There’s electricity in the air

At fashionable dinners and at those attended by heads of state, electric cars are regularly discussed, attracting a flurry of debate and even controversy. It’s such a popular subject, as mobility is at the heart of human evolution. And as with all innovation, the subject, by its very nature, divides opinion.

Electric cars are thus placing pressure on geopolitical relations. In recent years, the major global economic powers have not hesitated to subsidise the development of electric cars and battery production – directly with the manufacturers and indirectly by facilitating their adoption by consumers – in order to generate precious economies of scale. In response to such market distortions, there are ever increasing and reciprocal accusations of dumping from China, the US and Europe. Most recently, US Treasury Secretary Janet Yellen worried about “global spillovers from the excess capacity that we are seeing in China.” However, the US is hardly without blame when it comes to the issue of subsidies, one example being its Inflation Reduction Act (IRA).

For consumers, replacing a combustion engine vehicle with an electric model is a real brain teaser. Over the product lifecycle, an electric vehicle is considered a reasonable solution that restricts carbon emissions, providing it is of a modest size. But the economic trade-off is less obvious. Whilst energy consumption is, in principle, less expensive, higher insurance premiums, greater risks in the event of an accident due to the vehicle’s weight and the instability of the batteries, and significant volatility in second-hand market prices are all downsides that must be weighed up.

On the stock market, formerly stellar performer Tesla is suffering as the laggard in the S&P 500 in the first quarter of 2024 – with a fall of close to 30%, the last member of the Magnificent Seven has lost its shine. However, the company is still valued as a technology stock rather than a traditional manufacturer – its market capitalisation is 55x its 12-months projected earnings, way more expensive than the global automobile sector which is valued on just 12x forecast earnings. The outlook for Tesla’s growth trajectory is tricky, with heightened pricing and product competition from both traditional car manufacturers and the leading Chinese manufacturers of electric vehicles. Its temperamental boss, Elon Musk – a genius to his fans and a devil to his detractors – partly announced this at Tesla’s results presentation at the end of January, stating that the company was “between two growth waves.” In other words, at the trough of the wave. It remains to be seen whether the roll-out of Chinese vehicles can dispel the infatuation with this disruptor or whether a seawall will be raised to protect this US nugget.

There is also an economic dilemma for car rental companies – should they switch a large part of their fleet to electric vehicles as they are sometimes encouraged by legislation? Or should they wait until there is consumer demand for this? For its part, US giant Hertz has just gone into reverse on its shift to electric. This backpedalling towards combustion engine vehicles – following a stock market crash that cost the boss his job – can be explained by the higher level of accidents, more costly repairs, accelerated depreciation and disappointing demand.

As with all promising innovation, the democratisation of electric vehicles resolves some challenges whilst creating new ones. But isn’t this the case for all innovation?

Final version of 29 March 2024 Clément Inbona, Fund Manager, La Financière de l’Echiquier (LFDE)