ELECTRIC AMBITION
If the industry is serious about future of EVs, automakers may take cue from Tesla.
Don’t count on the Bank of Canada reaching the sweet spot for its benchmark rate anytime soon.
Forecasters expect another two BoC hikes in its key lending rate this year, which would make five hikes in the short space of a year and a half, starting last July, when the BoC finally felt confident enough about a sustainably robust Canadian economy to break out of remarkably long, post-Great Recession period of easy money.
The sweet spot for the benchmark rate would be in the range of 2.5 per cent to 3.5 per cent, what the BoC calls its “neutral” rate. You could call it the “Goldilocks” rate, one that keeps the economy humming without the risk of economic overheating. But that ideal rate is a big jump from the BoC’s current 1.25 key rate, which was left unchanged last week despite the Bank’s goal of achieving the Goldilocks rate.
Among the worrisome factors keeping the rate low are too many things over which the BoC and fiscal authorities have little or no control. Biggest among these is stubbornly high household indebtedness, which could have a crippling effect on consumer spending — and ultimately GDP growth — if Canadians can’t handle rising interest rates.
The good news here is that the rate of growth in household debt is finally decelerating — indeed, it has been inching down in each of the past three months. A soft landing in the long-overheated Toronto and Vancouver housing markets is also helping. Toronto house sales were down 6,448 units in January, the biggest drop in 29 years.
But average household spending committed to mortgage payments jumped 3.7 per cent in last year’s Q4, while disposable income inched up by just 1.3 per cent. A persistence in that gap would rule out the three additional BoC rate hikes a few analysts forecast in 2018, and might even rule out two. Is mimicking Tesla the cure for the EV blues? Ford Motor Co. launched the Edsel during a recession, and ever since, automakers have tended to do the right thing only reluctantly and with poor timing, notably with catalytic converters and life-saving three-point seatbelts.
While it’s true that the global industry is currently committed to spending about $70 billion on all-electric vehicles (EVs), here too it has acted half-heartedly. U.S. EV sales are expected to cross the 200,000unit threshold this year, but that still amounts to just over 1 per cent of total vehicle sales.
Any hope of widespread EV adoption rests largely with needed innovations in battery technology. North America still lacks a network of recharging stations big enough to overcome motorists’ “range anxiety,” the fear of getting stranded far from a recharging source.
Another issue is bland design, to be expected of vehicles until recently regarded by the industry as “compliance cars” — vehicles made only to placate regulators rather than to entice buyers.
Ford, which has budgeted $11 billion (U.S.) on EVs, is among the first EV makers to at long last recall that what propels auto sales is superb and often sexy designs — something Detroit, most notoriously, lost touch with starting in the 1980s.
Ford hopes in two years to have an EV SUV branded Mach 1, a badge once worn by its Mustang muscle car.
Maybe the one thing to watch in determining if the industry is truly serious about EVs is the showroom appeal of the next generation of EVs due soon from Toyota, Volvo, Audi and even high-performance makers like Porsche and Jaguar. Somehow, the industry is only now realizing that Tesla Inc.’s success with its Model S — which became an “aspirational,” or must-have, vehicle despite a sticker price of $175,000 (U.S.) — was not only its performance innovations but its sleek, fetching design. Elon Musk, the $2.6-billion (U.S.) man Shareholders of the aforementioned Tesla gather for a special meeting on March 21 to approve his board’s proposed $2.6-billion (U.S.) pay package, one of the biggest in history. The investor advisory service Glass Lewis & Co., a reliable scold on excessive executive pay, has surprised no one by recommending shareholders reject the compensation package. After all, the Palo Alto, Calif., company lost close to $2 billion (U.S.) last year, about triple the previous year’s loss.
Tesla’s Model 3, Musk’s first bid to make a mass-market vehicle, and whose start-up production costs account for most of that increase in red ink, is behind schedule. And Tesla has just lost its leadership in the residential and commercial solar-panel business to an upstart rival.
But most of Tesla’s biggest institutional investors are on board with the staggering Musk pay packet. And it’s possible that many corporate governance experts might be as well, on studying the details.
Musk is to be paid in stock options, 20.3 million shares that fully vest only if Tesla’s market cap jumps to $650 billion (U.S.) from its current $55 billion (U.S.). That’s a 12fold increase in a current market cap that’s already eight parts hope and hype to one part realistic promise. We worry at the rationale given by Baron Capital Inc., a fund manager that ranks 12th among Telsa’s biggest investors, for favouring the proposed Musk compensation.
“Think about Elon Musk and what he has had to overcome to achieve what he has achieved,” Ron Baron, chairman of the fund company, tells Bloomberg News. “The OEMs (original equipment makers, or Tier One suppliers) are against him, the dealers are against him, the unions are against him. Everyone is aligned against him.”
Musk is a geek god, no question. But if that many obstacles stand in his way (and Baron left out a few), that would seem to be a more convincing argument for betting against Tesla than for buying its shares at their current nosebleed price of $325 (U.S.).