It seems to me that the transition to electric vehicles is inevitable. The main reason I think so is that in EVs a big battery replaces the internal combustion engine as a source of power. The ICE is a complex, very costly engineering feat that requires frequent aftermarket maintenance, while the battery is a lot cheaper and, well, just lies there. A very big valuation difficulty that arises with traditional auto makers is that internal combustion engine technology and brand names are the heart of the intellectual property they own.
This huge advantage of EV-makers over ICE auto firms is something I, embarrassingly for me, didn’t really understand when TSLA emerged on the scene. I knew that the gasoline-engine incumbents, particularly those in the US, were bloated bureaucracies periodically flirting with bankruptcy, despite receiving very substantial government protection through tariffs and quotas that discouraged import competition. So that was a big plus for Musk. But it was nowhere as big as having a better, potentially cheaper, product.
TSLA also popularized direct sales to the consumer at a fixed price, as its main distribution channel. This eliminated the need for dealership middlemen, whose opaque pricing of new cars and high-cost maintenance services have been the bane, not only of car owners but manufacturers as well, in the US for generations.
Where are we today? I think we’re still very early in the game and in a sorting out period. We have the basic outlines of what is likely to happen over, say, a decade–that EVs will gradually replace internal combustion engine vehicles in most consumer and some business uses. But there will be bumps in the road and unexpected turns and twists–or at least that’s been my experience over close to half a century (ouch!) of analyzing companies and industries.
Three things stand out to me with EVs right now:
–probably the biggest is what I think of as the “Sony problem.” Back in the heyday of Japanese consumer electronics, Sony would unveil an exciting new product–the Betamax video player, for instance. As volumes built and economies of scale began to kick in, Sony would typically choose to keep its prices high rather than sacrifice margin to pick up volume, that is, “riding the cost curve” down, which would typically end up producing much greater overall profits. Panasonic would inevitably take advantage as a “fast follower,” bringing out an almost-but-not-quite-as-good product, like the VCR, six months later, selling for maybe 30% less than Sony, that would eat Sony’s lunch. In the TSLA case, its offerings are about a third more expensive than a hybrid. My sense is there aren’t any EV Panasonics yet, other than in China, where BYD is now the market leader.
–today Hertz announced it’s going to be selling about 20,000, or a third, of its remaining fleet of EVs (HTZ bought 100,000 Teslas in 2021, to much fanfare, and talked about turning). How so? As I read the 8-K, HTZ is doing so first of all because there’s not much demand for EV rentals, secondly because repair costs are unusually high. I’d heard rumblings from auto mechanics that Teslas aren’t particularly well-made, but for HTZ the more important issue for its fleet of EVs–which has at least some non-Teslas–seems to be the high cost of repair parts from manufacturers
–my wife and I are going to baseball spring training in Scottsdale next month. In arranging for a rental car, I noticed that EVs were being offered for at least 25% less than comparable ICE cars. Great, I thought, a bargain. But then realized I knew nothing about the availability of charging stations in Arizona, what typical wait times might be or how our needs would match up against the driving range of the EV we’d rent. So I began to understand why demand might be so soft
How to invest? I don’t have a very high level of conviction, but I’m thinking the independent gas station chains in the Midwest are interesting, if risky, ways to play the potential demand for charging.