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In Age Of EVs, Income-Based Range Inequality Will Become The Norm

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Includes: DMLRY, F, GM, RNLSY, TSLA
by: Zoltan Ban
Summary

For technical reasons, there will always be a positive correlation between EV range and sale price, therefore we are looking at range inequality in assumed future of EVs.

Larger percentage of lower income people will be completely shut out of car ownership, because used EVs will sell for much higher, due to battery change needs.

Push for replacement of ICE-powered cars with EVs may be hindered by severe social push-back, which we are already starting to see, yet we are failing to notice.

Investor assumptions about the future of the global auto market should take these factors into account.

While for the shorter term, investors interested in the automotive industry continue to be closely engaged in analyzing quarterly and annual financial reports, there is little doubt about the huge long-term bet that the market is making based on assumptions in regards to the future being dominated by EVs. We see it in regards to Tesla's (TSLA) market cap, where it rivals the largest US auto makers, Ford (F) and GM (GM), as well as being firmly in the top ten globally in this regard. This is despite the fact that it still sells only a small fraction of the volume that most other car makers on the list are selling. It also stands out in terms of lack of profits, compared with its industry peers.

The bet that investors are making is on EVs being dominant in the future, or perhaps the only option eventually. Given some government plans around the world to introduce ICE bans within a few years or decades, there are those who believe that EVs will be the only option in the future. To this end, even the traditional auto makers are increasingly judged, based on how robust their EV presence is on the market. I personally think that it is way too premature to assume that an EV takeover is all but settled. There is the much-debated technical aspect, but there are also social aspects, which are not being considered, which will most likely lead to social push-back. The technical aspects that are particular to EVs will make it impossible to address those social concerns, therefore we are looking at a serious problem ahead for the EV revolution. It might be wise therefore for investors to be more cautious in assuming that the future of any particular car maker depends on how well they are performing in terms of transitioning to EVs. For some car companies, it may turn out to be a self-harming effort.

The EV price/range correlation.

There is quite a bit of debate currently in regards to the exact break-even cost of some of the existing or announced EV models on offer, therefore I am fully aware of the fact that my own numbers may differ from other people's estimates. I am by no means interested in getting bogged down in that argument here. My only interest in the data I am presenting is to help highlight the very important correlation between EV prices and range, not to insist on a particular break-even point for any particular current or future model.

EV prices versus range Notes & Sources: The Dacia EV, is set to be sold at an approximate price of about $23,000 when it will hit the market, perhaps in about two years. I chose it as a reference point, because I believe it will be sold at break-even, given Renault's (OTCPK:RNLSY) track record of producing low price cars at a profit, especially through its Dacia brand.

The Nissan Leaf sells at a starting price of $30,000, or at least its 150 mile range version does. Based on available information, it is breaking even.

The Chevy Bolt is reportedly losing as much as $9,000 per each unit it is selling, therefore its break-even price is about $46,000, while it is priced at $37,000.

Based on the latest quarterly report we have from Tesla, it lost $167 million on its operations. In this case, I used the base model 3 as a reference point for range/price. Most estimates put the break even point at over $40,000 for the base model.

The model S comes with a steeper starting price, but one gets top range at the moment for that money. I am assuming its break-even cost for the manufacturer is about same as the starting sale price of $80,000 for the 370 mile range version.

As we can see, there tends to be a very strong positive correlation between EV driving range and break even costs. While technological innovation and scaling up of production volumes should cut costs across the board, the correlation will remain. What this means to drivers in practical terms, is that Household X, who can afford an EV with robust range of about 350 miles, can travel in two days as much as someone who can only afford around 120 miles range will travel in three. For myself, thinking of my frequent Omaha to Winnipeg trips (650 miles), I would not be able to make the trip in a single day in an EV, with less than 250 miles of range on a full charge. Even with such range, it would still take longer than it does for me right now in an ICE-powered car.

Point of social backlash can change expected EV fortunes.

As investors, we all make bets based on assumptions of future outcomes, and there are many investors who are fully invested in the belief that EVs will eventually completely eliminate ICE-powered cars, thanks to government policies, market forces or a combination of the two. There are valid reasons to expect this to be the case. Norway is set to ban petrol and diesel cars by 2025, unless they change their minds before then. Pure EV sales currently account for well over 50% of all cars sold. This was achieved in large part thanks to government efforts, in the form of subsidy incentives, as well as penalties on all vehicles, based on emissions levels. There is thus far very little social push-back, it therefore makes sense to assume that it is a non-issue in any market, based on the Norwegian experience with ICE replacement, which is the most advanced in the world.

Problem with the hypothesis is that Norway is not economically representative of the world. It is ironically funding this transition to EVs, mostly through its wealth of revenue it earns as a petro-state. Oil and gas currently makes up 22% of its GDP, and 67% of its exports. It is also a very high income country, while the income disparity levels are among the lowest in the world. Norway is in effect the perfect candidate to be an exception in regards to my expectations of social push-back against government initiatives meant to replace the ICE with EVs.

Looking at other countries where similar initiatives are pursued, we are already seeing push-back in the form of the Yellow Vest protests, which took place in France. For those who are unfamiliar, it was a middle class - working poor revolt against yet another fuel tax, meant to discourage ICE-powered cars, in favor of EVs. As it turns out, the tax hit hardest those with little disposable income available. It is those same people who cannot and will not afford to purchase high-range EVs. In other words, the backlash I am referring to is already happening, it is just that we are not paying attention, and are not taking the time to contemplate the investment implications.

EVs viable only on high-end of market as ICE replacement.

Auto makers are eager to provide long range as well as affordable EVs, but we should recognize that those two characteristics are never found within the same model. Most EVs being offered or planned in the lower price range, but with a decent driving range, are money losers, and should not be taken as a sign that any particular company is excelling in providing typical global middle class consumers with a viable EV alternative to the currently affordable ICE cars on offer. EVs are currently only a viable alternative within the luxury car segment, where car makers can provide a viable EV alternative to satisfy most tastes as well as driving range needs, while at the same time being able to at the very least break even on the costs involved.

To this effect, it is important in my view to follow the progress or lack of progress that the likes of Daimler (OTCPK:DMLRY) are making in terms of EV development and sales, because it may very well have to compete with the likes of Tesla within the luxury car segment. Tesla itself should in my view be regarded as a luxury brand. After all, its cheapest model, the model 3 is currently selling at a base price of $35,000, which most often ends up costing over $40,000, once a few options are included. Tesla should not be expected to become a true mass-market brand, therefore investor expectations of it eventually selling as many cars as some of the top auto makers today, should be greatly tempered. If Daimler fails to crack the EV market within a few years, with a few successful models of its own, I do think that investors should start to worry about its future. It is entirely possible that EVs will become a social status symbol. The typical EV buyer today fits within the top 20% of households in terms of income, with nine out of ten sales going to this demographic. We should keep in mind that among the 10% of sales remaining, there are probably many people who are wealthy, but may have not had a lot of income in the particular year when they purchased an EV. So luxury car makers should definitely be judged in part on how well they are doing in the growing EV market.

GM's announcement that it is looking at an all EV future and any signs that it is headed in that direction, should be viewed as a negative by investors, not as a positive trend. GM is a mass-market brand, and any true mass-market EVs, priced for the average US household, would be lacking in practical range for most consumers. Only the odd outliers, looking to exclusively travel short distances would appreciate a moderately priced EV, with a short driving range. That is only a niche market, not the mass-market that GM is accustomed to tapping. There is of course nothing wrong with GM also tapping into a future luxury market, which might in fact be dominated by EVs. No mass-market car makers should allow themselves to be swept up by faulty paradigms being created by group-think trends within our society. The particular features of EV technology, which will forever have a positively correlated price/range relationship, as perhaps its defining characteristic, should be taken into consideration. Investors should be mindful not to lose sight of it and its implications.

Disclosure: I/we 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 (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.