Electric Vehicles – Unready for Reality

EVs have run out of well-heeled early adopters.

• While the long-term proposition of electrical vehicles remains unchanged, the realities of delivering on that proposition are really starting to tell as Tesla (and the others) have run out of well-heeled consumers willing to pay big money to be beta testers.
• This has been apparent for some time but was brought into sharp relief with Tesla’s first YoY decline since the pandemic with Q1 24 shipments of 386,810 units down 8.5% compared to Q1 23.
• The only silver lining here was that BYD reported a massive 42% YoY decline in EV shipments to 300,114 allowing Tesla to regain its No.1 spot as the largest seller of EVs globally.
• BYD primarily sells in China where the economy is struggling and where there appears to be a growing preference for plug-in hybrids as including shipments of these vehicles allowed BYD’s quarterly shipments to grow by 13% YoY.
• Plug-in hybrids are not new but, because they also have a petrol engine on-board and are cheaper than EVs, they solve the range anxiety issue as well as the cost issue in a more difficult economic climate.
• This highlights that the EV industry remains immature and plagued by a series of issues that are yet to be fixed which are:
  • First, Cost which remains the biggest hindrance in my opinion.
  • EVs are more expensive to purchase compared to their petrol equivalents unless one is looking at some of the Chinese EVs.
  • At the moment it is unclear whether Chinese OEMs have achieved this through subsidies, manufacturing skills or subsidisation of sales in order to grow share.
  • Consequently, I am yet to be convinced that the Chinese have solved the EV cost problem.
  • Furthermore, the cost of petrol and diesel has fallen significantly while the price of electricity has increased meaningfully which also puts a dent in the EV proposition.
  • This has been further hit by both increases in the cost of living and the cost of financing which is an integral part of how almost all vehicles are purchased.
  • Interest rates do not appear to be coming down anytime soon despite what the Fed says and so this issue is likely to remain a drag on EV sales for a while yet.
  • Second, Range and charging where despite driving far fewer miles than the average vehicle’s range every day, most users are still consumed with worries about ending up stuck on the side of the road with a dead battery.
  • However, every now and then this problem is real.
  • This is regularly highlighted by the media when there is a public holiday, and users get into their EVs to drive a few hundred miles and get stuck in massive queues to charge or can’t find a charger.
  • The problem here is that the infrastructure is neither fully rolled-out nor robust enough to deal with peak demand.
  • Third, Technology immaturity, meaning that there are failures such as battery fires and that the technology is constantly changing.
  • Buyers of EVs are effectively being asked to pay a premium to be beta testers for immature technology.
  • This will appeal to well-heeled users who like to be at the cutting edge and who also have a second petrol-powered vehicle for long journeys.
  • It does not work for the mass market which is where EVs need to penetrate if they wish to keep growing fast and eventually replace petrol-powered vehicles.
• In the long term when these issues are resolved, it is not hard to make a case to buy an electrical vehicle.
• They are cheaper to run, last longer and can be much more fun to drive and so once these problems have been sorted out, there is scope for a rapid takeoff of EVs.
• The problem is now that we are now left with a chicken and egg situation meaning that there will be reluctance to fix the problems without high EV growth and vice versa.
• The current malaise will increase reluctance to invest on the promise of EV growth especially as the industry failed to deliver even when optimism was high.
• Hence, I see this being reduced to a large niche for a while and when the problems are eventually fixed, then it has a good chance of penetrating the mass market.
• This leaves Tesla in a tight spot because competition is rising, and the shares are still valued at a ludicrous $500bn which equates to 5x 2024 revenues and 59.1x 2024 PER.
• There is still plenty of downside in Tesla’s shares.