- We won’t mention Tesla (except for right here).
- Margins are essential for profitable long term investments.
- Alternative related investments seem like the best option for low risk, high reward pre-hype investing opportunities in the electric market, the opposite is true for oil.
The rumor is that Apple Inc. (NASDAQ: AAPL) is searching for a partner to develop a car that many believe will be all-electric. This would be only one additional player in the long line of automotive manufacturers that have embraced the electric trend.
In this article, we will look at how big the electric trend really is and what the investing opportunities and risks related to the new trend are.
It’s important to focus on the risks as electric vehicles are a fairly new market. If we compare electric vehicles to the internet in the 1990s, back then the internet was a new revelation but few have made sustainable profits since then by investing in the internet industry even though we all use it now.
Developments In The Industry
These days there are more and more electric vehicles (EV) driving around. There will be a point in the future when the majority will shift to EV as other alternatives will no longer make sense. Just think of how everyone switched to mobile phones two decades ago and then to smart phones not even a decade ago.
The trend is clear, but still in its infancy. At the end of 2014, EV still represented only 0.08% of the total number of passenger cars. The current sales are growing, and EV are going to get a large market share in the coming years. Some countries are ahead of the rest of the world in terms of EV sales, with Norway leading the pack at 22.4% of new car sales in 2015.
Figure 1: Market share (new sales) per country. Source: The International Council On Clean Transportation (ICCT).
This new sales market share will likely increase quickly as manufacturers are starting to introduce EV with very satisfying price ranges below $30,000. One example is Hyundai, which will introduce its fully electric low cost vehicle this fall.
Figure 2 Hyundai Ioniq. Source: Hyundai.
The car is already sold in Norway for a price of $28,680 and has a respectable range of more than 165 miles. As car prices in Norway are significantly more expensive than in the U.S.,—the Hyundai Tucson model in Norway sells for $37,122, while in the U.S. it lists for $22,700—we can generally expect to see a cheaper price tag on vehicles in the U.S. EV market.
Figure 3: U.S. EV car sales per brand. Source: Clean Technica.
As many car manufacturers offer EV, another trend is pretty clear: EV are becoming cheaper and cheaper. Increased investments in research by a large number of players improves the technology, and competition lowers prices. This leads to three important conclusions for investors:
Oil demand is bound to decline even if the OPEC doesn’t agree with this statement.
Long term investors should steer away from oil as higher demand for EV is going to lower the demand for oil. EV sales in China were up 188% in June, rejecting the thesis that emerging markets are going to save oil. If EV sales grow at the current growth rate, we are going to see more gluts in the oil market. According to Bloomberg, by 2023 the impact of EV on oil is going to lower oil demand by 2 million barrels per day if the current growth continues. We cannot know exactly when this will happen, but we can be certain that it will happen.
Figure 4: New oil supply glut and demand removal. Source: Bloomberg.
In any case, OPEC’s expectation that the EV market share will be only 2% by 2050 seems foolish as the growth is already here and costs are going down.
Figure 5: EV battery costs and market share. Source: Bloomberg.
Margins will be the key.
With the current higher prices for EV, many manufacturers are going to sacrifice margins in order to gain market share. This will provide growth, but not profits which is the worst combination for investors. Therefore, investors should carefully pick EV investments. It may be better to stick to already profitable manufacturers and enjoy the current positive earnings and cash flows while you wait for the EV benefits to kick in, but the competition is going to be fierce. By looking at the unknown names in the Chinese EV market, we can see how difficult it will be to gain market share without decreasing margins.
Figure 6: Chinese EV brands. Source: Clean Techinica.
Find alternative ways to grasp the EV trend.
As EV manufacturers are going to massacre themselves with low margins, it’s better to find investments that have less competition and are related to the unavoidable trend. You can always start with lithium as it is a main component of EV, but its price has already gone up significantly since we wrote about it back in May. You can invest in miners, refiners and battery producers in order to get exposure.
Another option that is less related to EVs but very related to electric energy, is copper. As EVs contain three times the amount of copper compared to gas-powered cars, and automotive manufacturing is 12% of global copper demand, we could see a nice spike in copper demand coming from increased EV production. As copper is becoming scarcer due to lower mining grades, a supply deficit could easily form making copper-related investments the big winners of the next decade. To read about our pick for a good copper stock, click here.
The same theory might apply to aluminum as it is much lighter than steel and thus its usage increases an EV’s range, but aluminum doesn’t have the supply constrains copper has.
Growth numbers can easily mislead unexperienced investors. It’s just history repeating itself. It was the internet in the 1990s, mobile phones in the 2000s and now we have EV. In the end, it all boils down to economies of scale and margins as competition intensifies and eliminates profits.
By taking a look at related sectors, we can find investments that are not yet in the investing hype but essential for the development of the trend, like copper. And we also find investments that have to be avoided as it is clear that demand will soon reach its peak, like oil. If you don’t believe it, look at the telephone cable lines in older homes that are already obsolete.