Investment in energy and transport is all about revolution not evolution. This isn't a time to view investments solely in terms of normal commodity cycles, even though we are in the middle of what could be viewed as a major commodity cycle downturn. The thing is that commodity cycles are about the status quo. I suggest that in the energy and transport space, virtually everything is being questioned. Here I consider Electric Vehicles (EVs) and make some comments about how to get exposure to the transition from fossil fuel powered cars (ICE) to electrified transport (EV). Range is a critical issue for EVs and three manufacturers, GM (NYSE:GM), BYD (OTCPK:BYDDY) and Tesla (NASDAQ:TSLA), have taken this seriously and are close to releasing or have released moderately priced cars with ~200-mile range. Volkswagen (OTCPK:VLKPY) is following with a vehicle with a similar range. The question is whether to play safe with evolution by backing a major existing player (using GM as an example of this approach) or to follow the disruptor Tesla.
2016 is the year that the EV goes mainstream
Some might argue that in 2015 Tesla achieved a major milestone in becoming a major force in the luxury car market, with Tesla competing with Mercedes (OTCPK:DDAIF)(and winning) in terms of acceptance and sales not only in the US, but also Europe. However, even dominating the luxury market doesn't mean that the EV is a major threat to ICE vehicle dominance. On the other hand, three mass marketed EVs that have a 200-mile range and that are moderately priced is a big deal. This is what is starting to happen in 2016 and it will play out in the next 12-18 months.
You know that the switch is on when a major oil company acknowledges the likelihood of major penetration by EVs in the current planning range (in the next 10-20 years). In a May 2016 report "New Lens Strategy," Shell (NYSE:RDS.A) (NYSE:RDS.B) updates its 2013 report "A Better Life with a Healthy Planet: Pathways to Net-Zero Emissions." These reports do not break up the markets as they are focused on global trends.
The language of the "New Lens Strategy" is vague and positioned as "most ambitious scenario," but the conclusion that Shell comes to is extraordinary. They break out road transport in two categories ("road-passenger" and "road-freight"). Shell argues that battery technology is developing rapidly and the numbers that they give for the balance between EV, hydrogen and fossil fuel (presumably mostly gas) in "road-passenger" is of the order of 80% EV, 15% hydrogen and 5% fossil fuel in terms of global markets. For "road-freight" they suggest that hydrogen will dominate (~45%), with fossil fuel ~35% and EV at ~25%. I've commented in a previous article about EV and hydrogen vehicles. There is a vague timetable presented by Shell, ("in coming years"; "over coming decades") but there is no doubt that they acknowledge a major threat and likely major uptake of EVs.
Shell's "New Lens Strategy" is a major break from the position that most oil majors (with the notable exception of Total (NYSE:TOT)), have taken. For example BP (NYSE:BP) predicts negligible (~1.4%, see p22 "Transport by Demand" figure) EV penetration even in 2035, and Exxon Mobil (NYSE:XOM) predicts 5% EV penetration by 2040.
The new Shell report perhaps is acknowledgment of the position that major auto companies have taken in relation to EVs.
Volkswagen CEO Matthias Mueller at the annual investor conference April 28, 2016, said the following:
"The automotive industry is on the cusp of the next big innovative leap. The car of the future is more efficient, more intelligent, more comfortable and also safer than ever before. It will be powered by electricity, and in a few years will drive itself. It will be connected via next generation wireless technology and will always be up to the latest technological standards thanks to continuous software updates."
The above statement comes not from a car industry magazine journalist. The CEO of a car manufacturer which makes almost 10 million small vehicles annually is talking about the near-term ("in a few years") electrification of personal transport.
With the above positioning of major car manufacturers as indicated above, I think that EV penetration is going to be much faster than almost anyone acknowledges.
Consumers are on board too; almost 400,000 expressions of interest in the Tesla Model 3, involving a $1000 deposit, is a powerful customer statement.
It is worth remembering the scale of the auto industry. Both GM and Volkswagen sell close to 10 million light vehicles annually. Worldwide in 2015, 25.1 million cars were sold in China, 17.5 million in the US and 17.7 million in Europe. The good times for the winners are huge even if the figure of 80% EV takes a while to be achieved. An interesting review of the Chevrolet Bolt, which suggests that GM has beaten Tesla in the race to be the first true mass market electric car manufacturer is perhaps premature (and it ignores the fact that Chinese company BYD is already a mass manufacturer of EVs with substantial range, with 58,000 EVs sold in 2015 and plans for up to 150,000 in 2016). Elon Musk has been explicit that Tesla doesn't need to dominate the EV market to be enormously successful. There is room for GM, BYD, Tesla and several other manufacturers. However, I think that there are risks for auto companies that don't participate or who are backing other technologies (for example fuel cell cars) as some will miss out in the electrification of personal transport.
So the EV is a live investment area and 2016 is a good time to get serious about participating. How does an investor get to play?
Tesla as an uncomplicated EV investment
By this I mean that when you invest in Tesla your investment isn't contaminated by a major investment in gas guzzling ICE vehicles, which GM makes lots of. Tesla makes EVs and that is all that they make.
The thing about Tesla is that it is an investment in a genius disruptor. Take away Elon Musk and the chances of Tesla succeeding in becoming a dominant industry player as a mass vehicle producer are pretty small.
I argue that Elon Musk may well pull this off. My reason for saying this has a lot to do with Musk's track record in entering a manufacturing area that has really big and dominant players, and succeeding. Anyone contemplating investment in a Musk company should have a look at SpaceX. It changed the way I view Musk and puts the risks of Tesla success into perspective.
It is important to understand that while Musk is definitely "out there" in his ideas, he isn't a mad dreamer. He does translate the visionary into reality.
I am a fan of Tim Urban's 'Wait But Why' and he has written about Musk's plans to colonise Mars with 1 million people. It takes a little while, but I recommend the Mars article, which spells out the "why" and the "how." If you read the 'Wait But Why' piece about SpaceX, I bet you will look at Tesla and also SolarCity (SCTY) in a different light as these are easy challenges compared to the Mars escapade.
If you enjoyed the 'Wait But Why' piece on SpaceX, you might enjoy his post on energy, the car and Tesla. Tim Urban makes two important points about the distinction between Tesla and a "normal" car company, as described by Tesla chief engineer Franz von Holzhausen.
1) Tesla is 'product' not 'finance' focused. Or as Musk has been quoted: "The moment the person leading a company thinks numbers have value in themselves, the company's done." Build a great product and you have a great company.
2) For normal car companies, engineering comes first and then designers try to make the car beautiful. At Tesla design and engineering have equal status.
While this visionary stuff isn't often addressed by investors, it is central to an investment decision about an Elon Musk company. There are shades of Steve Job's thinking in this approach.
Elon Musk, through Tesla, has changed the near-term prospects for EVs. As I indicated above, in both the US and Europe Tesla is already competing successfully with Mercedes at the luxury vehicle end of the industry.
Musk is the trigger for a switch to EVs, but he doesn't have the space to himself anymore and he is clear that this switch is bigger than Tesla. The danger for Tesla is all about money and execution. With plans to ramp up production to 500,000 EVs by 2018, Musk has a mountain to climb that is very challenging (but not as challenging as SpaceX building a rocket for $7.9 million in 2008, which led to a $1.6 billion contract with NASA to launch a dozen payloads to the International Space Station).
GM is not uncomplicated
A conservative investor might argue that GM is a safer EV investment than Tesla because GM is about to release the Chevrolet Bolt, which has a comparable price tag to the Tesla Model 3.
The problem is that you can't invest in GM, the EV company. It comes with a history of vehicles that have big assertive ICEs. GM's 2015 annual report makes clear that the company realizes the best margins on full sized pick-up trucks and SUVs. So you can't be certain that they won't lose their nerve and revert to the past before they finally become an EV company.
However, it is clear that GM "gets" that things are changing dramatically in the personal transport space and they are significant participants in future-oriented events such as last month's "Goldman Sachs cars 2025: Exploring the role of disruptive technology in the auto sector" conference in New York. Julia Steyn's (VP GM Urban Mobility & Maven) presentation about the GM Maven program explores a rethink of the auto experience, which is not just about getting from A to B, but includes the emotional experience. Julia made the point that the original view of the car was as an expression of freedom, but that driving in New York is no long "free" and enjoyable. Maven is about redrawing the concept of a car to deliver "freedom 2.0" as a personal mobility brand that will involve redrawing the concept of car ownership and access (cars on demand). A lot is happening, with a strategic alliance with Lyft and acquisition of self-driving company Cruz.
There is no doubt that GM is putting together teams of very smart people to take on Tesla.
Tesla Model 3 and Chevrolet Bolt are apples and oranges
In the above discussion my focus on Elon Musk has been on the visionary side of the man. In contrast to the big picture, there is a second aspect to the person: he is a nanomanager with extraordinary attention to detail. You get a sense of this in the products that Tesla makes.
It is said that a picture is worth a thousand words, so here are a few images contrasting two moderately priced EVs that will most likely transform the industry: the upcoming Tesla Model 3 is compared with the soon to be released GM Chevrolet Bolt.
I think this shows Musk the disruptor in action. The Chevrolet Bolt is just a car.
Now the Tesla Model 3 :
I am not surprised that almost 400,000 people put down $1000 holding deposit for the Model 3.
Now compare the Chevrolet dashboard,
with the Tesla Model 3 dashboard :
The Tesla Model 3 puts everything on a single screen, which is an easy install and it is very compact. Contrast this with the Chevrolet Bolt, which has a traditional configuration with lots of moldings to hold the various instruments. My hunch is that the simplicity of the Tesla integration on a screen must simplify manufacturing costs. It isn't just about design, there is a different thinking about the way the car is organised.
This goes far beyond mere layout of the car. Musk is a genius at combining things with their manipulation. The Tesla Model 3 is not just a car. It is far down the track towards being a self-drive vehicle. Of course GM, through its Maven program, is heading in the same direction. The difference is that Tesla is articulating this vision now. This is what a disruptor company delivers.
So investing in Tesla is about being taken on a ride into new territory. Sure there are risks as new things are introduced, but there are disruption and risks to the existing paradigm.
In investment terms there is the balance between the monolith of a GM versus upstart Tesla. Sure GM builds lots of cars (almost 10 million annually) and it has scale-up down pat, but it struggles to escape its past, even though the Bolt has been designed as an EV from scratch.
It is clear that there are many challenges to the traditional car industry, not the least of which is the scandal of rigged emissions and fuel efficiency statistics that almost destroyed Volkswagen and Mitsubishi (OTCPK:MMTOF). EVs are a threat that is becoming real with several countries (Norway, The Netherlands, Austria, India) considering banning new ICE sales between 2020 and 2030.
Virtually all of the major auto manufacturers are scrambling to address EV offerings, so there is lot of choice in deciding about where to invest. I think that Tesla and GM offer a good contrast in the kind of investment that one might make.
The above commentary is about participating in a major industrial transformation. GM has lots of quantitative metrics which allow traditional analysis and there is a lot of such analyses. My point is that it is very hard to value new initiatives that may or may not be successfully executed. There is no doubt that GM will be transformed if it succeeds in being a major part of the electrification of transport. The risk is that it will not succeed.
For Tesla, valuation is much harder, because the future is all that it has. It isn't profitable and won't be for a while. There are lots of articles arguing about Tesla's valuation and I urge readers to digest the financials when making a decision about investment. I'm providing reasons why I think that Elon Musk may make Tesla a dominant player in this new personalised transport world. Clearly a lot of investors have bought the dream, but conservative investors may prefer to watch and wait.
From an investor perspective, whether investment in Tesla is a good idea depends on how an investor balances between disruption and money/execution risks. I think a cautious investor might look to a more established auto company such as GM, but there is room in an investment portfolio for "out there" opportunities like Tesla.
There is no doubt about the change that Musk has unleashed and it is so compelling as a business proposition that it has galvanized the status quo. At the very least investors might carefully look at what Tesla is doing to inform themselves about major emerging business trends, even if they are not yet ready for the trip to Mars.
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