Think Electric Cars Are Coming Soon? Read This.

Will the car of the future be electric?

A lot of investors seem to think so, if the strength of stocks such as electric-car maker Tesla Motors (Nasdaq: TSLA  ) and EV-battery specialist A123 Systems (Nasdaq: AONE  ) are any indication. Prodded by governments around the world, the major global automakers and their key suppliers are spending billions of dollars on an electrified automotive future. Betting on such a future seems like a pretty good bet.

So why is Toyota (NYSE: TM  ) , of all companies, hedging its own bet on EVs in several big ways?

The world can't wait for a fully electric future
Bertel Schmitt of The Truth About Cars recently scored an interview with Toyota's Satoshi Ogiso. As Toyota's chief engineer and the man in charge of (among other things) the development of the Prius, Ogiso is about as close to a rock star as Toyota executives get, and he's definitely a man with ideas worth taking seriously.

Ogiso's view on the near-term future of the auto -- which is also Toyota's -- is thought-provoking stuff. In a nutshell, while Peak Oil may or may not be here yet, rapidly rising demand for cars and trucks in the developing world means that demand for oil is likely to outstrip supply sometime in the next several years, Ogiso says -- if all those cars and trucks run on gas and diesel.

(To be clear, the details of the timing and size of the gap are disputed, even among sober-minded experts. Toyota is conservatively assuming that a small gap between oil supply and demand has already opened and that it will grow rapidly as the growth of oil production begins to flatten later in this decade. Pulitzer Prize-winning energy expert Daniel Yergin, on the other hand, thinks that oil-production growth could continue until mid-century. I'd bet on Yergin. But I'd also bet on Toyota's key assumption that demand for vehicles will outstrip oil supplies in a significant way pretty soon, even if oil-supply growth continues.)

Toyota sees that gap becoming a big problem in the second half of this decade. Given the long lead times required to develop new vehicles -- nearly three years is average for an "ordinary" new-car program, never mind ones involving advanced new technology -- that means the cars and trucks that will help close this gap need to be in development now.

The world can't wait, in other words, until battery technology and recharging infrastructure are in place to make an all-EV future possible. Other technological paths -- hybrids, natural gas-powered vehicles, hydrogen fuel cells, synthetic fuels, and biofuels -- need to be pursued as well. And, in Toyota's view, all at the same time -- because some technologies will pan out, and some won't. It's an immense challenge, requiring an immense commitment of money and resources.

This challenge, Schmitt writes, keeps Ogosi awake at night. It's a safe bet that it's keeping his peers at the other major automakers awake at night, too. And some of those peers should be very worried.

Some automakers won't survive this challenge
Here's the thing investors should ponder: Toyota is a massive company, the largest automaker in the world by volume last year and the global leader in hybrid technology, and it is straining to do the research and development it thinks is necessary -- simultaneously funding the development of more-advanced hybrids, of EVs, and of hydrogen fuel cell-powered vehicles -- to meet this looming challenge.

The other automakers that clearly have the scale and resources to do this kind of development are easy to name: General Motors (NYSE: GM  ) and Volkswagen, the only two companies with global sales volumes that rival Toyota's. Ford (NYSE: F  ) , which is close to Toyota in hybrid development (and working with Toyota on a hybrid powertrain for pickups). Hyundai. Nissan, which acquired global scale with its tie-in with France's Renault. Probably Honda (NYSE: HMC  ) , which lacks the global scale of Toyota and the other giants but has been investing in green-car R&D for decades.

After that? I don't know. I don't know how BMW or Daimler or the Fiat-Chrysler mashup or Tata Motors (NYSE: TTM  ) or the emerging Chinese automakers will fare -- none of those automakers have the scale or resources of the giants, though some will leverage partnerships (like Daimler's with Tesla) to acquire the needed technology. But others may not survive. Brands like Chrysler and Jaguar and Volvo may follow Oldsmobile and Saturn to oblivion before the decade is out.

And there are many other questions to ponder, starting with Chinese consumers' reluctance (so far, at least) to adopt hybrids. The Prius is the best-selling car in Japan, and Toyota sold almost 141,000 of them here in the U.S. last year -- but only 60 found buyers in China. China's own BYD managed less than 500 sales of its own F3DM hybrid, despite big government subsidies that covered nearly half the purchase price. How will the world's largest and fastest-growing auto market deal when oil supplies can't keep up?

I'll be taking a deeper look at some of those other questions in coming days. But one thing's clear: While many investors have bought into the "electric cars are coming soon" thesis, the reality of the next several years is likely to be a lot more complicated.

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Fool contributor John Rosevear owns shares of Ford and General Motors. You can follow his auto-related musings on Twitter, where he goes by @jrosevear. The Motley Fool owns shares of Ford. Motley Fool newsletter services have recommended buying shares of General Motors and Ford. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (13) | Recommend This Article (7)

Comments from our Foolish Readers

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 November 14, 2011, at 9:02 PM, SleepingDog355 wrote:

    "A lot of investors seem to think so, if the strength of stocks such as electric-car maker Tesla Motors (Nasdaq: TSLA ) and EV-battery specialist A123 Systems (Nasdaq: AONE ) are any indication."

    -LOL, did you even bother looking at these stocks? The strength of A123? Are you kidding?

    This article is just another clueless industry expert wannabee speculating about things he doesn't have the slightest clue about. Peak oil, hydrogen, biofuel, we've heard it all before thousands of times. You have nothing interesting to contribute to the conversation. If you have another bad case of diarrhea aim for the toilet, not the keyboard.

  • Report this Comment On November 14, 2011, at 9:12 PM, nutcutter wrote:

    As one who has driven an EV for over 9 years, I can assure you that these cars are going to sell big as production ramps up. All you need to do is talk to the several thousand of new Volt and LEAF drivers to know how powerful the allure of driving without oil is. The benefits far out weigh the negative limited range. Folks learn very quickly how little they drive and that the typical EV is more than adequate for that purpose.

  • Report this Comment On November 15, 2011, at 9:54 AM, TMFMarlowe wrote:

    @SleepingDog355: The ideas you're objecting to came from Satoshi Ogiso, not me. I think he counts as an expert. My interest in all this is "This is Toyota's view of the world, what might it mean for investors?" If you'd like to contribute to that conversation, then lose the adolescent name-calling and step up and do it. Where's the guy wrong?

    @nutcutter: Maybe. We'll find out in a few years.

    John Rosevear

  • Report this Comment On November 15, 2011, at 10:00 AM, TMFMarlowe wrote:

    (And that should have said the strength of *investor interest* in stocks like AONE and TSLA. They've both been up and down, obviously.)

    John Rosevear

  • Report this Comment On November 15, 2011, at 10:25 AM, cokenfries wrote:

    I called you a clueless industry expert wannabee. Hardly adolescent. I also said you have nothing interesting to add to the conversation. Also true. You regurgitate views of someone in the industry and try to elaborate them as if you know what you are talking about, but you don't. When it's pointed out you turn around and say :"Where's the guy wrong".

    Why would I contribute to a conversation with someone who is just interested in sounding informed?

    The thing is I've read 100 articles just like this. Some keyboard jockey reads a few articles and fancies himself some sort of expert. It's just a bunch of B.S.

    Let's see you fess up to the fact that A123 has plummeted since it went public and you had no clue.

  • Report this Comment On November 15, 2011, at 10:30 AM, cokenfries wrote:

    "the strength of investor interest" ha ha yea...OKAY whatever you say.

    That phrase doesn't even make sense. You would just say "investor interest" not "the strength of investor interest".

    Quit lying. You don't have a clue and you got caught. Be a man and "step up to it".

  • Report this Comment On November 15, 2011, at 11:13 AM, TMFMarlowe wrote:

    @cokenfries, or SleepingDog, or whoever: As far as I can tell, your entire history on Fool.com consists of posting trollish comments -- but no actual facts or analysis that would suggest that YOU are "informed" -- on articles that mention TSLA. Guess we know where you're coming from.

    A123, already addressed. Badly worded and I'll own that. I'm always willing to own errors, even embarrassing ones (and I've certainly made my share), but this wasn't quite what you'd like it to have been. You can have the last word if you want, I'm done with the discussion.

    The article speaks for itself. I've written hundreds of articles for Fool.com and my perspective and the limits of my knowledge and expertise are pretty clear at this point. If you don't think I have anything to add to the discussion, that's fine: go read something else. I suggest starting with the rest of the Ogiso interview over at TTAC. You might learn something. I did.

    John Rosevear

  • Report this Comment On November 15, 2011, at 12:11 PM, NCIC wrote:

    Hmmm, which fuel has had the most stable price for the past decade? Electricity? The volatility in oil price is what is going to drive the EV, hybrid and CNG vehicle market. The big push for hybrids started because of the gas spikes in the summer of 2008 when we were at $4 per gallon.

    I'm banking on wider use of solar technology and improved battery technology. I drive a Hybrid now and have a reservation on a Tesla Model S for next year.

  • Report this Comment On November 15, 2011, at 12:29 PM, TMFMarlowe wrote:

    @NCIC: There are good reasons to think you're right. But recharging ("refueling") infrastructure and consumer resistance may prove to be durable sticking points to the mass adoption of EVs like your Tesla, even as battery technology and pricing improves. It may take another big oil shock to make it happen.

    But right now, absent a major oil shock, I'm leaning to Ogiso's view: By 2020, hybrids will be the default, mainstream choice for most consumers, at least in the U.S. and Japan and probably Europe as well. Everything else is a higher-risk bet, and the global automakers hate high-risk bets.

    I also don't see CNG being a really viable mass-market alternative for auto propulsion, though NG is probably the best intermediate-term way to generate the electricity for those EVs. But Toyota thinks they've got something going on with hydrogen fuel cells, and other automakers have been playing with that tech as well.

    Interesting times.

    Thanks for reading.

    John Rosevear

  • Report this Comment On November 15, 2011, at 1:42 PM, cokenfries wrote:

    Sure, I piss people off on Fool, because this site is a breading ground for distorted prophecies regarding the future of the automobile industry and you guys need a good slap across the face to wake you up.

    Pondering hydrogen is idiotic. It takes nearly 4 times the energy input at a plant to propel a hydrogen car 1 mile compared to an EV. Not to mention the huge new infrastructure required. What's funny is that while many consider this, they discount EV's because of their required "infrastructure". What infrastructure? The charger that plugs into the wall in the garage? The couple of fast chargers sprinkled along the freeway? Big whoop. It's 100th the size of the current fueling infrastructure.

    You guys don't ask the right questions.

    "What is the day to day user experience of an EV owner"

    "How does it compare to a liquid based fuel?"

    That's what you need to look into. The fundamental user experience. And not what you think the answers are. You actually have to talk to some one who say, owns a Roadster. And you have to look at the curve of $/KWhr prices over the last few decades and project that curve. If you do that it's obvious where the industry is going. Stop kidding yourself with these theories about this manufacturer doing this or that, or what this guy says. You are fooling yourself.

  • Report this Comment On November 15, 2011, at 2:09 PM, TMFMarlowe wrote:

    I've spent a little time in a Tesla Roadster, and talked to a couple of owners. Love that torque curve. It's a little too heavy for what it is but it's an excellent sports car, and I know something about sports cars. But: Hate the price tag. Hate the fact that even on the Model S I'm going to have to pay A8 prices for 250 mile range, and yes that matters, and I'm skeptical that they can deliver A8 fit and finish (or at least that they can make any money on it).

    But I've written extensively on TSLA, both on why I think it might succeed and why I think the odds are a lot longer than most TSLA bulls, who as a group don't actually seem to know squat about the car business, realize. I'll probably write again about TSLA later this week; check that piece out when it happens.

    Re hydrogen, they're not burning it -- that's a stupid idea, nobody needs 7-liter V8s making 170 hp or whatever. The idea is fuel cells, and not necessarily using H2 as fuel, but rather a liquid hydrocarbon -- using *existing* infrastructure, in other words, just far more cleanly and efficiently. These would be EVs that make electricity from gasoline on-board, Volt-style, only without the emissions and inefficiencies of the IC powerplant.

    I hear what you are saying. But you are fooling yourself if you think there's only one path forward. Gasoline isn't going away, not in my lifetime (I'm 44), though I expect to be buying a lot less of it by the end of the decade. Hybrids have caught on, but that does NOT mean that the next step is to a plug-in EV future, not by a long shot. (There's a whole discussion about coal and electricity that has to come in here somewhere too, but I'm late for lunch.)

    I'll leave you with this: Lots of writers muse about EVs every now and then on fool.com. But unlike all of them, I write about (and think about, and read about, and talk to people working in) the auto business almost every day, and if there's one thing I've learned, it's that predicting the future of this wacky industry more than a few years out is a fool's game unless you're leading the product team (and even then). I don't make prophecies that aren't of the "Automaker X is getting its act together and market conditions are improving, profits are likely to rise over the next several quarters" variety. There are way too many variables.

    John Rosevear

  • Report this Comment On November 16, 2011, at 3:24 PM, n8larson wrote:

    The Chinese uptake stats are surprising, but only against the backdrop of a few very western things: green guilt, the correlation of private auto ownership with status, and the transit-weak, spread-out nature of American metropolitan areas. Unlike in the U.S., Chinese cities are, with a few exceptions, very dense and very new, and many urban middle-class folks who could afford cars can have all of their travel needs met with transit and two-wheeled personal vehicles--motorcycles, bicycles, electric bicycles, and scooters (mostly the last 2). The cost to own and more importantly, park a 4-wheeled vehicle is much higher in a dense city than in a spread-out metroplex. Just my two cents, of course, but I wouldn't look to the Chinese for EV market growth.

  • Report this Comment On November 16, 2011, at 3:35 PM, TMFMarlowe wrote:

    @n8larson: Good points all, and this is really a subject that deserves a separate article, which I will try to get to in the next few days. Counter-points: Looking at this from a 10,000-meter perspective, reducing global demand for oil will have to include reducing China's (at minimum, reducing the rate of growth of China's). And while auto ownership hasn't reached Western levels of ubiquity and won't for years, right now more light vehicles are sold in China than in the U.S., so the volumes (and the smog problems) are getting significant in a hurry.

    Thanks for reading.

    John Rosevear

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