Our April 24 Boston Security Analysts Society lunch session on the Electrification of Transportation explored the potentially disruptive impact to multiple industries of the electrification of transportation. The internal combustion engine was – literally – the economic engine for much of the 20th century, so the far-reaching impact of a change is hardly surprising.
Our panelists talked about the drivers (increasing fuel economy standards, oil independence), the size and scope of the transition (affecting as well as requiring the involvement of multiple industries, consumers and policymakers), the major challenges (battery life, consumer acceptance, existing and new infrastructure) and business models (using A Better Place’s battery-swapping model as both an example and a counterpoint). The framing presentations by Itay Michaeli of Citigroup and Ron Minsk of the Electrification Coalition provide a significant amount of information. I’ve included Ron’s in this post and Itay’s is available here.
The discussion and Q&A opened up topics that could fill their own sessions. I’ve selected just a few that demonstrate for me why the electrification of transportation should be getting a lot more attention from investors and investment professionals.
- The natural tendency to assume that the auto companies have the most at risk and the most to lose. Consider it from a different angle. The century of the internal combustion engine spawned two mega-industries – autos and oil. Looking at market cap and corporate health, one could argue that’s worked out a lot better for oil companies than it has for car companies. Electrification may offer the automotive industry a chance to capture more value while being a significant threat to oil (72% of US petroleum consumption is for transportation).
- Will buying a car become like buying an iPhone? A Better Place offers just one take on what might be very different business models for cars in the future. Theirs is a subscription model. Instead of buying minutes, the customer buys miles (by swapping batteries). That revenue stream allows the customer to buy more car for the money, just as a smartphone buyer pays a discounted price for the hardware. The company says that, in its initial market in Israel, this model allows the consumer to buy the equivalent of a Camry for the price of a Corolla.
- Big Oil really isn’t Big Oil. Exxon Mobil is the largest US corporation by sales and the second largest by market capitalization. It wields significant political power. But, measured by total oil & gas reserves, it’s puny (see Ron Minsk’s Chart #8). 90% of the world’s oil reserves are held by national oil companies partly or wholly controlled by their governments.
- Building an auto industry isn’t easy. China established an ambitious program to develop an automotive industry. And like developing countries that skipped landlines to build cell networks, China looked to highly fuel-efficient and electric vehicles. They’ve found that it’s very hard to build a quality car – the fit & finish that automakers worldwide have had to develop. Electric vehicles are new and not easy. They are not yet producing cars at the volume they expected.
- Consumers want widespread availability of charging stations – but they may not actually use them. Cars spend 90% of the time parked at home or work. The addition of just one charging station in a Japanese EV pilot resulted in customers using more of the battery’s charge when driving. They didn’t use the charging station, but they were comfortable driving more because they knew it was there. What’s the business model for charging stations that people don’t use?