Better Place brought heavy ammunition to last week's Copenhagen Climate Change Conference. This included a working model of its smart battery recharging network and the unveiling of the Renault Fluence electric car with test drives in the streets of the Danish capital.
This is the car that will be the backbone of Better Place's initial penetration into the Israeli market. The car and the project attracted enormous attention, with photo ops with the world's business and political leaders, and of course, President Shimon Peres and Minister of Environmental Protection Gilad Erdan, who were in Copenhagen, heaped enthusiastic praise on the project.
However, there was no new strategic pronouncement about Better Place in Denmark, or even a declaration of support in principle by the US administration on a vision for the electric vehicle.
On to the practical phase
However, an investigation by "Globes" reveals that behind the scenes, Shai Agassi's Better Place has reached the final operative stages, and is beginning to speed up preparations for marketing electric cars in Israel, which will begin in the third quarter of 2011.
The issue now is not about a media-hyped national network of battery recharging points using advanced technologies of one type or another, all of which we have been covered by the media over the past two years. "Globes" looks at less sexy subjects like sales, leasing, and after-sales, which may be far from the glittering global stage in Copenhagen but without which the vision cannot be realized. These activities move Better Place into the more traditional and complex territory of Israel's vehicle market, which is controlled by powerful players with uncompromising rules.
There have been recent reports that Better Place has begun intensive contacts with, and undertaken surveys with, some of the country's major leasing companies. Better Place is clearly being realistic. Over the past few years the company's declared strategy has been focused lower down the supply chain at generating demand among last vehicle fleets, who, it was believed, would put pressure up above on the leasing companies.
According to Better Place itself, the company has signed nonbinding agreements over the past two years to try out the electric cars with some of Israel's largest fleets, which together operate over 40,000 vehicles. However, the distance between declarations of green principles by Israeli high-tech and biotech companies, and actually procuring electric cars, passes through the checkpoint guarded by Israel's leasing companies.
The leasing companies are attentive to their customer's requirements but only up to a certain point. At the end of the day their decision on what to buy rests on business considerations. Purchases that are not worthwhile translate into leading conditions and prices that are not attractive to customers.
An example of this can be found when hybrid cars first entered Israel's vehicle fleets. There was a demand from below for green hybrid cars in local fleets for years, but only after the right conditions were available did the leasing companies adopt the cars. In other words, only when the leasing companies were offered major discounts did the hybrid cars begin to sell to fleets in significant numbers.
Difficult to bypass the system
Theoretically, Better Place could bypass the system in two ways. First, it could persuade the mass of fleets, most of which are customers of the operating lease fleets, to buy cars directly from it with the assistance of various benefits, and the support of banks or financial institutions. This is a finance focused sector that would have to change the established order in the fleet market, and even the major, well-organized car importers have not succeeded in doing this until today. Better Place, according to its own statements, has no desire to become a car importer.
The second option would be to set up its own independent leasing operation or acquire a significant stake in an existing large leasing company. It is highly doubtful that the option of buying a leasing company is realistic when taking into account the current level of risk in the field and Better Place's timetable. Most large leasing companies operating in Israel already have a heavy debt structure and very close ties with vehicle importers.
On the other hand, acquiring a smaller company or setting up a leasing company would not be suited to the kind of major sales planned by Better Place.
A Deutsche Bank report that recently reviewed Better Place's business plan found that the company intends reaching sales to 14,000 customers by the end of 2012, which will be its first full year of operations. By the end of 2016 Better Place plans to have more than 100,000 customers in Israel and Denmark combined.
In other words, after one year of operations Better Place hopes to have a fleet of vehicles of a size that would not disgrace a well-established leasing company. This is a very ambitious target.
Giving incentives to the leasing companies
In order to shorten time to market and make sales targets, it is vital to achieve a critical mass of electric car users. To justify investment in infrastructure, and the commitment to car manufacturers (so far Renault), Better Place will need to offer leasing companies and their customers with fleets, generous packages and incentives and more practical bonuses than the promise of a green future, or immunity from the high price of gasoline.
This package will have to include three basic elements, which today shape purchase deals in Israel's leasing market: an attractive price for the car, a good second-hand market value for the car when the leasing company is ready to sell it, and an attractive use value for the customer. Two of these topics are in the hands of the Ministry of Finance.
The government's green vehicle tax on the group of electric cars that Better Place plans importing will produce tax savings of 60%. Purchase tax will be just 10% of the vehicle value compared with 83% for regular gasoline powered cars.
Lowering use value
The overall benefit of an electric car lowers the cars cost by $9,000 for the importer. Even before considering the battery itself, Better Place also has many more ways of making electric cars attractive for leasing companies. All this assumes that Better Place will ultimately decide not to give cars to customers for a monthly fee but rather to go through the leasing companies. The second tax benefit currently being mulled by the Ministry of Finance is lowering the use value on electric cars in company fleets. This benefit from 2010 onwards should be higher than the NIS 500 a month for hybrid cars.
These are serious incentives but do not necessarily compensate for the problem concerning the car's second hand value. Better Place claims that demand for electric cars in the first years of operations will significantly exceed supply and this will create a natural second-hand market in Israel for electric cars, which will protect prices.
A more likely scenario is that Better Place will need to offer independent purchase contracts for the used cars at an agreed price at the end of the usage period - known in the business as buy-back and then independently market the cars. This is a large trap into which many importers have already fallen, and just one of many traps waiting for Better Place in Israel's vehicle market.
Published by Globes [online], Israel business news - www.globes-online.com - on December 22, 2009
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