The automobile market is undergoing a transformation not seen since 1908 when Ford launched the mass market Model T. Electric vehicles (EVs) are at the forefront of this change, but we prefer to access this disruptive innovation through more traditional auto names rather than the increasingly expensive companies currently leading the charge, at least in the public eye.
Let’s look at some numbers to bring this to light. Tesla is now worth $650 billion despite the fact it sold just 500,000 cars last year. This might sound hugely inflated but is actually reasonable if you compare it to the recent SPAC (special-purpose acquisition company) transaction of Lucid (according to its CEO, the only EV company able to compete with Tesla), which is now valued at upwards of $20 billion without even selling a car. And what about NIO, the Chinese EV company, which was worth $5.9 billion at the end of 2019 and now has a total enterprise value of $72 billion?
With eye-watering valuations across the EV universe, who is actually winning? Well, Tesla has the lead but, as many across the industry will remind you, its takes decades to build out the infrastructure such as manufacturing plants, supply chains, touch points with consumers and brands that stretch across cultures and geographies.
With Tesla at 500,000 cars a year, where is the competition? It turns out its closest competitor so far is one of the most unlikely companies – Volkswagen. With more than 422,000 plug-in vehicles sold last year, Volkswagen is closer than any market commentor or automobile chief executive would lead you to believe.
How is this German behemoth quietly building an EV market position to rival Tesla’s? To understand this, we need to rewind the clock five years and revisit Volkswagen’s darkest days. Battered by the ‘Dieselgate’ scandal, the company had no alternative but to reposition its strategy to align with all stakeholders. Immediately, the company restructured its organisation to encourage innovation and reallocated significant capital from traditional internal combustion engine development to EV technology. The size of the pivot is staggering and is highlighted by the $42 billion investment the company is making in this technology over five years.
But what does this mean for consumers? From Wright’s Law (a way of forecasting cost declines as a function of cumulative production), we can predict the cost of production of EVs will collapse in line with the flow of capital investment into a new technology. And with EV manufacturing costs tracking this predicted decline so far, we can expect EVs to challenge traditional combustion engines within the next five years on the same price point.
EVs are already faster, quieter, cleaner and have fewer moving parts, so price remains one of the last hurdles, alongside range. The good news on range is that technology advancements in energy efficiency and charging are progressing at a rate that makes us confident EVs will be able to compete head-to-head with combustion engines soon.
For consumers, the upcoming launch of EVs across brands from Audi’s e-tron, Porsche’s Macan, Volvo’s XC40 to Ford’s Mustang offers an attractive line-up. But for the mass market, we ultimately care about price and so the launch of Volkswagen’s ID.4 in the US is the best litmus test yet. At a price point of $40,000 before tax incentives, it can not only go head-to-head with Tesla’s model 3, but also compete with traditional combustion engines on a level playing field. This means that if the launch is a success (unlike Tesla’s), Volkswagen can flex its supply chain and manufacturing base and meet demand across its dealership network. On the other hand, Tesla will have to contend with a big new competitor with many more to follow.
It remains to be seen if the auto market will end in a winner takes all when it comes to EVs, but we suspect that just like the smartphone market, where Apple now struggles to maintain a 10% market share, and the streaming wars, where a Blue Ocean for Netflix has turned a bit more red, there will be plenty of room at the table for companies able to compete head-to-head with Tesla. We think Volkswagen more than fits these criteria and offers a much better opportunity than the high-flying EV stocks.
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