A headline in the Wall Street Journal this week caught my eye:
“Americans Show Scant Interest in Electric Vehicles, Subaru CEO Says
The only EVs that are selling well are from Tesla”
Jan. 20, 2020.
Subaru doesn’t make an electric vehicle. But it introduced a Crosstrek plug-in hybrid in 2018 and has yet to sell more than a few of them. “We think the U.S. market is really difficult.”, Subaru’s CEO, Mr. Tomomi Nakamura, said in the article.
He’s right about that. While cars themselves have moved from strength to strength over many years, and become ever more ubiquitous in our lives, car companies have struggled under intensely competitive conditions. At the turn of the century, the U.S. had hundreds of car companies. Today we have three – two really if you consider that Chrysler is owned by Fiat (which itself plans to merge with Peugeot). A similar story of business failure and industry consolidation has transpired in every other country, leaving the major car-producing nations with two or three national champions each. Subaru is so concerned for its future that it recently sold 20% of its equity to Toyota. It needs capital from Toyota to fund the massive capital expenditures which electric vehicles require. Collectively, investors have lost untold billions investing in cars.
Now we are poised at a transforming moment in the car industry, and I think that history is about to repeat. Every single established car company plans to introduce an electric vehicle in the coming year or two. Some, such as BMW, have already done so. But models from Volkswagen and Toyota and all of the American brands are coming soon. Every company plans to sell its cars into the United States. Also, hundreds of small companies plan electric vehicles of one form or another, including robo-taxis, electric trucks, scooters, bicycles, and motorcycles. Check out Arcimoto, or the Bricklin 3ev, or the Zero SR/F. Every one of them offers an excellent ride and claims a transforming technology that will usher in a greener, more sustainable future. They all face dozens of competitors, all claiming the same thing.
Almost all of them will fail. In the first place, electric vehicles do not yet make much economic sense, because the savings to owners in gasoline are offset by higher sticker prices, and buyers can only recoup their investment over a period of years. Secondly, as noted everywhere, the best electric vehicles have a range of 120 miles or so before they require recharging. While that may suffice for short hops around town, you may never take these vehicles on vacation. You must use your other family wagon.
(As an aside, I think that Arcimoto has tackled this second objection intelligently, by creating a smaller, more affordable vehicle only suited to short hops. Arcimoto has just begun production and has logged backorders for 4,200 vehicles. You can buy stock in Arcimoto (symbol: FUV), but I don’t recommend it.)
Thirdly, the staggering level of competition will crush all but the largest, most well-capitalized entrants in this fray, and even they will suffer.
I find Tesla’s success interesting, as the CEO mentioned. Mind you, Tesla loses money on every vehicle, which it makes and shows no signs of moving to profitability. The craze for Tesla stock looks nuts to me – a large bubble just waiting to pop.
But beyond the quality of its product, which is high, I think that Tesla succeeds in selling electric vehicles by targeting a specific niche. This niche is wealthy; it can afford to spend $30,000 to $70,000 on a sedan. It’s well educated and concerned about global warming. Critically, Tesla allows one to show-off. Driving a Tesla says, “Look at me! I’m rich! I care! I’m green!” It empowers its owners to operate in regal comfort while feeling smug and superior about themselves. Toyota pursued the same strategy with the Prius hybrid, and the Prius succeeded where all other hybrids failed, including all others from Toyota. The other hybrids were merely efficient. They looked like conventional cars. But with its sleek shape and ground-up design, the Prius made a political statement. It attracted a set of shoppers, fairly small in the grand scheme, but large enough, who didn’t care about the price, and who wanted to flaunt their green credentials and encourage others. Tesla has targeted the same niche – perhaps even more upscale - with the same success: a brilliant move.
Tesla recently launched an electric pickup truck, which seems unwise to me. A pickup truck demands a larger, more powerful battery, and presents numerous additional engineering challenges. And pickup trucks appeal to a different demographic than do sporty sedans. Tesla obviously thinks that it can find wealthy enough, eco-conscious pickup truck drivers, who will love the Mars rover design, to make the venture a success. I have my doubts.
In summary, during a period of deep transformation, the car industry looks as perilous for investors as ever. Stay away. The industry has embarked upon a path of extraordinary capital expenditure for very uncertain returns, and a high likelihood that the majority of ventures will fail.