Blain’s Morning Porridge, 24^th Jan 2024: EVs will be 30% of Auto-market. What does that mean for Tesla?

“The rumour I’m building a spaceship to get back to my home planet Mars is totally untrue.”

The future of the Auto-sector is likely to comprise a mix of technologies. What does that mean for Tesla – which is under increasing pressure from competition, technology and the maturity of the EV market.

Toyota’s chairman Akio Toyoda recently opined battery-powered electric cars will only ever capture 30% of the global market. The leader of the most profitable car maker predicts a diverse future mix of autos including EVs, hydrogen fuel cells, hybrids and traditional combustion engines (ICE). He made the observation there isn’t enough available electricity where it’s needed for everyone to be able to (literally) drive electric cars.

Future auto-sales will reflect practicality, cost and sustainability – and customer preferences. EVs are perfect in many settings, hybrids make a lot of sense, but in other situations ICE vehicles will remain the only practical solution. There are powerful economic/cost/life-cycle considerations between EV or ICE. One major issue is the high cost of replacing batteries every 2000 (or so) cycles in a new Tesla vs a 1962 Land Rover that’s done trillions of miles with an occasional check to see if the bolts holding the diesel engine in place look ok (they do).

One of my Shard colleagues did a quick survey of the virtual Office yesterday, revealing over 50% of us intend to keep driving ICE, while 30% are EV fans – fitting with Toyota’s expectations. The rest said their EV adoption might rise once charging and range issues are resolved, but it will remain under 50% of total market.

If the Roller Skate (our Fiat 500 soft-top) expires (and why would it; it goes from here to the station), then it will be replaced by a hybrid or EV. But for the trips to Wales and Scotland something grunty will be required. In the past a new car would grace the drive every three years…. But now… Every year I go look at a new Rangey, and every year I decide I can’t justify the cost so wait to see if the new model is better. (My teenage Westminster-S is still in excellent fettle… but if I drive it into London I will be bankrupted by ULEZ…)

Famously Toyota has pitched hydrogen fuel-cell tech as the best solution for auto-power – and has spent billions developing the tech. It started the trend away from ICE with the Prius hybrid – which was frankly horrible. Fuel cells are efficient – but they have not been marketed with the same market nous as EVs. I love the tech, but wonder if they will ever catch on.. building infrastructure for EVs has been problematic enough, imagine the planning delays to roll out hydrogen top-up stations?

Meanwhile, I have an inkling the Magnificent Seven Tech Stocks will shortly be rebranded The Big Six.

Tesla has significantly underperformed its’ Tech Peers in recent months, stuck in a range despite all the AI hype Elon Musk has been trying to align himself with.

Later today we will get Tesla’s Q4 results. They are expected to confirm 1.81 mm vehicles delivered, but significant slippage in margins from 25% last year to 17% now. Earnings per share will tumble as it has cut prices in a market where more and more manufacturers are selling cars, and the market demand appears to be reaching saturation point. And in case you missed it, it is no longer the leading EV maker – Chinese firm BYD makes and sells more cars. BDY is selling 5 of its EVs in China for every one Tesla slips out the showroom. Toyota sells more cars than anyone else – 5 times as many as Tesla. Its operating margins are higher than Tesla’s, but its market cap is 30% the size of Tesla’s.

Musk’s great success with Tesla was not inventing a completely new mode of EV transport, but re-jigging mature battery technology and persuading us he’d cracked the capacitance problem. He made EVs practical and hyped Tesla as the auto-company evolved, much more than just cars, making the Tesla the product of the decade. His skill proved to be in marketing – hyping Tesla to its extreme valuation metrics.

Remember all the BS about Tesla’s phenomenal value from its’ unique data, being a battery company, self-driving, driverless taxis?

Today Musk is telling us Tesla is an AI/Robotics company (here is a page from the company’s careers site on AI). He is now more than vaguely threatening he would be “uncomfortable growing Tesla to be a leader in AI & Robotics” unless the company gives him $60 bln (12%) of new shares to take his stake to 25%. Really?

Is Musk such an AI expert? (Tesla’s autonomous driving programme lags others auto makers.) Autonomous driving will not be unique to Teslas. For the record…. 95% of Tesla’s revenues come from selling cars.. some with very-expensive autonomous driving packages that most definitely does not allow you to sleep at the wheel. Telsa’s FSD Beta V.12 is currently being rolled out – don’t bring a pillow.

The reality is Tesla sells cars. In a competitive market. Where they have a modest range of fairly old range models.

It is a “mature” 21-year company. First I time I looked at it I was excited, till a colleague who bought one of the first roadster’s told me about his range problems – he could not trust it to get him home to the Cotswolds on a Friday night. I expected the technology and design would rapidly evolve to resolve these issue. There have been marginal incremental gains, and you can buy longer-range vehicles, but essentially the success of Tesla and other firms launching copy-cat cars has not significant fundamental evolution of the Telsa Lithium BEV.

There is nothing wrong with Lithium-ion batteries. As batteries go the are currently the most energy-dese and fast. However, they are considerably less efficient than ICE engines due to the extraordinary energy density of petrol. If you want to talk about going green – then carbon capture of ICE emissions is a future technology – imagine if ICE engines also produced zero emissions as exhaust gases were collected and stored on board for later sequestration?

One of my problems with Electric Vehicles is where the technology is headed. For the last couple of years I’ve been hearing well sourced tales of how Toyota and others are close to a battery paradigm shift in new energy-dense, light-weight battery technology that will revolutionise EVs – making the cars lighter, more modular, with 1000 mile ranges as standard (getting rid of range anxiety and negating the need for mass charging roll-out), and being simple to recycle and repair. Such cars would make Tesla obsolete in a heartbeat.

The case against Tesla is growing. Hertz has given up on the ultra-high costs of running a stable of Tesla’s for rental – it is dumping 20,000 of them. Sixt, the European rental co, has de-fleeted Tesla’s over concerns on how quickly they lost second hand value. (According to the Torygraph, EV’s depreciate 23% per annum vs 3% for Diesels!) The new Cybertruck proved a nightmare to manufacture, and isn’t delivering the milage it promised. Don’t drive it in the snow.

I have said Tesla is massively hyped and overvalued so many times over the past 10-years. The market has not listened. Yet, I think the game is close to up; three factors threaten Tesla.

• Technological change – making the current Tesla range obsolete
• Competition – new entrants making better, cheaper, cars
• New Narrative – that EVs are just one part of the auto solution, and Musk’s star appears to be setting

When it comes to the right valuation on Telsa, I found some fascinating stuff in my notes. Back in 2019 I wrote there was “no way Tesla is worth $50 bln”. In 2021 I wrote “there is no way Tesla is worth $760 bln, maybe $70 bln at a stretch!” How wrong was I?

On the other hand, 3 years ago I wrote: “Tesla does not have anything like a monopoly. Its failing to deliver. It’s not selling enough cars in China, and others are selling more in Europe. Competitors are eating its lunch. Secondary Tesla claims like leadership in capacitance and autonomy are irrelevant if the main light goes out.”

For all the things Musk has done, perhaps the most extraordinary is that he still dominates EVs to the extent he does. Market history suggests the usual fate for any firm that invents, innovates and defines a whole new sector is to be swamped by the competition it creates for itself:

Witness the Wright Brothers in aviation – I wrote this back in 2020:

• “7 years after Kittyhawk (scene of the first flight) there were dozens of aviation companies competing for every conceivable aviation first in terms of speed, distance, and altitude. The Wrights won none of them. Instead, they tried to sue over patents – a singularly unsuccessful notion as Europe rearmed ahead of war. Wrights lost the plot as aircraft went from string and sealing wax to sleek killing machines in just a few years. Wilbur died of typhoid and Orville sold the company for $1.5mm in 1915. Whatever, the brothers were extraordinary and brilliant engineers.”

Is Musk a brilliant engineer or a canny marketer?

Out of time, and back to whatever the day job is today…

Bill Blain

Strategist – Author of the Morning Porridge