Tesla Riding Shock Wave of Industrial Tectonic Shift

Tesla is on fire; thankfully, not its batteries, but its stock. The electric automaker’s shares have more than tripled since October. As of this morning, Tesla, Inc. is valued at $179.5 billion – more than the combined market capitalizations of Ford and General Motors. In fact, Tesla is now the most valuable carmaker in the world. Tesla CEO Elon Musk has pledged to deliver at least 500,000 new vehicles this year, as the company plans to unveil its Model Y crossover. That would represent a 35 per cent increase over the company’s 2019 output.

Whether or not Tesla’s surge has staying power is hard to know, but it is an indisputable fact that Tesla, and the electric vehicle (EV) segment as a whole, is a disruptor that will change the course of many industries. Thanks to the steady decline in the price of lithium-ion batteries, EVs’ most expensive component, the selling prices of electric vehicles are projected to decline at a rate that will make them cheaper than their combustion engine competition by 2025. Meanwhile, EV unit sales are increasing  about 20 per cent annually.

Zero-emissions vehicles have powerful allies in governments across the globe. Several countries are taking steps to not only promote electric vehicles but also to eventually outlaw the sale of gas-powered vehicles altogether. The Netherlands, for example, will forbid the sale of gasoline-powered cars by 2025. Germany, which exported $155 billion worth of cars in 2018, plans an outright ban on gas-consuming vehicles by 2030. Singapore plans to phase out internal combustion vehicles by 2040. Norway and India are following suit. China, home to the world’s largest electric vehicle market, is working on a timetable to eliminate the production and sale of gas-powered automobiles.

Equity investors already sense that the emergence of electric vehicles will have a profound impact on the automobile industry. EVs are easier to build, because their engines and cooling systems are vastly simpler than those of internal-combustion-powered automobiles. According to a recent CNBC report, traditional automobiles require about 6.2 man-hours to build, while all-electric vehicles require just 3.7 man-hours. Fewer man-hours ultimately means fewer jobs at auto manufacturers and at suppliers along the entire automotive drive train supply chain as electric vehicles gain traction.

The tide of change is rising in countries such as Germany, where auto manufacturing represents about 5 per cent of the economy. German automakers currently employ 830,000 workers and support two million jobs in the broader economy. The industry generated €423 billion in revenue in 2017, and the country exported more than three-quarters of its automobile production. Germany could lose as many as 600,000 jobs over the next decade as production shifts to electric vehicles, according to a recent report by the country’s Liebniz Institute for Economic Research (ifo). German policymakers are taking a proactive stance in order to maintain the country’s vehicular dominance: the government plans to spend €3.5 billion on installing charging stations throughout the country, according to a Financial Times report. VW has pledged to invest €60 billion over the next five years to meet its target of selling 26 million electric vehicles by 2029.

Here at home in the US, there are market as well as social pressures to ramp up EV production, but this evolution will hurt autoworkers used to bigger pay packages. GM and LG Chem (Korea) announced a $2.3 billion JV to build a lithium-ion battery plant in Ohio to support GM’s rollout of new electric models later this decade. Full production from the plant is expected in 2023. It is yet to be determined if the plant will be unionized, but according to CNBC reporting GM has already told the UAW that, in order to make the venture competitive, the plant’s roughly 1,100 employees would need to take hourly pay cuts from current union contract rates.

Beyond the automakers, automobile dealerships and service stations must also pivot to embrace EVs, or else they will run the risk of being left on the wrong side of the power curve. Thanks to their simplicity, electric vehicles require less service and maintenance. Traditional automobile owners spend about $1,300/year in oil changes, tune ups, filter replacements and brake maintenance that electric vehicle owners would largely avoid. Since EV owners do 80 per cent of their charging either at home or at work, gas stations would eventually become obsolete: Boston Consulting Group estimates that at least one-quarter of global gas stations will close by 2035.

As its biggest source of demand evaporates, the oil industry will need to adjust to consistently lower crude prices. With the economic impact of the coronavirus to blame for now, oil prices have plunged into bear market territory since the beginning of the year. It may not be coincidental that Tesla shares have doubled in the interim. The US is the largest importer of fossil fuel and transportation accounts for nearly 70 per cent of its fossil fuel consumption. A shift toward electric vehicles would draw more power from the grid. America’s electric power generation industry currently accounts for a scant 1 per cent of total US petroleum consumption. Electric power generation is largely derived from natural gas (35.2 per cent) and coal (27.5 per cent); however, nearly 17 per cent of America’s electricity is generated by renewables, like hydro (7 per cent) and wind (6.5 per cent).

Investing is about risks and opportunities. While the risks associated with an EV revolution are widely known, we at Cresset are continually looking for opportunities. One such opportunity would be in the airline industry. Jet fuel, the airlines’ largest and most variable cost, represents as much as 20 per cent of total costs. If oil prices were to enter a secular decline because of evaporating demand from traditional automobiles, airlines would become more profitable.

Interstate charging is another investment opportunity. Any business that can provide EV charging stations can attract a captive audience for nearly an hour, giving it the opportunity to sell consumer goods and services. The broader consumer sector would also likely benefit as households recapture some of the spending that had formerly been funneled into gasoline and auto service. Lastly, we expect demand for natural gas to increase as the national vehicular power source shifts to the grid. At $1.96 per million BTUs, natural gas is trading at its lowest price in decades. Longer term, we expect natural gas prices to rise along with our increasing reliance on the grid.