Tong’s portfolio: Investing in EVs is like ‘spinning the wheel of fortune’
Afew will make fortunes, but most will go empty- handed. The future car market is electric, literally and figuratively speaking. We truly believe the electrification of cars is an irreversible secular trend and that, further into the future, the majority of cars will be autonomous. And we did not come to this conclusion lightly, given the failure of hydrogen fuel cells over a decade ago.
For sure, it has been 13 years since Tesla sold its first fully electric car and consumer adoption has been slow — hybrid or plug-in electric vehicles ( PHEVs) and fully battery electric vehicles (BEV) made up just about 5% of global auto sales in 2020. This can be attributed, primarily, to uncompetitive prices — compared with traditional internal combustion engine (ICE) cars — and a lack of charging infrastructure. But the landscape is changing very rapidly.
Governments have increasingly thrown their weight behind this shift, using carrot- and- stick initiatives including consumer subsidies, tax incentives, zero- emission mandates and penalties, all of which will accelerate the pace of adoption.
The Chinese government, in particular, has been a key driver in the global EV push. The country’s new energy vehicle ( NEV) policies are perhaps the most comprehensive in the world and its authoritarian leadership translates into a high degree of cohesiveness and effective execution at all levels of government. It has spent- invested tens of billions of dollars on consumer subsidies ( in the initial years) and, more critically, battery charging and swapping infrastructure as well as R&D in the underlying technology, power consumption and batteries. Under its latest five- year plan, NEVs are targeted to make up at least 20% of all car sales by 2025.
The European Union has also stepped up targets for zero- emission vehicles as part of its plans to achieve carbon neutrality by 2050. The threshold greenhouse gas emission for vehicles will be progressively lowered to hit the target of at least 30 million zero- emission vehicles on the road by 2030, up from roughly 3.2 million at end2020 ( including hybrids). Elsewhere, the Biden administration in the US has included allocations for EV as a key part of its ambitious US$ 2.3 trillion ($ 3.1 trillion) infrastructure package, including investments in the massive rollout of charging stations.
Closer to home, the Singapore government’s road map outlines EVs to account for 50% of private cars and buses on the road by 2050 and 50% to 100% of taxis/ ride- hailing cars, public buses and freight vehicles.
Major carmakers are responding by accelerating their EV rollout plans. For example, Volkswagen Group plans to launch a slew of EV models over the next few years — that will boost sales to between 6% and 8% of total sales this year, more than double that in 2020. The company aims for EVs to make up more than 30% of sales by 2030. Volkswagen has also unveiled plans to build six battery factories in Europe as well as charging infrastructure.
General Motors Co (GM) and Volvo plan to go all- electric by 2035 and 2030 respectively, while BMW targets at least half of its sales to be fully electric by the end of this decade. The world’s largest carmaker, Toyota Motor Corp, expects to sell at least 5½ million hybrids and BEVs annually by 2030.
The expected launch of hundreds of new EV models and continuous improvements in terms of range, quality and design will be much more effective motivations for consumers than mere subsidies. Equally important, we believe economics will, sooner rather than later, be the biggest driver behind consumer adoption of EVs — especially because, as production of batteries and vehicles reaches scale, prices will decline quickly and close the gap against ICE vehicles. The unsustainable subsidies will no longer be needed.
Given all of the above, it is not at all surprising that EV-related stocks have been among the hottest themes in play. Every investor wants to jump onto this bandwagon, at the ground level. In some ways, it is not unlike the internet revolution in the early 1990s. We knew the internet would change our way of life, even if we could not yet fully imagine how. What ensued were years of frenetic trading in internet players of all shapes and sizes — at its height, really, any company that had a “dotcom” to its name. And when there is irrational exuberance, the result is eye- popping share price gains.
We see this repeating in the EV space today. Euphoric investor demand is resulting in a deluge of new EV start- up listings, and especially through mergers with SPACs ( special- purpose acquisition companies). These are blank-cheque companies armed with cash in hand looking for assets- businesses to acquire. Unlike for traditional
IPOs, the start- ups- SPACs are allowed to make and give rosy (often unrealistic) sales and earnings projections to potential investors — further adding fuel to the mania.
The share prices of EV start- ups have soared. The current market capitalisation of the nine biggest EV players total US$ 867 billion, including the four companies yet to sell a single vehicle. None is bigger than Tesla, which has a market cap of nearly US$ 664 billion — which incidentally is almost as much as the combined valuation for the world’s five largest legacy carmakers today. We must concede that Elon Musk, with his 50 million- plus and counting Twitter followers, is an excellent one-person marketing machine. By comparison, the world’s nine largest carmakers — in terms of the number of sales — have a combined market cap of less than US$882 billion. This vast difference in valuations makes absolutely no sense ( see Table 1).
Looking back, while the dotcom bubble was similarly driven by speculative fervour, it was at least underpinned by a transformative technology whose full potential was as yet unknown. The ideas and concepts held the promise of entirely new applications, demand and markets. Not to be clichéd, but the sky is the limit in terms of possibilities. We cannot say the same for the EV.
The car is still pretty much a car, whether it is gasoline, diesel or electric: It gets us from Point A to Point B. The engineering may be different but the demand is the same — in other words, we know the size of the addressable market. We can tabulate the number of vehicles sold each year —