I am not a car person. There is a saying in the cycling community that you’re only a true cyclist if your bikes are worth more than your car, and with my 15-year-old Toyota Corolla jalopy, I have no problem passing that test! All that my car does is ferry around kids and bikes, and even my kids are embarrassed by it. So I’m not enthusiastic about EV stocks because I’m wowed by the cars. I’m enthusiastic about EV stocks because enthusiasm seems justified.
The valuations of Rivian (NASDAQ:RIVN), Lucid (NASDAQ:LCID) and other niche EV manufacturers, not to mention Tesla (NASDAQ:TSLA), says one thing clearly: the market thinks that most of the incumbents won’t make the transition. And the market may be right.
Putting ACES on ICE
Half a dozen years ago, the chair of the business I ran at the time sold his Bentley. The Bentley salesman, who had sold him several cars over the years, was thrilled to see him come into the showroom and was happy to agree a generous valuation for the used car. Once the price for the used car was agreed, he eagerly asked, “Now what would you like to test drive, sir?”, to which he received a simple answer: “Uber”.
While there weren’t many Bentley owners abandoning car ownership in 2015, many in the auto industry now see the future as moving from internal combustion engines (ICE) to ACES: Autonomous, Connected, Electric and Shared. While all of these technologies, and the business models they imply, have a place in the future, it will be a long time before they all have a place in the same future vehicle. Meanwhile, incumbent automakers are working rapidly to try to develop competitive advantages in software, networking, electric drivetrains and batteries and shared ownership models, all of which are distant from their previous core competencies, both technically and commercially.
Autonomous driving appears to be a much harder nut to crack technically than many expected a decade ago. Indeed, both Arrival (NASDAQ:ARVL), a light commercial vehicle EV start-up I find particularly interesting, and XPeng (NYSE:XPEV), a Chinese EV manufacturer taking on Tesla, argue persuasively that autonomous solutions are likely to differ regionally. XPeng has focused on developing driver assist for Chinese roads, while Arrival is planning to offer customers the opportunity to swap sensor packages and logic modules for different conditions, as what’s right for Russian winter will not be right for California summer. Moreover, there are complex outstanding legal issues surrounding liability for damage and deaths caused by autonomous vehicles.
Connected solutions will also fragment regionally, but for political rather than technological reasons. Given how the debate over Huawei network equipment has unfolded, it seems unlikely that many western countries will accept Chinese connected vehicles, or perhaps vice versa. In Europe, privacy concerns may also interfere with the rollout of connected vehicles. Standards will be a challenge with vehicles connecting to one another autonomously, as will concerns about cyber-attacks, as cars have proven relatively easy to hack.
Considering the technical and legal complexity of autonomous driving and the regulatory and political complexity of connected vehicles, it’s most likely that these techniques will be deployed for long-distance hub-to-hub transport on motorways, where the driving situation is much less complex, and in confined areas, like depots and ports. Many of the vehicles in these settings are heavy vehicles, which are as likely to be hydrogen-based as electric in the future. It seems unlikely that these early use cases for autonomous, connected vehicles will be the first to also electrify and move to shared ownership business models, which have so far focused on personal mobility.
In short, if established automakers are waiting for a comprehensive reconfiguration around ACES, then they are likely to wait for some time. By contrast, new entrants can focus on a narrow customer profile and a narrow range of vehicles, build great companies to serve these niches, and build out from there.
Figure 1: Aspirations for ACES fall short of reality
Will the incumbents make it?
In 1900, the rail industry accounted for more than 50% of market cap in the US, and just under 50% in the UK, which was the largest stock market in the world at the time. Today, the sector is irrelevant, and that isn’t because the companies involved didn’t have a chance to change. Consider Pullman, the famed manufacturer of rail cars. During the second world war, by which point it was absolutely clear that roads were supplanting rail, Pullman manufactured a wide range of combat vehicles. Pullman could have developed that business into a heavy vehicles business, naturally hedging themselves against the railcar business, but by the time that Pullman actually tried this, in 1951, it was too late to take the business in a new direction.
Current EV start-up valuations clearly indicate that the market expects that the new entrants are more likely to make it than the incumbents. Some incumbents are trying hard to make the transition, and only some of those will succeed. It would have been a shrewd trade a century ago to sell the incumbent railways and invest in auto manufactures. Today, markets are making the same bet, moving from incumbent ICE manufacturers to new EV manufacturers.
Strategy is what you choose not to do
When I was at London Business School, the ever-memorable Professor Costas Markides taught us that the way to understand a company’s strategy wasn’t to ask what new initiatives they were launching – you would inevitably drown in the deluge of worthy initiatives. Instead, you should ask what activities the company had stopped – not were planning to stop at some point in the future, but had actually stopped – because they were not in line with the strategy, The list, if it existed at all, would be short because stopping activities, especially high-value, margin-accretive activities, is very hard for any business.
Ford is facing this challenge now. The F-150 Lightning is apparently an excellent EV, with Ford closing new reservations after receiving 200,000 reservation deposits for the 70,000-80,000 vehicles that it plans to produce in 2022. Ford will surely deliver many more F-150 Lightnings in 2022 then Rivian will deliver R1Ts.
The problem for Ford isn’t whether it can deliver EVs. Rather, the problem for Ford is that it will be a very long time before it’s able to stop delivering ICEs. 8% of Americans do a job that involves an F-Series truck, ranging from the F-150 up to the massive F-SuperDuty platform. The F-Series has been the bestselling vehicle in America for more than 40 years, with sales of more than a million trucks a year globally, and the F-150 outsells its rivals from Chevy and Dodge almost two to one. Even if every F-150 buyer were willing to switch to an EV, and range anxiety may be an obstacle for many of them, electrification may not be the best decarbonisation route for the F-150’s heavier cousins. No matter how successful Ford is at making EVs, most of its executives’ time will be spent for many years to come on ICE vehicles, aftermarket support for ICE vehicles, and plants and workers focused on ICE vehicles.
Rivian has won its valuation because the Rivian team comes to work every day and focuses on making a great electric truck for recreational use. The market is betting that the Ford team will never get the opportunity for that focus.