Adapted from Chad Hagan's presentation at Skytop Strategies  Impact Investment Conference; Boston, Massachusetts,  September 17, 2019 ...

Electric Cars: The Impact of Changing Societal Values on the Auto Industry

Adapted from Chad Hagan's presentation at Skytop Strategies Impact Investment Conference; Boston, Massachusetts, September 17, 2019

Electric Cars: The Impact of Changing Societal Values on the Auto Industry

The impact of changing societal values on the auto industry is one we are all well aware of and I will attempt to point out a few bits of insight I see in the market from my research.

The recent attacks on multiple Saudi Arabian petroleum processing facilities has shaken up what is roughly 5% of global supply. 

While there are long term oil reserves, they are largely strategic, and the recent unlocking of US reserves helps illuminate how dependent we are on global oil.

Our daily burn rate of oil is staggering around 90 - 100 million barrels per day. 

“The total worldwide oil consumption was 93 million barrels per day (bbl/day) 2015” - International Energy Agency (IEA)

While changing values in society have created a market for EV’s - this has come after a period of deep neglect. 

One of the central issues with automobiles is their dependency on oil and the carbon footprint from such heavy industry.

Electric vehicles are better but the manufacturing of electric automobiles is far from carbon free. From plastics to textiles and electronics; not to mention the constant roll out of new models, ad campaigns and marketing spends - there is a massive amount of cultural and environmental waste. 

The US is the second largest polluter behind China, and China has been active a third the amount of time. If this were thirty years ago, the US would surely be the largest. 

I had a great talk about this in London last week, and sadly if you add in California with the fires and earthquakes, the US simply tops the charts. Despite the green revolution in California, one must admit the state creates a staggering amount of carbon organically, let alone from their mega cities.

Automobile manufacturing is a form of great pride to many families, nations and empires. FIAT heir Gianni Agnelli said it best in the 1970’s when he spoke about building the cars first, giving cars to the consumer and then watching policy follow suit by building roads, and entrepreneurs developing destinations and so forth and so forth. Think of Citronen, Porsche, Ford, Fiat, Delorean, and Tesla - but no matter the destination, the United States did it best.

The US defined the automobile way of life - numerous regions had deep car cultures with subsets and segments like drag racing and surfing; the family station wagon or perhaps a Jeep for camping and hunting. Cars in America guaranteed part of the American dream, they even promised teenage independence. Even Hollywood stepped in. Hollywood helped make the idea of a road trip common place. At a broader level an extended domestic rail system for the commuter and traveler in the States never happened. 

We exported that way of life. Look only to South Korea to confirm the example of heavy industry American style. The South Koreans have in turn exported our model back to us in the form of foreign direct investment and employment base. They are intertwined in the southeast, specifically in Georgia and Alabama where they have holdings which provides thousands of local high paying jobs 

A bit of history:
It wasn’t always this easy. For some time the horse and carriage ruled the road, especially here in Boston. When automobiles first arrived, they came in the promise of a horseless carriage. One had to compete with the horse and the horse drawn carriage so a motorized carriage was the centralized promise. 

The first promise was delivered in the 1700s. The year was 1769. The 1st steam-powered auto, able to carry humans is built by Nicolas-Joseph Cugnot. It was basically a “mechanical land-vehicle” - the vehicle was huge, and only went 2 miles an hour. Still, it sold reasonably well. In 1771 an incident occurred where the driver of one of Cugnot's land-vehicles lost control and ran into a wall. This mishap is often credited as being the world's first automobile accident. 

The market slowly moved away from steam and into combustion. 

In 1808, Fran├žois Isaac de Rivaz designed the first car powered by an internal combustion engine fueled by hydrogen. 
In 1870 Siegfried Marcus built the gas combustion engine;
In 1885 Karl Benz opens shop;
In 1899 FIAT is formed in Italy;
In 1899 The Detroit Automobile Co. was founded, I believe Henry Ford’s first commercial automobile company;

Electric vehicles on the other hand were largely neglected but they had a legitimate presence. EV’s are not from last century, but as far back as the 1800s. In the 1830s Scottish inventor Robert Anderson invented the first carriage powered by non-rechargeable primary cells - so this would be the first electric carriage. Electric vehicles were produced commercially in the United States until the Model T, powered on gasoline, came to dominate. Gasoline won out for a number of reasons, including it being readily available and capable of fueling longer ranges. 

In the United States it wasn't until the 1960s and 70s that consumers began requesting EV’s in some capacity.  This was largely after the oil crisis in the 1973 oil crisis (October 1973 – March 1974); 

I guess we can claim that between 1975 and 1990 we were back in the throw of big oil and the mentioning of EV’s was just novelty.  

However, in 1990 California passed a Zero Emission Vehicle (ZEV) Mandate. The program was landmark and proved to be highly influential. 
Since 2010, more than 500,000 zero-emission vehicles and plug-in hybrids have been registered in California. I imagine a great deal more since that is a figure from a decade ago. 

The ZEV mandate likely nudged GM to produce their EV, entitled the EV1, it was produced from 1996 - 1999 and sold through their Saturn subsidiary. At 100% electric and the range was about 100 miles. 

What is clear is that electricity - or alternative fuels from non-fossil sources - could have been used to power autos - instead of gasoline - over 100 hundred years ago. Perhaps electric autos lacked the technology and power to fuel transportation initially, but they certainly fell behind by attrition, negligence and devotion to the oil barons. 

In the US from 1920 - 1970 the market and powers that be turned their backs on the idea of EV’s in the marketplace. 

This has caused other movements in the energy world: wind, hydro, nuclear and also clean powered vehicles for all types of transportation. Clearly, apart from batteries, Eventually we will see 100% clean fuel, or at least renewable fuels, and this will allow airplane and container ships to travel around the world without the associate pollutants - to some regard. 

It is estimated in London that emissions permits will be on of the most traded securities in the next ten years. However, it is still hard to add up the market share for forecasting at my office.

We have a lot of questions about the free market mechanics behind permits and trading and well as how it all adds up. 

The move away from carbon comes after a minimum fifty year run for carbon producers who effectively had a monopoly from gasoline. Where are we now in the US with the major automobile manufacturers rolling back sedans and coupes to center on heavy trucks and SUVs? How will those be efficient powered to be effective in the market place when a bigger emphasis is being put on size and that regards added weight? 

From a family office investment perspective, we kicked the tires on a deal in 2018 - it was a roll up consisting of numerous dealerships - and from what we could see, the sales, services and supply chain could easily support the mass introduction of EV, so long as EV charging times continue to develop, and maintenance expands.  

EV’s will eclipse the internal combustion engine—one day. Before this happens, in order for it to happen we need a tighter framework of regulation and better incentives for innovation - much like what I see in London and Europe. 

Numbers & Markets:
Despite the intense fever and furor for electric vehicles, they are quite rare. 
At this moment EV’s account for a minuscule percentage of annual auto sales. 

Market leaders at this moment are Tesla in the US and BYD in China. A decent product, Tesla has attracted intense emotional response, fandom and devotion; at the same time foes and enemies. However, because of Tesla electric vehicles have entered the consumer market place indefinity. 

BYD Auto, short for Build Your Dreams, was established in 2003 and markets the brand in China. It specializes in electric vehicles and has a joint venture with Daimler. 

As far as market share, Norway leads (46% in 2018), followed by Iceland (17%) and Sweden (8%).

Estimated 2018 EV sales:
China (1M+) 
Europe (385K) 
United States (361K) 
These three regions accounted for 90% of all sales in 2018. 

Peak passenger vehicle oil demand is forecasted for 2028; commercial vehicle peak oil demand peaks in 2035. By 2040 over 50% of all passenger vehicle sales will be electric vehicles, with the commercial fleet and e-buses following - Bloomberg NEF.

Note: Facts and figures came from Bloomberg NEF, EIA & Zermatt Research.

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