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AIQ Editorial TeamGlobal Investment Thinking @avivainvestors
Investors are betting the likes of Tesla will win the race for sales of electric vehicles, but traditional carmakers and technology giants may have a say in who passes the chequered flag first.
Cars: A chequered history
Automobiles have fundamentally transformed societies, increasing the mobility and independence of individuals in a way that was once inconceivable. But they have also been a contributor to the biggest crisis facing the planet: climate change. And, despite all the efforts to cut emissions of greenhouse gases such as carbon dioxide (CO2), emissions in the transport sector (where cars are comfortably the biggest contributor) continue to grow.
As the automotive industry embarks on the electrical vehicle (EV) revolution, financial markets are seeking to price in the winners.
Replacing horses with cars took about 30 years, from 1900 to 1930. Replacing feature phones with smartphones took six years. Replacing traditional internal combustion engines with EVs may be somewhere in between, given the rapid pace of technological change and the massive sums being invested in renewable energy. Traditional carmakers have a fighting chance of catching up to new players like Tesla if they move decisively and rapidly, but until they do, there are reasons to remain cautious on their long-term prospects.
Climate concerns drive change and investment decisions
The great technological transformation of the nineteenth century was to harness the power of fossil fuels for industrial growth. The twentieth century rode the wave of innovation that followed, and inadvertently put the planet on track for massive warming. The defining industrial project of this century will be to leave carbon behind.
Investors are understandably paying close attention to the shift towards EVs
Consequently, investors are understandably paying close attention to the shift towards EVs. A disconnect has recently emerged over whom they favour, as highlighted by the contrasting stock-market experiences of Tesla and Volkswagen last year.
In 2020, Tesla’s share price rose by 690 per cent, from $88.60 to $699.99 – an astonishing surge for a company that reported its first ever annual profit in that same year.1
Volkswagen, meanwhile, saw its share price fall by 1.8 per cent, from €173.25 to €170.10, despite reporting a big expansion in its own electrification efforts.
Tesla is not alone in seeing a surge in its share price. Many other new EV companies or start-ups are trading at valuations that traditional carmakers can only dream of.
Calling the future
So why doesn’t the market seem convinced about the prospects for traditional automakers like Volkswagen? To understand what is happening in the car market, it may be worth looking at the example of Nokia, which dominated the mobile-phone market until Apple launched the revolutionary iPhone in 2007. The iPhone heralded a disruptive new technology, the smartphone, which overtook the traditional feature phones produced by Nokia in six short years. By 2019, smartphones accounted for over three-quarters of total mobile-phone sales.
Most forecasters currently expect EVs’ global market share to reach just 20 per cent in the next ten years
The transition to EVs could be much slower than the conversion to smartphones. Most forecasters currently expect EVs’ global market share to reach just 20 per cent in the next ten years, with cars powered by traditional internal combustion engines accounting for the remainder. Tesla sells just a fraction of the vehicles sold by the largest five European carmakers and, moreover, the European ‘Big Five’ recently achieved a larger global market share than Tesla itself in EVs.
On the plus side, Tesla, unlike traditional carmakers, does not have to spend much money to convert old internal combustion engine plants into EV factories – although it will need to spend money to scale up. Converting a plant to EVs is costly, but not as punishing as writing down a coal mine or an expensive oil project for an energy company.
The jury is out over what will happen to EV producers and traditional carmakers in the coming years, but both may face pressure from new challengers. Apple and Amazon seem increasingly likely to start building their own EVs to seize new opportunities in the mobility market and, for Amazon in particular, to control delivery costs and CO2 emissions.
Three points to remember
- The transition from the traditional internal combustion engine to electrically powered vehicles is well under way, driven by growing concern over climate change.
- Investors have recently favoured pure EV suppliers such as Tesla over traditional carmakers like Volkswagen, even though the latter are increasing their own production of EVs.
- Given that other giant technology companies such as Apple and Amazon seem likely to enter the EV sector, there are good reasons to be cautious on the long-term prospects for traditional automakers.