Research On Valuation Method Of New Engery Vechicle R&D Project Based On Real Option Theory

In recent years, in response to the growing of energy demand and environmentpollution, the world’s major automobile manufacturers have speed up the deploymentto develop NEV (New Energy Vehicle) as a national strategy, accelerated the technicalR&D and industrialization. With the background of high oil price, air pollution andrising oil external dependency, NEV is listed as one of the strategic industries by thegovernment of China. In the automotive industry, NEV is regarded as China’s autoindustry’s “corner overtaking” opportunity. However, compared with foreignautomobile companies, domestic automobile enterprises put not enough enthusiasmon NEV, expending on R&D is low. The reason is that NEV is an emerging industrythat is not fully mature on technology and market, and has a lot of uncertainty ofproject investment return.And traditional methods on the basis of the theory of the NetPresent Value (NPV), which is adopted widely in the industry, unable to correctly dealwith the uncertainty, and tend to underestimate the value of the NEV R&D project.The NPV-based methods restricted the enterprises’s enthusiasm on R&D investment.How to deal with the uncertainty of NEV industry, and how to value the R&D projectreasonably, become a very realistic significance.Therefore, this article study the NEVR&D project evaluation methods based on real option theory through a newperspective, trying to provide decision-making basis for NEV R&D investment.First, the present status of NEV development was studied. NEV is obviouslydifferent from the traditional ICE vehicle. With its technology becoming mature andits cost declining, some NEV models at present are mature enough to be industrialized.NEV is widely regarded as one of the most strategic pillar industry in the21st century.Hybrid technology is mature, and a large number of production models are availablein the market, with some of them have reached the level of economic scale. Themarket share of HEV is more than3%in some country. Although EV is nottechnically mature enough, but a large number of models have been released. Thereare only one or two EV models at or close to the level of economic scale. At presentthe market share of EV is about0.1%.Secondly, a basic real option framework was set up to evaluate NEV R&D project. A5-steps method was put forward, including the project uncertainty analysis, optionsidentification and selection, model selection, parameter setting. The uncertainty ofNEV R&D project was analyzed in detail, including uncertainty of technicaldevelopment, the battery price, oil price, regulations and policies, market and project’sown factors, etc. And methods of real option indentification in NEV R&D projectwere studied; methods of main parameters setting were studied in detail as well.Thirdly, based on BS model, the evaluation method of R&D project of NEV wasstudied. The general model of NEV R&D project evaluation was established,and using which EV R&D investment project was calculated and analyzed. The modelwas verified with the case of TESLA finally. Study shows that the real option theoryis more suitble to be used to assess the value of the NEV development project thanusing the NPV methods, because it can reflect the flexible value of theproject. According to the evaluation results, a typical high-end EV R&D project’soptions value is around$290million. Research shows that even EV is not profitablein current market and EV project’s NPV is negative, but because of its high volatilityand good long-term outlook, the project’s option value is higher than R&Dexpenditure, so it is worth to be invested.It also give a reasonable explanation tothe investment boom on EV worldwide these years.Fourthly, in order to value multi-stage project and multi-project sequencesinvestment, based on the theory of compound options, the investment evaluationmethods of NEV R&D project was studied. A general mathematical model of valueassessment was established, using which the HEV R&D investment projects wasevaluated, and the model was verified with the case of Toyota PRIUS. Researchshows that considering multi-phase project or correlation between projects, compoundreal option theory is more suitable for assessing the projects’ value than NPV methods.Research showed that because HEV has the opportunity to be “switched” to EV in thefuture, the value of this opportunity should be taken into account when valuing theHEV R&D project. And this value can be counted in by the method based on realoption theory. Therefore, it is a better method of valuing HEV R&D project.Finally, the rationality of countermeasures was analyzed from the perspective ofreal option, including R&D strategic choice, platform R&D, flexible decision, and intellectual property, etc.. And based on real option theory, in order to increase optionvalue of R&D of NEV, some suggestions were put forward from the perspective ofenterprise and the government. Enterprise should evaluate the NEV R&D projectbased on real options theory, and try all the best to improve option value. And in theprocess of industrialization of NEV, the government should play the role of leading,coordination, promotion and services, from policy, financial, standards, supportingfacilities and intellectual property, so as to promote the development of new energyautomotive industry.In short, the valuation method based on real option theory can deal well with theNEV R&D project’s uncertainty, assess project value reasonablely, so as to provide anew thought and method for NEV R&D project evaluation, and provide a goodtheoretical support on strategic decision for government and enterprises.