Markets are underestimating how big the electric car revolution will be

Electric cars are slowly happening, right? Wrong: their rise to dominance will see a sudden spurt. Investors must not be caught napping on this one.

Article updated: 23 October 2018 8:00am Author: Michael Baxter

If you have ever studied evolution, you will be familiar with a period known as the Cambrian Explosion. We tend to think of natural evolution as something that occurs very slowly — change measured in hundreds of millions of years. Actually, the Cambrian explosion was, relative to the broad scope of the evolution of life, a moment. Okay it was a long moment to our way of thinking. It lasted around 40 million years, which might seem like a long time to you and me, but this period saw a process that had begun around two billion years earlier, radically transformed. Starting around 542 million years ago, life was transformed from single cell to “every current phylum of life known today.” 

What’s that got to do with electric cars? Well, actually it’s got rather a lot to do with all forms of business disruption — the change is so rapid, it feels almost instantaneous. There is no gradual change, no neat graph that shows the emergence of a new disruptive technology or business, it goes from nought to 60 in the time it takes to say Tesla — metaphorically speaking.

To rivals, a new disruptive technology is like the Greek Goddess Athena, it comes into the world fully armed and complete.

The niche for electric cars

Actually, where disruptive tech may differ from change that occurs in natural evolution, is that it needs a niche first.

This is the point that cynics don’t get.

The big problem with electric cars and lithium ion batteries, is that they didn’t have a niche, not at first. Electric cars may have been around since the inception of the motor car, but until very recently, the internal combustion engine outclassed them. So, the electric car market stalled, it couldn’t get out of the drive.

The change occurred for more than one reason. The reality of climate change created an ideological need. The invention of the lithium ion battery occurred gradually, during the late 1970s. If you are interested in the history, Wikipedia has a good entry. At first it was used in those massive mobile phones we used to carry around with us. Then in computer laptops and then, as mobile phones became more sophisticated, the need for smaller more powerful lithium ion batteries grew. But even ten years ago, the idea that they could power an electric car revolution seemed absurd.

Lithium ion batteries started with a niche, such that their initial size and poor storage wasn’t too much of an issue.

Likewise, electric cars began with a niche. Their initial appeal was to very wealthy people who cared about climate change and those who wanted a car that could move like the clappers.

Electric cars have this amazing torque which provides them with the extraordinary acceleration for which they are now known.

And now

Only now is the technology, that makes modern electric cars possible, falling to a cost, and provide sufficient storage such that electric cars are becoming competitive with traditional alternatives.

Even now, electric cars compete at the higher end of the scale.

But the cost of lithium ion batteries have fallen from $1,000 a kilowatt hour in 2008 to $200. It is widely suggested that for an electric car to be competitive with petrol cars that operate at the £15,000 level, battery costs need to fall to $100 a kilowatt hour.

It is just that Tesla, which I have long described as being more of a battery and AI company than a car company, seems to be two or three years ahead in the lithium ion market. Earlier this summer, Tesla’s beleaguered boss Elon Musk said that the company would be able to produce lithium ion batteries at less than $100 a kilowatt hour later this year.

Tesla

Tesla finds the things difficult that other car companies can do well. Car manufacturing is a complex business with an interwoven network of suppliers. Tesla has been struggling with making cars at scale.

It is good at the things other car companies find hard, namely batteries and artificial intelligence.

Whether or not Tesla can pull it off depends on whether it can master mass production before its mainstream rivals can master lithium ion and AI.

Given that Tesla made 80,000 cars in Q3 of this year, three times up on a year ago and eight times up on three years ago, I would say the signs are good. What we don’t know yet is how much it cost the company to make 80,000 vehicles.

By market cap, after seeing its share price fall earlier this year, Tesla is roughly the same size as GM, smaller than Honda, BMW, Daimler, Volkswagen and Toyota. In terms of volume of cars that it makes, even at the levels seen in Q3, it is still a minnow.

Toyota makes more than 10 million cars a year, the 15th biggest car manufacturer by units made, is Changan, which makes 1.7 million.

Tesla must increase production by roughly seven-fold just to move into the top 15.

The market

A recent report from Frost and Sullivan stated: “EVs [electric vehicles] are likely to cost the same as conventional cars by 2020 which will be a huge threat to the conventional car industry. The EV industry will no longer require financial support from the government to regularise the price of an EV in the form of cash incentives.”

And nearly all the major car makers are looking at the opportunity, although Toyota is still touting hydrogen fuel cars.

To watch

Tesla remains in pole position in this market. It may eventually merge with a traditional car maker, or maybe with either Apple or Alphabet, but if you are looking for an alternative, consider Chinese company Nio, which recently floated in New York. It’s strength lies in its Chinese routes, although privacy concerns may hold it back in the West.

As for the traditional companies, I am not yet convinced. They were late to the electric car party, and still seem to be playing catch-up.


These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees

Michael Baxter portrait photo
Michael Baxter

Economics Commentator

Michael is an economics, investment and technology writer, known for his entertaining style. He has previously been a full-time investor, founder of a technology company which was floated on the NASDAQ, and a director of a PR company specialising in IT.

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