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Mind The Three "I". External Success Factors In The EV Market: Incentives, Infrastructure And Innovation

|Includes:Tesla Motors (TSLA)

(This is an updated version of the blog entry for 2014)

To sum up many comments I made on Tesla (NASDAQ:TSLA) articles there are three external success factors (i.e. factors largely outside the direct influence realm of each car maker) of importance:

  • Incentives
  • Infrastructure
  • (Battery) Innovation

All three elements will be critical for "pure" (that is battery only with no other energy sources) electric vehicle (NYSE:EV) makers to be able to increase their marketshare in the global car industry over time:

1. Incentives

When EV makers sell more car units in a sparsely populated country with a cold climate (Norway) than in big markets nearby with multiple times the population numbers (Germany, France, UK...) it's clear that incentives and subsidies (still) play a big role in EV sales.

Expect further skewed sales in regions like California, Northern Europe and mega cities with local pollution issues (e.g. the Shanghai region) that can't be replicated in countries with no meaningful subsidies.

These incentives may go away over time and are at the mercy of politicians in charge (remember for example when loans to Fisker and Tesla became a talking point in the 2012 US presidential election and the two companies a punching ball).

2. Infrastructure

Mass-market EVs will not sell well in some countries or customer segments because many car buyers simply don't have a permanent (or even indoor) parking spot needed for slow overnight charging - this has nothing to do with widely discussed fast-chargers that receive more attention right now.

TSLA is currently at an advantage selling its high-end Model S (and soon Model X) cars in a high-end market niche: These affluent segments of the population overwhelmingly own a house and a garage to charge their cars overnight - but many countries have a significant number of people living in large rental complexes and/or high-rise buildings in large cities and public parking spots with no EV infrastructure. There is no convenient way to charge in these cases.

It will take many years to improve a charging infrastructure for cheaper EVs - expensive TSLA Superchargers or other DC chargers won't help here. Overnight charging or charging at the place of work will require a lot of slower charging spots. Wireless (inductive) charging may also be interesting longer term for these slower (overnight and workplace) charging needs - there would be less vandalism and more convenience in public spaces (for faster charging speeds, wireless charging losses unfortunately are too high at the moment. There are technical details to resolve such as the optimal distance between the station and the car underbody etc.)

Similarly, it will take some years to build out fast-charging (DC, about 50 kW or well above) stations, these stations are important for transit and road-trip use during the day.

There are three competing DC fast-charging standards globally, each supported by different car companies. An incomplete list of car companies behind the three different standards follows below:

CHAdeMO: Nissan, Mitsubishi, Mazda, Hyundai/Kia, PSA, Tata, BYD, Volvo, Suzuki...

SAE Combo (aka CCS, Combined Charging System) : Audi / Porsche / Volkswagen... (VW Group), BMW, Chrysler/Fiat, Daimler, Ford, General Motors, Hyundai, Jaguar/Land Rover/Tata, PSA, Toyota, Volvo....

(Since Chademo is currently the dominant standard in Japan, some CCS vendors also offer Chademo-equipped export versions in Asia, for example BMW with their new i3 EV).

Tesla Supercharger: Tesla (so far the only company)

One can easily see that basically all car manufacturers worldwide have decided on two DC systems (Chademo or CCS) while Tesla is using a third DC fast-charging system.

Tesla is the only company producing long-range EVs at the moment. Tesla cars therefore have larger battery capacities [1] and support higher kW when charging (at first 90 kW, now up to 120 or 135 kW). Nevertheless, I expect the two other DC standards to become dominant over time - simply because those are supported by most other car makers (see list above) and because of public incentives.

For example, many countries in Europe (often supported by the European Union) will start deploying multi-charger EV networks equipped with both Chademo and CCS plugs in 2014 and beyond. [2]

Both CCS (up to 150/170 kW for Europe) and Chademo (up to 100 kW) standards may also be upgraded in the future as or if larger (long-range) batteries are more common at lower price points to retain the current fast-charging times for small- to mid-range vehicles (usually "up to 80% charging within 15-30 minutes").

3. (Battery) Innovation

Which leads to innovation and improvements in EV batteries. This is the most tricky field of all three. Battery and cell pricing only falls a few percent every year, there are no big breakthroughs that made it to mass production recently - or rather the announced breakthroughs achieved in R&D labs later fell short in the real world because of various issues:

Not enough recharging cycles, safety issues, manufacturing price too high or a mix of these factors.

There were even prominent cases of manipulated or inflated figures (Envia with General Motors or the Kolibri battery in Germany).

At present, only Nissan (more on this company later) has in-house battery manufacturing capabilities. All other car companies are sourcing their battery cells from third-party suppliers and only do final assembly into packs, adding wiring and battery management systems - including TSLA, which is just talking about in-house battery production. It will probably have to announce plans for its own factory soon (with a proposed capacity around 20-30 GWh) to be able to manufacture its own mass-market EV by around 2017.

Basically all relevant battery manufacturing and industrial R&D is located in South East Asia, namely in South Korea, China and Japan (companies such as LG Chem, Samsung SDI, Lishen, Panasonic/Sanyo and Sony...) - most battery know-how and manufacturing capacity therefore is outside the realm of car manufacturers. The car companies only have joint-ventures or similar alliances with battery manufacturers at the moment.

Why aren't more car companies entering the battery segment? Battery margins in manufacturing are very low, many pure-play EV battery manufacturers disappeared (e.g. Nasdaq-listed A123). The remaining Asian suppliers listed above are large and diversified conglomerates willing/able to "eat" temporary operating losses in their battery units.

TSLA is promising a cost reduction of 30 or even 40% with integrated battery manufacturing as of February 2014 - it remains however unclear if Tesla execs refer to the small cells or the entire battery pack. In their estimates, that should allow for a TSLA car base price of "just" $30 to $35k in a few years time.

Even so, it will probably take (at least) another 5-10 years before battery prices drop enough to use long-range EVs for all mass market car segments starting around $20-25k. Long-range is defined as 150 to 200 or more reliable miles per full charge, even in cold/hot weather or when the car was parked/idle for a few days.

The supply chain (raw materials such as Nickel, Cobalt and Lithium) and manufacturing bases needed for millions of EV batteries is another big issue since EV makers compete with other large buyers (such as AAPL) who are willing to pay more for battery output because of higher margins in consumer electronics and other sectors.

I won't reiterate all battery supply and raw material challenges here and refer to my previous article:

TSLA And Electric Cars: The 600 GWh Elephant In The Room That Will Not Go Away

seekingalpha.com/instablog/5760541-tftf/...-away

I therefore don't see a fast EV revolution (and thus a rapid disruption of the global car market) coming - it will be more a slow evolution over 10 or more years because of

  • slow car replacement cycles and slow ramp-up (cars are a very cap-ex intensive business compared to other industries),
  • high upfront investments in large battery plants with low margins and uncertain progress (unlikely battery technology breakthrough such as Lithium-Air in the near term, battery prices only fall in the single digits per year) as well as
  • intense competition from bridge technologies (more efficient ICE cars and hybrids of all kinds, e.g. short-range EVs with "range extenders" featuring very small and light combustion engines).

Given the cost elements of EVs (the EV battery pack remains the critical and most expensive component) and the vast knowledge pools within battery makers I also see EVs from new Asian entrants over time (e.g. an electric car coming from Samsung or other large electronics companies might be a wild speculative guess within 5-10 years).

Summary: Investors in TSLA and other EV car makers should keep the glacial speed of the sector and the three external "i" factors discussed above in mind - I assume few investors are willing to hold on to their EV investments over a period of 5 to 10 or more years.

At current prices close to $200, TSLA valuations already anticipate these developments and positive scenarios today - including very high gross margins and sales above 250-500k vehicles per year.

Where's the upside with a market cap up to $25 billion including dilution? TSLA shares are not trading in the $20-30 range any longer as they did before the Model S car was launched and ramped up back in 2012 and early 2013.

Around the same timeframe (2020 to 2025) as EVs might gain more significant marketshare self-driving cars might become a reality.

This "robot car" development could shake up the entire car industry more than EVs.

Imagine cheap, driverless taxi cars available 24/7 you order using your smartphone. This might reduce the car ownership ratio and slow down new car sales over time. Some pundits like to call these and related developments "Transport as a Service".

In my opinion, a car manufacturer/alliance talked up much less than TSLA (with currently only a single plant in California) is at the forefront of both developments, namely R&D in mass-market EVs and driverless cars:

Nissan-Renault with sales of about 8 million cars per year.

Nissan-Renault has a lot of expertise in automated parking, driverless cars and has three battery and EV plants in Europe, the US and Japan. It is also the current market leader in EVs, having sold over 100k cars with zero local emissions as of mid-2013.

Compare for example the market caps of Nissan (TYO:7201 in Japan or OTCMKTS:NSANY), Renault (EPA:RNO in Europe or OTCMKTS:RNSDF) or other car makers entering the EV space such as BMW Group with their i-series (FRA:BMW in Europe) with that of TSLA.

Something doesn't add up in my opinion in the sum of parts analysis.

This doesn't mean I advise you to rush out and buy Nissan, Renault or BMW shares tomorrow - I simply believe that TSLA currently gets a lot of media attention that is completely out of sync with its current and anticipated marketshare in both the car and energy storage industries. Remember the TSLA mass-market "Gen 3" car won't be on sale for another 3-4 years, TSLA remains a niche car manufacturer at least until 2017.[3]

________

[1] TSLA cars cost a lot more (the average Tesla selling price is still around $100k at the moment for the Model S and X !), therefore the higher EV battery costs can be absorbed in the total cost of the car. This is not possible for currently available, mass-market EV cars like the Nissan LEAF with base prices around a third of that. The gross margins and range (TSLA promises 200 or more miles) for Tesla's mass-market "Gen3 car" remain a challenge to be solved within three years (the car is supposed go on sale in late 2016 or by 2017).

[2] Many newer DC chargers feature both plugs (Chademo and CCS) going forward, therefore reducing issues between the two standards. Some even have an additional slower AC plug. A charger implementation example from ABB supporting both systems:

insideevs.com/abb-launches-sae-combo-cha.../

[3] To put these small numbers in perspective: Nissan-Renault finally sold over 100k EV units by mid-2013 - these were life-time sales of all their EVs - the company is the clear leader in the sector in terms of cars sold. By 2020, industry experts assume global sales of around 100 million passenger cars/year. EVs therefore have a long way to go to even achieve a global marketshare of just 1 to 5%, let alone 10% (10% would be equal to 10 million cars or about 600 GWh in cells) given the current battery supply limits.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I may initiate a new short position in TSLA around $200 or above (Feb 2014)

Stocks: TSLA