For many years, electric vehicle critics have been pessimistic that EVs will ever go mainstream because they, have argued, will always be more expensive than fossil fuel-powered vehicles. Market experts have repeatedly pointed out that EVs need to achieve cost parity with ICE vehicles if they ever hope to displace them from our roads. Luckily for EV buffs, there’s growing evidence that this might happen sooner than many expect. Stiff competition, especially from China, as well as an oversupplied market have become a nightmare for companies like Tesla Inc. (NASDAQ:TSLA), with the world’s most valuable automaker embroiled in never-ending price wars. Tesla has seen its profit margins tumble in recent years after repeatedly cutting prices of its models, with the sharp fall in the price of battery materials unable to fully offset lower sticker prices.
This is, obviously, bad news for EV investors, but is good news for buyers of electric vehicles. Indeed, Tesla’s most affordable model is now cheaper than its ICE peer, "The Model 3’s starting price is now $6,500 less than the cheapest BMW 3 Series, which is often seen as the Tesla sedan’s most direct gasoline-powered competitor," Bloomberg has noted. But one market expert now believes that this is bound to become an industry-wide trend in a matter of years. Gartner has predicted that EVs will be cheaper to produce than ICE vehicles of the same size in three short years, thanks in large part to improvements in manufacturing methods with production costs dropping faster than battery costs.
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“New OEM incumbents want to heavily redefine the status quo in automotive. They brought new innovations that simplify production costs such as centralized vehicle architecture or the introduction of gigacastings that help reduce manufacturing cost and assembly time, which legacy automakers had no choice to adopt to survive,”Pedro Pacheco, vice president of research at Gartner, has said.
Unfortunately, the vicious competition in the space will lead to the demise of many EV startups, as we have already witnessed with the likes of Lordstown Motors and Proterra. Gartner has predicted that by 2027, 15% of EV companies founded since the last decade will either be bankrupt or will have been acquired. According to Pacheco, the EV sector “...is simply entering a new phase where companies with the best products and services will win over the remaining.”
"The bankruptcy of Lordstown signals that the days of successful EV startups is in the rear-view mirror. Moving forward it will be Tesla and the traditional incumbents ... that will duke it out for market share," Thomas Hayes, chairman at hedge fund Great Hill Capital, told Reuters shortly after Lordstown filed for bankruptcy. The EV startup went under after failing to resolve a dispute over a promised investment from Taiwan's Foxconn.
Another downside to EVs becoming cheaper: according to Gartner, the average cost of an EV body and battery repair after a serious accident will jump by 30% by 2027, meaning it will be cheaper to just write off the vehicle than undertake the repairs.
Tesla, EV Stocks Hammered
As you might expect, investing in the EV space has become a high-risk venture amid shrinking sales and contracting margins. Tesla shares have tanked 29.2% in the year-to-date after Morgan Stanley’s Adam Jonas cut Tesla’s price target on weakening EV demand. Jonas warned that hybrids are competing for the marginal EV buyer while fleets are dumping EV plans. He also raises the possibility that Tesla will post negative profit margins in its pivotal auto segment in the current year.
"We expect Tesla’s 1H24 results to come in below expectations on profitability, with GAAP OP margins in the 2-3% range, implying underlying EV manufacturing margins (ex downstream retail and ZEV credits) to be potentially in the red," he updated.
Jonas sees Tesla’s FY24 automotive gross margin falling to 11.4%, including a single-digit margin rate for Q2. He has also cut the company’s FY24 EPS estimate to $0.99 vs. $1.54 previously and lowered non-GAAP EPS estimate to $1.51 vs. $2.04 previously. However, he has stuck with an Overweight rating on the EV stock, "We believe Tesla has significant attributes to be valued as an AI beneficiary, but the company must see a stabilization in the negative earnings revisions within the auto business first. We do not believe Tesla will get credit as an AI company as long as core auto earnings are being revised down. This process may take a few more quarters to see through, over which time our $100 bear case may be in play."
Tesla’s EV peers have not fared any better: Rivian Automotive (NASDAQ:RIVN) has tumbled 45.2% YTD; Fisker Inc. (NYSEFSR) has crashed 78.0% while Lucid Group (NASDAQ:LCID) has declined 26.4%.
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Long-term Tesla investors are, however, not complaining with the stock having returned a handsome 830% over the past five years.
By Alex Kimani for Oilprice.com
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Well I guess the developed world loves to have things it can just toss away when it is too expensive to fix them. I'm not sure that will fly in the other parts of the world where one can't afford to throw every broken thing in the recycle bin.
EVs are a fad, They will get a share of the global car market but they will never ever prevail over ICEs.
Dr Mamdouh G Salameh
International Oil Economist