Value.able: Roger Montgomery
Electric vehicles are set to cause widespread disruption but they won’t give investors a free ride
Electric and autonomous vehicles capture the imagination and the headlines. Like many earlier technologies, such as the internal combustion engine and commercial aircraft, electric vehicles (EVs) promise to change the course of human history. But it is easy to mistake excitement about the technology for a free ride to investing success. History shows that new technology, even technology that has changed the world, has not necessarily made for good returns.
In auto manufacturing the wave of change will disrupt everything from petrol stations and fuel tankers to coalmines and mechanical car maintenance. On the supply side, as component makers scale manufacturing and the production costs fall, cheaper products will open new markets and demand.
It may come as a surprise but the first electric car was released in 1837. That puts electric vehicles ahead of Ford’s Model T by about 70 years. Despite some complications for repairers, electric cars were popular until the 1920s. But as road infrastructure improved and people saw the value in driving longer distances, they were unable to meet the challenges of range and speed. Then oil prices plunged and EVs were relegated to the scrap heap.
More recently, rising oil prices and environmental campaigns, as well as advances in battery technology, have meant that the return of EVs today is likely to be longer lived.
Think of a “masstige” car manufacturer like BMW or Audi and their production considerations.
There’s diesel fuel to consider and different quality fuel standards worldwide. There are varying emission standards and then there is left-hand drive and right-hand drive to factor in as well. Coordinating 10,000 parts from a variety of suppliers is expensive and the cause of multi-year development cycles.
By contrast, the Chevrolet Bolt electric motor has just 24 moving parts compared with 149 parts in the VW Golf’s combustion engine. Clearly manufacturers are naturally incentivised to move to simpler platforms. When UBS disassembled a $US37,000 Chevrolet Bolt, it discovered it was $US4600 cheaper to produce than expected and concluded that “with further cost falls likely, electric cars would probably disrupt the industry faster than widely understood”.
On the demand side, the total cost of electric car ownership is expected to reach parity with combustion versions this year, making the decision to buy electric that much easier.
Even though electric vehicles will initially carry higher sticker prices, when fuel and maintenance savings are factored in they will become cheaper, especially in regions where fuel costs are higher, such as Europe. Once that happens, an inflection point for demand will be reached.
China is the latest country to announce its intention to phase out the production and sale of gas and diesel vehicles altogether. Elsewhere, the Netherlands, India, Norway, France and Britain have announced the end of sales of gas and diesel cars by 2040, and some much sooner. More recently, the Scottish government announced the phasing out of gas and diesel cars by 2032.
For investors it is important to remember that many businesses will be disrupted by the changes. Many production line jobs will be lost. Not only will the industry need fewer people to manufacture vehicles, fewer still will be needed to maintain them.
Combustion engines require regular maintenance. At a minimum, spark plugs and oil need replacing. EV “induction motors” employ fewer moving parts, making them much simpler and easier to repair. And as reliability advances, they may not need to be repaired at all, instead relying on wi-fi to deliver software diagnostics and updates – a reboot or an electronic patch may be all that is needed.
As reliability advances electric cars may not need any repairs
Now, it won’t all be bad news for investors in the internal combustion engine and ancillary industries. According to BP, by 2040 there will be nearly two billion cars on the planet but only 300 million, or 15%, of these will be electric. In other words, 85% of the global vehicle fleet is expected to have an internal combustion engine.
And keep in mind that the development of the technology and the race to release EVs has been more than partly a function of very low interest rates and abundant capital. If interest rates rise, and as quantitative easing is replaced by quantitative tapering, the spigot of money that has funded the race to develop and release electric and autonomous vehicles will be turned off. Consequently, development will slower.
So far, despite record earnings, buybacks and merger and acquisition activity, the January 26 peak in the S&P 500 has not been surpassed. That suggests chasing high-priced, speculative new technology companies could be dangerous at this part of the cycle and even buying established companies in traditional sectors should be done with a very clear understanding of value. With that in mind, let’s look at three companies with exposure to the changes impacting the most popular form of personal transport in the developed world.