I (Nick) recently chatted with a longtime friend who works in the auto industry for a well known global brand; (I can’t be more specific than that, for obvious reasons). Since I have followed the sector for +30 years as a buy- and sell-side analyst, we had a lot to discuss.
The big, chunky question neither of us could really answer with either industry data or a combined +50 years’ experience was “will millions of Americans buy electric vehicles in the next 3-5 years?” We agreed that Europeans would likely do so, and Chinese consumers will not have a choice.
The American market is, however, different. Distances travelled are typically longer, thanks to +50 years of suburbanization which got another shot in the arm over the last 24 months. Mass transit is rarely a genuine option for daily commuting outside of a few East Coast cities. People own cars to go to work, pick up kids from school, shop, get to leisure activities and take vacations.
Passenger cars and light trucks are our mobile living rooms, and Americans want them to be trouble- and nuisance-free. Gearheads aside, cars are appliances. And those appliances have to be available 24/7, with only minimal down time for refueling or recharging.
It is clear from all the auto industry chatter of late that car companies expect US consumers to adopt electric vehicles without much pause or question. They’ve seen how well anything new can sell in the Tech space, and they presume it will be the same with EVs. Industry executives see Tesla as proof of that as well. If a brand-new company can get to critical mass in EVs without a pre-existing brand, a dealer network, or much advertising, so can they. Or so the thinking goes…
The conversation turned to whether high gas prices might spur EV demand, and there is some good news on that front. The chart below shows the volume of Google searches for “electric car” (blue line) and “new car” (red line) from 2020 to the present. Search interest for “electric car” has indeed spiked in recent weeks and is now on par with the more generic search for “new car”. That is significant, even if the trend is new.
Also heartening: US search volumes for “EV charging” are rising quickly. The 2020 – present Google Trends chart below shows query volumes are 3x where they were a year ago. That speaks to both a growing installed base of electric vehicles and also interest from potential buyers in this important, novel feature of EV ownership. As with “electric car” searches, these peaked just 2 weeks ago as gas prices were spiking.
Gas prices are, therefore, a definite tailwind for EV demand but there are also several potential longer-term problems:
- EVs are more expensive than basic gas powered vehicles and will be for many years. It may be necessary to fundamentally alter the US vehicle ownership experience, with new vehicle buyers paying substantially more (but perhaps with more perks) than they used to with internal combustion engine vehicles.
- Their batteries lose power over time, reducing trade-in values in potentially unpredictable ways. Used car prices are an important component of calculating monthly lease payments and also determine a piece of new vehicle loan pricing (in case of repossession).
- Battery technology is not improving quickly, but if it does what happens to the value of older EVs? Will consumers want to take that risk?
- Charging infrastructure in the US is insufficient to reduce many consumers’ range anxiety. The auto industry hopes/expects buyers will get over this, but it is a brand-new problem.
- As more states mandate all-EV new vehicle sales in coming years, many consumers will hold on to their used, internal combustion engine vehicles longer. This will reduce overall light vehicle demand until those vehicles entirely wear out. This will take +10 years based on current turnover in the aggregate US light vehicle fleet.
- There will be a US recession at some point, reducing overall light vehicle demand (including that for EVs).
- There are still too many car companies and auto assembly plants in the world. Once supply chain issues get sorted out, industry profit margins will drop back to their old subpar levels. This could force some marginal companies to cut prices, even on EVs, to hold market share.
Summing up: in an industry that makes plus-billion dollar bets on new vehicles without batting an eye, the transition to electric vehicles is still far riskier than anything any car company CEO or investor has ever seen before. It will be a fascinating time for the industry. We recommend, however, caution if participating as an investor.