Better Place Is a Lousy Investment for You

From the perspective of the long-term investor seeking a parking place for his savings, the Israeli electric car company Better Place has two flaws.

The financial straits of Better Place, the electric-car infrastructure company that fired its CEO Shai Agassi on Wednesday, are very much your problem. That is, if you're an Israeli with savings in some pension fund or other.

How is that, you ask?

Through holdings in The Israel Corp, one of Israel's biggest holding companies, which is publicly listed for trade on the Tel Aviv Stock Exchange. You see, from Better Place's establishment to date, The Israel Corp has injected about $250 million into the company.

The Israel Corp's controlling shareholders are the Ofer family, who own about 50% of its shares. The general public owns 30% and Bank Leumi owns 18%. Ergo, the public financed more than half of The Israel Corp's investment in Better Place.

Does investing in Better Place make sense for Joe Investor? You might think it does.
Better Place's raison d'etre, as formulated by Shai Agassi, is to get people to drive fully electric cars. The company is essentially building a gigantic infrastructure project – it's deploying car-battery switching stations nationwide. (The company's concept isn't that you buy an electric car and plug it into the mains every night to recharge its battery: It's that you drive into the station and get your depleted battery switched for a full one. So Better Place is building these battery-switching stations, as well as selling electric cars made for it by Renault.)

Now, huge infrastructure projects require huge investment and are supposed to generate returns over decades. They're the sort of investment for pension funds not seeking immediate returns, but returns over time.

But from the perspective of the long-term investor seeking a parking place for his savings, Better Place has two flaws.

The first is that it's terribly risky. The company isn't building a train station or water desalination plant. It's pioneering revolutionary technology that may or may not take off; the risk to the company's value, and hence to investors, is enormous. The public's pension savings aren't supposed to be invested in projects that are so risky.

Even if we assume that electric cars will, indeed, catch on with the driving public, it seems Better Place strayed from its own vision. This is the second flaw.

Better Place needed to realize it would take decades, not just a few years, before becoming profitable. A business model based on breaking even only after a decade or more, and achieving profitability after 20, 30 or 40 years needs first and foremost to grab market share.

But instead of breaking the market with attractive prices, Better Place priced its cars sky-high, which didn't exactly win consumer hearts, let alone market share. One must suspect that based on its business models, long-term institutional investors weren't involved in shaping the company's policy. Rather, it was the company's private shareholders who, by nature, are impatient.