Speculation on the prospects for electric cars and their impact on the world’s economies make for interesting chatter. As China, the U.S. and European governments step up their stimulus programs to encourage electrification of vehicles, investors are starting to take notice. The question is which industries offer the best investing opportunity.
The Tesla Motors Roadster is expected to deliver 200 to 240 miles per charge, depending on driving conditions and usage. According to General Motors, the Chevrolet Volt, when it finally hits the showrooms, will get 40 miles between charges. The difference is due to the size of the batteries used to power the car. In the Tesla’s case there are more batteries installed on the car, as it depends only on battery power. The Volt will have a small gasoline engine to help recharge the batteries beyond the 40-mile limit. Other hybrid-eclectic vehicles such as the Toyota Prius also use a small gasoline engines to help charge the battery and in some cases add power to the wheels when necessary. The electric cars can be recharged by plugging the car into the power grid using a special adaptor, though some can be charged through the standard household electric outlet.
China has set a goal of producing half-a-million electric cars annually by 2011. To help stimulate this goal they have announced they are investing $1.4 billion in R&D. The United States has committed $2 billion in stimulus spending to help design and manufacture better batteries. Vehicle manufacturers are receiving help to the tune of $25 billion form the U.S. government to retool their production lines so they can produce larger number of fuel-efficient vehicles, including electric ones.
As more electrified cars and trucks move to the mainstream, they will require some significant changes in several industries if they are to be commercially successful. While some people may believe the move to electric cars is a long way off, the current drive by several major governments should not be ignored. The power trains, battery, and utility industries will each see investing opportunities.
Electric Power Trains
As shown by the success of the Tesla, start-up manufacturers are already making small inroads into the electric car industry. Faced with large legacy engineering and manufacturing processes, the incumbent auto and truck manufacturers must deal with the challenge of operating their existing vehicles while they introduce new vehicles including electric ones. Most of the vehicle manufacturers have outsourced all vehicle components other than engines and drive trains. Electric and hybrid-electric vehicles use significantly different engines and drive trains than your traditional gasoline or diesel powered cars and trucks. As a result, many of these companies must completely redesign their current engineering and manufacturing processes to adapt to the new electric power trains.
Controlling battery design and production will be a core skill that will help to differentiate a car or truck. If your car or truck can go 25% farther on the same charge, you will have a significant competitive advantage. In addition, the technology to manage power will require investment in electronics and software that is foreign to the auto manufacturers.
These new power trains open the door to innovations and start-up firms to capture a significant share of the market, as the traditional vehicle manufacturers wrestle with their transition from their current emphasis to new hybrids and all eclectic drive trains. As a result, many traditional vehicle manufactures will collaborate with or acquire these new firms. For example, Daimler A.G. (DAI) has acquired nearly a 10 percent stake in Tesla Motors, which remains privately held.
Companies such as BorgWarner Inc. (NYSE:BWA), who produces the single-speed gearbox for the Tesla Roadster, will have to adjust their design, engineering, and production approach to meet the challenges of electric vehicles.
The potential to displace oil as the power source for millions of vehicles is an interesting opportunity. Governments in China, the European Union, and the United States are trying to encourage industries to develop world-class battery technology, so they can become the world leader. Like many industries, the value of the product will shift from the basic components to total systems. Today, batteries are comprised of cells whose chemistry generates electricity. While important, cell chemistry is likely to become a commodity with little to differentiate it from others. For example, battery manufacturers have accomplished the transition from lead battery technology to lithium-based chemistry.
The most successful battery manufacturers will be the ones who move to system level capabilities designed to support specific vehicles. These systems will use electronics and software to offer power and thermal management capabilities that optimize the battery’s performance for a specific vehicle. This will require a more complex engineering and production capability. It will also require the battery manufacturers to work closely with the tier one drive train manufacturers and the auto manufacturers themselves. To succeed the battery manufacturers will have to develop significant new skills and capabilities so they can meet the needs of each vehicle. This will require substantial financial strength as well.
Engineers estimate that the cost of a battery for a plug-in electric car that gets 40 miles before it needs recharging is $11,800. This cost increases to $24,000 for a car that gets 100 miles per charge. The cost of a battery for a common laptop runs $50 to $100. This gives you an idea of the opportunity for battery manufacturers. If the world were to see 6 million electrified vehicles sold per year, the market could be greater than $70 billion. The cost of a battery will decline as volumes rise and economies of scale are achieved. Some analysts estimate we should expect a six to ten percent drop in the price of an equivalent battery over the next ten years. To achieve this, battery manufacturers will have to invest substantial sums in engineering and manufacturing.
Another challenge the battery manufacturers face will be how they deal with warranty issues. Today, these manufacturers have a relatively small exposure to warranty problems. Probably the largest has been problems associated with several laptop computers that have high failure rates or in some cases caused a fire. While serious, these batteries have a relatively low cost compared to the cost of an electric car’s battery. Replacing an entire battery system and possibly the vehicle will require new approaches as well as very strong balance sheets.
As each of us has witnessed, batteries have a useful life that grows shorter with use. Eventually batteries must be replaced. This creates a new aftermarket opportunity that has not existed. It also creates a disposal problem. Recycling cell phone and laptop batteries is one thing. Putting in place the process to recycle lithium car batteries is quite another. So far, there seems to be very little study on this problem, though it looms quite large as areas of the world move to electric cars. Where there is a problem there is an opportunity
Electric vehicles offer new opportunities for the electric utility industry. Most people assume that the plug-in vehicles would be recharged at night. If true, the electric utilities would not have to invest in new infrastructure, as this is an off-peak demand period. However, if drivers of electric vehicles found it necessary to plug their cars in during the day, a peak period use, they could force the utilities to invest in additional infrastructure to meet the higher demand. Companies might want to encourage their employees to drive electric cars by providing plug-in centers at their parking facilities, so drivers could recharge their cars during the day. I could even see some companies claiming this as a company benefit, using the service as a way to help offset their carbon producing facilities elsewhere.
Electric utilities are aware they must invest to create new smart grid capabilities that will help to manage usage of electricity. Electric cars will add to the demand for this new infrastructure. Utility company engineers see this as just another demand placed on the electric grid. However, we might see entrepreneurs employing renewable energy methods to take advantage of these opportunities. Maybe a windmill and or solar panels hooked up to a recharging unit in the parking lot will offer a way for cars to recharge without using the local electric utility.
The Bottom Line
Any time there is a fundamental change in the way an industry operates, new investing opportunities develop. Investors who understand these opportunities can reap the rewards. They also must manage the risks, as they can be large. These opportunities will come from several industries, but especially the drive train and the battery companies. To a lesser extent the electric utilities may also benefit, though not to the same extent, and possibly not at all.
As governments stimulate the move to use of electricity to replace oil, investors should be prepared to find opportunities to benefit. These opportunities will grow with time and the time is now to start your research.