The Promise of Yo and the Legacy of Communism

by Stephen Bryen

Sponsored by SDB Partners LLC ( http://www.sdb-partners.com )

Episode A016

He is 6’8” tall, so he could play basketball.  And in fact he can play basketball whenever he wants; he owns the NBA’s New Jersey Nicks.  He also owns Renaissance Capital and a number of enterprises from sports, to media where he is now a major player in liberal media, to real estate, to minerals.  He became a billionaire at the age of 28.  He is not American, but rather Russian.

His name is Mikhail Prokhorov and he is one of the few Russian “oligarchs” to hold onto his fortune, derived from his ownership of a nickel company.  In 2007 his net worth was estimated at $17 billion by Forbes. And, unusually, he is not only an entrepreneur but an innovator.  Prokhorov appears to have been the generator and financier of a project in Russia called Yo (the pronunciation of the Russian Ё ) produced by Ё  Mobile.  While he now appears ready to sell much of his stake, the story of Yo – including the part about selling out of the project – is a window on 21st Century Russia and the legacy of communism that has not been overcome.

Yo is a hybrid car, and while hybrids are increasingly common, they remain a niche item primarily because of the cost: $6,000 or more for a hybrid Camry over a non-hybrid; $9,000 for a hybrid Fusion over the non-hybrid.  The extra expense is mainly in the battery.  A standard hybrid runs its engine on battery power, using the gasoline motor only to charge the battery.  That means a big, big lithium-based battery that is very heavy and so expensive as to not be justifiable on economic grounds (though there may be other compelling reasons to buy a hybrid car).

Yo Hybrid Car

Yo is almost the opposite.

According to analysts and press reports, Yo powers the car with a small rotary vane engine running on gasoline or compressed natural gas.  The rotary vane engine is very small in size but performs well at high RPMs, making it very efficient.  Yo’s Russian-produced engine is said to achieve 67 mpg.  There is no large storage battery, only a conventional battery to start the engine. “Boost” or “dash” power comes from capacitors that run the electric drive motors for the power wheels.

While the idea of replacing batteries with capacitors has been around for years, the problem has been capacitor technology.  There have been some promising innovations including nanotechnology matrices, but most experts agree it is not yet possible to use capacitors to store and release energy the same way or better than a lithium battery.  So Yo doesn’t try to replicate batteries with capacitors; it uses them only sporadically to boost the vehicle’s speed  and power and to provide about 2 km of travel capability if it runs out of gas.

The vehicle is attractive in many respects. The body is made entirely of polypropylene plastic, has an operating range of 680 miles, is low cost (fully equipped at $14,500) and meets Euro-5 emission standards.  It has air bags and tires with a solid rubber “donut” inside so it can run with a puncture, which makes sense on Russian roads.

Prokhorov seems to have found the innovative spirit in Russia but will he be able to translate innovation into a successful, marketable commercial product?

It is a bad sign that Prokhorov is looking to sell his shares.  Has he hit technical or manufacturing roadblocks?  Are the production costs too high to be reasonable and the car’s price points too low to be realized?

Here we come to the nexus of risk and money.

Prokhorov’s Onexim and its partner Yarovit Motors (51% and 49% respectively) have so far invested $150 million each in the project and have started building a manufacturing plant in St. Petersburg.  Most experts think the real cost of the project will be far greater, and that significantly more investment will have to be made, and the manufacturing start date in 2012 seems optimistic.  And it appears that outside investors are not flocking to the Yo banner.

One reason that capitalists – Prokhorov and potential outside investors – are wary is Russia’s track record in handling business. Russia’s leadership is not kind to capitalism, no matter what it claims about its post-communist self.  There are too many cases where Russian business people have been arrested because they are political opponents of the government. Rule of law in Russia is more wishful thinking than reality.  Banks and bankers have been subjected to harsh treatment, and there are a lot of unexplained murders. Prokhorov himself has recently learned that politics and business don’t mix, as he tried and failed entering the political fray.

Under the best of circumstances, there is tremendous risk in manufacturing from scratch, and even more when the technology is new.  Add to that the car must have dealerships and support, ample spare parts, trained technicians, and a solid customer service system, most of which is not reliably available in Russia. In all the Yo literature and promotion, there is not a single word about any warranty.

While Prokhorov and his partner might be able to go it alone financially, they cannot reach out in Russia to find the skills, manufacturing know-how, support systems or even the right financing mechanisms for Yo.

And there may be a patent problem – perhaps a vestige of the Soviet days of stealing Western technology.  American inventor Raphial Morgado thinks the Russian engine may be a clone of his own patented MYT (Massive Yet Tiny) engine that he believes could revolutionize future vehicles.  Is there a patent infringement issue?  It remains an open, vexing question -the Russians claim the invention and have some patents for the rotary vane design.

Russia needs capitalism.  It would be a shame if a true commercial venture such as Yo, infused with innovation and originality, was to fail, yet Russia still seems to retain the worst residue of the Communist era that inhibits growth and investment.

There are those who believed, erroneously in the 1960’s and 1970’s (and some into the 80’s) that if Russia developed commercially, the Cold War would disappear and Russia could become a free trade, capitalist nation. It didn’t. Soviet leaders bet the farm on military superiority as a way to coerce the West into providing the much-needed infusions of cash and technology that they thought might lead to an improvement in their living standards.  There was no development of business acumen or appreciation of meeting market requirements.  In the end the regime collapsed.  Communism was a failure.

Today Russia has yet to overcome the limitations it inherited from its Communist past, although there are positive sparks like Yo.  But if the promises the Communists made of a better life were simply lies, the 21st Century Russian promise of successful commercial enterprise still cannot be realized without fundamental change.

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