Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

EV Market Success Factors Reconsidered: Incentives, Infrastructure And (Battery) Innovation In View Of Recent Apple EV Rumors

|Includes: Apple Inc. (AAPL), GM, NSANY, TSLA

A few updated draft notes on external/macro success factors for electric cars over the coming years, namely:

  • [Tax] Incentives
  • (Charging) Infrastructure
  • (Battery) Innovation

I talked about these "three key I" topics in earlier Instablog entries.

This update is in view of Apple potentially entering the car market with its own electric car (maybe even a self-driving electric car).

Please refer to this round-up for further information on Apple's project:

uk.businessinsider.com/project-titan-wha...

The above link conveniently summarizes all relevant Apple car news until mid-February 2015.

The three external/macro success factors (from the bullet point list above) are discussed one by one below:

1) Incentives and Inflection Points for EVs

EV sales at present only amount to around 1% marketshare or below in most large car markets (even when including PHEVs sales numbers that still have a gas engine, not just battery-only EVs). EVs still depend on various subsidies and incentives to get more sales traction.

One exemplary poster child is Norway. The following chart shows 2012, 2013 and 2014 EV sales in Europe by country (labeled in French). Norway is on the very left with the most sales, France is in second place followed by Germany, the UK and the Netherlands:

(Source)

Out of around 65'000 newly registered EVs in Western Europe in 2014, over 18'000 were registered in the country of Norway, a country with just 5.1 million inhabitants.

I used the Norway example on purpose because EVs have range disadvantages in cold climate zones; this is even conceded by EV enthusiasts, see for example this detailed range test on a Tesla Model S in sub-zero weather. So why is Norway in love with EVs?

Comparing Norway to other European countries with a high income per capita, a rather cold climate and even slightly higher population numbers (such as Switzerland at 8 million inhabitants) one will immediately notice the huge difference gap in sales.

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

EV proponents call for continued subsidies (or a combination higher oil prices, taxation or Co2 emission controls or credits) to soon reach the inflection points where EVs and PHEVs can compete on their own with more traditional ICE and mild hybrid cars.

I therefore used the word "inflection point" instead of "disruption" on purpose when talking about future EV sales, even assuming a best-case scenario for EVs:

Given the slow replacement cycles (cars are the second biggest "investment" for the average household after a house), the EV revolution many optimists predict could turn into a slow EV evolution in my opinion.

Apple has the luxury of timing its market entry as an outsider with no investments tied to traditional ICE engines or current EV (battery) technology.

EVs may only play out their strengths longer-term once the following issues discussed in 2) and 3) below are resolved:

2) Infrastructure for EVs

EVs need to be charged. This simple fact is not easy to solve sometimes until the infrastructure is built out;

Slower, regular (usully done overnight) AC charging depends on the individual buyer and his living circumstances:

Affluent segments of the population (according to many studies, these segments disproportionately own more Apple products on average) more often own a house and a garage to conveniently charge their EVs overnight - so far so good. But in many countries, a significant number of people with higher income live in large rental complexes and/or high-rise buildings in large cities. They would be dependent on public parking spots which currently lack EV infrastructure.

The other issue is range anxiety and the ability to fast-charge EVs while in transit - even if this is only needed a few times per month or per year (otherwise, many buyers will still need a conventional ICE car as "backup" for these situations).

There are four existing standards to quickly charge EVs:

The infrastructure is still in flux and it is likely that the standards and stations will be upgraded over time as and if larger batteries become prevalent.

(I personally doubt that charging numbers will go beyond 150-250 kW for a long time because of battery buffer costs, peak surcharges, wiring and related installation costs per station. Tesla, the car maker currently selling EVs with the biggest passenger car batteries is offering DC charging at up to 135 kW.)

The numbers are important because competing propulsion methods obviously offer faster re-fuel times while battery swapping business models didn't work out at all so far.

There are important regional differences (Chademo for example dominates in Japan while all the major Western car makers settled on CCS/Combo). Lately, most DC chargers installed with public funds support both standards to avoid further customer confusion.

As the rather elevated pricing of the few profit-oriented networks in Europe shows (Fastned is one such pioneer in the Netherlands, soon expanding to more countries) it will be quite hard to make a direct profit and a sustainable business model based on charging alone - especially since some charging stations are subsidized by public funds. It's hard for the private sector to compete with funding or utilities owned by the state in some countries.

Many EV car makers responded by allowing "free" charging for a few years (Nissan) or for the car's entire lifespan (Tesla). These offers are of course either directly or indirectly added to the car price, there is no free lunch.

Apple (given its huge cash cushion) could opt to add a fifth standard and create its own charging station network - it may be one of the last companies able and willing to do so because of its financial firepower. The question is whether this makes sense or further hurts the entire EV car category because of customer confusion.

Considering compatibility the likely choice is to use the dominant Western DC charging standard (CCS/Combo, probably using a faster, future revision of the standard) to avoid buyer confusion. By 2020, a common wireless charging standard for overnight and destination charging should also be available. A similar wireless standardization is under way in consumer electronics.

3) Innovation in Batteries (and Battery Technology Gaps)

Lower battery (cell and pack) pricing, better battery chemistry and battery supply volumes are without a doubt the main elephant in the room when it comes to EV adoption beyond the lack of infrastructure.

It is clear that battery output would need to grow by multiples (for example up to 600 GWh for annual sales of 10 million long-range EVs per year), this supply ramp-up will likely take decades. EVs will therefore remain at a single-digit marketshare level for quite some time (it is easier and faster to ramp up PHEV and hybrids because these cars obviously require only smaller batteries/unit).

At the same time investing billions in batteries today is a giant bet on getting the technology right and hoping it won't improve radically until the plant(s) and eqipment have achieved a decent ROI.

Nissan had to write down billions on its EV projects and three battery plants (one each located in Japan, the US and Europe) for the Nissan Leaf. Tesla will soon face the same risk with its "Gigafactory" battery project under construction in Nevada.

Apple has three advantages here compared to other newcomers:

Apple obviously enjoys a huge cash flow completely unrelated to EVs. Apple can end up delaying the introduction of its first EV or even switch propulsion technologies because of its current business model (that's an understatement since Apple recently recorded the highest quarterly net profit [fixed] in history, except for an outlier quarter from Fannie Mae, see the comment section for the details).

Second, Apple already is one of the biggest buyers of batteries worldwide because of its portable devices. Since these devices have higher margins and require fewer capacity/unit, Apple can access the latest battery technology. There's plenty of promising technology from start-ups such as SolidEnergy or Sakti3 to just name two recent examples among many battery ventures. There are also start-ups in stealth mode such as 24M or promising foreign ones such as Oxis Energy (NASDAQ:UK). Following well-documented setbacks such as the one from Envia it however pays off to be very cautious regarding

  • battery development times (safety and cycle testing)
  • the ability to use this new technology and/or chemistry in mass production for millions of batteries

The history of battery technology is full of "promising" lab technology which ended in long R&D delays and commercial failure.

Both SolidEnergy and Sakti3 claim that they already focus on future mass production capabilities. They also claim relatively low investment needed compared to other radically better battery appraoches. We will see. Others worked their whole life on on advancements:

qz.com/338767/the-man-who-brought-us-the.../

(I absolutely recommend reading this longer story in QZ, it's fascinating!)

How many batteries would Apple need for its cars? Using the previous sales scenario (in between Porsche and BMW) that could result in about 1.5 million battery packs/year. This would require about 100 GWh in battery capacity - a number equal to roughly three times Tesla's first Gigafactory at the battery cell level. Using Tesla's cost estimates and adding an additional $5billion as safety overhead and future dark capacity this would require investments of $20 billion in battery plants alone for Apple and its suppliers. A huge investment even for Apple, but easily available thanks to its cash on balance.

We may also have to let of the notion of traditional cars in urban areas. In cities, small cars (like the Renault Twizzy, some may not even call it a car) could become more and more interesting as autonomous taxis or "people movers" for 1-2 people. Imagine a nicely designed Apple "pod" or "cocoon like" car the size of a Twizzy, sort of a mini version of the Mercedes-Benz F-105 concept car.

Misc. Footnotes on Autonomous Driving, And Large and Small Competitors:

- On self-driving cars and hurdles beyond technology: As many car industry observers point out, the introduction dates for autonomous cars and related AI projects are also tied to moral and legal challenges (e.g. changing national driving laws as well as car insurance policies). The result, as with EV versus ICE sales, could be a slow evolution instead of a disruption or revolution: More and more self-driving features will be added one by one over time:

"Self-driving" isn't a yes-or-no feature

Technology itself could also become a political stumbling block: Since vehicles will need to talk to cloud servers and other vehicles, there need to be common standards for inter-vehicle communications (or in the worst case different competing standards locked in an infight over years).

- On EV acceptance within the car industry: Some car companies favor EVs,when it comes to "alternative drivetrains" especially Nissan-Renault. Others are "warming up" to EVs and PHEVs (for example VW Group, BMW and Mitsubishi). But some large car companies such as Fiat-Chrysler and Toyota appear to have a very skeptical view towards current EVs and may only decide to produce them (beyond compliance cars in limited quantities) once radically better (and cheaper) generations of batteries become available. Toyota obviously also has a huge vested interest in hydrogen technology, maybe more so than all other automakers. Honda, Daimler and others seem to equally hedge their bets with R&D in both the EV and the hydrogen camps. Hydrogen may get regional acceptance thanks to large subsidies, as discussed for EVs in section 1 of the article (Norway's EV subsidies). Japan is one such example subsidy region for hydrogen. Large technology subsidies can obviously distort true market demand considerably.

- On merging new industry entrants, especially a Tesla/Apple tie-up rumor: Some analysts called for Apple buying Tesla in the past, for example Berenberg Bank back in October 2013 (PDF). I don't think this will happen - even though Apple may end up working on similar products, propulsion methods and services if it enters the car sector. A few reasons:

- Tesla looks overvalued in my opinion, Tesla would have been a more interesting target back in early 2013 when TSLA was still trading at a range of $20-40.

- Tesla forgave all its patents. Apple is very focused on IP.

- Tesla's management team may not fit with Apple and seems distracted (rockets, solar etc.). Apple and its management is laser-focused.

- By buying Tesla, Apple would lock itself into a giant Gigafactory project and one battery form factor (small cylindrical cells). Details in footnote 1 in the article.
When all other car companies (except Tesla) use different form factors for cars going forward, this is a giant gamble. Apple can start fresh and use the best battery technology in a few years after looking at all options when it goes alone.

- Apple is not interested in mass-market products and low margins. Tesla wants to introduce a Model 3 and later an even cheaper Model 4 (name not yet defined) car in the 2020s. Apple does not go down-market, it stays in the premium segments with high margins.

If I had to pick an IT company gobbling up TSLA one day it would be Google or a similar giant (the global list is very short given Tesla's double-digit market cap premium in case of a take-over) with too much cash on hand or debt hunger (thanks to ZIRP, adding debt is dangerously "free" and there are always enough M&A experts and IBs willing to assist in ungodly stupid transactions in boom cycles for a fat cut.).

As I noted above, the list of companies able (and willing) to drop so much money would be very small due to Tesla's elevated market cap - and especially additional future cap ex needs. Massively overspending on a free messaging company like Whatsapp or Snapchat or a "small" company like Nest (bought by Google) is one thing, spending billions in cap after buying TSLA is another...

Disclosure: I am/we are long AAPL.