The car business is about to take us all on a wild ride. Autonomous vehicles will challenge industry business models. Electric propulsion will challenge the global economy.
I talked last week about how the current investment and political environment is starting to resemble the Gilded Age of the 1880s-1910s. There is so much innovation going on, and fortunes being made, that it’s like the dawn of mass transportation and information all over again.
This move to electric powertrains in cars, buses and trucks is going to be unstoppable as it makes so much sense, just like the development of the first automobiles. Electric vehicles (EVs) are better for the environment, safer, better for the U.S. trade deficit and EVs are a blast to drive.
Back at the turn of the last century, the growth of the automobile market — against the entrenched interests of the horse and buggy industry — was also front and center. Looking back, we can see that General Motors (GM) and Ford (F) were ultimately big winners due in part to their innovation of new factory, business and financing practices. But there were originally more than 50 competing auto manufacturers who presented propulsion schemes ranging from steam and electricity to gasoline and diesel. None were a lock. And now electric is coming back, and I suspect the transition will deliver gains now similar to what industrialists and investors in the Gilded Age enjoyed.
Toyota this month joined Daimler, Volkswagen, General Motors (GM) and Ford (F) in making a major longer-term commitment to electric vehicles. Big automakers are being pushed toward EVs faster than the public realizes. Business-model dynamics and clean energy regulators demand the course change. An unknown is the unintended consequences of removing even a small portion of energy demand from a crude oil market in equilibrium.Right now, EVs represent just 1% of the market. Even in China where demand is growing fastest, EVs account for just 337,000 units in a market of 22 million. And despite the bevy of shiny Teslas roaming Silicon Valley streets, EVs make up just a tiny fraction of the 17.5 million-unit U.S market.That is going to change. Car companies know autonomous vehicles are coming. That will bring lower sales and a new Mobility-as-a-Service business model in which EVs will be sought after.Veteran venture capitalist Steve Jurvetson told an audience that Uber Chief Exec Travis Kalinick recently told him that in 2020, if Teslas are autonomous, he’d want to buy every single one of them — 500,000 of estimated 2020 production. “I’d want them all,” he said.That type of enthusiasm is not lost on auto company honchos. They see EVs as their path to MaaS fleet sales. Toyota chief exec Akio Toyoda, is personally overseeing EV expansion. Volkswagen wants EVs to represent 25% of sales by 2025. Ford said it would invest $4.5 billion by 2020.While the rise of electric cars now seems inevitable, it will have a devastating impact on long-term fossil-fuel demand.In February, Bloomberg analysts predicted EVs will reach price parity with internal combustion vehicles by 2022. More important, many of these models will have better performance. Add that to operational advantages and it’s tough to see why most people would opt for anything else. They are fun to drive — featuring terrific acceleration and nimble steering due in part to their lighter weight.Based on trends and forecasts that take into account MaaS, Bloomberg analysts suggest EVs could create a 2 million barrel/day glut of oil as early as 2023. And that is where the unintended consequences get tricky.Even Tesla founder Elon Musk concedes political advantages make it difficult to replace fossil fuels as the main source of energy. However, oil prices are governed by margins. A significant longer-term glut would ravage prices, force producers to give up on costly projects and flip the power structure in global politics. It would also wreak havoc with the U.S. petrodollar equation, but we will leave that for another day.This is a big deal, like identifying the auto industry as an opportunity in 1910. We know electric vehicles are coming. We know why. Now we just have to wait to see if politics will intervene, and how it will affect our investment choices. My guess is that the more innovative and progressive auto parts makers, like Magna Intl (MGA) of Canada, may be a better bet than car makers as they shift production toward higher margin pieces like electric powertrains.Best wishes,Jon Markman
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