“The dawn of commercialisation of electric vehicles is upon us.”
“The dawn of commercialisation of electric vehicles is upon us.”
“The dawn of commercialisation of electric vehicles is upon us.”
The above words appeared in print in newspapers … in 1898! In 2019 the Tesla Model 3 was touted as the first electric taxi to be approved in New York. In reality electric vehicles found the first commercial application as a fleet of New York electric taxis in 1897.
The electric vehicle is nothing new. It will come as a surprise to many readers that the electric car was invented two centuries ago in 1832, and that this is not new technology. The first electric vehicle even predates the first internal combustion engine by 50 years.
130 years ago electric vehicles outnumbered all other vehicles by 10-to-1, as they had a number of advantages. A poor road system in the US meant that most trips were short, so the EV’s lack of longer range was not an issue. Despite this, some EV could travel more than 160 kilometres from a single charge. More importantly, early internal combustion engines suffered from a critical flaw: they had to be cranked by hand. Many suffered broken wrists from the process. EVs instead started easily, and were particularly favoured by women for short trips within the city. New York even had charging stations every 10 blocks.
Today’s supporters of the wonders of EV technology should study history. A century ago we already had fast charging batteries (80% of capacity in 10 minutes), automated battery swapping stations, public charging poles, and regenerative braking. Under this light Tesla’s claims look less like technological innovation, but more like copying what had already been done.
And we haven’t even made that many technological advancements in all this time. Many of the problems that we see in today’s EV were already noted a century earlier. I was in London last month as the driver complained about her country’s policy for EVs. All new cars already have to be electric, and she decided to swap her 5-year old car for an electric one. A few days later, driving on the road the whole day, she ran out of charge for her battery, and the few charging stations she could find in London were all taken up by other cars. She ended up having to take the rest of the day off, and charged her car battery by running a power cable through her kitchen window (in the middle of winter) that she had to keep open overnight. She was so disappointed that a month later she sold her EV and bought a used combustion engine car.
Is this the future of autos that merit such a high multiple on stock exchanges?
As with all new technologies, the original EVs captured the minds of investors, resulting in an epic bubble. The Electric Vehicle Company was founded in 1897, listed in 1899, and promptly gained more than 5x in share price in a few months. Just one year later the stock price had dropped below its IPO price. It continued its decline, finally ending in bankruptcy seven years later. Most of its competitors failed much faster, within two years of going public.
EV production peaked in 1912, but by then combustion engines had already taken over with more than 90% market share of auto sales. By this year, many of the companies producing EVs had already gone out of business. Gasoline cars were faster, could drive longer distances, and benefitted from a better refuelling infrastructure. Most importantly, they were significantly cheaper than EVs.
The only advantage left, which is the reason we want EVs back today, was the lack of polluting emissions.
The most surprising aspect of all this is that there has been very little progress in battery technology, a critical component of EVs. We already had EVs that could drive over 160 km on a single charge, the same as what is being touted for some current EVs.
It's instructive to learn the history and to compare it to where we are today with the new (which is really the second) EV mania, and see whether we’re in a second bubble.
Investment returns tend to be highest in sectors where capital is the most scarce, especially when this under-investment has been continuing for many years. Two years ago, in the midst of the COVID lockdowns and the continuing move by governments away from oil, markets were pricing in the end of the era of big oil . Exxon Mobil was the world’s most valuable company as recently as 2013. Last year, Tesla’s market capitalisation was the same as the entire US oil sector.
Is the EV sector in a second historical bubble?
Before the pandemic, the global auto sector had a market cap of US$1 trillion. Now it is $3 trillion. It is not just a Tesla / EV story. Until 2020, EV share valuations grew exponentially while the traditional automakers share prices stalled. Something changed last year, as the share prices of traditional automakers started rallying tremendously, boosting the whole auto sector.
Disruption is supposed to make incumbents suffer. Who knew it could be generous to everyone involved?
Total global car sales, in contrast, are still below 2018 levels. In fact, sales in the US and EU have been flat for two decades, with most of the global growth coming from China, which has grown from less than 3 million car sales per year in 2000 to 26 million now, but even China has seen annual sales flat-line since 2018.
So, the combined valuation of the auto industry has tripled despite having zero growth. EV makers are priced as if they will all become winners. Now the traditional auto makers are also priced as winners.
Rivian, the electric truck maker that has just announced it will expand into SUVs (pretty much like every other auto maker in existence) has a $100 billion valuation on zero revenue. EVs are currently 7% of global auto sales, but have taken half the market capitalisation. Of course the expectation is that they go to 100%, but the traditional automakers are not just going to sit around and see their combustion engines go obsolete. They will become EV companies themselves.
Unlike the first EV bubble a century ago, this time the sector has government regulation on its side, as more countries are mandating all-EV production in a few years. Despite this, does it make sense that valuation of the whole sector has tripled? Will you buy three times the number of cars you now own? The sector’s valuations has become divorced from reality. As with all technological innovations, there will be a handful of winners, and many more losers.
By LEONARDO DRAGO
Co-founder of AL Wealth Partners, an independent Singapore-based company providing investment and fund management services to endowments and family offices, and wealth-advisory services to accredited individual investors.