A few 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 Major carmakers are responding by accelerating their EV rollout plans sold its first fully electric car and consumer adoption has been slow — hybrid or plugin 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 end-2020 (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 billion) 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 — the nine biggest carmakers sold 47 million cars in 2020, with revenue totalling almost US$1,352 billion (see Table 2).
In fact, when cars become autonomous, even fewer will be needed, as the rate of utilisation will rise sharply. In other words, improving technological development for this product is likely to lead to falling demand in units, and it is debatable whether prices will rise.
The auto business is not the tech industry, where high growth and margins are the norm and some platform and software companies even enjoy decreasing marginal costs. The combined revenue for the world’s top nine carmakers grew at a compound annual rate of 3.4% between 2010 and 2020, whereas operating income expanded at an even slower compound annual growth rate of 2.1%. Operating margins ranged between 4.7% and 7.4% on average over the last decade. Toyota, the most profitable of the largest carmakers, reported a net profit margin of 7.2% last year. In short, the auto industry is intensely competitive and has relatively consistent and low margins.
All the EV start-ups — and Tesla — will be competing for a slice of this market. The potential size is fairly known. To justify their current valuations would be to assume that they would, as a group, capture the entirety of the global auto market in the very near future. That is as massive an assumption as it is unrealistic. Why? Because EV start-ups are not disruptors the way we would typically define tech companies. As we said, they are selling cars. And the legacy carmakers are not facing the competition lying down.
Start-ups — many with little to no manufacturing and distribution experience — will be competing head on for the same customers against significantly more experienced carmakers. The latter have had years to build their brand names and trust with customers, supply chains as well as distribution and maintenance networks.
Case in point: The best-selling EV in Europe last year was Renault’s Zoe, which topped Tesla’s Model 3 (the best-selling model in 2019 but saw sales decline 9% year on year in 2020). And it was Volkswagen that ended 2020 as the biggest BEV manufacturer in Europe, with a 24% market share. Tesla’s comparative market share dropped from 29% in 2019 to 13% last year, as it competes against a plethora of new launches, and ranked only sixth in terms of BEV registrations in January 2021.
In China, the world’s biggest EV market today, the Model 3 has fallen behind the Wuling Hong Guang Mini (produced by SAIC-GM-Wuling Automobile, a joint venture between GM and Chinese companies SAIC Motor Corp and Liuzhou Wuling Motors Co). In fact, Tesla has had to cut prices several times over the past year to compete against the hundreds of Chinese EV companies.
Perhaps this is why Musk has been steering expectations away from just selling cars towards the addressable market for public transportation using autonomous cars, which will offer recurring income. Subscription income gets a higher price-toearnings (PE) valuation than earnings from one-off sales (Musk is obviously a good stock analyst). In 2019, he touted plans for Tesla to launch its own smartphone app and a fleet of a million self-driving robotaxis within the year. That deadline has come and gone.
We think autonomous vehicles for public transportation, ride-sharing and logistics makes a lot of sense — controlled by artificial intelligence that can operate 24/7 with a high degree of efficiency and safety. The question is, why Tesla? Why not Uber Technologies or Lyft, which have established ride-hailing platforms?
For that matter, why not Apple or Google? Waymo, Google’s autonomous vehicle arm, is currently way ahead of competitors in terms of actual miles driven. It has launched a test pilot autonomous taxi service in Phoenix, Arizona — though commercialisation remains a moving target.
An Apple car makes sense as a natural progression for the iPhone giant to produce a smartphone on wheels, which is what we envision an autonomous car will be. Apple certainly has all the component knowledge — in terms of operating system (iOS), software apps such as Maps, battery, charger, camera and sensor technologies, chips and core processor (designed in-house) that seamlessly integrate hardware with software-apps. Its Apple CarPlay already connects the iPhone to dash displays in a range of car models, albeit on a rudimentary level. Last but not least, few would argue that Apple knows how to design a desirable product.
Therein lies the biggest risk for EV startups — and investors paying huge valuations for them. Not only will they be competing against the experience of traditional carmakers, but future competition is likely to come from mega tech companies (with deep pockets) such as Apple.
As we saw with the internet revolution, for every Amazon.com and Facebook, scores more never made it big and/ or outright failed, relegated to the footnotes of history. Over the course of the last 100 years or so, thousands of carmakers have come and gone or merged into larger groups. Today, just a small cohort of global companies dominates the auto industry. Who will be the eventual winners in the car market of the future? This trillion-dollar question is further complicated by the fact that the industry structure remains highly fluid and is evolving rapidly, as are the underlying technologies.
Our bet? China will inevitably lead. The need for scale, synchronised policies and rollouts such as standardisation for charging stations, batteries, rules and regulations makes China the favourite. Among the legacy carmakers with their supply chain capabilities, we like Geely Automobile Holdings, Volkswagen and GM. But we think the biggest winners are likely to be tech companies such as Google, Apple, Uber and Tencent Holdings.
In short, a few EV companies will inevitably be very big winners. But the majority will simply disappear, go bust and be written up as yet more lessons for future generations.
The Global Portfolio gained 2.6% for the week ended April 7, lifting total returns to 58.9% since inception. The portfolio continues to outperform the MSCI World Net Return index, which is up 45.3% over the same period. The best-performing stocks last week were Alphabet Inc (+8.6%), Microsoft Corp (+6%) and Adobe Inc (+3.8%). Only three stocks in our portfolio ended in the red; ViacomCBS (-2.7%), Vertex Pharmaceuticals (-1%) and Johnson & Johnson (-0.5%).
Disclaimer: This is a personal portfolio for information purposes only and does not constitute a recommendation or solicitation or expression of views to influence readers to buy/sell stocks, including the particular stocks mentioned herein. It does not take into account an individual investor’s particular financial situation, investment objectives, investment horizon, risk profile and/or risk preference. Our shareholders, directors and employees may have positions in or may be materially interested in any of the stocks. We may also have or have had dealings with or may provide or have provided content services to the companies mentioned in the reports.
