Life is tough if you're a Tesla Motors (NASDAQ: TSLA ) short-seller. I should know -- I am one.
By all indications, Tesla has the pedal to the metal, and it's presumably leaving all traditional carmakers in its dust and nonexistent fumes. Tesla shares hit an all-time high weeks ago, topping out at a market value of $33 billion shortly after another market-thumping earnings report that saw the company deliver a record 7,579 Model S electric vehicles in the second quarter and earn $16 million in net income on an adjusted basis.
Yet the buzz that provided the ultimate spark that pulled Tesla to a new high last week was an upgrade from Deutsche Bank to buy based on its view that the electric-vehicle manufacturer would hit or exceed 1 million units in annual production by 2025.
This upgrade from Deutsche Bank got me wondering what the auto landscape would look like if other electric vehicle manufacturers were able to grow their production at a 32% compounded annual growth rate as Deutsche Bank's projections have implied for Tesla.
With that in mind, I attempted to calculate what percentage of global market production would belong to EVs by 2025. The results were a bit shocking.
This technological shift may not be as impressive as you think
According to figures from IHS Automotive, global auto sales in 2013 hit 82.84 million, topping the 80 million mark for the first time on record. This represented an increase of 4.2% over the previous year and implies that middle-class consumers in emerging-market economies, as well as in China, are beginning to taste the luxury of owning their own vehicle for the first time.
Since 2010, global auto sales have grown by nearly 10 million, but looking ahead, IHS anticipates that growth from the developing BRIC nations -- Brazil, Russia, India, and China -- could push worldwide sales over the 100 million mark by 2018. Assuming a global growth rate of 3% through 2025, and 100 million global units sold in 2018, we'd be looking at 123 million autos sold in 2025.
By comparison, global all-electric vehicles (not including hybrids) saw unit sales rise to 111,718 in 2013 based on data from EVObesssion, including a 229% increase in the United States.
Assuming all existing electric-vehicle manufacturers (Tesla, Nissan, General Motors, and so on) grow production at the same compound annual rate Deutsche Bank predicts Tesla will grow its production (i.e., 32%), there would be approximately 3.1 million all-electric vehicles being produced annually by 2025.
Another way to look at this is that just 2.5% of the world's auto production is on pace to be 100% electric by 2025 if all other automakers grow their production capacity in line with Tesla's. Obviously, that's a nice improvement from the 0.13% of the market that all-electric vehicles currently make up based on EVObsession's data, but it's a far cry from the dominance that Wall Street and alternative energy enthusiasts have been lauding from this industry. California, for example, adopted a mandate last year to have 15.4% of all vehicles on its roads by 2025 be EVs.
What's holding EVs back?
The way I see it, EVs have plenty of opportunity to gain market share on traditional gas-powered autos but there are three primary reasons why I suspect they'll only garner a small percentage of global sales.
First, pricing is a big hurdle. Within the U.S. there are a number of tax credits that EV car-buyers benefit from, which they can claim on their tax returns at year's end and which effectively reduce the price of their purchase. However, the truth of the matter is that EVs may not be very affordable when compared to traditional gas-burning vehicles. In many cases, the cost-savings associated with purchasing an EV will only begin to take effect after many years and tens of thousands of miles.
For example, UC Davis in California set up a website allowing users to simulate their commute in an electric vehicle compared to a gas-powered vehicle. This "EV Explorer" project, as EcoWatch noted this month, shows that a 50-mile round-trip commute over the course of a year could save a 2014 Chevy Volt owner about $1,000 in fuel costs compared to driving a gasoline-powered 2014 Ford Focus. However, the base model price for the 2014 Ford Focus is less than $17,000, while the base model 2014 Chevy Volt will set consumers back more than $34,000. In this hypothetical scenario, it'd take the Volt owner more than 17 years to recoup the added costs of buying an EV.
In other words, unless you plan to hold on to the vehicle for a long period of time, an EV may not make sense.
More along the same lines, even if an electric-vehicle buyer hits the point at which the costs to charge their vehicle versus filling up at the pump sways in favor of buying an EV, the costs to replace a battery cell in today's EVs often runs in the thousands of dollars.
Nissan, for instance, suggests that owners of its Leaf will have about 80% of their battery capacity left after five years and 70% after 10 years. The cost to replace the battery core, and retrofit a previous-model Leaf when that time comes, is about $5,500, the same cost as replacing an engine in a number of comparable gas-powered small cars.. Of course, I'd be misleading you if I didn't mention that things like oil and fluid changes in a traditional engine cost money, too; though few repairs appear ready to wallop consumers in one lump sum as much as an EV battery cell replacement.
Driving radius constraints
Secondly, it's an issue of driving radius. With improved gas- and diesel-engine technology, it's not uncommon for gas- or diesel-powered vehicles to get upward of 30, 40, or close to 50 MPG. By comparison, electric vehicles achieve an MPG-equivalent of between 76 and 121 based on EPA fuel economy estimates found on the Department of Energy's website. However, EVs rarely have the capability to go too far outside of a given mileage radius.
The Tesla Model S is the benchmark for driving range, with its 85 kWH pack allowing the user on a full charge to drive 265 miles, according to EPA ratings. This is one of the primary reasons the Model S has sold well despite its blistering $70,000-plus price tag. Other all-EV automakers boast considerably weaker driving ranges, just 62 miles in the case of the Mitsubishi i-MiEV and 84 miles for the Nissan Leaf, which make them practical only for city-limit driving. That is, of course, unless EV infrastructure becomes widespread enough to make any talk of mileage ranges obsolete.
Where's the EV infrastructure?
Finally, EV infrastructure is a big problem. The world today caters to gas-powered vehicles. Rolling out charging stations and making plug-ins accessible outside a person's home is an enormous expense to undertake. We're slowly seeing it occur in some of the most advanced countries of the world, such as the U.S. and throughout Western Europe. However, emerging market economies, where auto growth is expected to soar in the coming decade, aren't as equipped to implement EV infrastructure.
Even within the United States, the infrastructure to support EVs is thin. Tesla is trying to change this by building a nationwide Supercharger network that'd allow an owner to get half a charge on their battery pack within 20 minutes. The other option is merely a battery swap for a price that'd be similar to that of filling up your car with a tank of fuel at the gas station. But as of mid-August, just 106 of these stations existed throughout the entire U.S. Not to mention, plug-ins can be difficult to come by for people who live in apartments or condos, effectively removing these consumers as potential buyers.
Reality, meet perception
I'd suggest the lesson both for investors looking to take advantage of the coming EV boom and for consumers who expect alternative-energy vehicles to rule the road sooner rather than later is to keep your expectations well in check. Until we see marked improvements in battery capacity to increase driving range, battery production to make EVs more cost-competitive with gasoline-powered cars, and more geographically diverse EV infrastructure, the likelihood of EVs representing more than a small fraction of the global auto market over the next decade is slim at best.
This is Warren Buffett's worst auto nightmare (hint: It's not Tesla)
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