Season 4, Post 33: Robo-taxis and the two key EV debates

Love him or loathe him, it is hard to deny the impact that Elon Musk has had on transforming the auto industry. When Tesla speaks, it therefore pays to listen. While your author has sadly not had the chance to meet Elon, he was privileged recently to join a small group meeting with a senior executive from the business.

There are just two key debates that matter concerning the electric vehicle (EV) at present, according to Tesla: it’s all about capacity expansion and the cost of goods sold per vehicle. Have no doubt, EV adoption is growing: 20m vehicles had been sold globally by the end of June, compared to just 1m at the end of 2016. Growing customer acceptance, falling prices and a wider range of models (c60 by year-end and more than 250 by decade-end) could lead to over 50% of all passenger vehicle sales being electric by 2040, per Bloomberg New Energy Finance.

While forecasts such as these should be music to the ears of Tesla (and the general auto industry), the broader challenge, we were reminded, is how does the world build as much capacity as it needs to? Put simply, in the words of Tesla, “the supply chain is not ready.” Constructing EVs is non-trivial and requires many inputs including lithium, nickel, cathodes, anodes, and semiconductor chips. Further, the supply of such factors is often located far from the demand, creating additional complexities and costs. The recently passed US Inflation Reduction Act certainly goes some way to encouraging businesses to relocate production to America. However, Tesla highlighted that (even with its own gigafactory on US soil), the general gap between supply and demand was only getting “wider and wider.”

How the EV industry scales is also of critical importance. Tesla highlighted that in the history of auto production, the two major step changes to-date had been when Henry Ford expanded his company’s Model-T production process and when Toyota introduced the concept of lean manufacturing. Tesla hopes to drive a third revolution through “religiously” lowering the cost of goods sold per vehicle. EV architecture is “fundamentally different” to that of a combustion engine, potentially creating major cost advantages through ongoing design improvement and more efficient new factories. Its newest models are also explicitly designed to be battery-agnostic, meaning that reliance on any single provider is reduced.

The road ahead for the broad electric vehicle ecosystem looks to be an exciting one, where much value should accrue to the best-positioned players. Although we have no specific view on Tesla, it is hard not to be impressed by both their near-term positioning and longer-term vision. Even if not all readers may agree, watch this space for developments in respect of vehicles with increasing self-driving capabilities. Further, robo-taxis will also “become a necessity over time”, per Tesla. Whether these occur over a one-year or ten-year horizon, of course, currently remains to be seen.

24 August 2022

​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​The above does not constitute investment advice and is the sole opinion of the author at the time of publication. Past performance is no guide to future performance and the value of investments and income from them can fall as well as rise.
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Alex Gunz, Fund Manager