If you look at the stock market valuations Tesla is now the colossus of the global car market. Its trillion-dollar stock market capitalisation is more than double that of Ford, General Motors, Mercedes, VW and BMW combined.
However, if you look at the progress of electric vehicles, it is more pedestrian to date, with battery electric light vehicles – mainly cars – accounting for single-figure percentages of the total being made and sold in most countries.
Chart 1: 2020 Battery Electric Vehicle sales share
The valuation of Tesla tells us the market thinks electric-car sales will grow and grow in the next few years and tells us that many investors believe Tesla will keep an edge and will gain more market share at the expense of the traditional car makers. Tesla, they hope, will be the Amazon of the car industry, expanding and investing on an ever-grander scale until one day, from a dominant position, it is a superb cash generator living up to the fancy share prices achieved. So far, the Tesla Model 3 has been the poster car of the movement.
Chart 2: Tesla and select traditional carmakers key metrics comparison
There are two important assumptions in this view. The first is that electric cars will catch on with the majority as they have caught on so far with the minority, those who can afford them and those green city dwellers who do not need to travel long distances by car. It seems likely electric cars will continue to grow in numbers, as they are likely to get plenty of government support and stimulus in various European countries, in particular.
Cars at the core of emissions reduction
Governments on the road to net zero need to drive there in an electric car. As numbers grow, so there will be more charging points and more-rapid charging, easing the worries many potential customers have about range and reliability on longer journeys.
Analysts need to ask if there will be a proper fightback by the great brands of traditional car engineering.
The second is that they assume Tesla will be able to hold its early-mover advantage in being the source of some of the most prized electric vehicles. Analysts need to ask if there will be a proper fightback by the great brands of traditional car engineering. New Mercedes, BMW, Toyota, Ford Volkswagen and products from other well-known car marques will find their way into the showrooms. Could electric cars from traditional makers steal customer hearts?
The global truth is this electric car and lithium-ion battery market is dominated by China. Whilst Tesla did make the most battery electric cars over the last year SAIC from China was second, with BYD another top five player. China produced more electric cars in 2020 than Europe or North America. The gap is expected to stay wide over the next few years.
When it comes to batteries, China has nearly 80% of the market. There are now plans for substantial battery capacity for Germany and Poland, and some increase in the US. The West is behind in securing crucial minerals, in putting in battery capacity and in developing the electric vehicle (EV) market through sufficiently attractive subsidies and tax breaks.
There is a wish to end production of petrol and diesel light vehicles as early as 2030.
There is a wider problem hitting world economies from this attempted transition. How quickly will regulation force the pace? How much capital do the traditional internal combustion engine car makers need to write off as their diesel and petrol car factories become redundant? Will there be a continuing hit to total volumes as people adjust to the transition, or is that mainly to do with chip supply shortages which will resolve next year with more capacity? It is to Europe that we need to look to power this revolution from government action?
There is a wish to end production of petrol and diesel light vehicles as early as 2030, which implies a tight timetable to build the battery and EV factories and shut down the petrol and diesel factories. There is not much overlap between the two, with a very valuable battery dominating the EV accounting for up to 40% of the cost with fewer other components. As the current car parc shows, there is a long way to go to make Europeans mainly dependent on electric cars instead of the diesels and petrol vehicles they currently own.
Chart 3: EU passenger car fleet in 2019 and new car registrations by fuel type
The European passion for electric vehicles is allied to a wish to switch more journeys to walking, cycling and public transport. The pressures against petrol and diesel cars in urban areas will spill over into physical restrictions and speed controls on electric vehicles too. The motor industry is destined to lose urban custom as the green revolution in transport modes unfolds.
Traditional carmaker valuations predict the pain
The pessimistic valuations of the great traditional brands discount the write offs, redundancies and lost revenues on the traditional vehicles that have kept them going to date. Output of diesel and petrol cars is down by around a half in Germany in the last three years as the overall market has declined and battery cars and hybrids have taken a bigger market share from a smaller market. Maybe some of the traditional car makers will grow a larger electric car business from within which will in due course get a better valuation.
Chart 4: German new car sales by engine type
Australia has the largest proven reserves of lithium, followed by Chile, China and Argentina.
The likelihood is there will be price competition to gain market share in electric vehicles, as and when all the main manufacturers have electric line-ups and the chip shortage has ended. This will be pitted against the new players that electric propulsion has brought into the market.
There will be substantial growth in battery production, favouring lithium, cobalt, manganese, graphite and nickel. Much of the refining capacity for these minerals is in China, with the west now rushing to catch up. Australia has the largest proven reserves of lithium, followed by Chile, China and Argentina. Indonesia has the best position in nickel. China has read these trends of western policy better than western industry, leading to the need for the west to step up its investment in raw materials and production more rapidly to avoid importing the products needed for its own electric revolution.
Germany understands the huge challenge to its own position and is busily putting in more substantial battery capacity led by a large Tesla commitment. It will still leave Europe and the US well behind China in total battery capacity in 2025.
The US has shown less enthusiasm than Europe and is likely to continue to lag in battery electric amongst the big three. There will be some attempts to set up hydrogen as a rival as the gas gets more-widely adopted for larger vehicles, but battery products have a current strong lead.
Markets will need to watch carefully who will emerge as strong electric vehicle makers capable of turning success into profit, whilst watching out for the continuing downsides from closure costs and a smaller market.
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The road to net zero needs electric cars
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