Are Friends Electric? Or, “Who wins in an age of electricity powered vehicles?”

By Robert Swift 

“Our one source of energy
The ultimate discovery
Electric blue for me
Never more to be free
Nuclear and HEP
Carbon fuels from the sea
Wasted electricity
Our one source of energy
All we need to live today
A gift for man to throw away
The chance to change has nearly gone
The alternative is only one
The final source of energy
Solar electricity

Electricity – Orchestral Manoeuvres in the Dark – 1979

Aside from showing that our musical tastes are firmly mired in the late 1970s, this is an article on the apparent inexorable rise of electric powered vehicles, and the concomitant decreasing importance of humans in driving them. We seem to be amid many significant technological changes including the prospect of a mass, government mandated, move towards Electric Vehicles (EVs).

Initially spurred on by environmental concerns, battery technology is likely to advance so rapidly that it will prove cost advantageous to switch to EVs as vehicle prices, running and maintenance costs come down, and recharging facilities become ubiquitous. For example, battery prices were around US$1300 KWh in 2007 falling to US$500 KWh in 2012, US$145 KWh in 2016 and General Motors estimates US$100 KWh in 2021.

Currently under 0.5% of all global vehicles are fully electric. Several governments, such as France and UK, have already mandated a date for the outlawing of combustion engine sales! Additionally, the UK has seen a price put on diesel emissions by a charge now levied on diesel vehicles, in addition to the congestion charge already levied, to enter capital cities. This has had an immediate impact on the resale value of diesel cars and the incentives are clearly being put in place to introduce fully or partially electric cars.

However, are electric cars feasible currently? Are they truly less polluting? How can we make money as investors from this trend?

We don’t think EVs are currently feasible for a number of reasons, BUT will be when some other necessary changes take place – many of which are already underway such as ride sharing in cities.

Here are the obstacles which need to be overcome for EVs to be feasible and for a mass uptake possible:

  1. Range. EVs currently look good, especially the sports varieties, but do not have sufficient driving range to be viable, especially when there is the problem of…
  2. Inadequate recharging infrastructure. The USA has over 125,000 gas filling stations and currently fewer than 15000 electric recharging stations. Not only that but the home voltage of 110V in the USA is inadequate to charge a battery in an acceptable time frame. Even at 220V, the standard elsewhere, the car battery would take over 8 hours to recharge. Check out the Nissan charge website for details.What about people who live in apartments or houses with no driveway? Are we to see wires hanging out of windows in streets tightly packed with terraced houses? It’s unlikely. In short, a lot of infrastructure spending is needed.In countries where there has been some uptake of EVs like USA and China, auto manufacturers like Tesla and VW have built parking bays for re-charging so it’s possible. Local authorities in conjunction with electricity companies, have plans to provide further facilities in streets. Oil companies with existing fuel stations will also gradually convert these to electric charging as take up increases.It is also likely that car dealerships will become marque aligned charge points. These businesses are already under pressure since there is really no reason for their existence. They are tied to the manufacturers for historical reasons, but the success of the direct selling model, piloted by Tesla, has illustrated their obsolescence. Qualcomm, the USA based technology company, is even discussing how charging can take place wirelessly from the road surface – effectively producing a limitless range vehicle – as you charge on the move.The infrastructure will be built but capital expenditure requirements will be high, and experience has taught us that to invest during a period of high capital investment is not optimal – better to wait until we see who is winning and jump on that bandwagon.
  3. Initial outlay cost for EVs is too high. Savings from lower fuel costs will take most of the expected holding period of the car to materialise. Additionally, the EV technology is likely to get better and thus the resale value of even a three-year-old EV is likely to plummet at an ever faster rate. In short, a strictly logical buyer would still opt for a combustion engine or hybrid car over a fully electric powered vehicle.
  4. Current technology. The combustion engine will continue to improve both in terms of mileage and emissions. It is also not readily apparent that EVs are LESS polluting than the combustion engine, simply because the source of the electricity may be producing high carbon emissions? Additionally, the EV batteries tend to contain a lot of heavy metals which are hard to dispose and are polluting to mine. Put another way, when the fight is really on, the traditional technology has many more aces to play and the benefits of the switch may become LESS obvious not more.

Our conclusions

  1. EVs will become synonymous with driverless cars.There will more incentives offered, and penalties imposed, from governments to aid the adoption of EVs and driverless vehicles. Higher gasoline or diesel taxes and additional taxes on low MPG cars and ‘congestion charges” are always good revenue raisers, and are consequently probable!This is very likely to result in the greater use of Electric Vehicles for short distances where the range limitations are irrelevant and probably as a ride sharing format. City commutes less than 15km by single passenger occupancy combustion engine cars may become a thing of the past.Intel’s purchase of Mobileye looks increasingly clever since cars will become more intelligent if they are to be both driverless and use an infrastructure which is not yet fully ready.
  2. For car makers, bigger will be better since some of the bigger car companies have deep pockets, but all the smaller ones don’t.Existing auto manufacturers face both an opportunity and a threat from the transition to EV; they also must grapple with other new technologies too – driving automation and artificial intelligence. This is already leading to vast investment expenditure by all the major players. Some will invest well and be winners, while others lose out. At this stage it is just too early to call but they will all share a need to deploy a lot of capital on new technologies.Bigger may be better because they have deeper pockets. Our fund currently holds Daimler – the owner of Mercedes Cars and Trucks. They are rarely first to market with anything, but, they do have the size and financial resources to make the necessary investment scale. They have already developed an electric truck, and this is being trialled with various customers. EVs will become viable in short haul ride sharing format but longer distance driving and heavy payload will remain combustion engine dependant.Right now, it is just too early to know who the definite winners and losers will be from the auto manufacturers, but the picture will start to get clearer as time evolves. Newcomers like Tesla may be early, but they may not ultimately be successful – they may have made the initial technological leap – but ultimately vehicles need to be made to a consistent and reliable standard, and profitably. This can only happen with high volume capacity. This challenge may yet defeat Tesla.
  3. Invest in the auto component suppliers since the capex burden will necessitate devolving more production and R&D to autoparts companies.A way for the car makers to free up necessary cash flow is to outsource more of their existing work in the manufacture of parts, and their R&D functions. We like Lear Corp, Borg Warner, and Magna. Battery companies too will continue to be theme stocks. Battery technology is improving rapidly right now having been fairly static for decades, so we can’t be sure precisely what will finally win out. At present the focus is on lithium, cobalt and magnesium.Toyota and Panasonic are cooperating on battery technology to provide a ‘Japan Inc’ solution and VW has committed over US$10bn with JAC Motors which is based in Anhui Province, China and listed on the Shanghai Exchange.Mining companies with significant exposure to these materials may continue to do well – Albermarle, FMC Corp, SQM (NYSE), Tianqi Lithium Corp (China) have all been names in the headlines.
  4. Invest in the shovel makers not the prospectors?We’ve all heard the old saying from the California gold rush in 1849 – the ones who were sure to make money were the shovel suppliers – few actual prospectors got rich; many died.This may not be a bad approach in this new gold rush? So, what are the “shovels” in the electric and/or autonomous vehicle market? Well electricity for one!Of course, it will be some time before consumption by electric vehicles becomes meaningful for electricity utilities and the distributors, but it will eventually lead to significant growth for them from about 2025 and beyond. Many countries simply don’t have the capacity right now to meet this demand, so this will require more electricity infrastructure. This will have to be renewable energy such as nuclear, wind, solar or bio fuels. This will create demand for the likes of Siemens, Vestas, and solar panel manufacturers,Another reason to like electric utility and transmission companies? The surge in crypto currency interest and its mining is incredibly power hungry. Power demand from Bitcoin mining operations has surged along with the Bitcoin price, and miners now consume as much power as Denmark! Bitcoin mining will consume 1.5-3% of global power.These utility companies have suffered from poor performance in the growth driven stock market of the last few years and are now priced for zero revenue growth and profit declines. With growing power consumption per capita as living standards rise, and growing populations, this looks unlikely.The following companies are ones we think interesting:
    • China Resources Power
    • ENEL in Italy
    • First Energy Corp in the USA
    • RWE in Germany (majority owner of listed Innogy, the renewable energy company)

    We have been right in having zero exposure to utilities but as interest rate increases become increasingly discounted, and as electricity consumption continues to rise, the attractions of owning the shovel makers in this new gold rush are becoming increasingly tempting. We follow about 2,000 global companies of which about 120 are classified as utilities. Of these 120, over one quarter are in the top 10% rank by valuation. Put another way – many of these stocks are very, and disproportionately, cheap.

    Invest in electric utilities and you can tell your friends that you are also investing in the future of electric vehicles.

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