Humans can be terrible predictors of the future. Henry Ford famously said most of his customers would have asked him to design a faster horse, rather than a car. And this wasn’t an illogical thought in 1900s America. There were no gas stations, no highways, roads were gravel tracks and cars were unreliable, expensive and difficult to fix. Horses made sense.
Customers tend not to be the ones with their fingers on the pulse of emergent technologies. That’s the job of entrepreneurs like Ford and these days, Elon Musk. And it’s their job to sell us the benefits of these new developments. The early adopters buy these technologies first, which in turn drives mass adoption. This becomes the tipping point.
This happened with Ford back in the 1900s. He built the first highway and petrol station and before you knew it, the US was criss-crossed with a highway network, tarmacked roads and everyone was driving Fords, Buicks and Cadillacs. And this is where we can bring it through to sustainability, the present day and electric vehicles (EVs).
The EV tipping point
Not many dispute the technology or the sustainability argument. We have seen EVs on the roads for some time, as early adopters splashed out on Tesla vehicles, or, more economically, the hybrid Toyota Prius.
But now all major car manufacturers are selling EVs and they are becoming more commonplace. The cost has traditionally been prohibitive, as has the availability of electric charging for vehicles. With average ranges of 180 miles before batteries need re-charging, they have probably been more suited to short journeys in urban areas, rather than for someone doing lots of mileage or driving around rural areas. But this is all changing and as governments the world over work towards a greener future, EV charging infrastructure is burgeoning. We are officially at the EV tipping point.
EVs are cheaper to run, and the price of them is coming down as demand grows. EVs have fewer moving parts, so have lower maintenance costs. They have higher low-end torque and faster acceleration, if you care about that sort of thing. If you mainly drive to and from work and have a charger at home, you never have to stop for petrol.
And the cherry on the top? They are better for the environment, emitting far fewer air pollutants than petrol and diesel counterparts. Transport is the second largest contributor to global emissions at 20-25% and road travel is 80%, so a transition to electric vehicles and renewable energy with battery storage will have a significant environmental impact.
Having said that – and despite the rapid growth we are seeing – lots of car manufacturers still see EV as niche. BMW recently said none of its customer base wanted an EV outside California – a bizarre claim given the recent EV unit growth in all marketsand companies such as Tesla succeeding without having to spend money on advertising. Demand is high because a lot of consumers are becoming more environmentally aware – they want a more sustainable transport solution.
With investing in innovation, it’s really important to understand when an inflection in demand might happen. Something we use in the world of investment is Wright’s Law, known as the Learning Curve of Innovation. Pioneered by Theodore Wright in the 1930s, it is essentially a framework for forecasting cost declines as a result of increased production – it states that for every doubling of units that are produced, costs will decrease by a set percentage. In car production it has translated to 15% improvement in cost, for every doubling of cumulative production. When it happens, it translates to higher gross margins and lower capital expenditure (capex) per unit of production – great news for investors.
From an investment point of view, it is interesting to see different types of companies that might model Wright’s Law. Take Tesla – it has produced more EVs than any other company, and unlike its competitors, it’s a vertically integrated technology company, which means it designs and builds its own electric motors and batteries.
Most other companies outsource these elements. This makes Tesla as much a software company as a hardware company. But in terms of innovation, all EV manufacturers are racing ahead with development and production, addressing areas of performance where EVs still lag, namely range and re-charge speeds. It won’t be long before they get there.
Smart investors also have to think more broadly – it is about the ecosystem of companies related to this sustainable form of transport. The battery storage companies, the companies involved with charging infrastructure, the companies that make cathodes and so on.
Ways of playing it
The transition to electric vehicles will favour the companies with the clearest vision of the future which are innovating fastest. These companies will demonstrate their competitive power through revenue growth, profitability, cash flow, balance sheet strength and brand awareness.
As is often the case, investing in funds and a basket of companies that operate in a certain space – rather than trying to find the next market leader – is often the way to approach investment in innovative technologies. Funds such as Baillie Gifford Positive Change offer exposure to this electrification theme, as does Ninety One Global Environment fund. And exchange traded funds (ETFs) such as First Trust Clean Energy ETF, which offers exposure to the broad clean energy space and includes batteries and EVs in its universe, and L&G Battery Value-Chain, which offers more targeted exposure.
Driven by demand for more sustainable transport and in a bid to save the planet, consumer demand for EVs is soaring. And this coupled with the pace of change in EV development is starting to tip the balance. The end of the petrol car is nigh.
Patrick Thomas is investment director and head of ESG investing at Canaccord Genuity Wealth Management and an ESG Clarity editorial panellist.