2022 was not kind to the electric vehicle (EV) industry, with Tesla (TSLA -1.06%) and many other stocks suffering their worst calendar year of performance on record.
Given the ongoing market volatility, now seems to be a good time to take a step back and focus on the ultra-long-term factors driving the EV industry forward. Let's dive in.
The ICE is melting
Daniel Foelber: Federal support through favorable tax credits and growing consumer demand for EVs are two significant tailwinds for the industry. But I would say that the least talked about green flag is the skin in the game that the industry now has in EVs.
Virtually every major legacy automaker has rolled out a sizable EV investment plan. For example, let's look at the world's second most valuable car company (behind Tesla) -- Toyota (TM -1.08%).
In December 2021, Toyota announced a staggering $35.2 billion investment in EVs between 2022 and 2030. In August 2022, it announced a $5.6 billion investment toward battery manufacturing for EVs. It plans to begin battery production between 2024 and 2026.
In addition to the legacy automakers, we have a slew of companies exclusively devoted to pouring billions into EV production. Rivian (RIVN 0.34%) finished 2022 with $12 billion in cash, equivalents, and restricted cash left on its balance sheet. It plans to deploy all of that cash by the end of 2025. Major Chinese automakers focused on EVs include BYD, Nio, Li Auto, and Xpeng.
In March 2022, Ford (F -0.41%) announced a restructuring that split its business into two divisions -- Ford Blue (legacy internal combustion engine (ICE) portfolio) -- and Ford Model e (EVs). In November 2022, General Motors (GM -0.47%) announced plans to build 400,000 EVs in North America from 2022 through the first half of 2024.
The sheer capital and multiyear efforts conducted by the major automakers add a layer of stickiness to the EV transition. Not only do these automakers want a return on their investment, but they also want to not look foolish by pulling the plug on these programs and risk wasting money. Put another way, aggressive EV spending by legacy automakers and a swath of new companies make it harder to turn back toward the old ICE ways.
The industry is transitioning from the "early adopter" phase to the "early majority" phase along the technology-adoption curve. That transition bodes well for EV automakers that can sustain a price and/or performance advantage and spend investment dollars wisely.
The U.S. aims to catch up to China and Europe
Howard Smith: It's still too early to know all the winners or losers in the EV sector, but Tesla has shown there's a clear path to earn hefty profits. It's not hard to see why investors follow Tesla stock closely when its profits have accelerated over the past two years.
Data source: Tesla. Graph by author.
While some detractors point to a lack of competition contributing to the company's success, there is still a long runway for growth in the sector. EVs made up just 10% of all cars sold in 2022. That marks a turning point toward mass adoption that opens up opportunities for others in addition to Tesla.
Demand has mainly been driven by consumers in China and Europe so far, and industry followers started to worry that demand slowed last year when Tesla dropped prices in China. It followed that up with further vehicle-price decreases in Europe and the United States. Those moves stoked sales, and investors realized Tesla was making strategic moves when it reversed course and raised prices of its best-selling Model Y in the U.S. multiple times soon after.
That was because the company was working to take advantage of $7,500 in federal tax credits approved in the Inflation Reduction Act (IRA). Early last month, the U.S. Treasury Department clarified and adjusted conditions for vehicles that qualify for those tax credits. Tesla moved quickly to take advantage of that.
But it also means that other automakers can participate in the push from the U.S. government to spur EV adoption. As Ford, General Motors, Volkswagen (OTC: VWAGY), and start-ups like Rivian grow their electric-vehicle lineups, they have a chance to duplicate the kind of profits Tesla has shown is possible.
Risks remain for the EV industry
Tesla proved that a company could make money selling EVs. And that accomplishment, paired with emissions-reduction efforts, was a one-two punch that opened the floodgates on industrywide EV investment. A united front gives the transition from ICE to EVs more weight. And tax credits add even more incentive to make that push sooner rather than later.
The biggest challenge facing the EV industry is whether other companies can profitably produce and sell EVs. This is a significant uncertainty for the industry because we do not know how widespread EV adoption will influence supply chains for elements like lithium and rare earth metals, or how increased charging would impact the electric grid.
New car demand rises with population increases and the economic progress of developing countries. But aside from that, demand for cars won't skyrocket all because people are buying more EVs. Rather, EV demand is taking market share from existing ICE sales. Automakers heavily invested in ICE are attempting to switch buyers to EVs in a zero-sum game. Pure-play EV companies entering the market are competing with each other and established brands to switch consumers from ICE to EVs -- from the familiar to the unfamiliar.
As Charlie Munger famously said, "Always invert." He means to think of the best counterargument to your investment thesis. When it comes to EVs, there are sizable tailwinds and a great deal of uncertainty. And for that reason, the industry continues to be a hotbed of exciting but risky growth stocks instead of surefire bets.
