*with humble apologies to Charles Darwin
John Petersen
The Oxford Dictionary
defines the adjective ‘specious’ as:
- Superficially plausible, but actually wrong;
- Misleading in appearance, especially misleadingly attractive.
The Wiktionary
offers a broader definition as:
- Seemingly well-reasoned or factual, but actually fallacious or
insincere; strongly held but false; - Having an attractive appearance intended to generate a favorable
response; deceptively attractive.
Over the last two years I’ve patiently analyzed the evolving price and
performance forecasts of electric vehicle advocates and lithium-ion
battery developers. In the process I’ve shown them to be possible, but
unlikely, and interdependent to the point where a single flawed
assumption can level the entire house of cards.
I’ve also puzzled over the broader question of why supposedly
reasonable businessmen would encourage market expectations that are so
aggressive that the probability of delays, cost overruns, performance
shortfalls and other predictable failures approaches certainty.
Everyone knows that the stock market reacts badly to disappointment, so
I’ve never been able to figure out why companies would voluntarily set
themselves up for that kind of pain.
I found my explanation last week. The lights went on when I downloaded
a new DOE Report titled “Economic
Impact of Recovery Act Advanced Vehicle Investments,” which just
happened to coincide with groundbreaking ceremonies for Compact Power’s
new plant in Holland, Michigan that will create one new job for every
million dollars of capital investment. When I compared the conclusions
of this seven-page DOE report with the exhaustive technical discussions in
the 380-page Annual
Progress Report on Energy Storage Research and Development the DOE
released in January, the differences were breathtaking.
Who’d have dreamed an industry could make that much progress in only
six months.
The answer fell into place when I noticed that (a) the DOE press release
uses a hyperlink to the White
House for people who want to read the full text of the Report, and
(b) the Report is not even hosted on the DOE’s server. Since I’ve never
encountered a situation where the government agency that generated a
report left it out of their official record, the clear inference is
that the Report is political theatre wrapped in a DOE cover.
Once you understand that The Origin of
Specious is political rather than technical, everything else
makes sense. Armed with barrels of taxpayer money, the political class
has sought out battery developers who will adopt the party line and add
technical credence to questionable ideological goals. Faced with a
Hobson’s choice between needed funding and technical integrity, the
developers make the rational business decision and take the money,
confident that future apologies will be easier to spin than current
failure. Sprinkle in a healthy dose of optimism from journalists who
don’t bother checking facts and you have the perfect political story
for the next five years.
American presidents are supposed to inspire with challenges like
putting
a man on the moon or tearing down the Berlin Wall. The great ones
sometimes succeed. For lesser men, the grand visions of their day
target the highest
fruit on the lemon tree and bring us wars on poverty, drugs, terror,
foreign countries and CO2 that inevitably fall short of
the mark while leaving us no wiser, but a little poorer and a little
less free.
We all know how well pre-election promises work out. While it gives me
no end of comfort to hear presidential assurances that battery
prices, healthcare costs and budget deficits will collapse over the
next five
years, I’m not quite ready to pay a premium price to invest in those
outcomes.
At the close of business on Thursday, the electric vehicle complex
including Tesla Motors (TSLA),
A123 Systems (AONE),
Ener1 (HEV)
and Valence Technology (VLNC)
had combined 12-month revenues of $258 million and sported a combined
market capitalization of $3.4 billion, including $900 million in
stockholders’ equity and $2.5 billion in blue sky premium.
In comparison, the lead-acid battery complex including Enersys (ENS),
Exide Technologies (XIDE),
C&D Technologies (CHP) and
Axion Power International (AXPW.OB)
had combined 12-month revenues of $4.6 billion and a combined market
capitalization of $1.6 billion, including $1.2 billion in stockholders’
equity and $460 million in blue sky premium.
Something is out of kilter when the electric vehicle complex has 6% of
the sales and 77% of the stockholders equity of the lead-acid battery
complex, but trades at twice the price.
Within a couple weeks, all of these companies will report second
quarter results. The electric vehicle complex is likely to report
bigger than expected losses – again, and at least for Ener1 and
Valence, weak financial condition. In comparison the lead-acid complex
is likely to once again report better than expected revenues, margins
and financial condition. At some point the market will accept the cruel
reality that political promises cannot repeal the laws of economic
gravity, we can’t waste scarce resources in an effort to conserve
plentiful resources, and investments in vehicle electrification are
bound to follow the tragic value trajectory blazed by fuel cells and
corn ethanol, which have been favorites of the political class since I
was a baby lawyer.
It’s your money, but at least you understand The Origin of
Specious.
Disclosure: Author is a former
director of Axion Power International (AXPW.OB)
and holds a substantial long position in its common stock.