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Think Electric Cars Are Coming Soon? Read This.

John Rosevear
November 14, 2011

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