Who Will be the Winners of the EV Industry?

Looks like Trump is not the only one who can stir things up with a tweet.

I trust you know the trouble Elon Musk has caused.

He’s been using Twitter to make a whole bunch of claims. Some of which aren’t entirely true. It wasn’t that long ago Musk said he had the funding to take Tesla Inc [NASDAQ:TLSA] private…when he didn’t.

He’s been in and out of court. Regulators are watching his every move.

And now he decides to again tiptoe the line on Twitter.

Free report: Aussie stock picker, Sam Volkering (with gains as high as 1,431% in the last 18 months) reveals what he believes are his next four big potential winners.

After hearing a couple filmed themselves having sex in a Tesla while on autopilot, Musk took to Twitter to write:

Money Morning

Source: Twitter

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A bit lewd, Mr Musk.

But there’s another ‘Shoulda seen it coming…’ you should know about. The manufacturing fall out in the electric vehicle (EV) industry…

[Last week, Lachlann and I decided to sit down for an informal discussion. We cover current topics from the recent tariff hikes to the problems going on in Europe. The aim was to go through the mainstream drivel and give you different viewpoints, ones you’re not hearing about at The Age or Herald Sun. You can watch our discussion by clicking the picture below.]

Personal computers all over again

Let’s take a quick trip to China. Where the cities are crowded, the air is average at best and there are EV start-ups everywhere.

As of March this year, there were 486 EV manufacturers in China. That number has more than tripled from two years ago.

And guess who have been the stars of China’s recent stock market listings? That’s right, EV makers. Reported by Bloomberg:

After billions of dollars were poured into the industry in China — BloombergNEF estimates start-ups raised nearly $8 billion last year alone — only 20 to 30 vehicle manufacturers may survive, Lian said. There were 486 EV manufacturers registered in China as of March, more than triple the number of two years ago.

Money Morning

Source: Bloomberg

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Maybe this makes a whole lot of sense. China, after all, is expected to lead the world in EVs. Annual sales surpassed a million only last year. EVs make up just 4% of the overall 23.7 million in annual sales.

Speaking to the optimists out there, Cui Dongshu of the China Passenger Car Association said:

There is still huge room out there in the new-energy vehicle market with China’s relatively low vehicle-penetration rate.

Money Morning

Source: Bloomberg

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But of course, there’s a problem. As Dongshu said, China’s transition to EV is slow, glacial some might say. Yet all these start-ups are pumping out product. 3.9 million units is the expected figure this year.

What’s going to happen to that gap of almost two million units? Most of it will likely be sold off for below cost. And there’s bound to be more than a few bust EVs.

Again, from Bloomberg:

The government started pushing development of electric cars to help eliminate air pollution, reduce oil imports and develop high-technology manufacturing.

By 2025, China’s leaders want annual sales of new-energy vehicles — including pure-battery electrics, plug-in hybrids and fuel-cell cars — to reach 7 million units. That’s the equivalent of about 20 percent of China’s total auto market.

Even that amount would barely be enough to sustain a few dozen companies — not hundreds. A factory typically needs to produce at least tens of thousands of vehicles a year to be profitable.

It’s almost as if we’re looking at the rise of personal computers all over again. Companies like IBM, the Teslas of computers, were going to be the most dominant companies in the world, investors thought.

Sales growth was amazing. Profits were easy. Yet that all stopped when competitors saw how profitable it was to manufacturer computers.

And when new competitors came in to supply the massive demand, volumes spread across all incumbents, prices came down, and no one was making any more money.

I expect the same could happen in the EV market.

If the market really will be as big as everyone is guessing, then you’ll see hundreds of companies set up plants, pumping out EVs. In fact, that’s already happened to a large extent.

It’s likely one reason hedge fund manager, David Einhorn has renewed confidence in his Tesla short. To short a stock means Einhorn profits if the price falls.

We have a negative view toward Tesla,’ Einhorn said in an earnings call.

We think the stock is overvalued and the risk reward on the long side is exceedingly poor. The company’s business has deteriorated remarkably.

So who will the winners of this industry be?

What to avoid

If we circle back to our personal computer analogy, who have been the real successors?

Two names that immediately come to mind are Microsoft Corporation [NASDAQ:MSFT] and Intel Corporation [NASDAQ:INTC].

Competitors have tried. Yet all have been unable to steal customers from Microsoft’s incredibly strong network. None have ever come close to Intel’s scale and customer relationships either.

Both of these businesses succeed because there are incredible barriers for new competitors to enter their market and compete.

Companies like IBM or Tesla don’t have this ability — to keep competitors out of the market.

So if you do have ambitions for EV profits, maybe steer clear of the manufacturers.

Focus on a smaller sub-category of the market. You might just find the real winner of EVs, a company dominating that small niche, keeping other competitors out.

Your friend,

Harje Ronngard,

Editor, Money Morning

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Money Morning is Australia’s most outspoken financial news service. Your Money Morning editorial team are not afraid to tell it like it is. From calling out politicians to taking on the housing industry, our aim is to cut through the hype and BS to help you make sense of the stories that make a difference to your wealth. Whether you agree with us or not, you’ll find our common-sense, thought provoking arguments well worth a read.

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