Avoiding the Car Companies

Let’s get one thing out of the way. Tesla. The iconic electric vehicle company produced about 360,000 cars last year and lost $864 million. That was a win; the company lost over $1 billion in 2018.

Founder and CEO Elon Musk thinks they might produce 500,000 cars this year. They might even turn a smidge of a profit. For that, investors have graced the company with a $135 billion market cap. I thought the company was an obvious short at $420. I still think so at $740.

Tesla is the one car company stock that’s moving higher. After losing more than $1.5 billion last year, Ford’s stock is back to $9, and GM’s stock fell back to $33, the price at which it went public (again) a decade ago, in November 2010.

This isn’t the end of the pain. Car companies, in general, are in a trick bag, and Tesla’s in the group, but for different reasons.

A couple of years ago, cities including Paris and Mexico City pledged to ban the registration of new fossil fuel cars by 2025. Several countries picked up the mantle, with France and England planning to ban new fossil fuel car sales by 2040, and Norway pledging the same by 2025. Last year, Britain moved the timetable forward, claiming it will ban the sale of new fossil fuel cars by 2035. Everyone is moving to curb vehicle emissions.

Whether you’re a climate change advocate or skeptic doesn’t matter. Governments are moving this direction and demanding that industries follow.

With global car sales trending a bit lower over the past year, this might sound like glorious news. A new mandate from the government gives car companies a golden opportunity to exploit – er, explore – a new market. But switching from internal combustion engines (ICEs) to electric rides isn’t simple, and it isn’t cheap.

You might not know it, but Ford actually sells electric vehicles, but it will take a sizable investment for them to ramp up production to a meaningful level. The company plans to invest $11 billion in electric vehicle capacity and deliver 16 electric models by 2022.

That’s somewhere between 24 and 36 months from now.

Clearly Ford wants to get in front of the governments mandating higher demand in the years and decades to come, but who’s going to buy all of these cars in the next three to five years?

Electric vehicles were a modest 2.0% of U.S. auto sales last year, that’s 350,000 out of 17 million. If we doubled that this year, and then again next year, we’d go from 2%, to 4%, to 8% in 2022. If car sales reach 18 million, which seems unlikely, that would be 1.44 million electric cars sold in the U.S. by all manufacturers.

Even if Ford captured 30% of the U.S. market, which again, seems highly doubtful, it would sell 540,000 electric vehicles domestically. That’s a pretty lousy return on $11 billion.

GM isn’t much better off. The company plans to spend $10 billion and bring 20 battery-powered electric vehicles to the market by 2023.

Volkswagen, the largest car seller in the world, plans to spend $90 billion.

All of this investment might be for good reason. As governments around the world forbid the sale of new ICE-powered cars, car manufacturers want to be ready for the switch. But so far, there’s no plan on

how they will turn profits as they make the transition.

Instead, it looks like they will burn through every dollar they make, leaving shareholders with precious little except the hope that their company is well-positioned for a questionable future.

As for Tesla, clearly the company is set to produce electric vehicles. It’s already proved there’s a niche market for high-end electric vehicles. But sales of the Model S and X have been falling off as the Model 3 picked up the slack. And with Ford, GM, Volkswagen, and a host of other companies bringing more electric models to market, Tesla will face increasing competition for the budget-conscious shopper.

When that happens, even Tesla will be fighting over limited market share in the electric vehicle space.

Rodney Johnson

Rodney’s investment focus tends to be geared towards trends that have great disruptive potential but are only beginning to catch on to main-stream adapters. Trends that are likely to experience tipping points in the next 5 years. His work with Harry Dent – studying how people spend their money as they go through predictable stages of life and how that spending drives our economy – helps he and his subscribers to invest successfully in any market.