Over the last 5 months I have seen more and more "NFD" deals. NFD is my quick and dirty term for "Non-Financial Drivers," or, when including my likely opinion on the viability of the opportunity: "No Fucking Deal." These include all of the "Socially Responsible" or "Green" deals that have come across our bow at Sub Rosa. (Ethanol has been increasingly common but fuel cells, hybrid part manufacturers, hydrocarbon reclamation and solar have have been appearing with increasing frequency too).
One of the deep flaws in investing strategies like "Socially Responsible Investing" or "Green Investing" is less about an intrinsic strategic flaw (though these exist too) than the nexus between the decision to add non-financial criteria to an investment process and human nature. The general miasma created by focusing on how "green" an investment is (or isn't) or how "socially responsible" it is (or isn't) clouds clear decision making. This is because these criteria are political, and therefore subject to the whim of policy and public opinion. I have, of course, discussed this before on Going Private, quoting, among others, Jon Entine who said:
The dark secret of "social investing" is that it is neither art nor science: It's image and impulse. It reflects perceptions, not performance.
The social investing community also suffers from the hubris that it can separate the good guys from the bad guys.
Taking the subjective nature of deciding what is or isn't "green," and the moving target that is the definition of "green" this week and you have a recipe for disaster.
Since joining Sub Rosa, I have had occasion to review any number of NFDs. A common theme in major "green" or "socially responsible" projects is that when someone finally bothers to study the larger impact of the technology or product it becomes painfully obvious that the product or technology is either astonishingly impractical or has a more substantial negative impact on, e.g., the environment than the "non-Green" alternatives already in the marketplace. If this pattern appears regular in SRI or Green projects, I believe it is because of this miasma effect. It is, however, easy to avoid the miasma effect. Ask what the pricing mechanism is for the product. Is it the market, or something else that is setting pricing?
Let's take an example. Trying to get back into the swing of work I have been researching hybrid cars, a project I began last spring related to some parts manufacturers we were considering acquisitions of. Some interesting things came out. Ford, for example, was at one point taking losses on every hybrid they sold. I haven't seen recent data but I suspect not much has changed. Consumers simply won't pay the $5,000 - $6,000 premium for a hybrid just "because," or at least not enough of them will do so to make the product even a break-even proposition. What was Ford thinking? Why would this be?
No matter, the savings on gasoline make up the premium cost. Nope. Not for a long while. The Toyota Prius is among the fastest at returning savings to the user. It takes 5 years and then how much can one expect? $80.00.
Well, it's worth it. Buying a hybrid will reduce your impact on the environment and if it takes 5 years to break even, well, that's just fine isn't it?
Sure, it would be, if that were true. It isn't.
In fact, the major hybrids are really quite unfriendly when you use real metrics to evaluate them. In this case, energy cost per mile over the lifetime of the vehicle.
CNW Market Research has done a comprehensive study (updated with 2006 model recently) on the "dust-to-dust" energy costs for everything from extracting and refining raw materials to manufacture, assembly, testing, delivery, driving during the life of the car and even disposal. This is, of course, the metric that should have been used to justify hybrids in the first place (since savings on fuel costs certainly didn't make their manufacture rational).
The study is intensely detailed (a great deal of time is spent modeling how long a vehicle remains with its first owner and how many times it changes hands before being disposed of, for instance, as each incremental transfer is additional energy expenditure). Read the 400 page report, absorb the "energy cost per mile" figures and some interesting things emerge:
- Actual consumption of gasoline is generally less than one third of the total energy consumption in the lifetime of a vehicle
- The 2006 model hybrid with the lowest energy impact during its life cycle is the Toyota Prius that consumes $2.965 per mile during its life
- The 2006 model hybrid with the highest energy impact during its life cycle is the Ford Escape that consumes $3.540 per mile during its life
- For many hybrid vehicles 25% to 30% of the life cycle energy expenditure is consumed in raw material production and manufacture- this is much higher than in non-hybrid vehicles. For foreign built cars this means that emissions in the country of use (the United States, say) are not being eliminated, but rather transferred to the country of manufacture. Next time a hybrid driver looks smug feel free to remind them that they are likely dumping their emissions into the second or third world. What kind of pig subjugates the peoples of Mexico and endangers their health to look "green" for their suburban neighbors and smirks about it?
- Federal (and state) subsidies mean that this energy use and emissions transfer is part of United States monetary policy (and California is exploiting Mexico).
Remembering that the hybrids consume $2.965 - $3.540 of energy per mile during their life cycle it is interesting to consider these figures for other popular vehicles:
Ford Escape: $3.540
Porsche Boxter: $3.388
Toyota Land Cruiser: $3.354
Maserati An: $3.219
BMW 5 Series: $3.197
Cadillac Escalade: $3.197
Toyota Prius: $2.965
Lincoln Navigator: $2.943
Porsche 911 Carrera 4: $2.806
Lincoln Town Car: $2.661
Range Rover Sport: $2.602
Porsche Cayenne: $2.539
BMW X3: $2.513
Hummer H3: $2.069
Interestingly, most large SUVs have a fairly significantly lower lifetime energy impact than do any of the hybrids.
What a wonderful "Green" investment strategy. Hybrid cars.
Hybrids are such a horrible mess because they mix all the elements required to destroy the market forces. Subsidies, state and federal. Green investing. Substantial research and development to avoid spending money on gasoline, which the market has actually left quite cheap, at the expense of a more expensive product. (Hint: use cheap resources until they are not cheap anymore).
Gas has to hit $6.00 per gallon before today's hybrids show any cost savings to their owners inside of three years. Even the most basic sensitivity analysis would expose this. We can only reason that the likes of Ford either expected $6.00 per gallon in the near future, or simply disregarded the economic analysis in favor of a political one. Is it any surprise that the resulting product is more expensive in every way worth measuring than its conventional counterparts? Shouldn't be if you were paying attention.