Electric cars, and the industry that's emerging to support them, get a lot of play here at the Fool. Many of us love the idea of investing in what could be a giant, transformative new industry -- one that shatters old ways of doing business while (in theory, at least) doing some major environmental good.
But as a professional auto-industry nerd, as well as an avid individual investor, I have a more conflicted view. On one hand, I think electric-auto technology, whether in pure-electric cars or in ever-more-advanced gas-electric hybrids, is here to stay and will, in fact, grow in a big way over the next decade or two.
On the other hand, I think this is a hard trend to invest in, because there's a dynamic at play that most tech-oriented investors don't see. As I see it, the companies that are really going to be in the forefront of this transformation are not the brand-new names that appear to be on near-vertical growth trajectories. In fact, some of them are among the very oldest names in post-horse transportation -- and their dominance is an obstacle to growth in this space.
The promise of -- and problem with -- Tesla
Tesla's recent execution has been impressive. I think that, absent some self-inflicted error (unlikely, but possible), the company will hit its goals and sell quite a few cars over the next year or two. But I've been reluctant to invest, or recommend the stock to readers, because I can't come up with a good answer to this question:
What happens when the big kids decide to eat Tesla's lunch?
The living room is full of elephants
Tesla is a company with one factory, a small (by global auto-giant standards) engineering staff, and a business plan that requires it to maintain margins that no other automaker can match.
What happens when a company with dozens of factories around the world, thousands of engineers, the clout and budget and stability to hire anyone it likes, and massive, established relationships with hundreds of leading specialist auto suppliers decides to beat Tesla at its own game? Tesla's technology is good, but it's not rocket science. It won't take long for a company like Ford
What happens to Tesla's 25%-plus margins when Volkswagen, which is happy with margins in the 8% range, decides to build an electric Audi that out-Teslas Tesla -- and leverages Audi's massive popularity in China to generate huge economies of scale that Tesla can't hope to match? What happens when Nissan, which is already rumored to be developing an electric Infiniti, comes to market with a car that matches the Tesla Model S's range and beats it on luxury features -- all for less money?
I could keep going in this vein. You see the problem: Tesla might -- might -- have a sustainable future as a niche player. But the companies blocking them from becoming more -- the companies poised to be the real big players in EVs -- are immense, established, global names that aren't likely to be high-growth investments.
This isn't particularly advanced technology
Drilling down past the automakers to the suppliers yields the same problem. Start-up battery-maker A123 Systems
Again, the same problem: Billions and billions of dollars are being invested in the electric car's future, and those investing are huge, global players. This is an exceptionally hard industry to "disrupt" because of the massive capital outlays required to bring a product to production -- and because the established players control most of the capital.
And none of this addresses the (very large) fundamental question of whether consumers will even want electric cars. Gasoline isn't going away, and to the extent that the major automakers can meet their regulatory fuel-economy obligations with hybrids and more efficient conventional designs, they probably will, because those technologies don't require a paradigm shift on the part of the consumer.
That's ultimately the big question. It's pretty clear that hybrids will continue to capture more of the market -- and that will ensure a role for electric-car technology. But pure-electric cars are much less of a sure thing, and investors in pure-electric plays need to ponder that risk, along with the (much larger, to my mind) risk that today's automotive leaders will continue to be the leaders in tomorrow's changed world.
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