Testing Tony Seba’s EV Predictions 9 (And Then There Was Tesla)

Not bad! I’ve reached number nine in my series of posts on Electric Vehicles (EVs) and haven’t done a post yet concentrating on Tesla. There are two main reasons for this. First, so much has been written about Tesla, and so many opinions are publicly available on the web about Tesla, that I am not sure I can add much.

Second, this is a series of blog posts looking at the question of whether EV penetration can realistically get to 95% in 2030, which roughly equates to around 130 million vehicles. Even if Tesla becomes the most successful auto company ever–or even if it becomes the most successful auto company ever multiplied by a factor of two–it alone cannot get even close to that target of 130 million EV sales. Let us say that in 2030 Tesla has the combined market share that Volkswagen and Toyota have today (the top two in terms of global autos sales market share). That combined VW-Toyota percentage share of the market now would equate to Tesla selling about 30 million cars in 2030. Pretty bloody good (if it ever happens), but it will not get us even close to 130 million EVs. For that to happen we need the collective heft of the rest of the global auto players.

Nonetheless, in our S-curve analysis we started by looking out 5 years, since battery plant and auto lines need to be financed and designed now in order for cars to roll off out in sufficient quantity in 2023. So let’s recycle this chart again:

EVSalesto2023

 

In my post on China’s New Energy Vehicle (NEV) strategy, I surmised that it would be relatively easy for China to hit its target of having 5 million NEVs (made up almost entirely of EVs rather than fuel-cell vehicles) on the road by 2020. That would see Chinese consumers buying around two million EV vehicles that year. My next question is whether Tesla, as the current world’s largest seller of EVs, could supply a large chunk of the other 3.6 million EVs needed in 2020 to stay on Tony Seba’s S curve. My answer to that is “possibly”. Here’s how.

First, Tesla will have enough batteries. From the press release accompanying their January 2017 investor event relating to their factory in Nevada:

“Gigafactory 1 (GF1): GF1 is the world’s leading battery production facility, maintaining high efficiency and output while achieving the lowest capital investment per gigawatt hour (GWh) and the lowest production cost per kilowatt hour (kWh).

The factory will produce cells, battery packs, energy storage products and vehicle components. Phase 2 construction, currently underway, will support annualized cell production capacity of 35 GWh and battery pack production of 50 GWh. The cell capacity represents more than the 2013 total global production of lithium-ion battery cells of all other manufacturers combined and supports the production of about 500,000 cars.”

So in January 2017, battery plant capacity was already being put in place to fit out 500,000 EVs. By 2020, that number will be a lot higher.

Tesla delivered 101,312 Model S and Model X  vehicles in 2017, and Elon Musk has stated his intention to produce 10,000 of the mid-market Model 3 a week by the end of 2018. The press has been rife with stories over how Tesla has been missing its production targets in 2018 for the Model 3, but in April Elon Musk tweeted that production was now exceeding 2,000 per week, which is on top of another 2,000 Model S and Model X vehicles. He then went on to say that they should be producing 5,000 a week of the Model 3 by end June with a stretch goal of 6,000. If we take the 5,000 number add 2,000 Model S plus Model X’s and multiply by 50 we get 350,000 EV sales annualised.

So far, this entire series of blog posts have been dedicated to the supply side; in short, the question of whether the auto manufacturers have put, or will put, enough plant in place to physically build the necessary number of EVs for us to move up Tony Seba’s S curve of EV market penetration versus internal combustion engine (ICE) vehicles. I have said nothing about whether consumers will want to buy a ton of EV cars. In Tesla’s case, however, the demand side is already in the bag for a couple of years since the company has 450,000 reservation deposits for the Model 3 as reported in Tesla’s Q1 2018 results update letter released on 2 May 2018. This really is a case of “build it and they will come”. Moreover, for those who don’t believe that EVs can go mass market look at this chart contained in the same release by Tesla:

MidSizeSedanMarketShare.

Given Tesla will be on an annualised run rate of 350,000 cars by end of June, it looks entirely feasible that this figure will improve to 500,000 by year-end. Then, with the gigafactory in Nevada being scaled up again and more new models to be released over the next two years, it looks likely that Tesla alone could do a third of the 3.6 million vehicle sales needed outside of China to stay on Tony Seba’s S curve through to 2020.

The situation beyond 2020 will be the subject of a separate post, but I want to finish this post by introducing a video by Jack Rickard, an electric car expert, explaining why he thinks Tesla will continue to go from strength to strength. Rickard looks like a Hollywood caricature of an elderly battery nerd, and I will come back to one of his videos where he deconstructs a Tesla battery in a future post.

What I like about Rickard, however, is that he obviously never picked up the book “How to Give a Ted Talk” or, for that matter, any self-help book on presentation style or image branding at an airport book stand. From looking at some of his videos, I have drawn up a Jack Rickard guide to giving a presentation:

  1. Never go to the gym in an attempt to stay in shape: life is too short for such a colossal waste of time.
  2. Dress like you don’t give a shit, because you don’t give a shit.
  3. On the day of your presentation, don’t change your grooming routine since you don’t have one.
  4. When deciding on the length of your presentation, first think of the likely average attention span of your audience. Second, quadruple that number and add a bit more.
  5. Go off at random tangents at great length.
  6. Don’t talk to the camera. Look down a lot and mumble.
  7. Write down your presentation on multiple pieces of paper, then laboriously talk to each page.
  8. Fancy infographics and the like are for morons.
  9. You know your IQ is a lot higher than the vast majority of your audience: communicate that fact to them. Don’t patronise them by letting them think they are cleverer than they really are.
  10. Realise that you can get away with one through nine only because you really, really know your subject.

So here is Jack Rickard spending one hour 50 minutes explaining why Tesla is revolutionising the auto industry, why its competitors are unable to respond and why Tesla’s stock is a screaming “buy”. Enjoy:

 

 

For those of you coming to this series of posts midway, here is a link to the beginning of the series.

Testing Tony Seba’s EV Predictions 8 (The Invisible Chinese Auto Maker Disruptors)

When following the EV story in the Western press, you would be forgiven for thinking that it is solely a story about Tesla. Having such a flamboyant and charismatic head in Elon Musk obviously helps the narrative.  Another reason for the neglect of the Chinese EV market is that it is just bloody difficult to discern what is going on there.

The ownership structure of Chinese automakers is complicated, with public-private partnerships, joint ventures with foreign makers, and cross- and subsidiary-holdings galore. Moreover, new entrants into the EV market are announced almost every day, fresh alliances are formed, units are spun out or merged and foreign parters are brought in or dropped.

The fragmented and somewhat chaotic nature of the Chinese auto-manufacturing marketplace was viewed as a disadvantage in the Harvard-Kennedy study I referred to in a previous post. Yet out of this chaos has grown increasing Chinese market share: 10 of the top 25 best-selling EV models globally in Q1 of 2018 were Chinese brands (Chart from EVvolumes.com).

GlobalEVDeliveries

The situation contrasts markedly with what is going on in the overall Chinese market where ICE vehicles still dominate. There, Volkswagen sits supreme at the top, with only 1 Chinese maker in the top five. I’ve marked in red those Chinese producers who have EV models featuring in the table above (note Zhi Dou is a subsidiary of Geely).

Chinese1-25

 

Chinese25-50

Moreover, there appears to be a distinct difference in strategy between foreign and Chinese makers with respect to EVs. The few foreign firms that have invested heavily in EVs (Tesla excepted) have just promoted one or two EV models to champion in this space: think GM’s Chevrolet Volt and Bolt, Nissan’s Leaf, BMW’s i3 and Mitsubishi’s Outlander (although as I posted on here, over the last six months that has changed radically).

Many Chinese makers, by contrast, have been setting up or spinning out dedicated EV subsidies whose aim is to launch a range of models and who are less worried about cannibalising successful and profitable existing ICE lines. The Chinese makers also have the advantage of access to risk capital through multiple public-private channels under China’s unique form of Wild West capitalism. So the Chinese majors a) have large equity stakes from state-owned enterprises, b) are able to borrow from state-owned banks, and c) are also accessing global capital markets through listing on stock exchanges in China and Hong Kong.

 

AutoMakerMarketCap

Let’s dig a little deeper into those Chinese names who have had initial success in the Chinese EV marketplace, and some of the larger auto makers who are yet to show up in the EV rankings. We should note, however, that at this early stage of the S curve, rankings are very fluid and names can suddenly appear at the top of the sales charts from out of nowhere, or, for that matter, drop off.

Geely

In the US, most observers would nominate Elon Musk of Tesla, Jeff Bezos of Amazon, Mark Zuckerberg of Facebook and Larry Page and Sergey Brin of Google as visionary leaders. Jack Ma of Alibaba has also made it into the Western consciousness but not so Li Shufu of Geely. A hybrid oligarch entrepreneur, Li has personally bought a 9% stake in Daimler and a 6% stake in Volvo Trucks. That comes after Geely (Li is chairman) bought Volvo cars outright in 2010. More recently, Geely took a controlling stake in supercar maker Lotus in January 2018.

With the announcement that Volvo will only sell EVs or hybrids from 2019, Geely has a dedicated EV brand at the top of the market and also one at the bottom of the market with Zhi Dou. It is also rapidly electrifying its mid-market offerings that it sells in its own name, with a major announcement of a new plug-in version of its flagship Bao Rui Sedan at the Beijing Motor Show in April 2018. The company’s intention is clear: it wants to extend the Volvo EV commitment across all its offerings at breakneck speed as spelled out by its CEO and President An Conghui:

“China will ultimately become the global centre of a new energy revolution that will reinvent the car as we know it, hence making its automotive industry stronger and more resilient. As a leading Chinese automotive brand, we’ve realised that competition in this new era will come in the form of a technology war and that we must lead through technological innovation to become the vanguard of this new age.”

Changan Motors

While none of Changan Motors models are present in the top 25 table above, the company already is marketing a range of EVs in the SUV, mid-market sedan and compact car segments of the market.

The company also launched its “Shangri-La Plan” in September 2017, which includes a $15 billion investment in EVs, and 33 EV models to be added to its existing line-up of 4 EV models,by 2025; at that time, all its models will be offered as EVs. An interesting part of the plan was the announcement of strategic partnerships with the German parts maker Bosch, the dominant Chinese search engine Baidu, the ride-hailing company Didi Chuxing and the lithium-ion battery producer CALT (the largest lithium-ion battery maker in the world).

Again, I am not sure how many observers of the EV market realise the type of technology and capital Changan is accessing through these alliances. Didi is the largest ride-sharing company in the world, far outpacing Uber and Lift. It has a market capitalisation of $50 billion, larger than Tesla. Baidu is the largest search engine the world after Google and one of the leading companies in artificial intelligence (AI). Its market cap at $75 billion is larger then any car maker in the world except for Toyota and Volkswagen.

Not surprisingly, Changan Motors wants to lever these relationships with Didi and Baidu so as to become a leader in autonomous driving technology.

SAIC (Shanghai Automotive Industry Corporation ) Motor

As is typical in the Chinese auto industry, the state-owned (and thus deep-pocketed) SAIC pops up in my top 50 sales ranking of the Chinese auto market in a number of different places. In seventh place is its Baojun marque, which is a joint venture between SAIC and General Motors at the budget end of the market competing against Geely and Chery. It does have EV aspirations and a dedicated EV plant was established in 2017.

For more high-end vehicles, however, we need to turn to SAIC Roewe, SAIC’s luxury marque. In my last post, I quoted Ken Brinsden of Australian lithium-mining company Pilbara Minerals. Ken said this at a presentation to the Melbourne Mining Club:

“For those of you who have a picture in your mind that the Chinese cannot build a quality outcome, I’m telling you they are already there.”

If you don’t believe him then check out SAIC Roewe’s EV SUV the eRX5 and their i6 saloon,  which feature in the Chinese sales table above at ranks 16 and 18. Even more impressive is that SAIC have teamed up with Jack Ma of Alibaba to incorporate every aspect of digital technology into future car production (quote from here):

“In July 2016, Alibaba Group and SAIC (Shanghai Automotive Industry Corporation), one of the largest auto manufacturers in China, teamed up to launch the Roewe RX5, a brand new SUV that incorporated Alibaba’s ALIOS operating system and that was dubbed “The world’s first mass-produced internet car.” Just one year later, in July 2017, the Roewe RX5 was already the 6th best-selling SUV in its category in China.

And, most importantly, when asked about their buying decision 75% of customers said they purchased the RX5 because of its connectivity. In other words, what they valued most of all was not the car’s design or its comfort, its engine performance, or its safety standards, but the fact that it gave them the connected mobility that would integrate them seamlessly with the rest of Alibaba’s ecosystem, where smartphones, shopping sites, payment systems, video services, IOT-enabled home appliances, wearable devices, and – yes – cars, are all linked together as part of one comprehensive digital immersion experience.”

Dongfeng Motor Corporation 

Another state-owned enterprise like SAIC, Dongfeng has been somewhat of a laggard in the EV space. Currently, it main avenue to incorporating more EVs into its line-up is through its joint venture with Nissan, the Dongfeng-Renault Automotive Company (DRAC). Yet don’t count Dongfeng out due to its access to huge amounts of capital.

FAW Group

The FAW Group is another state-owned enterprise; along with Changan Motors, SAIC and Dongfeng, FAW is part of  what are called the ‘Big Four’ in Chinese automotive circles. In FAW’s case, its joint venture with Volkswagen Group has made it one of the largest players in the Chinese automotive market.

In December 2017, recognising that the Chinese automotive market was entering a new era centred around EVs, FAW entered an agreement with two other of the Big 4 state-supported enterprise Changan and Dongfeng to pool resources. The agreement had the following goals:

  • Establishment  of a national innovation centre for intelligent connected vehicles.
  • Creation of an advanced technology innovation centre that will develop in the fields of new energy, internet connectivity and lightweight materials.
  • Joint investment and development of core technologies and shared platforms.

I would expect a number of well-financed new EV initiatives to come out of this alliance.

Great Wall Motor Company 

In number eight in the overall (ICE plus EV) sales chart is Haval, which is a marque of Great Wall Motor Company specialising in SUVs. In my last post, I mentioned that Great Wall has also set up an EV specialist operation under the Wey marque.

A hiring spree for top European auto talent resulted in  Jens Streingrabber, who was responsible for SUV development at Audi, coming to the group as CEO for the Wey brand. He was later joined by the chief designer from BMW. Great Wall’s aspirations are evidenced by initiatives to incorporate Level 5 autonomous driving capability and contactless charging in future Wey models.

Beijing Automotive Holdings (BAIC)

BAIC is 60% owned by the Chinese government and 12% by Daimler of Germany. In January, 2018, Beijing Electric Vehicle Company (BJEV) was spun out of BAIC as a pure play EV company and currently boasts the top-selling EV in China, the BJEV EC180/200.

In March 2018, BAIC opened a brand new dedicated EV factory in Changzhou, Jiangsu province, which at full production will be capable of making 300,000 vehicles per year. BAIC has promised to end the sale of all fossil fuel cars by 2025.

The parent company BAIC, together with other state-entities, own a majority share of BAIC Motors, which is an auto company listed in Hong Kong (the listed piece of BAIC whose market cap I have included in the chart above; but don’t confuse it with the valuation of the wider group). The principal business of BAIC Motors are joint venture operations with Daimler (Beijing Benz brand) and Hyundai (Beijing Hyundai brand), as well as its own-brand vehicles (Beijing Brand).

BYD (Build Your Dreams)

Considered the closest Chinese equivalent to Tesla, BYD is a pure EV player, built out of a battery business rather than an ICE business. Its model the Song ranked fourth by sales in China in the first quarter of 2018. Warren Buffet and Charlie Munger’s investment  in BYD way back in 2009, so the company has had some publicity overseas. Listen to Charlie Munger talk about BYD’s CEO Wang Chuanfu:

BYD remains just as much an electronics company as an automotive company as can be see from its latest annual report:

BYDRevenueBreakdown

Wang Chuanfu, visionary CEO, started the company as a specialist in lithium-ion batteries for cell phones and has expanded from there. A major difference between BYD and Tesla, however, is that BYD’s core competence has been in lithium-iron phosphate battery chemistry. Such battery cells are very stable but lack the specific energy (energy stored per unit of volume) of batteries (like Tesla’s) that make use of cobalt compounds. This is an important topic, but I will return to it as a post in its own right down the road.

The company also has a strategic alliance with Daimler, and in September 2017 Daimler announced a large expansion of both battery production and EV sales in China working with BYD.

JAC (Anhui Jianghuai Automobile) Motors

Another state-owned company though with a stock market listing. JAC also has an alliance with Volkswagen (along with FAW and SAIC) and in 2017 they announced a joint project to build 100,000 pure EVs per year. The JV will see $12 billion invested over the next 7 years through to 2025, with the aim of producing 40 EV models locally.

To date, its EV offerings in China, such as the iEV6e have been at the compact end of the spectrum like those of Geely and Chery.

Chery Motors 

Chery is an independent non-state company like Geely.  It is the only Chinese company that, to date, has had some success marketing its products abroad, with over one million units exported.

Simultaneous with the Frankfurt motor show, Chery announced its intention to start selling all-electric models in Europe in 2017. While the Chery eQ EV is a SMART-type city compact car, the new offerings being promoted and unveiled at recent motor shows are are at higher sticker price tags including the compact SUV Exeed TX. They incorporate high-end electronic systems similar to Tesla, such as a 10-inch touch screen.

Jiangling Motors (JMC)

In the past, JMC was mostly associated with a joint venture with Isuzu of Japan, selling compact cars. More recently, however, it has been expanding its EV offerings in larger model sizes. In addition, Ford has been negotiating with JMC to set up an EV operation in China aimed at producing commercial vehicles. This is in addition to Ford’s EV joint venture with another Chinese auto maker Anhui Zotye.

I could go on with this blog post since I have yet to cover the EV aspirations of a whole host of other Chinese EV makers, both incumbents and brand new entrants. The above, however, gives you a sense of the fever pitch activity going on in the Chinese market. Out of this rather complex mess of car-maker acronyms and complicated holding structures, I will, nonetheless, pull out some key points:

  • The Chinese market hosts a vibrant ecosystem of disruptors who wish to leapfrog western dominance of auto markets through jumping directly into high spec advanced EVs. These include BYD, Changan Motors, SAIC Roewe, BJEVs and Wey.
  • Like the US, China has access to leading edge digital technologies like AI through its huge tech firms such as Baidu and Alibaba. These deep-pocketed tech firms are forming alliances across the board with auto makers and in the process changing cars into consumer electronics items as much as a means of transport.
  • You shouldn’t count out the large laggards like FAW and Dongfeng. They have what a company like Chrysler doesn’t: massive state support. The support consists of a) vast pools of capital composed of both state-originated equity and loans and b) the means to transfer in technology through the state’s control of overseas makers access to the Chinese market (in effect limiting access to joint ventures only).
  • Lastly, take a looks at this video (which has a rather annoying computer-generated interpreting system from Chinese into English, but bear with it) You will get to see BYD’s 4 wheel drive EV the SEED, with a 600km range on one charge and an acceleration of zero to 100 km in 3.9 seconds. Tesla: eat your heart out.

 

 

For those of you coming to this series of posts midway, here is a link to the beginning of the series.

Testing Tony Seba’s EV Predictions 7 (Is China Force Feeding Its Citizens EVs?)

Let’s have a recap of where we need to be on Tony Seba’s S curve in 5 years’ time. For starters, out comes this chart again:

EVSalesto2023

From my last post, we saw that China’s State Council is targeting 2 million EV sales by 2020, and through the use of a series of central-, provincial- and city-government level carrots and sticks should get there with ease.

On Tony’s S curve, we need to register 5.6 million global EV sales to keep on track for 130 million sales by 2030; that is the logic of an S curve. This is where we stood in 2017:

GlobalNewEnergyVehicleSales2017SCMP

So if China is doing 2 million EVs in 2020, we need to find 3.6 million EV sales from the rest of the world. Given we are estimated to hit 800,000 EV sales outside China in 2018, a jump to 3.6 million in 2020 is a more than three fold increase.

But we should remember that we are at the very foothills of the S curve. If we go out a bit further to 2023, we need to see global EV sales of 22.2 million units to keep Tony’s dream alive. Now while the Chinese state has gone full Tony, we have limited evidence that it’s citizens are all completely on board with the programme.

Currently, there is a high degree of force feeding of EVs going on via state-owned enterprise procurement, the EV subsidy system and city level non-EV car registration caps. Moreover, next year the “New Energy Vehicle (NEV)” 10% incentive scheme will, in effect, force all auto makers down the EV route.

Indeed, China, as an authoritarian state, could just ban internal combustion engine (ICE) vehicle sales just as many other countries have promised to do. The following table from Wikipedia shows the expressed intentions of a swathe of states and cities to ban ICE vehicles.

ListofCountriesBanningFossilFuels

Such actions, however, will not in and of themselves get us to an EV sales penetration rate of 95% by 2030, since there are a host of countries, most obviously the United States, whose political systems are not very good at pushing their citizens to do things they don’t want to do.

Nonetheless, if the Chinese consumer chooses voluntarily to buy an EV over an ICE car– rather than be forced to buy and EV over an ICE car–then this will be a far better catalyst for the wholesale global adoption of EVs. So the question then is whether Chinese auto makers can make cars that Chinese consumers want without subsidies, NEV credits, city ICE bans or whatever.

For me, the wake-up call that Chinese manufacturers were actually far further along the road toward making attractive and desirable EVs came to me, strangely, while watching a presentation by the CEO of the lithium mining company Pilbara Minerals (ticker PLS listed on the Australian Stock Exchange). in April 2018, Pilbara Minerals CEO Ken Brinsden got a coveted spot to present at the prestigious (in resource circles) Melbourne Mining Club.

The beginning of the video consists of Ken being very smug about the fact that Aussie miners can now rebrand themselves as eco warriors rather than rapists of the planet. From 11:45 into the presentation, however, Ken switches to talking about China. Given that he has been negotiating and partnering with the Chinese battery material makers for some years now, he has a unique insight into what is going on there.

The presentation slides are available here:

http://www.melbourneminingclub.com/events/luncheons/ken-brinsden-md-chief-executive-officer-pilbara-minerals/

His general overview of how fast China is moving in EVs is something I am familiar with, but 21 minutes into the presentation I got rather a shock when Ken started to talk about a particular car: the luxury SUV called the Wey made by Great Wall Motors. Now I had vaguely heard of Great Wall, but I was completely unaware that a domestic Chinese manufacturer was capable of making a prestigious EV SUV that in time will compete directly with Tesla’s Model X. In Ken’s words:

“For those of you who have a picture in your mind that the Chinese cannot build a quality outcome, I’m telling you they are already there. And as a result, they are in a very short period of time going to become the dominant global car supplier because they have got the technology right, they’ve locked up the lithium-ion supply chain, and especially the raw materials, and they are also producing the quality product.”

I would echo Ken’s remarks about looking down on the ability of any developing Asian nation to go up the value chain. I am old enough to remember as a child Japanese cars being termed “Jap crap”, just as the UK car industry was going into terminal decline. Then in the 1980s and 1990s while working in Japan I took countless meetings with senior Japanese executives who had a similar attitude towards Korean products. Panasonic telling me that Samsung products were crap, Toyota same with Hyundai, and then Nippon Steel with POSCO. Then in the 2000s, I had a ringside seat as China’s Baoshan Iron and Steel made its meteoric rise both in terms of tonnes of steel produced and the quality of the products.

The brand CEO for the Wey is Jens Streingrabber, who was responsible for SUV development at Audi, and the chief designer of the Wey hales from BMW. So build quality is something Great Wall understands. True, the first low-end Great Wall cars that have arrived upon European shores have got poor reviews (for example see here), but I would not take that as indicative of where they will remain on the quality ladder. Great Wall’s aspirations are evidenced by initiatives to incorporate Level 5 autonomous driving capability and contactless charging in future Wey models. You can see a pure high-end Wey X EV at the April 2018 Beijing motor show here.

True, the Wey X on display at Beijing was a concept car, but full production versions of EV versions of Wey SUVs and Great Wall’s new pure EV brand ORA are on their way. And these are just part of a wave of EV disruption that is set to come out of China. I’ll spend one more post looking at the Chinese EV auto maker ecosystem across all the major makers,  and the potential for Chinese EV makers to act as the mega disruptors, then it will be time to talk about Tesla.

For those of you coming to this series of posts midway, here is a link to the beginning of the series.

 

Testing Tony Seba’s EV Predictions 6 (China Plays Leapfrog)

In 2012, China’s State Council (China’s central government policy-making body) issued a plan with the snappy title “Energy-saving and new energy vehicles industry development planning (2012- 2020)”. It reiterated the target of having 5 million new energy vehicles (NEVs, which includes fuel cells and EVs) on China’s roads by 2020, but backed the mission statement up with a swathe of incentives. The table below is taken from a report by the International Council on Clean Transportation (ICCT).

 

ChinaEVSubsidies

 

So let’s annotate the above table a bit. BEV stands for battery electric vehicles, PHEV for plus-in hybrid electric vehicles. BD refers to the minimum battery-energy density measured in watt/hours per kilogram and ER relates to the minimum electric range of a vehicle in kilometres. At the current exchange rate of roughly 6.4 Chinese yuan to a US dollar, a subsidy of CNY10,000 is approximately US$1,500. So if a maker sells an EV with a minimum range of between 100k and 150k, the Chinese government will give that maker a subsidy of $3,900. Note that unlike many other such subsidy schemes worldwide, the subsidy goes to the manufacturer not the end purchaser.

Another point to note is that since the subsidy scheme was introduced, the minimum BD and ER criteria have been gradually raised, so forcing auto makers to constantly upgrade their EV product if they want to remain beneficiaries of the subsidies.

Two years after the original plan was unveiled, the Harvard Kennedy School of Government came out with a very damning report on China’s EV strategy. If you have ever sat down in a bar or pub next to a petrol head who believes that the height of sexual satisfaction is watching an old episode of Top Gear with Jeremy Clarkson you would get the gist:

  • Cars too expensive as battery costs too high
  • Range anxiety will kill demand
  • Can’t drive cross country as no charging infrastructure
  • If EVs succeed, utilities will need to burn more dirty coal to generate electricity so worsening air quality and CO2 emissions

The report also pointed out two China specific issues:

  • China car industry far too fragmented to support EV push
  • Trade and direct investment barriers to foreign entrants prevents major global auto makers (with better technology) supporting the plan

The Harvard report basically poured a bucket of cold sick over the “Energy-saving and new energy vehicles industry development planning (2012- 2020)” initiative:

“In mid-2013, China had only about 40,000 EVs on the road, more than 80% of which were public fleet vehicles (e.g. taxis and buses). China EV incentives face the same challenges as the rest of the world: high battery costs, long charging times, and no obvious business model for charging infrastructure. But domestic barriers loom even larger. The country has a weak domestic auto sector, counterproductive trade barrier, a balkanized subsidy and infrastructure program, and uncertainty over standards and technology.”

The author was also happy to take a pop at the New York Times journalist Thomas Friedman along the way (since Friedman has got the Tony Seba religion):

“The idea that electric vehicles for private and public use could allow China to leapfrog the internal combustion engine (ICE) and build a clean, high-tech transpiration system was a compelling vision. In 2010, New York Times columnist Thomas Friedman wrote: “It will be a moon shot for them, a hobby for us, and you’ll import your new electric car from China just like you’re now importing your oil from Saudi Arabia.” Despite Friedman’s forecast, China remains a long way from meeting its ambitious goals.”

Time to repeat a chart from yesterday’s post:
GlobalNewEnergyVehicleSales2017SCMP

So China has gone from 44,000 EVs on the road in mid 2013 to an estimate of around 2.5 million at the end of 2018. To reach 5 million EV sales at the end of 2020 would require sales growth of less than 50% in 2019 and 2020. It really doesn’t look that difficult. Against the backdrop of these numbers, the Harvard-Kennedy study conclusion looks, well, embarrassing:

“In addition to the unexpectedly difficult infrastructure challenge, it seems the Chinese government was over-optimistic about the technological capacity of China’s domestic automakers. It overestimated the amount of technology transfer that foreign firms had imparted on their domestic JV partners. An absence of data in the Chinese policy making process helps explain why basic driver in the Chinese vehicle market, as well as more tangible issues such as battery costs, were poorly understood.”

Well they must have done something right to have already become the most vibrant and dominant EV market in the world.

On top of this, the Chinese state has recently added a very nasty stick to its tasty subsidy carrot in the form of a zero-emission vehicle credit system for auto manufacturers. The details of this scheme can be found here. It’s certainly complicated, but basically the idea is that every auto maker in China must sell a certain percentage of its vehicles that meet a range of EV standards. Auto makers get credits for those vehicles they sell that meet the necessary EV standards. But if they don’t get enough “New Energy Vehicle” (NEV) credits they can then buy them in from other companies who are more fully committed to the EV programme (and as such have surplus credits).

Imagine a race where all the contestants are forced to run with weights. Subsidies allow the EV contestants to run with lighter weights. Conversely, an NEV credit system means that that non EV internal combustion engine contestants have additional weights attached to their legs.

Moreover, the scheme is quite clever in that it forces Chinese ICE reliant makers to, in effect, subsidise and support aggressive EV makers.

Such positive and negative incentives have consequences; and the Chinese auto makers have responded accordingly. That is the topic of my next post.

 For those of you coming to this series of posts midway, here is a link to the beginning of the series.

Testing Tony Seba’s EV Predictions 5 (The View from China)

In my last post we looked at the Big 6 automakers and their somewhat panicky strategy decisions over the last 6 months to fast forward EV capital expenditure and model  roll-outs.

Teasing out the causation behind this step change in attitudes to EVs is not easy. Could it be the FoMO (fear of missing out)  response to Volkswagen’s decision to go full EV via its “Roadmap E” plan (which sees VW’s entire model line-up available as EVs by 2030)? And was VW’s action, in turn, founded on the realisation that Tesla was moving down the food chain into the mass-market saloon segment with the Model 3? Personally, I don’t think either factor is the key catalyst in causing the attitudinal shift. For me it is China. And what is going in China is posing an existential threat to all the Western based auto makers. So what’s so special about China? Well:

  • China is the largest auto market in the world, 60% bigger than the US at number 2.
  • The Chinese auto market is growing faster than any developed nation’s auto market.
  • The Chinese government has made the shift to EVs a national strategic priority.
  • China’s EV market is the largest in the world, more than the rest of the world put together.
  • The Chinese EV market is dominated by local producers; Tesla, Nissan, VW and GM are nowhere to be seen.
  • China has a suite of new entrant disruptors with no ICE legacy business to protect.
  • The large incumbents with strong ICE sales are pivoting toward EVs at breakneck speed helped by access to almost unlimited pools of financial capital under China’s public-private system of capital allocation.

A couple of charts to illustrate these point (Source: here):

GlobalCarandLCVSales

And here:

GlobalNewEnergyVehicleSales2017SCMP

Then there is the fact that China has become the world’s battery behemoth. Batteries will get a number of posts dedicated to them in due course, but until then here is a taste of China’s positioning in the battery ecosystem:

  • China is buying up battery metal resources across the globe (or locking major battery metal miners into long-term supply contracts).
  • China dominates the production of electrode powders that are fabricated into cathode and anode components.
  • China has a web of component manufacturers covering cathode, anode, separator and electrolyte production.
  • China has the largest battery cell maker in the world, CATL, plus another 4 in the top 10: BYD, Guoxuan High-Tech, Tianjin Lishen and Optimum Battery.
  • CATL is also the world’s largest producer of lithium-ion battery modules, with BYD and Lishen also in the top 10.

Critically, the strength and depth of the Chinese battery food chain has resulted in every major non-Chinese battery overseas manufacturer getting involved in battery fabrication operations in China as well. This includes Tesla, LG Chem, Samsung and Panasonic.

The slides below are from the an investor presentation by the Australian lithium miner Kidman Resources. The aggregate numbers show battery production growing 6-fold between 2016 and 2020, and China dominates the market:

ChinaBatterySector

 

ChinaIsLeadingtheCharge

If Tony Seba is right and internal combustion engine fabrication will be an irrelevance by 2030, it will be a story made in China. Next post the Chinese government’s EV strategy and the Chinese auto makers’ response.

For those of you coming to this series of posts midway, here is a link to the beginning of the series.

 

 

Testing Tony Seba’s EV Predictions 4 (FoMO with the Big 6)

Let’s start with a chart from my last post. I’ve relabelled it to read ‘sales capacity’ adds rather than ‘production capacity’ adds just because we can then tack the time series on to the existing EV sales numbers we have for the last few years as reported by EVvolumes.com. In reality, there is a lag between leaving the factory and delivery to the customer, but given this is less than a year, I think it can be safely ignored.

 

EVSalesCapacityAdds

 

In the chart below I add a bit of texture so you can see some numbers (rounded to the nearest 100k) for total sales and sales additions both historically and projected into the future based upon my Tony Seba central scenario S curve:

EVSalesto2023

I’ve gone only as far as 2023 since we should be able to see evidence of action being taken now in order to obtain outcomes then.

To give you a sense of the development process, below is a fascinating presentation by Alex Patterson of Nissan showing you how to get from sketch to production for a new version of the Qashqai. What jumps out at me from this video is that the whole complex process only took three and a half years!

Now let’s do some bottom-up work. I’m going to do this by looking at the EV strategic intentions with respect to two main categories of auto maker:

  • The major motor manufacturers (VW, GM, Toyota, Hyundai, etc)
  • The disruptors (Tesla, BYD, SAIC, Geely, etc)

The Major Motor Manufacturers

A good starting point to this analysis is to take a look at the latest global market share of auto sales by maker to identify the big guys. The International Organisation of Motor Vehicle Manufacturers (OICA) publishes just such data, albeit with a lag. The latest release is for market share as of 2016 as can be seen here (2017 numbers are not out yet):

GlobalAutoSalesMarketShare

And because we are also interested in how many cars were actually sold, here is the same chart looking at those unit numbers.

GlobalAutoSalesUnits

So from my top charts, we were looking for 14 million EV sales in 2023 for Tony’s S curve, which also translates into 5 million units in additional capacity that year. Those numbers compare with Big 6 sales of between 5 and 10 million units per annum.

Next, let’s look at the declared intentions of the top six global auto manufacturers.

Toyota 

Toyota has been sparring with Volkswagen for the title as world’s number one motor manufacturer for the past few years. When it comes to sustainability, it is well know for its investment in hybrid technology via the Prius and also for pioneering hydrogen fuel cells through the Mirai, but the company has been a laggard when it comes to pure battery electric vehicles (BEVs). Indeed, the company previously pushed the benefits of hybrids far more than pure EVs.

On 18 December 2018, however, the company announced a dramatic change of direction  (press release here) when it stated that it was targeting 5.5 million EV sales by 2030, of which 1 million would be pure BEVs (not hybrids).

The shift away from ICE to EVs was made stark by this statement:

“Additionally, by around 2025, every model in the Toyota and Lexus line-up around the world will be available either as a dedicated electrified model or have an electrified option. This will be achieved by increasing the number of dedicated HEV, PHEV, BEV, and FCEV models and by generalizing the availability of HEV, PHEV and/or BEV options to all its models.

As a result, the number of models developed without an electrified version will be zero.”

And the R&D commitment to battery technology was unequivocal:

“Batteries are a core technology of electrified vehicles and generally present limitations relating to energy density, weight/packaging, and cost. Toyota has been actively developing next-generation solid-state batteries and aims to commercialize the technology by the early 2020s. In addition, Toyota and Panasonic will start a feasibility study on a joint automotive prismatic battery business in order to achieve the best automotive prismatic battery in the industry and to ultimately contribute to the popularization of Toyota’s and other automakers’ electrified vehicles.”

The commitments by Toyota don’t get us anywhere close to Tony Seba’s 95% EV penetration target in 2030, nor do they accelerate us up the S curve near term. But the central core of Seba’s analysis is that incumbents find it exceedingly difficult to counter disruptive technology since they are loath to junk past sunk costs in the old technology (in Toyota’s case also a bridge technology in hybrids). Indeed, every single one of Tony’s presentations has Kodak’s death at the hands of digital photography at the front of the slide deck pushing this point.

In this light, Toyota’s press release can perhaps be seen as reactive rather than proactive. And while Toyota has admitted that there exists a threat from pure EV, their response is measured when compared with arch-rival Volkswagen.

Volkswagen

Wind back two months from Toyota’s press release and you come to Volkswagen’s unveiling of “Roadmap E” on 17 September 2017 (press release here). It leads off with this:

“The Volkswagen Group is launching the most comprehensive electrification initiative in the global automotive industry with its “Roadmap E”: Volkswagen will have electrified its entire model portfolio by 2030 at the latest. This means that, by then, there will be at least one electrified version of each of the 300 or so Group models across all brands and markets.”

And this was written by Matthias Muller, Chairman of the VW Board (not by Tony Seba):

“The transformation in our industry is unstoppable.”

Unlike with Toyota, we have a nice big solid number to stick on Tony’s S curve:

“The Company estimates that around one in four new Group vehicles – up to three million units a year depending on how the market develops – could already be purely battery-powered in 2025.”

In my former industry finance it was always a good idea to follow the money to find incipient trends. In this regard, VW’s press release gives us a lot of money to follow:

  • $20 billion in direct investments in industrialisation of e-mobility
  • $50 billion of battery procurement tenders
  • Setting up of in-house battery production lines
  • Gearing up for next generation solid state batteries

It seems VW has decided to go ‘all-in’ with the EV game. Is this an incumbent showing  enough flexibility to survive? We shall see.

Hyundai

Like Honda and Toyota, Hyundai (and it’s subsidiary Kia Motors) has been somewhat lagging on the electrification of its line-up due to an ongoing commitment to hydrogen fuel cell vehicles. Responding to the aggressive plans announced by Toyota and VW, however, Hyundai announced a $22 billion investment in electric cars in January 2018 and that a new line-up of 31 models by 2020 and 38 models by 2025 . There doesn’t appear to be a specific press release related to their “Clean Mobility” strategy plan, but you can find details in one of Hyundai’s investor presentations here.

No EV sales targets have been announced as of this time.

General Motors

The three emblems of the rebirth of the EV have been Tesla’s Model S, the Nissan Leaf and G.M.’s Chevrolet Volt. Yet until October 2nd, 2017, G.M.’s commitment to the EV space appeared half-hearted due to its meagre model line-up. That all changed with this press release.

“General Motors announced today how it is executing on a major element of its vision of a world with zero crashes, zero emissions and zero congestion, recently announced by GM Chairman and CEO Mary Barra.

“General Motors believes in an all-electric future,” said Mark Reuss, General Motors executive vice president of Product Development, Purchasing and Supply Chain. “Although that future won’t happen overnight, GM is committed to driving increased usage and acceptance of electric vehicles through no-compromise solutions that meet our customers’ needs.”

In the next 18 months, GM will introduce two new all-electric vehicles based off learnings from the Chevrolet Bolt EV. They will be the first of at least 20 new all-electric vehicles that will launch by 2023.”

Like VW, GM appears to have got the EV religion.

 Ford

In May 2017 Ford got a new CEO Jim Hackett whose brief was to prepare the company for a completely reconfigured marketplace. The incoming CEO’s  first strategy announcement in October 2017 was short on detail apart from a commitment to aggressive cost cutting. The forward-looking ideas vaguely centred around a smart car agenda, with the China market playing a key role. The most detail we got on EVs was this:

“The company recently announced a dedicated electrification team within Ford focused exclusively on creating an ecosystem for products and services for electric vehicles and the unique opportunities they provide. “

In January 2018, however, we got more meat when Ford’s Chairman Bill Ford announced the following measures:

  • 16 fully electric vehicles to be added to line-up by 2022
  • 40 fully or partially electrified vehicles to launch over that time frame
  • Investment in EVs to rise from $4.5 billion to $11 billion

In an important move necessary to increase EV penetration, Ford also explained how electrification of existing SUVs and pick-up was to take place, making this comment to Reuters.

“If we want to be successful with electrification, we have to do it with vehicles that are already popular.”

Nissan 

Rather than a standalone company, Nissan can best be thought of as part of the Nissan-Renault-Mitsubishi Motors alliance. As such the group taken together could be viewed as the largest auto maker in the world.

Rather like GM with the Volt, however, Nissan has been somewhat slow to take the technology from its breakout product the Leaf and apply it across its product range. Again I can hear Tony’s voice talking about the lack of ability of incumbents to disrupt their own businesses even when they are leaders in the technology driving the disruption.

But completing our orgy of announcements from the Big 6, Nissan has suddenly decided to aggressively play catch-up with a commitment to sell 1 million EV cars a year by 2022. The March 23rd press release is here and the “M.O.V.E. to 2022 Plan” has these goals:

  • Develop eight new pure electric vehicles, building on the success of the new Nissan LEAF
  • Launch an electric car offensive in China under different brands
  • Introduce an electric “kei” mini-vehicle in Japan
  • Offer a global crossover electric vehicle, inspired by the Nissan IMx Concept
  • Electrify new INFINITI models from fiscal year 2021
  • Equip 20 models in 20 markets with autonomous driving technology
  • Reach 100% connectivity for all new Nissan, Infiniti and Datsun cars sold in key markets by the end of the plan

Conclusion 

The strategy announcements are different in texture and difficult to to compare, but they have elements in common:

  1. A broadening of electrification across the product range
  2. The acceleration of EV model roll outs to the early 2020s
  3. A tidal wave of money going into the EV space
  4. A massive recommitment to EV R&D, particularly with respect to batteries
  5. Not one mention of any new initiative with respect to ICE technology
  6. Lots of FoMO (fear of missing out)
  7. And lots of plain FEAR (It seems that VW’s September 2017 strategy announcement has scared the crap out of VW’s competitors, and their strategic ripostes have been tumbling out one after another since then.)

Moreover, if we assume that the battery materials, battery cells and battery modules will be available to make the cars (I’ll come back to those issues in later posts), the Big 6 makers have the intention to try to sell EVs across every model segment. Thus, on the supply side of Tony Seba’s forecast, the big guys intend to play a major part. Of course, just because you can make an EV, it doesn’t mean anyone will buy it. But that is the demand side, which I also want to leave for later.

Rather, for my next post I want to look at the disruptors. How much money can they raise, how many factories can they build, how many EVs can they sell. To date, Tesla sales are really just a rounding error in terms of total global auto sales. Will that change? And, then there are the Chinese.

For those of you coming to this series of posts midway, here is a link to the beginning of the series.

 

Testing Tony Seba’s EV Predictions 3 (Fleshing Out the S Curve)

In my last posts, I have been trying to quantify Tony Seba’s assertion that “essentially no internal combustion engines will be produced after 2030”. Further, we looked at the broad outline of what the required sales trajectory would need be to take electric vehicle (EVs) penetration rates from 1.3% in 2017 to 95% in 2030.

In this post I want to hang some vehicle numbers onto this outline shape. So to start with, we need to determine how many vehicles are being sold today. Various public organisations and private companies put out slightly different numbers, but I have chosen the stats released by the International Organisation of Motor Vehicle Manufacturers (which goes under the abbreviation OICA derived from its name in French).

OICA data show that 97 million vehicles were sold in 2017, consisting of 71 million passenger cars and 26 million commercial vehicles. The recent sales trend looks like this (you can find the chart here):

OICAVehicleSales

These numbers allow us to do a quick fact check with respect to the chart put together by EVvolumes.com at the bottom of my last post. That chart had a total of 1,281,000 EVs sold in 2017 with am EV market share of 1.3%. Put their EV sales number over OICA’s 97 million and we do get 1.3%. Good!

Note we are talking about total vehicle sales. Tony has been full on with his bet, forecasting the demise of the complete ICE vehicle infrastructure. Not for him, wimping out and restricting his argument to passenger cars. So all those trucks, lorries and vans have to go EV too.

In later posts, I will start to slice the data more finely to stress test his forecast, and that will require us to look a vehicle segments, geographical penetration and manufacturer commitment to EV production, but for now let’s just stay with the top line.

Nonetheless, we do need one further tweak before we can attach a number to what 95% sales penetration by EVs in 2030 actually looks like. Obviously, global auto sales are growing, so we are not looking at 95% of 97 million. Accordingly, we need the annual average growth rate in auto sales through to 2030 before we can come up with our EV target.

As a ranging shot, let’s just take the average annual growth rate in global vehicle sales between 2005 and 2017 from the OICA chart above. So I’ve just plugged those numbers into a compound growth rate calculator on the internet to get 3.87% annual growth. Using the 3.87% number, we can then plug that back into a future value calculator and go forward to 2030. A growth rate of 3.87% doesn’t sound much, but the magic of compounding changes 97 million vehicle sales to 159 million vehicle sales by 2030. The bar has been raised for Tony: EV sales now need to go from 1.3 million in 2017 to 159 million in 2030. That’s 122 times!

Nonetheless, we probably need to adjust for a decline in auto sales in China as the market gets more saturated, although India, South America and Africa could start to pick up the growth baton in future.

Moreover, a close reading of Tony’s book “Clean Disruption” suggests that the advent of driverless cars on our roads will dramatically change the pattern of car ownership. Tony is big on “Transport as a Service”, so fewer and fewer people will want to actually own a car when they can tap on a phone app to get the use of one almost instantly.

Even if you don’t believe that autonomous vehicles will pass safety standards for many years to come, app-led transport services like Uber and Lift make car ownership less attractive, particularly for urban dwellers. The decline of driving licence ownership among younger adults in the US and Europe is evidence of this.

In 2016, McKinsey issued a report that incorporated such technological-related disruptions into a macro economic forecast. Their ‘high disruption’ scenario sees 15% of new car sales being autonomous vehicles by 2030. Based on this scenario and other trends in car sharing and so on, they came up with 115 million vehicle sales in 2030 (a 2.45% annual growth rate).

AutoSales2030McKinsey

At this stage, it is worth stressing that the choice of vehicle sales figure for 2030 is a question of subjective judgment. The range of macro economic and technology related variables make a more quantitative approach facile. So let’s split the high vehicle growth scenario of 159 million vehicles and the McKinsey high-disruption scenario of 115 vehicles to arrive at 137 million forecast vehicle sales in 2030. Now Tony is looking for 95% of this number, which is 130 million. So we can plug the 130 million number into the S curve from my previous post and we get this:

ElectricVehicleSalesMillions

It looks like not much is happening until around 2024 in terms of high year-on-year jumps in units sold, but that hides some pretty stunning year-on-year growth rates.

%GrowthRateEVSales

Are those growth rates completely mad? Well let’s compare them with recent year growth rates in a chart from my previous post:

EVVolumes.com

So apart from 2016, the EV sector has been achieving growth rates in and around 60% per annum. So it looks tough, but not completely crazy. Next, let’s look at how much additional capacity needs to come on line each year to support those forecast sales.

AdditonalAnnualProductionCapacity

This chart allows us to stress test Tony’s from the supply side. Additional production capacity for the EV final product requires production capacity adds right down the supply chain. So to add 0.8 million units of EV capacity in 2018; 1.3 million in 2019; 2.1 million units in 2020, 3.4 million units in 2021 and 5.3 million units in 2022 requires huge ongoing investment in metal mining (lithium, cobalt, graphite, etc), battery cells, battery assemblies and additional vehicle manufacturing lines and factories.

So for my next post we will just assume that the end-user demand is there. If so, are the miners and manufacturers capable of delivering the capacity adds? Let’s see.

For those of you coming to this series of posts midway, here is a link to the beginning of the series.