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Tales From The Future. I picked my nickname because many advisors and investors claim they can predict the future of the (stock) markets and somehow pick the winners. I don't. I usually do not engage in short-term trading and myopic analysis (quarter by quarter, without looking at the big... More
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  • Mind The Three "I". External Success Factors In The EV Market: Incentives, Infrastructure And Innovation 7 comments
    Feb 10, 2014 10:20 AM | about stocks: 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
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Comments (7)
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  • Tales From The Future
    , contributor
    Comments (5250) | Send Message
     
    Author’s reply » Update: I added a new $TSLA short position around $198 today (Feb 10, 2014) after staying on the sidelines for a few months.
    10 Feb 2014, 01:20 PM Reply Like
  • Tales From The Future
    , contributor
    Comments (5250) | Send Message
     
    Author’s reply » I forgot to add a source for one figure in the blog entry:

     

    "In their estimates, that should allow for a TSLA car base price of "just" $30 to $35k in a few years time."

     

    See the PDF slides here (Jan 2014 investor presentation, page 24):

     

    http://bit.ly/MFOabI
    10 Feb 2014, 02:03 PM Reply Like
  • Tales From The Future
    , contributor
    Comments (5250) | Send Message
     
    Author’s reply » An interesting update on the close relationsship between Nissan and Renault at FT AlphaVille:

     

    http://on.ft.com/1bqeqT9
    12 Feb 2014, 09:05 PM Reply Like
  • Tales From The Future
    , contributor
    Comments (5250) | Send Message
     
    Author’s reply » Addition to DC charging standards: China has its own DC standard that is now being rolled out:

     

    "The Chinese government has introduced a direct current (DC) fast charging standard (GB/T 20234, analogous to CHAdeMO in Japan and the US/Europe Combo standard) to encourage technical innovation and stimulate market acceptance of EVs."

     

    http://bit.ly/MucIEG
    17 Feb 2014, 11:13 PM Reply Like
  • Tales From The Future
    , contributor
    Comments (5250) | Send Message
     
    Author’s reply » I wrote above: "The supply chain (raw materials such as Nickel, Cobalt and Lithium) and manufacturing bases needed for millions of EV batteries is another big issue"

     

    There's another example: Graphite

     

    "Tesla's new $5bn ‘gigafactory’ could spur 37% graphite market growth"

     

    ".....a new $5-billion lithium-ion battery ‘gigafactory’ that could potentially increase natural graphite demand by up to 37% by 2020, according to UK-based analyst Industrial Minerals Data (IM Data) manager Simon Moores."

     

    " Whether Tesla plans to use spherical graphite - made from large natural flake graphite – or synthetic materials remains unclear."

     

    http://bit.ly/1dYygDM

     

    These huge demands could result in price spikes or at least high price volatility in battery raw materials going forward.
    14 Mar 2014, 11:36 AM Reply Like
  • Tales From The Future
    , contributor
    Comments (5250) | Send Message
     
    Author’s reply » TSLA now says it mainly wants to source battery (raw material) components from North America:

     

    "Tesla to Use North American Material Amid Pollution Worry"

     

    http://bloom.bg/1rN0WFQ
    31 Mar 2014, 05:26 AM Reply Like
  • Tales From The Future
    , contributor
    Comments (5250) | Send Message
     
    Author’s reply » Update about battery innovation from a company I linked to before:

     

    "Scientists have developed a new lithium ion battery which could overcome the two major complaints about current generation batteries – price and range.

     

    What’s even better, the new battery could become fully commercialised in just over a year’s time. Vauxhall Ampera charging small

     

    Developed by scientists at the Massachusetts Institute of Technology (MIT), the new battery can triple the driving range of an electric vehicle and all for a significantly lower cost.

     

    Dr Hu founded a company called SolidEnergy in 2012, just outside Boston, to commercialise the technology and hopes the battery will be in production for consumer electronics in the first half of 2016 and in electric cars by the second half of that year."

     

    http://bit.ly/1tErWtf

     

    Also see: http://bit.ly/10id8o4 and http://bit.ly/1bGKewM

     

    We shall see in 2016 (delays are the norm for new battery types...), there were and are so many "exciting" battery news that never made it to a commercial product that this has to seen in an actual car.

     

    Other companies such as Sakti3 promise similar breakthroughs before 2020.

     

    Both SolidEnergy and Sakti3 of course also seem to approach large CE companies such as AAPL as potential first customers (even before EV maunfacturers as CE companies are able to pay a higher premium for smaller batteries).
    4 Nov 2014, 11:50 AM Reply Like
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