[ausev] How Silicon Valley could become the Detroit of electric cars

[Andrew W. Donoho]

THEN AND NOW
How Silicon Valley could become the Detroit of electric cars
DAUNTING CHALLENGES FACE FIRMS ENVISIONING LIFE AFTER GASOLINE
By Matt Nauman
Mercury News
Article Launched: 11/07/2007 01:37:16 AM PST

Silicon Valley is already the capital of the world's high-tech  
industry. Is it also becoming the Detroit of the electric car industry?

Last week's announcement by Shai Agassi, a former SAP executive based  
in Palo Alto, that he's raised $200 million for a company that will  
try to revolutionize the electric car industry is the latest sign of  
this region's growing role in one of the hottest sectors of the  
automotive industry.

That's no surprise considering California's mandate for cleaner cars,  
the local enthusiasm for plug-in hybrids, the Silicon Valley  
fascination with new technology and the number of Bay Area venture  
firms investing in this industry.

Agassi, who spent months studying his venture, makes an interesting  
observation about the valley and the Motor City. "Detroit is a car  
manufacturing center. I think what we're looking at is not something  
that can be done in a normal way. . . . It needs an Internet approach,  
a Google approach."

And, he said, this region is well-suited to do that. "In the valley,  
we know how to do technology disruption. We know how to do business  
models, how to develop proof of concept and get it adopted around the  
world," he said.

Others, even those enthusiastic about the potential of electric cars,  
are uncertain about how much success start-ups such as Agassi's Better  
Place and Tesla Motors of San Carlos can have against the huge global  
auto industry. General Motors and Toyota, for instance, each produced  
more than 9 million vehicles in 2006.

"It's not simple or cheap stuff to do," said Neal Dikeman, partner  
with Jane Capital Partners, a San Francisco merchant bank focusing on  
cleantech and energy technologies. "$100 million is the ante up to  
play the game," Dikeman said.

"People are waking up to the fact that this is not like software start- 
ups that raise $40 or $50 million, and then have IPOs," said Darryl  
Siry, Tesla's vice president of sales, marketing and service. "This  
business is capital intensive."

Agassi acknowledged that "massive investments" are required to begin  
the transition from gasoline engines to electric-drive autos. He  
calculates the total cost for every affected industry at a staggering  
$6 trillion a year.

Still, he said, it's worth it: "The first carmaker to field a solid  
electric vehicle at scale will enjoy benefits that will dwarf the  
success of the Prius for Toyota."

Why electric cars? Among the reasons: the rising cost and possible  
scarcity of oil, growing worries about pollution and global warming,  
and developments in technology that will make batteries more affordable.

And using the power grid for transportation will be more affordable  
and more environmentally sound, electric-car proponents argue. That's  
especially true as governments require utilities to get power from  
renewable sources such as solar, wind, water and geothermal.

Agassi has computed the economics of oil - prices are above $90 a  
barrel - and concluded that electricity is the only answer for future  
personal transportation, because gas will be too expensive.

"Whether Shai does it, or someone else does it," he said, electric  
cars are inevitable.

His plan calls for Better Place to partner with carmakers whose  
products will use the company's batteries and charging/swap stations.  
If consumers commit to a long enough contract for power, Agassi  
argued, they could even get cars for free - just like with mobile  
phones and service plans.

It all makes perfect sense to Stephan Dolezalek, the senior partner  
who heads VantagePoint Venture Partners' cleantech portfolio in San  
Bruno. He's invested in both Better Place and Tesla.

He sees a future where electric vehicles serve as city cars while  
bigger vehicles, such as SUVs perhaps burning ethanol or biodiesel,  
are used for longer trips and carrying more passengers.

He uses an analogy of a barbecue's propane tank to describe where  
Better Place fits in. While you used to have to wait in line to get  
your tank filled, now you just swap an empty one for a full one.

"Think of electric cars and batteries the same way," he said. "You own  
the car, and the battery comes packaged with the fuel."

Ron Cogan, editor and publisher of the Green Car Journal and a  
longtime industry consultant, acknowledges the progress being made  
with battery and electric-drive technologies. Still, one fact stands  
out - "batteries are very expensive," he said.

"You have to realize that it's just potential until we start seeing  
real products on the market," he said.

Tom Gage, who works two days a week in Sunnyvale, knows how long it  
take to create a successful electric vehicle company. His 15-year-old  
AC Propulsion, which tests and builds electric-car parts such as  
motors and battery-management systems, began delivering a handful of  
electric eBox vehicles earlier this year. It's a boxy Scion xB sedan  
converted into a pure electric car that can go 150 miles on a full  
charge. It costs about $70,000, Gage said - $15,000 for the Scion, and  
$55,000 for the conversion.

He's optimistic about the momentum being generated by Tesla and Better  
Place, but cautiously so.

Look at the trajectory of hybrids, he suggests. The Prius came out 10  
years ago, and Toyota has sold 1 million of them worldwide. About 500  
million new vehicles have been sold in the same period.

"And that's with something that's been fairly well accepted and  
acclaimed," he noted.

It's clear that the electric auto industry is in its infancy. None of  
the big automakers sells a pure electric or a plug-in hybrid in the  
United States.

Yet both Elon Musk, Tesla's chairman, and Agassi forecast tremendous  
growth for their ventures. With initial testing beginning in 2008,  
Agassi predicted Better Place could have 100,000 cars on the road by  
2010. Musk has said that Tesla's third model, which would cost about  
$30,000 and go on sale after 2010, might reach "100,000-plus" sales.

Whether it'll be these Silicon Valley companies, other start-ups based  
elsewhere or the world's big automakers selling electrics remains  
unclear.

Still, venture capitalist Dolezalek does ask the question: "What if  
you take something that has always been designed in Detroit and you  
moved it to Silicon Valley, how would you do it different?" Both Tesla  
and Shai Agassi are trying to answer that question.



Contact Matt Nauman at mnauman at mercurynews.com or (408) 920-5701.
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