Electric Vehicles: New Rules for the RoadElectricVehicles:NewRulesfortheRoad

This represents an extraordinary opportunity for automobile manufacturers and investors. There are over one billion cars on the road—but less than 1% are EVs,¹ and an even smaller percent have the hardware for full autonomy. Car companies today largely lose contact with their customers once the car is sold and driven off the lot. Of course, car owners will continue to make outlays for their vehicles—for gas, insurance, maintenance, and repairs—but most of this spending is captured by other businesses and third parties. The fully connected EV, however, allows the car maker to offer subscription services that extend the relationship between the consumer and the manufacturer—and the economics of the business—to the entire useful life of the car. This can include the subscriptions supporting self driving and other software services, insurance, and company-owned service centers and charging stations. Subscription fees for these services could total several hundred dollars per month.

This represents an entirely new business model for car makers that would redefine the economics of the automobile industry. We believe a company that sells one million smart, fully connected EVs per year is better positioned to generate more cash from those one million cars over the life of each vehicle than a company that sells significantly more traditional cars each year.

For this to occur, however, EVs need to gain share in the market, and we are seeing evidence of a shift in consumer sentiment. In addition to aesthetics, car buyers typically value safety, speed, affordability, and cargo capacity. In all of these categories, EVs outperform equivalently sized gas-powered cars. An EV, for example, offers comparable performance to a gas-powered luxury sports car for about half the price. EVs offer more cargo capacity because the battery pack is on the floor, freeing up space for a frunk. EV powertrains require fewer parts, and significant portions of the vehicle’s frame can be cast as single pieces, requiring fewer robots, parts, and less labor—in the end lowering production costs considerably. Despite recent inflationary pressures, we expect these cost advantages to widen over time as scale kicks in, leading to steadily declining prices for electric vehicles over the long term. We expect the combination of lower priced EVs, in addition to their lower operating costs, to significantly increase EV adoption over time.

We expect the wide-spread adoption of EVs to be supported by the rollout of full self driving capabilities.

We believe FSD will significantly enhance the value of the car to consumers, materially increasing productivity and leisure time, which can enable automakers to realize the vehicle’s full monetization potential by capturing their fair share of this incremental value. Although we are seeing remarkable progress in the technology, it is challenging to predict when it will be available in non geo-fenced areas. We expect FSD implementation for the leading EV manufacturers within a decade.

Auto companies and their investors, however, are preparing now for an EV future. Virtually all global car companies—both legacy and new entrants—have committed to developing EVs. Not all manufacturers will succeed in making this difficult transition at scale. In our view, the winners will be those companies that have the largest installed base of monetizable assets because they can capture a disproportionate share of the recurring revenue and cashflow streams of the entire industry.

 

¹“Electric Vehicles Tracking Report,” International Energy Agency, November, 2021. https://www.iea.org/reports/electric-vehicles