Anyone who has tried to put together a 5,000-piece puzzle knows that the best way to carry out the task is to have an overall picture. Electric car venture Better Place LLC is a multidimensional and multilayered puzzle whose pieces are scattered all over the world.
Every few months, new pieces of the puzzle appear somewhere in the world, and some of them raise eyebrows in the motor vehicles industry. That was the case with the announcement by HSBC Holding plc (LSE: HSBA; HKSE: 005; NYSE, Paris: HBC), not known as a bank to make adventurous investments, that it would invest $125 million in Better Place. That was also the case with the announcement of a strategic partnership with the venture by General Electric Company (NYSE: GE).
More than anything else, the Israeli business world is embarrassed and astonished by the steady interest of Israel Corporation (TASE: ILCO), a company known to be thoroughly grounded in reality, to put its hands deep into its pockets to finance the project's costs, when the date of the return on investment is not known.
It seems that one of the reasons for the lack of clarity is the public's tendency to attribute Better Place and its economic potential to the electric car market, a disputed and exotic product with four wheels and a battery. However, a much broader picture emerges from some of the puzzle's new pieces, which were put into place this month - a picture directly related to the energy and electricity production market in China, the country with the world's largest economic growth potential.
The emerging picture shows Better Place moving from the centerpiece to the side as a means for Israel Corp., its main shareholder, to expand its global interests. Israel Corp. has business interests and ambitions in China, its electricity market, and other industries.
China's electric car market is $15 billion
On the public side, in late April, Better Place's announced a cooperation agreement with China's second largest electricity utility, China Southern Power Grid Company Ltd., to open a battery switch station and joint education center in Guangjou, a city of 10 million residents. The wording of the announcements was rather vague and not particularly binding, mentioning the establishment of a joint training center for electric cars to demonstrate the battery replacement system.
The statement adds, "The Better Place-CSG agreement calls for the companies to jointly engage relevant Chinese government bodies and other stakeholders, secure governmental policy support, and promote technical standards, where appropriate, to further accelerate China’s rapidly-growing, electric-car industry."
Better Place and CSG are also "looking at the potential for a joint commercial operation based on a switchable-battery, network-operator model."
With all due respect to letters of intent and pilot ventures of one kind or another, the question, "where is the money?" remains unanswered. The announcement with CSG does not mention any financial commitments or timetables for implementation. The money in this case is the $15.2 billion that the Chinese government plans to invest in electric car R&D, and subsidies for building infrastructures and purchases of electric cars.
Last year, the Chinese government cited electric car development as one of seven strategic directions in its five-year plan to reduce the country's dependence on oil imports. Better Place's new partner, CSG, is part of a consortium of 20 government companies set up to promote the electric car.
This consortium includes two electricity utilities, the China National Petroleum Corporation, the China National Petrochemical Corporation (Sinopec), and several government car and battery manufacturers. Like everything else in China, the consortium is centrally controlled by a government committee. Better Place's hook-up with these huge companies, even through the back door, is a kind of business networking that multinationals would sacrifice an arm and leg for.
For example, the CSG agreement opens the door to China's motor vehicle industry's supply chain, which includes more than 100 vehicle manufacturers and countless battery makers, spare parts companies, and electronic systems firms. Better Place already has close ties with French carmaker Renault SA (Euronext: RNO), but it has limits and restrictions in the global market. For Better Place, which wants to have independent and inexpensive supply sources for cars, the Chinese supply chain is a bonanza.
Israel Corp. has a joint venture with China's Chery Automobile Company Co. Ltd., Chery-Quantum LLC, which will manufacture gasoline and electric cars.
China's $60-100 billion smart grid
We are not ridiculing $15 billion, or even a thousandth of it, but the most interesting aspect of CSG and the State Grid Corporation of China, and the really big money, is not in electric cars or the motor vehicle market, but in the electricity market.
Here too, there are two big pictures: one titanic and the other gigantic. The titanic picture is the $60-100 billion that the Chinese government plans to invest over the next nine years to upgrade obsolete and inefficient grids to smart grids.
In contrast to many other procurement sectors that are mostly open to domestic companies, the smart grid project is also, and mainly, open to Western companies with the relevant technologies and know-how. Better Place happens to possess to important and proprietary technology smart grid links. One is the remote management of the electric car battery recharging points, and the other is technology that enables use of unused car batteries as a power reserve that can operate in the other direction - in other words, to recharge itself overnight, when the load on the grid is low and electricity rates are cheaper, and generate power for the grid during peak hours.
This is a unique field, which becomes economically feasible at the scale intended for the Chinese electric car market, which will include tens of millions of batteries. For Israel Corp., Better Place's hook-up with CSG's grid and the Guangzhou government, and through them to the Chinese energy consortium, creates an edge over not insubstantial business rivals, such as General Electric Company (NYSE: GE) and Siemens AG (NYSE: SI; XETRA: SIE), which are investing heavily to participate in the Chinese smart grid program. These advantages could be realized in the form of an exit by Better Place or its peripheral technologies.
The really big picture: China's electricity market
The gigantic picture amounts to tens of billions of dollars a year. It is China's electricity shortage, especially in southern China - CSG's territory. China's dizzying industrial growth is accompanied by an insatiable hunger for electricity, and the gap between demand and supply is widening.
Chinese sources estimate that southern China, the country's industrial heartland, will face a shortage of 6 gigawatts in electricity production this summer. This means rolling brownouts at manufacturers, affecting both exports and the local population.
This is one of China's most burning issues, and it generates hundreds of billions of dollars in potential business for multinationals that build and operate power stations. Israel Corp. is one such company, and it has marked the industry for strategic development, investing in solar power, gas stations, and who knows what else. However, this activity has mostly been limited to Israel (through OPC Rotem Ltd.) and Peru (through Inkia Energy Ltd.) to date. Better Place's networking in China could be Israel Corp's entry ticket to the premier league.
Obviously, Israel Corp. isn't the first to think this. Warren Buffett has already hundreds of millions of dollars in Chinese electric car and battery manufacturer BYD Automobile Co. Ltd. and billions of dollars in energy and electricity companies.
Published by Globes [online], Israel business news - www.globes-online.com - on May 8, 2011
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