How to invest in alternative fuel vehicles

[Editor’s note: This is an opinion piece by Darryl Siry, of Tesla Motors. We asked him for his views about investment opportunities in the area of alternative fuel cars. Here’s his response.]

There’s been a surge of interest in the field of alternative fuel vehicles in the past year — the public reception to the Tesla Roadster is indicative of a very large pent up demand for exciting alternatives to the petroleum powered cars we all drive. The sheer size of the market opportunity has drawn the attention of traditional automotive OEMs as well as a growing number of startup companies. Investors of all types are asking the same question – how can I participate in the creation of value in this space?

The answer to that question is not as straightforward as it may seem. A great deal of recent activity in the space comes from traditional OEMs such as GM and Toyota. On the heels of the introduction of the Tesla Roadster, GM re-entered the EV race with the Chevy Volt concept car – envisioned as a plug-in vehicle with an electric drivetrain good for 40 miles per charge and an onboard generator to extend the range of the car. Toyota, which has enjoyed a near monopoly on efficient hybrids with true “green” bona fides with its Prius model, has signaled that they plan to extend the Prius brand into new types of cars, including a plug-in version. Both GM and Toyota’s models are planned for the 2010-11 timeframe. Just about every other OEM has signaled their intent to develop either plug-in hybrids (Ford, Daimler) or pure EVs (Nissan, Honda, Mitsubishi) The problem here is that you can’t buy a tracking stock for these alt-fuel cars or the drivetrain technology– you can only buy a share of the whole car company, which is a mixed bag.

The interested investor can scan the landscape for new companies or established technology specialists that might provide focused participation in this growth opportunity. In analyzing these opportunities, I would recommend that you consider the following:

1) Has the company demonstrated a unique or superior technology advantage or the ability to deliver a uniquely valuable service? This question is fundamental. Does the company have IP that represents an advantage in the marketplace or that makes it attractive to a business partner or acquirer? Alternatively, does the company have unique expertise that could be marketed as a valuable service or a new business model that creates value by addressing some existing or emerging problem in the marketplace?

2) Is the company engaged in something that is of value to the incumbents? A successful company in this field is either going to create new value for end consumers or alternatively will be very good at something that is highly valued by the incumbent players. Ideally the company does both at the same time. As many of the traditional OEM companies pursue alternative fuel technologies, they are looking to outside partners to provide the expertise and supply the components that they have not developed internally. Using Tesla Motors as an example, Tesla is marketing highly desirable electric cars to consumers, but has also developed unique technology and expertise in EV drivetrain development and integration that is very valuable to potential partners.

3) Can the company scale to very high volumes? While there are many valuable niches in the automobile or EV market, marketing to mainstream segments requires scale. The company’s ability to scale, in manufacturing or distribution for example, is a key factor in sizing the ultimate opportunity.

4) Does the company have brand value in the emerging field? For the first time in about 100 years, new automotive brands are being created that carry important meaning for customers looking to make a statement that they are doing something different for positive change. These new brands have the opportunity to build equity with consumers that is unencumbered by past brand associations.

Surging consumer demand for automotive alternatives and regulatory pressure for more efficient vehicles ensures that alternative fuel vehicles will be a high growth segment for many years to come. Participating in this upside as an investor requires understanding the drivers of long term value in the “pure play” companies that are sprouting up and considering both the creation of value in new markets as well as the creation of value for incumbent players looking to new companies to help them achieve their own goals.