Funny advertising; serious undertones
In the past month, we’ve seen several newsworthy and economically impactful events including a volatility shock due to a squeeze on short-selling, a change in the White House, and expanded progress against the coronavirus. Each of these stories received a well-deserved amount of attention. However, the most underappreciated story might be one you’d only have noticed if you were paying more attention to the commercials during the Super Bowl. Did you watch General Motors’s advertisement starring Will Farrell, where he’s leading the charge against Norway? (https://www.gm.com/our-stories/no-way-norway.html) More specifically, the ad focuses on Norway’s superiority of electric vehicle (EV) adoption.
A broadening scope of change
Like other car manufacturers, General Motors’ overarching strategy for the recent past has been to increase the modularity between their different vehicle types. In other words, instead of using individualized parts and systems for each unique car make-and-model, GM product lines tend to share chassis design, replacement parts, system functionality, and so on. Thus, when General Motors felt that the fueling infrastructure, battery range, recharge speed, service options, and price points for electric vehicles were nearing an inflection point, their management teams made a widescale commitment to electric vehicles, which will impact multiple brands simultaneously. GM plans to launch 30 new EVs in concert with a $27 billion investment in electric and autonomous vehicles over the next 5 years. EVs are currently available in compact and sedan sized models, but GM is signaling an expansion across product types. Over the next five years, we may expect to see significant proliferation as EVs expand into off-road pickups, minivans, SUVs, commercial vehicles, and other industrial vehicles.
The effect of GMs move cannot be overstated because of two key attributes of the EV market. First, electric vehicles are steadily advancing towards price parity vs traditional internal combustion engine (ICE) vehicles, but it hasn’t arrived yet for most use cases. In terms of total cost of ownership, EVs currently cost more up front (due to battery costs) whereas ICE vehicles cost more to maintain and operate. Scaled manufacturing will create battery cost improvements which should accelerate the migration towards EVs within five years. Second, while EVs are relatively simple compared to ICE vehicles, the underlying technologies haven’t yet had the chance to enjoy the advantages of competitive innovation. For the past 100 years, traditional ICE vehicles have been getting safer, more sophisticated, and more efficient as the best and brightest minds focused their attention to improving their designs. Moreover, over the past decade Americans have enjoyed historically inexpensive fuel prices. Despite the ingrained infrastructure, fuel cost tailwind, and natural resistance to change, EVs have expanded from a virtually unknown niche product to an uncommon (2.8% market penetration), but not rare, product during the same 10 years. What might the next 10 years bring to an emerging industry with ample room for improvement and a continually expanding global ecosystem to support it?
Competitors, new and old
General Motors isn’t alone in these strides towards electrification. Competing car manufacturer Ford has historically been deeply focused on their best-selling ICE models and leaving electrification to the periphery of their business (offering only a few hybrid models and one-offs like the Mach E-Mustang). In contrast, the cash-cow Ford F-150 is the most popular truck in North America and arguably the most recognizable brand name for US trucks. It came as a real surprise when Ford announced a fully electric F150 to begin production sometime in 2022 – ready to compete against other fully electric trucks expected from Hummer, Tesla, and newcomer Rivian. British manufacturer Jaguar has made a commitment to fully move to electric vehicles within 5 years; note that this impacts the luxury Jaguar brand, but also off-road brands like Land Rover. Japanese manufacturer Toyota has been a laggard in terms of EV adoption, hedging their bets with hydrogen fuel cell vehicles as the possible successor to traditional ICE cars. Last Friday, Toyota announced the debut of three new EV models (one hybrid, two full electric) for 2021, with product reveals to be scheduled later this year. Other smaller and luxury manufacturers – from Hyundai, to Audi, to Porsche – continue to roll out EV models in anticipation of these market trends.
The energy ecosystem: consumers and producers
Developed economies in EU, Asia, the UK, and North America have made multiple commitments towards phasing out ICE vehicle purchases over the next decade. Key emerging markets have incentives to bypass ICE development completely. For example, China is the world’s largest EV market, but has no competitive ICE manufacturing capability on the global stage. China is also the largest consumer of imported oil, which creates both economic and environmental problems for them. These factors give China a tremendous incentive to develop, produce, and distribute EV technology both domestically and globally.
The ICE energy providers can read the writing on the wall. Shell Oil company made a statement last week declaring the world had reached peak oil consumption in 2019, prior to the coronavirus slowdown, and they expect a 1-2% year-over-year decline in oil consumption for the foreseeable future. Despite very inexpensive fuel production and end-user costs, Shell plans an “accelerated strategy” to phase into alternative energy source production and distribution, but only time will tell how exactly that manifests and how many more write-offs of stranded assets they’ll accept along the way. Shell’s declaration matches assertions by British Petroleum (BP) last year that we’ve reached global peak oil consumption, and that the future of vehicles will continue to migrate towards electric models.
The changes are massive but gradual.
Nobody can say with certainty how long it will take for electric vehicles to outsell traditional ICE vehicles. There are a lot of confounding factors, such as the rolldown of subsidies for both EV and ICE industries. Most analysts are united by the assertion that it will happen eventually, but not imminently. One guess, by BloombergNEF, suggests the process will take roughly 15-20 years. Analysts at JATO, an automotive information technology firm, suggest 2030 is the year EVs will outsell traditional cars. We know consumers don’t turnover their vehicles quickly, so the phase-out process will take many years, but it should accelerate and become inexorable once the economies of scale finally land on the side of EVs. Recent announcements from energy producers and car manufacturers are showing how these companies are setting themselves up for pole position in the next race.