How to cash in on the electric transport boom

The popularity of electric cars is on the rise, thanks to subsidies and high fuel prices. With a new generation expected to come to market in the next two years, Eoin Gleeson looks at how to make money from the sector and picks two stocks to spark your interest.

In the opening scene of the 1996 documentary Who Killed the Electric Car?, a rag-tag group of minor Hollywood celebrities gathered to bury a cause that had failed to ignite. Crowded around a grave in a Hollywood cemetery, Baywatch actors and bit-part filmstars bowed their heads as an electric car was laid to rest. The film was billed as a murder mystery who could have killed off such a clean, young beautiful thing? and chief among the suspects was General Motors (GM). Having leased 800 electric cars out in the early 1990s, the car giant had later sabotaged their push for electric cars, recovering the prototypes and crushing them in Californian scrapyards.

But the real reason GM did away with their electric cars was far less mysterious than the film suggested. It was simply not economical. Even after a couple of attempts to make the vehicle roadworthy - with cars that ran on lead acid batteries GM's upgraded nickel battery vehicles were costing them up to $80,000 to build. That was about twice the guide price of the actual car. And once it was out on the road, there was the real possibility you could be left stranded, should the battery unexpectedly run out of charge. It made little sense to keep making such a car after all, who would buy it?

But it seems that reports of the electric car's death have been over-exaggerated. In fact, thanks to the Japanese, the electric car is very much alive and well, and could soon be swarming all over the roads of Tokyo. That's partly down to government subsidies the Reva Electric Car Company will get $2,600 for every electric car they make, for example.

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But it's Japan's electrical utilities that have really been pushing for electric cars. As one Tokyo Electric Power (Tepco) chief told the Financial Times, the reason that utilities like electric cars is because it allows them to sell electricity at night. Most drivers prefer to charge their cars at home during the utility's off-peak hours, using regular power sockets. In one Tokyo prefecture, the local utility is providing 150 quick recharge stations as part of an effort to put at least 3,000 vehicles on its road within five years.

Stung by paying $4 a gallon for gas, Americans have also found a new respect for the electric car. Four out of five American consumers said they would consider a hybrid, such as the Toyota Prius (which use a battery backed by a petrol engine), when they next replace their car although that may be some time off. Meanwhile, a sleek Lotus-styled electric car by Tesla Motors has just been brought to market with a price tag of £92,000, for the wealthier conspicuously green consumers. Apart from the price of gas, recent developments in using lithium batteries have cut the cost of installing batteries to £8,500.

A fleet of plug-in cars is now expected to come to market over the next two years and this time they will be practical as well as green. The new Chevy Volt is expected to drive 40 miles on a single charge (which takes about three hours) and more than 300 miles if its petrol engine is tapped to recharge the battery. The US Department of Energy is already studying the implications of plug-in cars grabbing a 25% share of the market. "Investors should do the same," says Jack Hough in Smart Money Magazine. We have a look at two companies set to profit below.

Two component suppliers charging ahead of the competition

The best way to invest in the transition from the petro-car to the electric car is through those companies making the components, reckons Jack Hough in Smart Money. He likes Ener1 (AMEX:HEV). One part of the company's business involves using nanotechnology to solve problems with the new lithium-ion batteries being used in electric cars. Just like the lithium-ion batteries used in laptops, measures need to be taken to make sure such a big battery doesn't catch fire. But the firm is also uniquely positioned as the only American supplier of advanced lithium batteries, says Hough. This $781m company is on the cusp of turning a profit, starting with a $70m supply deal with Norway's Think electric car.

The electric car is about more than just the battery, of course. A company such as Borgwarner (NYSE:BWA), which makes fuel-efficiency components, such as turbochargers reducing emissions in the backup petrol engine in hybrids will also do strong business in the years ahead. Borgwarner already supplies parts for hybrids from Honda, Toyota and Ford. The group just reported a rise in quarterly earnings to 74 cents a share, from 64 cents per share a year ago, on the back of strong international sales and despite the current weakness in the American car market. The stock trades on a forward p/e of 13.1.

Eoin came to Money Week in 2006 having graduated with a MLitt in economics from Trinity College, Dublin. He taught economic history for two years at Trinity, while researching a thesis on how herd behaviour destroys financial markets.

Eoin acts as managing editor of MoneyWeek's newsletters.