riding bicycles or motor bikes (many of which are already electric) and don’t have western preconceptions about the desired driving range of a car. Most of China’s car buyers over the next decade will be first time car owners and are likely to be content to adopt driving habits which fall within the scope of what vehicles running on existing battery technology can provide. In any case, in some respects there are fewer obstacles to rolling out an EV infrastructure in China than in many other countries. As the Accenture report points out, China – which is predicted to have 200 million cars on the road by 2020 – doesn’t face the problem of displacing an existing infrastructure:

“China needs to build an infrastructure to support rapidly growing numbers of cars on the roads, while the US already has a large legacy infrastructure in place and the number of cars on the road isn’t expected to rise.”

Aside from Better Place, most EV infrastructure solutions are based on the established plug-in charging model – with technology innovation focusing on fast charging methods. Venture investments in charging infrastructure companies have included $14 million for Coulomb Technologies, a California company which is developing a ‘fast charging’ station in partnership with Aker Wade Power Technologies. That deal (a Series B round led by Voyager Capital and Rho Ventures) took place in February 2010.

Dutch intelligent charging solution developer Epyon closed a €7 million funding round last year. Investors in Epyon include SET Venture Partners, Chrysalix, LiteOn Technology Corp. from Taiwan and BOM and Breesaap of the Netherlands. Epyon, which launched Europe’s first commercially operated fast charging station last year, has entered into a partnership with LiteOn for the Chinese market.

Early this year, ABB of Switzerland made a $10 million investment in Californian fast charging firm, ECOtality, which is deploying some 15,000 charging stations in 16 US cities. It will offer drivers of the Nissan LEAF and the GM Volt a free residential charger through a project being supported by $115 million in US Department of Energy grant funding. ECOtality has also entered China through a joint venture with Shenzhen Goch Investment.

 In addition to the challenge of infrastructure, high battery costs remain a barrier to the adoption of electric vehicles. The US is investing heavily in battery technology through the Batteries for Electric Energy Storage in Transportation (BEEST) programme, which is funding research and development into low cost battery technologies.

General Motors Ventures has invested in companies such as Sakti3, which is developing lithium-ion battery technology, and Envia Systems, which produces components for lithium-ion batteries. The Sakti3 investment was made as part of a $4.2 million funding round alongside Itochu Technology Ventures. General Motors Ventures invested $7 million in Envia Systems as part of a $17 million funding round alongside Asahi Kasei, Asahi Glass, investors Bay Partners and Panagea Ventures – and it also secured the rights for GM to use Envia’s technology in its EVs in the future.

Given the importance of energy security, Accenture points to the role which natural resources will play in future transport strategies at the government level. China has a major natural advantage in terms of batteries, in the form of its reserves of lithium (the ’feedstock’ of electrification). The focus is also on jobs – and Accenture expects China to grow in significance as a battery exporter. Accenture concludes that China will have a competitive advantage over the US in EVs – and that the fact that Chinese car ownership is set to almost triple over the next decade, to some 200 million, means that “in China there will be no losers”.

Government subsidies will play an important role, but ultimately consumer choice will determine which technologies prevail in most markets outside of China. It is clear, however, that we are embarking on a transport revolution which looks set to result in a major shift to electric vehicles. In the US and other mature car markets, where displacement of existing technologies is part of the equation, there will be both winners and losers. The EV industry offers a host of opportunities for cleantech investors. This revolution will also be highly significant for other industries – with major implications for investors in traditional utilities and the oil and gas sector.