I am wondering about your statement that low valuation is not a structural issue. However, I see high Capex needs as the primary constraint for cash flow generation and share price appreciation. What changes do you see in this respect? How could OEMs decrease their Capex needs? Looking at such start-up companies as Lucid and Rivian, they both have a large cash burn due to Capex. Arrival tries to present a CAPEX-light model but does not seem successful so far. I would appreciate your view.
Thanks for the comment. I think the "valuation is not a structural issue" has really only been proven by Tesla at this point, but this is a good example for other OEMs who are following their lead. This includes both legacy OEMs shifting business models (i.e. moving to DTC sales, monetizing the car post-sale) and new entrants without the legacy overhang. At scale, EVs are easier and will be cheaper to produce than ICE. Many companies will fail before reaching that point, but I think there's opportunity for the select few that successfully execute.
On capex specifically, I agree that the industry's capital intensity won't change. However, I don't think this alone is a key reason for why many of these names trade at single digit earnings multiples. For example, basically all of today's leading tech companies (i.e. Google, Amazon) are also very capital intensive. The difference is big tech generates strong ROI on their investments, while legacy OEMs have almost nothing to show for their investments. This will be a big hurdle to overcome but I suspect at least a few OEMs, other than Tesla, will reap strong returns from their investments in EVs and new technologies.
I wonder if future installments will consider the effect of the Oil industry on the economic dynamic for the legacy auto transitioning to EVs?
I perceive a lot of foot dragging and whistling past the grave yard in the lack of urgency of Legacy Auto's EV transition and I wonder if economic pressure plus old boy network rib nudging can be documented.
After all if the legacy OEM successfully convert their products to EVs they still have a business but Oil companies stand to loose up to 2/3 of their market.
Great article. I wonder what you have to say about the impact of the market's transition to EVs on the valuation of the financial arms of OEMs (dependent as it is on the resale value of legacy ICE fleets). Also, how the adjacent market of stationary storage (including vehicle-to-grid) could affect the assessment of total market size for EV companies.
I think captive financing arms are definitely a liability for OEMs as ICE residual values are likely to decline significantly over the next decade. The financing divisions also have massive capital requirements. EV adoption and ICE resale values will be an interesting combo to monitor.
Energy storage and charging are big opportunities that Tesla has shown promise in but it's unclear how many other OEMs are going to integrate this into their business. Only a handful are even thinking about this today. VW does have a strong energy storage product roadmap and Ford offers bidirectional charging capability with the Lightning.
Having worked with many legacy OEMs in the development of new models, I completely agree with this description of their practices and limitations. Most of the auto brands we grew up with will disappear in the next decade.
I am wondering about your statement that low valuation is not a structural issue. However, I see high Capex needs as the primary constraint for cash flow generation and share price appreciation. What changes do you see in this respect? How could OEMs decrease their Capex needs? Looking at such start-up companies as Lucid and Rivian, they both have a large cash burn due to Capex. Arrival tries to present a CAPEX-light model but does not seem successful so far. I would appreciate your view.
This may sound counterintuitive but I think the competition for Tesla is ICE vehicles. They still have ~95% share in the US and ~90% share globally. Most people aren't even considering buying an EV and are very uneducated on the topic.
For EVs, I think Nio is the most formidable competitor right now. BYD's cars are a different price range/vehicle class but eventually Tesla will also move down market and compete more directly.
Longer term, I think there will be many more formidable EV competitors. Both legacy OEMs and new entrants like Rivian and Lucid all have potential to make compelling EVs. Some will, some won't get to that point. I don't see any single OEM having more than 25% share of new car sales so there will always be plenty of competition.
I wonder how a (probable) shortage of battery materials this decade could create a prolonged auto shortage and affect the economics of the industry. Can shrinking volumes be combatted with increased supply/demand dislocation (higher margins) to keep OEMs alive?
I agree this is a key development to monitor. Securing raw materials supply is critical and many OEMs will not succeed in this new aspect of the supply chain. I suspect battery shortages will be limiting production for many OEMs in a few years, similar to how chip shortages limited production the past couple of years.
One popular idea is that suppliers will not want concentrate into one customer (OEM) and therefore guarantee at least a few OEMs are fed… but TBD how many factories that allows each OEM to keep at appropriate utilization levels. I may be too eager to simply assume auto demand will be unmet and this is going to be all about supply and covering overhead costs for OEMs for next 5-10 years. Almost seems like I need to brush up on my Game Theory.
Great article, indeed. Thanks a lot!
I am wondering about your statement that low valuation is not a structural issue. However, I see high Capex needs as the primary constraint for cash flow generation and share price appreciation. What changes do you see in this respect? How could OEMs decrease their Capex needs? Looking at such start-up companies as Lucid and Rivian, they both have a large cash burn due to Capex. Arrival tries to present a CAPEX-light model but does not seem successful so far. I would appreciate your view.
Thanks for the comment. I think the "valuation is not a structural issue" has really only been proven by Tesla at this point, but this is a good example for other OEMs who are following their lead. This includes both legacy OEMs shifting business models (i.e. moving to DTC sales, monetizing the car post-sale) and new entrants without the legacy overhang. At scale, EVs are easier and will be cheaper to produce than ICE. Many companies will fail before reaching that point, but I think there's opportunity for the select few that successfully execute.
On capex specifically, I agree that the industry's capital intensity won't change. However, I don't think this alone is a key reason for why many of these names trade at single digit earnings multiples. For example, basically all of today's leading tech companies (i.e. Google, Amazon) are also very capital intensive. The difference is big tech generates strong ROI on their investments, while legacy OEMs have almost nothing to show for their investments. This will be a big hurdle to overcome but I suspect at least a few OEMs, other than Tesla, will reap strong returns from their investments in EVs and new technologies.
A good point on ROI, thank you!
I wonder if future installments will consider the effect of the Oil industry on the economic dynamic for the legacy auto transitioning to EVs?
I perceive a lot of foot dragging and whistling past the grave yard in the lack of urgency of Legacy Auto's EV transition and I wonder if economic pressure plus old boy network rib nudging can be documented.
After all if the legacy OEM successfully convert their products to EVs they still have a business but Oil companies stand to loose up to 2/3 of their market.
https://www.eia.gov/energyexplained/oil-and-petroleum-products/use-of-oil.php
Great article. I wonder what you have to say about the impact of the market's transition to EVs on the valuation of the financial arms of OEMs (dependent as it is on the resale value of legacy ICE fleets). Also, how the adjacent market of stationary storage (including vehicle-to-grid) could affect the assessment of total market size for EV companies.
Thanks! Those are great questions.
I think captive financing arms are definitely a liability for OEMs as ICE residual values are likely to decline significantly over the next decade. The financing divisions also have massive capital requirements. EV adoption and ICE resale values will be an interesting combo to monitor.
Energy storage and charging are big opportunities that Tesla has shown promise in but it's unclear how many other OEMs are going to integrate this into their business. Only a handful are even thinking about this today. VW does have a strong energy storage product roadmap and Ford offers bidirectional charging capability with the Lightning.
Having worked with many legacy OEMs in the development of new models, I completely agree with this description of their practices and limitations. Most of the auto brands we grew up with will disappear in the next decade.
Noice
Great article, indeed. Thanks a lot!
I am wondering about your statement that low valuation is not a structural issue. However, I see high Capex needs as the primary constraint for cash flow generation and share price appreciation. What changes do you see in this respect? How could OEMs decrease their Capex needs? Looking at such start-up companies as Lucid and Rivian, they both have a large cash burn due to Capex. Arrival tries to present a CAPEX-light model but does not seem successful so far. I would appreciate your view.
I passed ( an exhaustive) comment, but then the app took me away to sign in and the effort was wasted.any chance of recovery please?
Who do you think are teslas biggest competitors when factoring in the points above? BYD?
This may sound counterintuitive but I think the competition for Tesla is ICE vehicles. They still have ~95% share in the US and ~90% share globally. Most people aren't even considering buying an EV and are very uneducated on the topic.
For EVs, I think Nio is the most formidable competitor right now. BYD's cars are a different price range/vehicle class but eventually Tesla will also move down market and compete more directly.
Longer term, I think there will be many more formidable EV competitors. Both legacy OEMs and new entrants like Rivian and Lucid all have potential to make compelling EVs. Some will, some won't get to that point. I don't see any single OEM having more than 25% share of new car sales so there will always be plenty of competition.
I wonder how a (probable) shortage of battery materials this decade could create a prolonged auto shortage and affect the economics of the industry. Can shrinking volumes be combatted with increased supply/demand dislocation (higher margins) to keep OEMs alive?
I agree this is a key development to monitor. Securing raw materials supply is critical and many OEMs will not succeed in this new aspect of the supply chain. I suspect battery shortages will be limiting production for many OEMs in a few years, similar to how chip shortages limited production the past couple of years.
One popular idea is that suppliers will not want concentrate into one customer (OEM) and therefore guarantee at least a few OEMs are fed… but TBD how many factories that allows each OEM to keep at appropriate utilization levels. I may be too eager to simply assume auto demand will be unmet and this is going to be all about supply and covering overhead costs for OEMs for next 5-10 years. Almost seems like I need to brush up on my Game Theory.