Why Are Carmakers Betting Big on Electric Vehicles?

When I was growing up, I developed a deep attachment to the sci-fi genre. When other guys from high school talked football, I found myself gazing into the open skies, wondering when flying cars would make their appearance. Oh yes, my teenage years were a tough time.

But the 21st century hasn't exactly proved exhilarating thus far. Where are the flying cars? Nowhere. Instead, it appears all we look forward to in the next decade or so is the all-electric car. But, as I'm about to explain, I think everyone (and investors in particular) should be really pumped about the movement.

A new dawn
Thanks to an energy market hinting at higher prices for the sustained future, that day seems to be moving much closer. Snatching the spotlight from the Corvettes and the Camaros are cars like GM's (NYSE: GM  ) Chevy Volt and Nissan's LEAF. Since this may be the first step in an automotive revolution, let's take a look at the details and try to better understand this budding market.

In the near future
Experts say electric cars are going to be the future of the automotive industry, and that's probably why carmakers like Nissan have hyped the marketing drive for its EV (electric vehicle) LEAF by planning to begin an advertising wave, including commercials featuring cycling great Lance Armstrong, among other efforts.

Toyota's (NYSE: TM  ) new plug-in version of the widely sold Prius might bring in more sales this year. And despite obvious challenges for the company right now, optimism for this plug-in version is definitely in the air for Toyota. Last month, the company announced that sales of its enviro-friendly Prius have hit the 1 million mark.

Waiting for its 2012 debut from the Toyota stables, partnering with Tesla Motors (Nasdaq: TSLA  ) , is the RAV4 EV. If this vehicle begins to catch on in Prius-like popularity, Toyota can quickly become a big part of the newly developing electric car business.

Last week, Ford (NYSE: F  ) came up with a list of 25 U.S. cities that the company feels are most ready to host the electric vehicle. To me, this looks like a flexing of Ford's marketing muscles as it readies the field for its own rollout of the electric version of the Focus. In 2012, Ford also plans to release the futuristic plug-in hybrid C-max energi. That's also the year when Honda (NYSE: HMC  ) plans to introduce its Fit EV. New entrants are coming from all around!

An important moment in history
I believe that in the near future, the competition might reach a fever pitch, and I say this because I can see team-ups happening in the unlikeliest of places. For example, Toyota recently joined hands with Microsoft (Nasdaq: MSFT  ) to provide in-car telematic systems for some of its on-road models and many of its future releases. Leaps of technology are being made within vehicles. I also think we're long overdue for that leap to be made within the drive train of the car as well.

On hyper drive
The future is here for the electric vehicle, but it needs to be plugged in and charged first. A bold forecast by European auto major Renault puts the market share of "pure" electric vehicles at 10% by 2020. However, research from IHS Global puts it at just a modest 0.6%.

What stands in the way of this trend manifesting itself sooner rather than later is essentially a function of the recent devastating events in Japan. The earthquake there has maimed several supply chains by halting production at factories where small manufacturers make car parts for the large carmakers. As a result, carmakers have faced ugly production stoppages at facilities around the world.

There's also the cost factor to look out for. Each electric car cuts a deep hole in the pockets of customers. The Mitsubishi I has a price tag of $30,000, and the Tesla Roadster plug-in clocks in at $109,000. It's no surprise that slow growth in electric vehicle sales is blamed on expensive batteries. Consulting firm Boston Consulting Group, however, paints a slightly sweeter picture, setting the market share forecast for 2020 at 26% while accounting for the rise in demand with the drop in battery prices.

Foolish future
Whatever the scenario, carmakers appear optimistic about the electric vehicle and have lined up an impressive array of releases for the next two years. I suspect investors can find a good deal of profit from these car stocks as well.

From where I stand, this could be a very profitable investment opportunity, especially over the long term. With the demand for green clean energy soaring day by day, EVs will likely find many takers in the next decade. Under all circumstances, however, keep your eyes open. With technology, you never know what's next.

Arunava De does not own any shares of the companies mentioned in the article. General Motors and Microsoft are Motley Fool Inside Value recommendations. Ford Motor is a Motley Fool Stock Advisor choice. Motley Fool Options has recommended a diagonal call position on Microsoft. The Fool owns shares of Ford Motor and Microsoft. Alpha Newsletter Account, LLC owns shares of Microsoft.

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 20, 2011, at 3:16 PM, ramon123 wrote:

    The automakers are not jumping in the EV market in a very enthusiastic fashion. They are mostly simply taking gas powered designs and replacing

    the drivetrains and throwing away a lot of junk -

    exhaust systems, etc. This is a low cost method

    of having product available, albeit in small quantities. Despite all the hoopla about the Volt, GM will sell a paltry few every year. Certainly there is no way that automakers are going to see any big profits off EVs anytime soon. The small numbers make such an event impossible. If you want to invest in electrics, go with tesla, the only

    profitable and competent EV makers around.

  • Report this Comment On May 01, 2011, at 12:52 AM, baldheadeddork wrote:

    What leads you to believe automakers are betting big on EV's? Even the most enthusiastic automaker, Nissan/Renault, is only spending a tiny slice of its R&D on electric vehicles.

    Anyone predicting a 26% market share for EV's by the end of this decade is on crack. Even Renault's 10% forecast is a lottery ticket bet. The problem is that battery prices are not going to come down fast enough to make EV's viable against improved mileage from next-gen hybrids and alternate fuels like CNG.

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