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Tesla hits some speed bumps

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Tesla’s stock was down around $200 again after its fourth-quarter report disclosed that neither its sales nor profits had met analysts’ expectations. At the same time, the company went into what one analyst called its “insane mode” as founder Elon Musk predicted that by 2025 the company’s market capitalization would reach $700 billion, matching the current value of Apple.

Analysts were scratching their heads as Musk’s vision seemed utterly at odds with the difficulties that are starting to pile up with Tesla’s ability to meet current goals. The company’s 2014 revenues rose to $3.2 billion, up from $2 billion the year before. However, expenses continued to mount, and losses widened from $74 million to $294 million last year. For the fourth quarter, Tesla delivered only 9,834 of the 12,000 cars it had predicted. Musk blamed the winter weather and customers’ holiday travel for the shortfall. A bigger disappointment has been sales in China, where Tesla sold only 120 cars in January. Musk has supposedly messed up by insisting that the cars be sold only by dealers, whereas the Chinese want anyone to sell them. He also says that concerns about home chargers and the lack of public charging stations have made it extremely difficult to crack China’s notoriously tough market. Musk now says that the company is now not counting on any sales in China to help it reach its goals.

But those goals are wildly ambitious. Musk told analysts that Tesla is anticipating a 30 percent increase in revenues per year for the next 10 years, which is the pace needed to put Tesla’s market value on par with Apple’s. “That would imply sales volume of well over 5 million vehicles per year,” Edward Niedermeyer wrote in Bloomberg View. “That would have Tesla surpassing the 2014 sales of such familiar names as Nissan, Honda and Fiat-Chrysler – at highly significant profit margins – within a decade.” Needless to say, Niedermeyer and many others find this prospect unlikely.

But Tesla isn’t standing still. It announced last week that it will produce a battery for home electricity storage. This will fold nicely with its partnership with SunCity, run by Musk’s cousin. People who install solar panels on their roofs will welcome a battery system that allows them to store electricity for times when the sun doesn’t shine. Just as solar seems to function best when distributed across a wide variety of users, so energy storage may ultimately work best when it is distributed over a wide variety of users.

Whether Tesla will be able to survive all this, however, is still an open question. The main threat to Musk’s vision seems to be coming now, not from predictable delays and bumps in the road, but from healthy competition from experienced automakers. Chevrolet has announced the Bolt, a successor to the Volt, which will be swinging right in Tesla’s wheelhouse – the $30,000 market for electric vehicles that can travel 200 miles or more on one charge.

General Motors has moved the introduction date up to 2017 (the same as the Tesla 3) and seems deadly serious about entering the EV market. “The Bolt EV concept is a game-changing electric vehicle designed for attainability, not exclusivity,” General Motors CEO Mary Barra said in a statement. “Chevrolet believes electrification is a pillar of future transportation and needs to be affordable for a wider segment of customers.”

Besides the Bolt, GM will have an improved version of the Volt, plus the $75,000 Cadillac ELR, a plug-in model. Daniel Miller of Motley Fool isn’t terribly impressed with any of these efforts, noting that the ELR has already had little success competing with Tesla’s Model S in the luxury-car category. “Because of that premium, first-mover brand image that Tesla created with its Model S, it’s hard to imagine how the Bolt will steal much of Tesla’s Gen 3 market in 2017, even if it is price-competitive,” Miller writes.

But if Tesla really has something to worry about, it’s the rumors that Apple, its Silicon Valley rival and the world’s largest company, is preparing a secret plan to enter the car market as well. Just this week it was revealed that Apple has a secret project employing 1,000 people to come up with some kind of concept car that will rival the Tesla Model 3.

“Apple has batted around the idea of developing a car for years,” reported Adam Satariano and Tim Higgins of Bloomberg Business. “Phil Schiller, Apple’s senior vice president of marketing, said in 2012 court testimony that executives discussed building a car even before it released the iPhone in 2007. Mickey Drexler, an Apple board member and head of J Crew Group Inc., also said in 2012 that Apple co-founder Steve Jobs had wanted to build a car.”

Apple has worked on batteries for the iPhone and iPad and also has a supply chain that could easily be applied to vehicles. “The mapping system it debuted in 2012 can be used for navigation. Last year, Apple also introduced CarPlay, a software system that integrates iTunes, mapping, messaging and other applications for use by automakers,” Satariano and Higgins wrote. Of course, that’s a long way from turning out thousands of vehicles, but Apple has invaded other businesses before. It basically knew nothing about the music business when it started on iTunes, and had no experience with telephones when it invented the smartphone.

In any case, even if Tesla finds itself in competition with much larger established companies – something Musk predicted at the start – it is revolutionizing the field of automobiles by making the electric car seem practical. Although Musk’s dream may prove to be overblown, he has certainly advanced the search for alternatives to the internal combustion engine.

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Is Elon Musk the next Henry Ford?

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Elon Musk doesn’t mind making comparisons between himself and Henry Ford. Others are doing it as well.

In announcing his plans for a “Gigafactory” to manufacture batteries for a fleet of 500,000 Teslas, Musk said it would be like Ford opening his famous River Rouge plant, the move that signaled the birth of mass production.

The founder of PayPal and current titular leader of Silicon Valley (now that Steve Jobs is gone), Musk is not one for small measures. The factory he is now dangling before four western states would produce more lithium-ion batteries than are now being produced in the entire world. And that’s not all. He’s designing his new operation to mesh with another cutting-edge, non-fossil-fuel energy technology – solar storage. His partner will be SolarCity (where Musk sits on the board), run by his cousin Lyndon Rive. Together they are looking beyond mere automobile propulsion and are envisioning a world where all this solar and wind energy stuff comes true.

So, is Musk a modern-day Prometheus, bringing the fire to propel an entirely new transportation system? Or, as many critics charge, is he just conning investors onto a leaky vessel that is eventually going to crash upon the shores of reality? As the saying goes, we report, you decide.

One investor that is already showing some qualms is Panasonic, which already supplies Tesla with all its batteries and would presumably help the company fill the gap between the $2 billion it just raised from a convertible-bond offering and the $5 billion needed to build the plant. “Our approach is to make investments step by step,” Panasonic President Kazuhiro Tsuga told reporters at a briefing in Tokyo last week. “Elon plans to produce more affordable models besides [the] Model S, and I understand his thinking and would like to cooperate as much as we can. But the investment risk is definitely larger.” Of course, this is Japan, where “the nail that sticks out gets hammered down.” Corporate executives are not known for sticking their necks out.

Another possible investor is Apple, which has mountains of cash and, at least under Steve Jobs, was always willing to jump into some new field – music, cell phones – to try to set it straight. This is a little more ambitious than the Lisa or the iPod and Jobs is no longer around to steer the ship, but Apple and Musk officials held a meeting last spring that stirred a lot of talk about a possible merger. A much more likely scenario, according to several commentators, is that Apple would become a major player in the Gigafactory.

And a Gigafactory it will be. Consider this. The three largest battery factories in the country right now are:

1)    The LG Chem factory in Holland, Mich. is 600,000 square feet, employs 125 people and produces 1 gigawatt hour (GWH) of battery output per year.

2)    The Nissan factory in Smyrna, Tenn. is a 475,000 square-foot facility with 300 employees puts out 4.8 GWH per year.

3)    A123 Systems’ battery factory in Livonia, Mich. is 291,000 square feet, employs 400 people and produces 0.6 GWH per year.

Both LG and Nissan received stimulus grants from the Department of Energy, built to overcapacity and are now operating part-time.

Now here’s what Musk is proposing. His Gigafactory would cover 10 million square feet, employ 6,500 people and produce 35 GWH per year of battery power. Basically, Musk’s operation is going to be ten times better anything ever built before, at a time that most of what exists isn’t even running fulltime. Does that sound like something of Henry-Ford proportions? Similar to Ford’s $5 a day wages, perhaps?

There are, of course, people who think all of this is crazy. In the Wall Street Journal blog, “Will Tesla’s $5 Billion Gigafactory Make a Battery Nobody Else Wants?,” columnist Mike Ramsey expresses skepticism over whether Tesla’s strategy of using larger numbers of smaller lithium-ion is the right approach. “Every other carmaker is using far fewer, much larger batteries,” he wrote. “Tesla’s methodology – incorrectly derided in its early days as simply using laptop batteries — has allowed it to get consumer electronics prices for batteries while companies like General Motors Co. and Nissan Motor Co. work to drive down costs without the full benefits of scale. Despite this ability to lower costs, no other company is following Tesla’s lead. Indeed, in speaking with numerous battery experts at the International Battery Seminar and Exhibit in Ft. Lauderdale a few weeks ago, they said that the larger cells would eventually prove to be as cost effective, and have better safety and durability. This offers a reason why other automakers haven’t gone down the same path.

But Musk has managed to produce a car that has a range of 200 miles, while the Leaf has a range of 85 miles and the Chevy Spark barely makes 82. Musk must be doing something right. And with Texas, Arizona, Nevada and New Mexico all vying to be the site of the Gigafactory, it’s more than likely that the winning state will be kicking in something as well. So, the factory seems likely to get built, even on the scheduled 2017 rollout that Tesla has projected.

At that point, Musk will have the capacity to produce batteries to go in 500,000 editions of the Tesla Model E, which he says will sell for $35,000. Sales of the $100,000 Model S were 22,000 last year. Does this guy think big or what?

To date, Silicon Valley doesn’t have a terribly good record on energy projects. Since Kleiner Perkins Caufield & Byers fell under Al Gore’s spell in 2006, its earnings have been virtually flat and the firm is now edging away from solar and wind investments. Venture capitalist Vinod Khosla’s spotty record in renewables was also the subject of a recent 60 Minutes segment. But, as venture capitalists say, it only takes one big success to make up for all the failures.

Will Tesla’s Model E be the revolutionary technology that, at last, starts making a dent in oil’s grip on the transportation sector? At least one investor has faith. “I’d rather leave all my money to Elon Musk that give it to charity,” was the recent evaluation of multi-billionaire Google founder Larry Page.

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Tesla Takes It to the Next Level

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This will be a week for watching Tesla, not only because the company’s stock had soared to new heights but because Elon Musk seems poised to take it to the next level – manufacturing batteries.

Musk has scheduled a conference call this week and gives every indication is he will be announcing plans for a new “Giga factory” where the Silicon Valley auto company will manufacture its own batteries. “Very shortly, we will be ready to share more information about the Tesla Giga-factory,” Musk told shareholders in his 4th quarter letter last week. This will allow us to achieve a major reduction in the cost of our battery packs and accelerate the pace of battery innovation.”

In a way the company has little choice. If Tesla is to move down-market from its current luxury niche – which has always been the plan – it is will need to buy the equivalent of the world’s entire current output of lithium-ion. The easiest thing to do is to go into manufacturing itself.

As usual, Musk will be doing things with a flair. Rumor is that he will be combining with SolarCity, which is run by his cousin Lyndon Rive, to produce a facility running largely on solar power. This will take us way beyond fossil fuels into the kind of world environmentalists imagine, where intermittent solar and wind power are stored to provide the kind of “high-9’s” reliability required by an industrial, digital society. And the key to that will be the same thing that Musk is working on now – batteries.

This kind of convergence is the reason for the number-two rumor of the week – that Tesla and Apple have engaged for a possible collaboration, even a merger. Last week San Francisco Chronicle reporters Thomas Lee and David Baker revealed that Apple’s M&A specialist Adrian Perica met with Musk last spring. What did they talk about?  Obviously a joint venture is in the air. Remarkably, only last October German stock analyst Adnaan Ahmad wrote an open letter to Apple saying it should consider entering the auto business by buying Tesla. The reasoning is as follows:

  • Despite its reputation for cutting-edge products, Apple’s traditional market for personalized devices seems to be reaching its limits. Sales of smart phones and tablets are maturing. Apple’s Next Big Thing is supposed to be a smart watch. A watch?  Is that an appropriate ambition for the world’s most innovative company?  As Steve Jobs did so many times, Apple need to enter an entirely new business and turn it upside down.
  • Apple is sitting on $160 billion in cash. It could literally buy almost any company in the world. Even with a market capitalization that is inflated by high expectations, Tesla is only worth $24 billion. The whole thing is doable.
  • Tesla needs an infusion of cash if it is to break out of its luxury niche and provide a car for the masses. The company’s proposed Gen III would sell for $35,000 and compete with the Chevy Volt and the Ford Focus. But more than half of that cost is in the battery. If Tesla can achieve vertical integration and come up with some new innovations, it may be able to turn a profit. But Apple is in the battery business as well, since most of what’s under the hood in an iPad or iPhone is lithium-ion. There is a convergence taking shape.

Of course there are many things working against this vision. Both Tesla and Apple may deal in lithium-ion batteries but designs aren’t the same and the chemistry is different. Also, when it comes to storing huge amounts of electricity at the factory, lead-acid remains the preferred technology. It’s cheaper in a way that lithium-ion will find if very difficult to duplicate.

Still, there seem to be breakthroughs coming in battery research almost every week. Only two weeks ago, researchers at Harvard announced the invention of a “flow battery” that stores a charge in organic liquids rather than metals. At the University of Limerick, researchers announced the development of a new germanium nanowire-based anode that greatly expands the capacity and lifetime of lithium-ion batteries. And researchers at Stanford said they had developed a silicon anode based on the design of a pomegranate seed that improves lithium-ion storage capacity by a factor of 10. All this is within the space of the last two weeks.

Batteries are hot and Elon Musk will be walking right into the middle of it. He has proved Tesla’s charging system has legs. The first Model S just made the 3,464-mile journey from Los Angeles to New York in 76 hours using Tesla’s new network of supercharger stations. Recharging has been reduced to just over an hour. Model S sales hit 22,500 for 2013, exceeding expectations. With all this success under its belt, the company is preparing to move down-market, where it can really have an impact on our fossil fuel dependence.

Like many Silicon Valley entrepreneurs, Musk is obsessed with space travel. He says he wants to be buried on Mars – “and not on impact.” With Steve Jobs gone, Musk may be the man to take Silicon Valley’s venture into alternative automobile propulsion to the next level.

 

Arctic Leaf

Robert Rapier loves methanol

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Robert Rapier – “R2” as he calls himself in good scientific notation – is one of the smartest people out there when it comes to energy. A master’s graduate in chemical engineering from Texas A&M University, Rapier is chief technology officer and executive vice president for Merica International, a renewable energy company. He also writes a regular column at EnergyTrendsInsider.com.

And he is a big enthusiast of methanol.

In a series of recent columns, Rapier has made a strong case that methanol is our best option for replacing foreign oil. He believes it can be done cleanly and in a way that also reduces carbon emissions. Unfortunately, one of the biggest impediments, according to Rapier, is the huge political momentum behind corn ethanol, which he regards as an inferior fuel. He is also highly critical of the biofuels effort, which has attracted so much attention in the form of venture capital from Silicon Valley.

“You can buy methanol today for around $1 per gallon,” he said. “This is a big, well-established business that does not receive heavy subsidies and government support as ethanol does. On a per BTU basis, unsubsidized methanol costs $17.61 per million BTUs. You can buy ethanol today – ethanol that has received billions in taxpayer subsidies – for $1.60 per gallon. On a per BTU basis, heavily subsidized and mandated ethanol sells for $21.03 per million BTUs.”

Yes, you read that correctly. We are paying 20% more for ethanol, enabled via highly paid lobbyists, heavy government intervention, taxpayer funds and protectionist tariffs than we are for methanol that has long been produced subsidy-free.

Unfortunately, the decision to mandate ethanol consumption while ignoring methanol has been based much more on politics than on the two fuels comparative advantages. “The fact is, methanol simply has not had the same sort of political favoritism, but is in [Rapier’s] opinion a far superior option to ethanol as a viable, long-term energy option for the world.”

Where biofuels are concerned, Rapier states that the effort has always been predicated on the assumption that we will eventually switch from corn ethanol to much more abundant, non-food cellulosic feedstocks such as switch grass. We just have to wait until somebody comes up with a way to break down cellulose. What investors do not seem to realize is that techniques for breaking down cellulose have been around since the 19th century. They just have proved to be too expensive.

But “high costs have never been a deterrent for Silicon Valley entrepreneurs who wielded Moore’s Law as the solution to every problem. In their minds, the advanced biofuel industry would mimic the process by which computer chips continually became faster and cheaper over time. But advanced biofuels amounted to a fundamentally different industrial process that was already over 100 years old. A decade into this experiment it is clear that Moore’s Law isn’t solving the cost problem.”

(Actually, if you read George Gilder’s latest book, “Knowledge and Power,” you would realize that mathematicians such as Claude Elwood Shannon and John von Neumann have determined that information as an entirely separate entity from energy and matter. Moore’s Law applies only to information, not matter and energy.)

Rapier says biofuels will never succeed until the effort at developing them is redirected into producing methanol rather than ethanol once again:

For methanol, we can produce it from biomass via a similar process to how it is produced for $1 per gallon today. There are numerous biomass gasifiers out there. Some are even portable. They do not require high fossil fuel inputs and they utilize a much larger fraction of the biomass. They aren’t limited to cellulose. They gasify everything – cellulose, hemicellulose, lignin, sugars and proteins – all organic components. And if there is also a heating application, the combined heat and fuel or power efficiency of a biomass to methanol via gasification route is going to put cellulosic ethanol to shame. In any case, the efficiency of biomass gasification to methanol is going to put cellulosic ethanol to shame, because it doesn’t have to deal with all of that water present in the ethanol process.

Altogether, Rapier argues that methanol has a much broader potential feedstock, is easier and cheaper to produce and could be manufactured in much larger quantities than corn ethanol. And this doesn’t even consider the possibility of synthesizing it from our superabundant supplies of natural gas. The problem is that “methanol doesn’t have a big lobby and 42 senators from farm states it can count on for perpetual support.”

At Fuel Freedom Foundation, we believe we should pursue all these options – ethanol, biofuels, compressed natural gas (CNG), liquefied natural gas (LNG) and electric cars. They all offer the possibility of reducing the $350 billion we shell out each year for imported oil. But we can’t help but admire Rapier’s observation that the methanol option is greatly underappreciated. The reasons are: 1) the EPA restrictions that make it illegal to use in car engines and 2) the lack of any large constituency such as the farm lobby that stands to gain from it. For that reason alone we’re very encouraged by Rapier’s writings and look forward to more in the future.