2012: The Year EVs Hit Puberty€¦ · costs by moving toward electric fleets. (FDX), the biggest...

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January 12, 2012

2012: The Year EVs Hit Puberty

Authors:

John J. Licata Christopher M. Potts Chief Commodity Strategist Associate Analyst 212.346.9161 908.319.0397 [email protected] [email protected]

Executive Summary No longer an infant but still a far cry from being considered a mature industry, Blue Phoenix (BPI) believes the electric vehicle (EV) market is poised to hit puberty in 2012. This means change is likely to sweep through the industry in a big way, most noticeable through relationship building. This evolutionary relationship cycle will cause the space to have its share of growing pains and growth spurts this year, but we expect this to greatly aid the EV sector in its progression to a more mature phase of market development and consumer adoption. Thus, our analysis points to trends we consider the main road for EVs to take this year.

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Companies Mentioned in This Report: Products Mentioned in This Report:

GM (GM) Chevrolet (GM) Fisker A123 (AONE) Toyota Motors (TM) PepsiCo’s Frito-Lay PG&E Via Coca-Cola (KO) Verizon (VZ) FedEx (FDX) Navistar (NAV) UPS Nissan (NSANY) Tesla (TSLA) Ford (F) Honda Mitsubishi Reva Zem Energy

BYD (BYDDF) Valence Technology (VLNC) American Vanadium (RMRCF) Convergys Corp. (CVG) Siemens (SI) Coulomb Technologies Better Place Google (GOOG) Bug Labs Apple (AAPL) Qualcomm Evatran IBM General Electric (GE) Hughes Telematics (HUTC) Mercedes JJT Energy Sumitomo Renault Xcel Energy (XEL)

Chevrolet Volt PG&E EREV Nissan Leaf Tesla Roadster Ford Focus Electric Honda Fit EV Mitsubishi i-MiEV Toyota Prius Coulomb Technologies CharePoint Network Mercedes-Benz Ford Escape



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Table of Contents

Executive Summary………………………………………………………………. Companies & Products Mentioned in This Report………………………………. Background………………………………………………………………………. 1 Fleets Can Lead the Charge…………………………………………………… 2 Lithium…………………………………………………………………………..

2.1 Lithium Concerns………………………………………………………. 2.2 Lithium Players………………………………………………………….. 2.3 Lithium & Vanadium……………………………………………………

3 Billing Solution for EV Charging Time………………………………………….

3.1 Billing Solution Alliances & Advanced Software Development…….. 3.2 Learn from Mobile Phone Service Providers………………………..

4 Leasing EVs…………………………………………………………………….. 4.1 Leasing EV Batteries…………………………………………………. 5 Vehicle-to-Grid………………………………………………………………….. 6 Legislation………………………………………………………………………… 7 Lithium………………………………………………………………………….

7.1 China…………………………………………………………………… 7.2 Growing Alliances……………………………………………………….

7.3 Price……………………………………………………………………. Disclaimer………………………………………………………………………..

1 2 4 5 6 7 8 8 9 9 11 12 12 13 14 15 15 16 17 17



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Source: Motor Trend

Background The EV market has been battling slow consumer adoption, high battery prices, and the stigma that EVs are not safe. That latest battle (safety) is one that the industry is desperately trying to overcome in the aftermath of the very recent, very public GM Chevy Volt battery fire post routine crash test by the National Highway Traffic Safety Administration. Not to be outdone by Chevy, Fisker made headlines of its own entering 2012 but for all the wrong reasons – namely, a recall of its Karma plug-in hybrid due to battery systems which could result in fires. The good news is that GM stood behind its Volt product, a top safety pick by the Insurance Institute for Highway Safety, and Fisker has already stated that most of its vehicles using A123 (AONE) battery packs have been fixed. Even better news is that lessons from missteps can be overcome. Just ask Toyota Motors (TM) which saw its fair share of recalls during the past two years and experienced most unfortunate natural disasters in Japan and Thailand only to bounce back and announce in late December its expectations for record global sales in 2012.

So while many of us experienced varying degrees of awkwardness in our pubescence, that experience helped shape our respective futures. That same feeling is presently transforming the electric vehicle market. Range anxiety is being overcome by range confidence, albeit slowly. This transformation is no doubt being helped along by new government fuel standards put in place by Washington. Fuel standards (CAFE: 35.5 mpg by 2017 and 54.5 mpg by 2025) mandates mean auto manufacturers (OEMs) need to be more creative since iron and steel make up 62% of the typical weight of a car.

Despite working to overcome many growing pain challenges, the EV sector still needs financial assistance from its parents (the government). CAPEX investments for new EV focused OEMs are significant in order to bring production online and will be a competitive disadvantage over the traditional OEM’s that will require less substantial investments. Thus, relationships and alliances related to technology, advanced batteries, and carbon-fiber are paramount for the successful transition from puberty to a mature EV sector in our view. Therefore, our research focus is on infrastructure, education, components of production, especially the components that make the autos lighter, more quickly charged, safer, and able to drive longer distances without asking Daddy and Mommy for an allowance.



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1. Fleets Can Lead the Charge As transport companies look to grow businesses post the worst recession since the Great Depression, we are expecting a greater move toward using EV fleets for local transport in 2012 as means for save fuel costs. Also, rolling out V2G technology seems like a no-brainer for fleet owners with scheduled delivery times which could make idle trucks value-added and thus more cost-effective by returning power back to the grid (discussed further in Section 5). PepsiCo’s Frito-Lay North America, already the largest commercial all-electric truck fleet in North America, said last week it was gearing up through Smith Electric Vehicles to manufacture 10 new electric trucks (bringing their total to 176). Mike O’Connell, senior director of fleet for Frito-Lay North America, said, “With the seventh largest privately owned fleet in the U.S., we have set a goal of becoming the most fuel efficient fleet in the country, and these vehicles give us an opportunity to use the latest advances in transportation technology as a significant way to reduce our environmental impact.”

PG&E last week unveiled the first extended-range electric pickup truck (EREV) for utilities through Via, a company PGE&E has invested funding in which is aiming to sell 2,000-2,700 vehicles this year. If the Via gamble works, PG&E’s new EREV could provide on-site power supply for PG&E mobile during electrical outages and times of high electricity demand. "This truck has the potential to significantly transform the way we manage electrical outages for our customers," said PG&E Corporation's Senior Vice President of Corporate Affairs Greg Pruett.1 PG&E thinks it could save $9.5mln if its entire 3,500 ICE powered trucks were replaced with electric trucks. Separately, Coca-Cola (KO), Verizon (VZ), cable and local delivery companies could all save on fuel costs by moving toward electric fleets. FedEx (FDX), the biggest hybrid-electric truck operator in the transportation industry, continues to ramp up all-electric parcel delivery trucks with the help of Navistar (NAV). With only 2.7% of its 93,736 delivery fleet adopting alternative-fuel vehicles, we believe UPS could soon make a big splash in the EV fleet world.2

1 PR Newswire, Pacific Gas and Electric Company 2 http://www.ups.com/content/us/en/about/facts/worldwide.html

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2. Lithium So much has been talked about related to lithium these days and its use for battery technology that despite BPI anticipating further growth, much of the enthusiasm may be already baked in. Knowing the exact amount of lithium in each EV battery is a secret most OEMs and battery manufacturers guide with their lives. Our analysis leads us to suggest on average there is roughly 10 pounds of lithium in an electric car battery (roughly less than 2% of the overall battery weight). Assuming there will be a total 100mln cars globally by 2020 would mean if every car in the world used lithium batteries there would be a need for 455,000 tons of lithium in autos alone. However, investors should not necessarily be scrambling to bid up the price of lithium since there are roughly 13 million tons known economical reserves in the world and ~26,000 tons used in global production according to 2010 data from USGS; new data expected before month end but USGS has previously reported that there are 4mln tons of resources in the US and 29mln tons in other countries meaning which only further solidifies that there is enough lithium in the world to meet future demand, especially as technology advances). In the US, lithium batteries now power 100% electric cars such as the Nissan Leaf (NSANY) and Tesla (TSLA) Roadster as well as the hybrid Chevrolet Volt (GM), which operates on electricity and gas. The Ford (F) Focus Electric, Honda Fit EV and Mitsubishi i-MiEV are electric vehicles all jumping on the lithium bandwagon.3

While Toyota Motor (TM) has been endorsing more bulky, nickel-metal hydride batteries for the Prius model it sells in the U.S. market, it seems even Toyota is coming around to lithium. Last week, Toyota Tsusho, a Toyota Group company, announced it will start lithium production at the Salar de Olaroz Lithium-Potash Project in 2013 with the lithium to be used for Toyota Motor products.

Above Pic: John Licata, Chief Commodity Strategist of Blue Phoenix Inc. and Tom Glendening, President of E3 Think, look under the hood of the 2012 Nissan LEAF after a recent test drive at Ramsey Nissan in Upper Saddle River, New Jersey

3 http://www.theglobeandmail.com/globe-investor/investment-ideas/electric-car-demand-expected-to-jump-start-lithium-stocks/article2097811/

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2.1 Lithium Concerns So while it appears lithium is the play of 2012, we do have concerns. For one thing, like just about everything in life, there is no guarantee that today’s lithium ion batteries will be the leaders in future decades. Why? Efforts are being made everywhere from labs to start-ups to find new alternatives to lithium ion such lithium air, zinc air, fuel cells, ultracapacitors, and hybrid energy storage. There certainly could be a dogfight on hand to remove lithium ion from its leadership position due to its cost and scale advantages and the fact that more energy can be stored in an ounce of this metal versus any practical metal alternative. For this reason alone we do believe there are still opportunities to consider when analyzing the lithium space. However, because of the potential glut of lithium coming online, especially from start-ups, we believe the real relationship opportunity lies in low-cost producers of lithium, especially those with additional allure of having byproducts. Then there is the issue of recycling. Is it recyclable or not? The answer is yes, and Nissan has been a frontrunner in this category. Although recycling of lithium still needs to be advanced, Nissan is presently using second hand lithium batteries in wind/solar energy storage and photovoltaic solar for industrial and home applications. India’s electric car OEM Reva and Zem Energy have also been working on potential reusability of second hand lithium batteries. So while every detail related to recycling EV batteries still need to be worked out, we are at least encouraged by efforts presently being made in the space. Nissan representatives have told us that 5 years use of its battery would still yield 70% to 80% efficiency. We believe that number will actually be closer to 70%, especially if vehicle-to-grid technology becomes more prevalent as we expect during that time-frame. However, we are very intrigued by the leasing and second life applicability of used lithium batteries.

Source: Nissan



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2.2 Lithium Players

Equity Last Price Price 1 yr Ago I year Performance FMC US equity $ 87.568 $ 78.56 11.47% ROC US equity $ 40.710 $ 39.80 2.29% SQM US equity $ 54.770 $ 57.58 -4.88% VLNC US equity $ 1.000 $ 1.77 -43.50% TLH CN equity $ 3.300 $ 6.89 -52.10% GXY AU equity $ 0.735 $ 1.60 -53.92% RDR AU equity $ 0.320 $ 0.75 -57.05% CLQ CN equity $ 0.499 $ 1.88 -73.46% AONE US equity $ 1.850 $ 9.37 -80.26% ABAT US equity $ 0.440 $ 3.80 -88.42%

One name we think is worth keeping an eye on, both fundamentally and technically, is FMC.

2.3 Lithium & Vanadium So while opportunities may lie within the lithium market, we believe those positioned together with vanadium will have an even stronger future. We are not the only ones who believe this. Warren Buffet invested $230mln (a 10% stake) in BYD (BYDDF), a growing Chinese automaker, the largest supplier of rechargeable batteries on the planet and a leading voice behind production of lithium vanadium batteries. So if OEMs wanted to really forge ahead with alliances in lithium they should consider lithium vanadium oxide anodes in rechargeable lithium batteries. These batteries exhibit greatly improved safety compared to the more generic lithium cobalt oxide-type cathodes seen in cellular telephone or laptop batteries, as well as providing higher rates of energy storage which



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can benefit utilities when distributing power during peak periods and higher operating voltages which allow consumers to charge the battery more quickly.

Keep in mind that while usage in rechargeable EV battery technology are credible, at present 90% of global vanadium is currently used in vanadium steel, which is 30% lighter and 100% stronger than traditional steel. The problem with vanadium, unlike lithium, is that it is not as readily found in the world and is concentrated in only select areas such as China (50%), Russia (24%), South Africa (24%) and 2% from other regions combined. Names like Valence Technology (VLNC) and American Vanadium (RMRCF) are ones to watch if usage of lithium vanadium batteries catches wind like we are anticipating. 3. Billing Solution for EV Charging Time Thus far there have not been any widespread solutions when it comes to providing real-time billing data and management support services for EV charging stations. We began seeing this change in late in 2011 with the announcement that Convergys Corp. (CVG) partnered up with Plug Smart to use Plug Smart’s Zephyr platform to solve EV billing issues in a highly scalable and flexible way. From the October 4, 2011, press release: “The electric vehicle market is just starting to emerge. Only limited standards have been established and transaction models have yet to be defined,” said Richard Housh, Plug Smart President and CEO. ‘We are excited to partner with Convergys who, as a recognized leader with proven experience in real-time transaction processing at scale, provides technology that will keep pace with the needs of the market as it grows and evolves. Together we are shaping the future for the electric vehicle charging ecosystem.’”

3.1 Billing Solution Alliances & Advanced Software Development The evolution of the billing cycle for EVs has us speculating that Siemens (SI) could step in and acquire its partner Coulomb Technologies for its ChargePoint Network prior to any move by Coulomb to go public, especially since Better Place secured another $200mln back in November. That means Better Place has taken in over $750mln and according to Forbes that values the EV infrastructure startup at $2.25bln. Siemens Ventures participated in Coulomb’s Series B funding in early 2010 so the two companies are very well acquainted already so a move by Siemens doesn’t seem so far fetched to us considered Coulomb operates in the US and Better Place does not. For those not familiar, Coulomb’s ChargePoint Network is an advanced software system that is open to all drivers of plug-in vehicles. What’s neat about the ChargePoint Network is its features which include 24/7 driver assistance, the ability to locate a charging station from any smart phone, the ability to detect charging station availability from a smart phone or Google (GOOG) Maps, EV trip mapping and driver billing. What Siemens may find most attractive to have all to its own may be the ChargePoint Network’s ability to provide Siemens charging station owners remote management, flexible billing, fleet management, maintenance and other on-demand software applications. With connectivity of technology growing by leaps and bounds, consumers are calling for new initiatives by OEMs to move away from a one-size fits all applications and make



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driving a fully personalized content experience. It’s pretty obvious that OEMs are listening (or at least they should be). Ford teamed up with Bug Labs, an open-source hardware and software provider, in the Fall of 2011, to research, develop and distribute open-source developer tools (including BUGswarm, a cloud-based service, to advance in-car connectivity innovation). Nissan, definitely one of the most innovation OEMs in our minds, continues to grow its alliance with Apple (AAPL). Before the holidays, the two collaborated on the Nissan Global App, for the iPad and now iPhone which allows users the ability for free to access the latest global news (including video and social media links) and information from Nissan itself. From Nissan’s November 9, 2011 press release: “The digital world is evolving, and Nissan will continue to focus on emerging communication technologies and distribute information that appeals to customers, and prospective customers, as part of its efforts to raise awareness and interest in Nissan Motor Company.” We can tell you from our own personal experience (see App image below) when we visited Ramsey Nissan in New Jersey to test-drive the LEAF, the new Nissan App from Apple can tell drivers the current charging information on their LEAF as well as set the temperature in the car before you enter.

Relationships to enhance technology connectivity for EVs to monitor battery life and charging station locale (i.e. West Coast Green Highway) as well as advance the sector toward wireless inductive charging and back-end infrastructure (i.e. Google, Qualcomm, Evatran—who may be next? IBM? Forging alliances with billing system companies could see a huge growth spurt this year. Utility companies need to better incentive consumers to charge their EVs during off-peak hours. Keep in mind GE announced a deal with Nissan back in October to help promote the use of EVSs and make them easier to use and more consumer friendly.

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A name to watch in the smart EV technology space is Hughes Telematics (HUTC), already a partner with Qualcomm for mobile health/wellness solution, a technology partner for the Mercedes-Benz mbrace and the all new mbrace2 and a telematics solution partner for AAA. HUTC is connecting drivers to next generation telematics which can also be upgraded as new technologies hit the market. Today HUTC is all about building innovative solutions around next-generation architecture, primarily for auto, fleets and aftermarket vehicles. The company has focused on helping consumers connect to improved navigation functionality, contact Concierge, determine alternative routing, verify logistics, gauge GPS tracking, report on driver deliveries as well as provide remote diagnostics which can help drivers feel more at ease about any safety/mechanical issues the vehicle may be experiencing. HURTC has natural voice recognition which can interpret many dialects and help drivers to connect to social networking features which allow the driver to meet up with friends and relatives, the ability to purchase music after listening to songs and use voice-command to find out about upcoming events. Anyone remember KITT from Knight Rider? Oh yes, HUTC’s technology can read emails as well but we are excited the real future may be in all things cashless. This means HUTC may in fact play a part in moving the EV market forward by cashless charging stations with the car itself acting like a credit card. In short, HUTC is connecting drivers to technology like never before and we think they are in a good position to move forward in the EV space with solutions to convey vehicle range, nearest charging station and the like. With an ad slogan like “Empower the drive, enjoy the journey”, we look forward to upcoming offerings from HUTC. However, shares of HUTC, ~61% owned by Apollo Global Management, are very thinly traded so proceed with caution. This means with a lofty debt to assets figure, investors may look to more stable companies like Ford’s SYNC and GM’s OnStar to gain more traction versus HUTC.

3.2 Learn from Mobile Phone Service Providers In our view, utilities need to put in place more competitive rates to allow consumers to charge their EVs overnight during non-peak hours. Regardless, we support the notion of charging EV users a per kilowatt charge similar to the way consumers presently pay for mobile phone minutes/text messages beyond their monthly fees. By adopting this sort of pricing plan, utilities can become the next-generation version of phone companies by creating tiered products to purchase a specific amount of kilowatts per month that customers can choose depending on their driving habits. If the customer goes outside the local utility space, then roaming charges would apply (just like cell-phones). Thus, we believe new emerging Energy Service Companies (ESCOs), for instance JJT Energy in New York, could create a more competitive pricing environment for kilowatts along with existing utility providers. As we have said before, most auto drivers know the price of a gallon of gasoline but very few can tell you the price of kilowatt. We expect that to change in coming years and believe the mobile phone market could and should be replicated when considering a national adoption of EV time of use (TOU) billing.



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4. Leasing EVs We recently sat down with Andrew Waddell, Sales Manager at Ramsey Nissan, New Jersey, one of the premier Nissan dealerships along the Northeast region of the US. When asked if he thought leasing was a good deal for consumers, he replied, “We are seeing a lot of interest in the LEAF and we are offering attractive leases that can be a good trial run experiment for early adopters and those not fully committed to buying an EV. With Nissan offering 8 year, 100,000 mile warranties on the battery, consumers really have a great option when considering either buying or leasing from Nissan since any battery concerns should be offset thanks the fully backed warranty from our company.” According to TrueCar.com 2011 saw the highest percentage of American car leases in at least 15 years (nearly 24%).4

So with such a strong number of Americans interested in lease programs, is the EV lease market appealing today? Despite the weak economy and many people looking to save money and thus lease versus buy, we believe EV dealerships need to offer more attractive leases to help usher in potential would-be buyers. OEM’s relying on car sharing to introduce their products need to compliment that initiative with more affordable lease programs. Why?

“Residual values play a key part in the calculation of lease monthly payments since leases are based on the difference between residual value and negotiated selling price. The higher the residual, the lower the lease cost for a given selling price.”5

It is hard to not consider the $7,500 government rebate to purchase an EV when considering buying or leasing. For one thing, some people don’t really about cost and car maintenance so leasing an EV may be better for them. However, if you do the math and include the $7,500 rebate, for a few thousand more, you may be better off buying the car rather than not having anything to show for it when the lease period is over.

Residual value calculations are more complex for EVs than they are for traditional autos because there are still uncertainties related to the life of the lithium batteries and how different driving habits can influence each battery’s longevity. Volt marketing manager John Hughes notes that every deal “will be a little different,” and “depends on the equipment and how the deal is written.”

4.1 Leasing EV Batteries Presently, Nissan, has put in place key relationships with Sumitomo and Renault to sell a car to purchasers yet lease the battery, the most expensive part of an EV. Moving to a leased battery model in the US may help boost sales of EVs in North America for OEMS since (Nissan has stated it expects to sell 50,000 second hand batteries per year in Japan alone). 4 http://news.leasetrader.com/archive/2011/02/25/Leasing-a-car-Donrsquot-forget-auto-insurance.aspx 5 http://www.leaseguide.com/Articles/residualvalues.htm

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5. Vehicle-to-Grid Connections flowing from vehicles to power lines --This is an exciting area with amazing potential to reduce utility costs. While it could take several years before this segment of the EV world takes off, we believe 2012 will usher in an increased number of pilot programs to offset the rising price of energy we expect this year. Rolling out V2G technology seems like a no-brainer for fleet owners with scheduled delivery times which could make idle trucks value-added by returning power back to the grid. While we are excited about the future of V2G, we do believe there are challenged that need to be overcome. Unidentified stresses on the battery pack could be seen if electric vehicle batteries are used more than just occasion to power homes since that is not what the battery was designed for. Then there is issue of security that needs to be addressed and whether or not additional stresses on the battery could cause safety issues. Therefore, before we can see the vehicle-to-grid (V2G) market advance, the development infrastructure that enables EVs to intelligently communicate with the grid to determine when charging, and ultimately discharging, needs to increase significantly. Thus far, efforts have been made by utility companies such as Xcel Energy (XEL) and PG&E (PCG) to convert hybrids such as the Ford Escape and Toyota Prius with V2G. The University of Delaware, which is working on V2G technology, estimates that the yearly gross revenue generated by vehicle owners could be between $1,000 and $5,000 (Delaware Governor Jack Markell signed a state law in 2009 to become the first state to implement the first law of its kind to compensate owners of electric cars for electricity sent back to the grid at the same rate they pay for electricity to charge the battery).6

We are expecting more pilot programs to see a more diverse number of vehicles being tested but do believe this year testing on electric trucks makes much more economical sense as long as local energy market regulations don’t impede the growth (something we think would just be silly). Names to watch in V2G technology and electromobility include IBM, Siemens (SI), Mitsubishi, Nissan and General Electric.

Source: University of Delaware 6 http://www.udel.edu/V2G/QandA.html

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6. Legislation The American people know that President Barack Obama is an avid supporter of EVs. In his January 2011 State of the Union address, President Obama declared that “we can break our dependence on oil…and become the first country to have one million electric vehicles on the road by 2015.” He has taken steps in order to attempt to achieve this goal, and now he wants to change the current $7,500 tax credit to an up-front rebate to entice consumers to purchase these vehicles.7

But what about President Obama’s chief competition, Republican frontrunner Mitt Romney? Many know his overall stance as being pro-business, but what is his view on electric cars? During a recent talk radio program, when asked about the Chevrolet Volt, Romney said it was “an idea whose time has not come" while chuckling. “Ultimately we’ll have electric cars, but we’re not going to have the country covered in Chevy Volts. Most people have gasoline combustion engines. And so we’ve got to develop our oil resources and be drilling for more oil and searching our land to find out where that oil is. We’ve got to be developing our gas resources.”8 However, he has shown questionable support for the domestic auto industry as a whole. He actually argued against a federal bailout for automakers and advocated for managed bankruptcy. Romney also criticized President Obama for loaning $500 million of Energy Department funds to Tesla Motors and Fisker Automotive to produce their high-end EVs.9

Fellow Republican Mike Kelly, U.S. Representative for the Third District of Pennsylvania, is against the current $7,500 tax subsidy. What will happen if this subsidy disappears? We believe consumers will be even less likely to purchase electric cars. Even with the subsidy, EVs are already more expensive than today’s combustion engine cars, and EVs are also surrounded by uncertainty (lack of charging infrastructure, relatively low miles per charge, recent battery issues with the Chevrolet Volt, etc.). Leading EV companies have already missed their 2011 EV sales goals. (Nissan sold 9,674 Leafs, missing its goal of 10,000-12,000; and Chevrolet sold 7,671 Volts, missing its goal of 10,000.10

) If this subsidy were to disappear, this would be a disaster for this industry.

California has been setting the tone for the green movement in the U.S., but last week a federal judge made California’s regulatory environment significantly less certain. The court blocked California from enforcing a low-carbon fuel standard, a regulatory framework that encouraged the adoption of electric cars.11 This may delay EV initiatives nation-wide. In Oregon, lawmakers are actually considering a road-usage charge of 1.43 cents per mile for drivers of electric and plug-in hybrid vehicles.12

7 http://www.instituteforenergyresearch.org/2011/03/10/obama-administration-pushes-electric-vehicles/ 8 http://newhampshireprimary.blogspot.com/2011/07/mitt-romney-on-renewable-energy.html 9 http://www.mlive.com/politics/index.ssf/2011/12/presidential_hopeful_mitt_romn.html 10 http://www.businessweek.com/news/2012-01-11/obama-electric-vehicle-goal-reachable-by-2015-energy-chief-says.html 11 http://www.forbes.com/sites/uciliawang/2011/12/29/judge-blocks-californias-low-carbon-fuel-standard/ 12 http://www.oregonlive.com/politics/index.ssf/2011/04/oregons_electric_car_owners_sh.html

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7. Light-Weight Materials Use of carbon fiber has been around for years yet the race is now on for automakers to adopt them into future vehicle designs. These materials are increasingly popular since they are super lightweight, super strong, super stiff and easily molded into all kinds of different shapes. However, this is not new, so what is really driving this rapid move toward carbon fiber adoption today? Based on our research, the real case for wider use and consideration of carbon fiber materials by OEMs is based on several factors.

7.1 China Now it doesn’t take a rocket scientist to know that many markets, including the electric vehicle, will be driven by the growth story in China, which overtook the U.S, as the world’s largest vehicle market in 2009 and may see its auto sales double to top 21 million by 2015. However, our view on how this market will see a metamorphosis in coming years which differs greatly from mainstream analysis. Status has traditionally been the most important item when buying a car in China and that may pave the way for global brands to enter the Chinese market in an aggressive way. However, we believe automakers relying solely on “status” symbolism will have an ineffective and flawed growth strategy in the region. Does anyone recall just how quickly oversized SUV’s (i.e. Hummer, the now obsolete brand of GM) lost their status appeal in the U.S. when crude oil prices marched toward $150/pbl and gasoline was north of $4/gal? Companies like GM (Chevrolet, Buick), Acura, BMW, Mercedes and Honda will all be negatively affected by the Chinese government’s auto tariff in place through Dec 2013, to tax all vehicles made in the US if they are exported to China and exceed 2.5 liter engines. This could impact as much as $4bln in US auto exports and means in order to capitalize on the growing appetite for all things green, automakers need to think differently and consider how to make a line-up of cars in the mid-size to SUV category fit into China, a market that is seeing EV growth 5X greater than the rest of the leading auto markets. So while status is still important in China, consumers (already taxed for foreign auto purchases) may now look for value whenever possible. This has us thinking the new Chinese auto tariffs (as high as 21%) could actually stifle growth for some OEMs. We do see a way out for automakers though if they look beyond the 2017-2025 CAFE 54.5 mpg fuel standard in the U.S. and instead think more globally with a strategy to produce electric versions of models that require 2.5 liter and up engines so years of product designs are not lost. To shift gears and focus even more on electric vehicles post the China auto tariff, automakers need to use carbon fiber to offset battery weight (over 700 lbs in some instances) to allow for a more alluring miles per charge that goes beyond local driving. With China investing $364bln by 2015 in its power grid development (including increased nuclear power output) it is clear that 24/7 baseload power generation should



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only strengthen the case for OEMs to slim down the weight of its product offering to capitalize on the apparent support for electric vehicles.

7.2 Growing Alliances In recent months, there have been an increased number of alliances forming between automakers and composite material companies. GM, for instance is now banking on its relationship with Teijin Limited of Japan to help it drive future growth. In fact, Steve Girsky, GM’s vice chairman, was quoted on 12/8/11, saying, “Our relationship with Teijin provides the opportunity to revolutionize the way carbon fiber is used in the automotive industry.”13

BMW is gearing up for its high-production of carbon fiber parts in 2013. Talk about putting your money where your tailpipe is, BMW is investing $100mln to build a purely carbon fiber factory in Washington state in the US with partner SGL Carbon. Toyota, Mercedes, Audi, Lamborghini are all looking to source carbon from outside providers in order to make their respective vehicles lighter. This is a trend we believe we only grow more rapidly due to the Chinese move to protect domestic auto producers (see section 3.1.1). In our view, OEMs without carbon fiber partners may get left in the dust by industry competitors. Why? Most OEM’s are already forging alliances with composite providers in the hopes of redefining automotive technology and shedding hundreds of pounds of steel along the way. Who can blame them? These thermoplastic composite materials are roughly 5-10 times stronger than steel and more pliable which would speed finished good time to market and thus lower costs across the production chain in the process.

Photo of Teijin Senior Managing Director, Norio Kamei (left), and GM Vice Chairman, Steve Girsky (right).

Source: GM

13 http://media.gm.com/content/media/us/en/gm/news.detail.html/content/Pages/news/us/en/2011/Dec/1208_teijin

http://media.gm.com/content/media/us/en/gm/news.detail.html/content/Pages/news/us/en/2011/Dec/1208_teijin�



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7.3 Price While the biggest disadvantages of using carbon fiber is cost (~$10 per pound vs under $1 per pound for steel; see graph below) and the limited recycling potential at present, we feel large scale adoption of composite technology would greatly lower prices, make use of them more competitive with aluminum and ultimately downshift global fuel consumption a whopping 30% and both emissions and greenhouse gas by 10-20% according to Oak Ridge National Laboratory. With China gearing up to tax heavy vehicles upon import, the time to slim down for OEMs certainly should be a long-term trend. For OEMs, cost leadership is certainly the tale of the tape for the future. Consider that outside of the frame, the single heaviest component on a car is the engine block and you have to start to wonder just how long will it be before a composite engine block built at a competitive price is born.

Please direct inquiries to [email protected]. Disclaimer: The information and views set forth in this report may be subject to change for numerous reasons, which may include changes in market conditions. Blue Phoenix shall have no obligation to provide any further research reports on any of the matters covered in this report. The publication of this report is not to be construed as, and does not purport to be, a solicitation of an offer to buy or sell any security or other financial product. Blue Phoenix expressly disclaims any responsibility for any decisions made with respect to the securities covered by this report or for the suitability of any security or transaction based on it. By accepting this report, you agree not to hold Blue Phoenix liable for any possible claim for damages arising from any decision you make based on the information and/or views set forth in this report.

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