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Automaker turmoil could be huge renewable investment opportunity

How do you make a surefire investment in electric vehicles (EVs)? A clear answer is to invest in renewable energy as it is the “gasoline” of the future. Comments are bouncing around the US financial analyst community this week, forecasting gloom and doom for the automotive industry, over the transition to electric vehicles, and what that might mean to the global economy. What it means for the renewable electricity industry is far clearer.

The analysts asking if the car industry has suddenly reached its peak seem to believe that global economic growth is the “be all and end all” of the auto industry. Whereas profit is the motive and that may be even harder to find in the coming years. Growth has already pretty much flatlined years ago in the sense that for the past four years new registrations globally are roughly the same, up around 77 to 79 million each year. In the 90s it was roughly half that, but there have been many new markets opened up, China being the largest, and that is probably responsible for most of the uplift.

This is because the car industry competes head-on with previous year registrations and it has finally understood that and tried to improve the product it delivers. But more reliable cars eventually makes the second hand market even more vibrant than ever. Today cars routinely last for 15 years with little maintenance, and they did not do that even ten years ago, meaning than if there is any reason not to go for a brand new car, everyone can pick a second hand option that performs just as well. This may depress the market and the market for spares, but it does not slow car usage.

The number of cars on the road globally constantly goes up – and it seems to be a function of the global population and it may also be a function of the global number of kilometers of roads. Both are going up, but perhaps more slowly than they have in the past two decades. A higher number of registrations then is down to pricing, marketing and package and feature innovation. There are plenty of drivers out there looking for their next car.

Buying cars is a sensitive mix of what is tax efficient for corporations, what is affordable for citizens, and how the secondhand market is behaving and how it is policed, as well as the current government regulatory framework in each country. The car population density per mile of road laid is different from one country to another, and while some markets are flourishing, others are flatlining or worse. If all you are buying into in your country is more traffic jams, then you are less keen to become a new driver, but if the roads are open and appealing, you may want to enjoy the convenience of personalized travel.

One issue that is hard to factor in is air quality. This has stalled diesel sales in the aftermath of the VW emissions scandal in Europe for instance. But it’s more a concern about what governments actually do or promise on the back of such scandals. The UK put a massively higher year-one excise duty on new models of cars in 2017, and then on all new cars in 2018. This amounted to £2,000 per car for high CO2 producing cars, and they needed to adhere to freshly designed tests which are not easy to get around. This promptly accelerated the market for a year in 2017, and in particular everyone who has ever considered buying a diesel car, bought one before the new rules came in. Now everyone complains the market has crashed, but only by comparison with that bumper year, which was actually created by a new regulatory regime. Other similar moves are having the same effect across Europe.

Where EVs are concerned, it is clear that right now many people are considering their last ever petroleum powered car, which they know already will not have such a high resale value, which will eventually create an uncertain second hand market, which will push people towards new registrations or second hand EVs. Governments will eventually outlaw secondhand gas driven cars during that 15 year period of ownership. This could as much stimulate EV sales as halt petroleum-driven sales.

So, if someone takes a hard line, for instance to say “all vehicles after 2040 must be EVs”, this creates market momentum behind such a shift and the industry will anticipate it, as will prices. No-one will want gas driven inventory on their hands, and it will create bumper sales at some point. But cars no longer desirable or highly valued in one part of the world, can be shipped second hand to another part of the world, where they can promptly depress local car sales by their very existence.

All of this will happen in the coming disruption of the global car market. But it is unlikely that car sales have reached their peak. What may have happened is that this version of the car has reached peak, and that cars will go through several design changes – not just using an EV drivetrain, but also replaced by powered scooters and bikes, and made smaller and more efficient, and bought less for luxury and more for function.

That kind of transition is far easier for newer automakers that don’t have such legacy support burdens. Companies like Tesla, and the 50 or so EV makers from China, are starting from a better place than say General Motors, Ford or Honda. Not only does Tesla have a future vehicle vision that it holds with religious fervor, and which includes solar panels and home batteries, but it has no historical baggage. It may not be a particularly well run company (as we have said in the past), but few are – as they experience hypergrowth and have to put into place mechanisms for ensuring they meet targets and expectations, with little experience of knowing how bigger companies manage this.

Many of these pressures are beginning to show in the merger-mania that is ripping through conventional car makers, this week Tata’s Jaguar Land Rover cut a partnership R&D relationship over EVs with BMW, and Nissan and Renault are talking, while Renault has revealed it is interested in buying Fiat Chrysler.

When analysts in the US say they doubt the forecasts of Tesla, it’s because they seem to be pulled out of the air, and are largely unachievable. This does not mean that what the company actually achieves is not impressive. The truth is that Wall Street does not quite know how to invest in the car industry right now. Should it be chasing the new breed of EV ventures in China, or back massive mergers with traditional car makers, which may lead nowhere, or go with EV only makers from the US and elsewhere?

But investors can see, clear as day, how to invest in renewable energy, which will be part and parcel of the EV revolution. Investors can all chase pure EV manufacturers such as Tesla or those who have transitioned best into EVs from traditional car makers such as Nissan. Or they can stick with the grim, but predictable endgame for gas power cars. None of these is a surefire route to investing success, but renewable energy is – and its returns are increasing day by day.

Global car sales will be off 3% one analyst predicts – yes but what about profits? What about the EV/Gas mix, what about the luxury/functional mix? Those figures are more important than the 3% of people who are unsure of what to do about their cars right now and holding off on purchases.

One of the reasons for the car sales depression is the way China behaves. It used to be a great importer of cars, now it makes most of its own, and now sales have fallen off a cliff – down 16% in January, 14% before Christmas and 13% before that. The accelerating fall has been met with Chinese ideas on stimulus, but they are not yet in place. Government officials have talked about subsidies in the rural parts of china, where there are less cars – but even China has to put its trousers on one leg at a time, and has not yet reacted to falling car sales.

Is it perhaps because word of mouth is telling all Chinese buyers to wait, as  some 500 models of EVs have been registered in the country – a move which promises to create the mother of all price wars, out of which the successful companies (survivors) can then export to the rest of the world. It is the first time in many decades that companies like GM and Volkswagen have had to innovate at this speed, to survive in a disruptive Chinese car market. China’s BYD (Build Your Dreams) leading EV maker had been creating sales record after sales record, but even it had sales fall 32% in Q1 this year, because it had previously relied so much on Chinese subsidies.

Basically, this is the wild west of car sales once again, with few companies likely to survive, a bit like the 1920s were in the US, and new global leaders will emerge from the wreckage of the Chinese car market in a year or two, exporting the successful models. And if Donald Trump thinks he can prevent this by putting up a wall by saying the car makers are a security liability (as he has tried to with communications firm Huawei), or should have tariffs put on them (which the Chinese will then retaliate which will harm US exports) and anyway Chinese made EV car prices will still be way below US made prices), then he has another thing coming. The world outside of the US will suck up cheap EV designs, as they currently do with more expensive Tesla designs.

In Europe, there is of course the confusion that Brexit has wrought, with many manufacturers reporting that sales have fallen in the UK, but also reporting sales falls for all cars made in the UK and some falls because they are busy moving car production lines out of the UK. But little of that is permanent, and it simply confounds those who would like to forecast car numbers for the next ten years.

If you work in renewables, the best way of thinking about the new EV markets is that over 1.3 billion vehicles need replacing over the next 15 years, and they will all need recharging stations and grid improvements, but also several $trillions worth of electricity, which HAS to come from renewables. So the sooner the EV markets take shape, the clearer the future is for renewables. And that is the only thing that is clear about the future of car manufacturing, except that it will likely shift from being US controlled to being China controlled.

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