Italian iconic coachbuilder and design firm Pininfarina and start-up Britishvolt announced a collaboration to build the first UK EV Battery Giga-Factory. The project is set to bring the UK at the forefront of the automotive industry evolution to compete not only with the US’s Tesla Giga-Factory but also with numerous competitors that are increasingly crowding this space in Germany, Poland, and more.

*Silvio Pietro Angori, Pininfarina CEO and Lars Carlstrom, co-founder of Britishvolt

The term hypercar usually indicates a vehicle sitting at the very top segment of the market in terms of pricing, performance, and customer experience. As one could expect, it is a market reserved for a really small crowd of wealthy. This market niche has become quite crowded in just a few years though.

Many new companies are entering this niche despite the Automotive industry being notoriously a sector with really high entry barriers. The reasons for this are various, along with the general direction of the mobility sector and environmental regulations. The nature of the EV itself lowers these barriers. As a product requires less engineering complexity and makes it easier to achieve eye-catching performance and numbers.

*Lotus Evija

The current EV battery industry, with a few big companies, is very much an oligopoly. And the major ones all come from Asia, Korea, Japan and of course, China.

Chinese CATL (Contemporary Amperex Technology Limited, or in Chinese 宁德时代 – Níngdé shídài) has got the spot as the largest EV battery manufacturer in the worldfor a while now. Already in 2018, CATL signed deals with VW who has a major presence in China which is also its major market, but also BMW and Nissan. It raised RMB 5.46 billion (£623 million) becoming the leader over Panasonic, which is famously in partnership with Tesla for the EV batteries production. At the end of the year, it posted a 48 per cent year-on-year revenue growth, reaching RMB 29.61 billion (£3,2 billion).

HOW IT STARTED

CATL, which according to Reuters is still the largest EV battery manufacturer, has in the meantime added to its customers Daimler, Volvo, Toyota, and Honda. The Chinese company after its big expansion in China is also building its first plant in Germany and looking at the US as well. For CATL this could be an opportunity to leverage its position in the largest automotive market in the world to extend its partnerships with European manufacturers even outside the domestic market. Panasonic still follows, then come Chinese BYD and the South Koreans LG Chem and Samsung.

Having secured deals with big groups like VW, BMW and Daimler could give CATL access to luxury performance brands under large group umbrellas too (Bentley, Bugatti, Lamborghini, Rolls-Royce).

CATL IN THE SHENZHEN STOCK EXCHANGE

The current expansion in the Chinese domestic market and the numerous partnerships make CATL prospects really strong for the future and its shares appreciation shows the trust of its investors. Since its IPO in mid-2018 on the Shenzhen stock exchange, its shares have more than tripled their value from RMB 53 each to over 169.  There has naturally been a slight decrease in the last two weeks caused by the current coronavirus outbreak emergency.

*CATL share price 1 year graph

Despite this last slump, from which the company will arguably recover once the situation is stabilised, CATL has experienced a continued and stable growth. Its appreciation started accelerating in November 2019 when talks with Tesla began. But over a week at the beginning of February, the stock experienced a big jump upwards as it is clearly visible in the graph. Once again, as it often happens these days in the electric segment of the automotive industry, this sudden appreciation has its roots in a big announcement that involved Tesla.

A NEW DEAL FOR THE BIGGEST AUTOMOTIVE MARKET IN THE WORLD

And China to become a global leader in the sector through another partnership with the firm producing the best-selling electric car in the world, the Tesla Model 3.

More importantly, according to a CATL announcement, the company is going to provide Tesla with Lithium Iron Phosphate batteries (LFP). Despite having an inferior energy density compared to those using lithium cobalt oxide, LFP batteries should have a higher specific capacity, lower cost, and toxicity and be more sustainable. It avoids, in fact, the use of cobalt, a rare mineral whose mining, mainly happening in Africa, has caused numerous discussions around ethical and environmental issues, which I have also analysed in a previous article.

THE STRATEGIC SIGNIFICANCE OF THIS PARTNERSHIP

To strengthen even more the Chinese company’s position, there seem to be troubles on the horizon for its main competitor and Tesla’s first partner, Panasonic. Tensions between the two began in 2019 when Elon Musk blamed the Japanese batteries manufacturer for constraints in the production of the Model 3. News started to spread regarding Tesla vertically integrating the batteries production to reduce its dependence on Panasonic. As for 2020 though, the JV between the two turned profits for the first time, following the strongest financial year yet for Tesla, which I also discussed here. On the automotive side then, things seem to be improving, but last month it was also announced that Panasonic and Tesla would end their collaboration on solar cells. Once again, due to tensions over production issues and differing objectives. Tesla turned once again to China for the solar cell supplies. If such an important partnership was interrupted this would bring further advantage to CATL, especially as it moves in Europe and potentially in the US.

TO CONCLUDE

Along with the results of this partnership in the Chinese domestic market, a key role to lead the industry will be played by expansion and exclusive deals in Europe and the US, as well as technological advancements toward better environmental and production sustainability.   

As of now CATL seems a strong investment option. With profits doubled year-on-year in H1 to RMB 2.1 billion (£232 million), a portfolio of deals with the most important car manufacturers in the automotive industry, and a partnership with great potential and ongoing expansion plans in the other two major continents.

As I am writing this article, Tesla shares trade on the NASDAQ for around $750 each. Its market capitalisation is currently well over $100 billion and has overtaken Volkswagen as the second most valuable automotive company in the world. It is now second only to Toyota. This astonishing growth is the result of a really positive year for the EV company.

Q1 of 2019 still saw slow sales and delayed deliveries to the following quarter. Production and deliveries have gradually improved throughout Q2 and Q3 with Model 3 substantially pulling up the entire company with 60,000 to 79,000 vehicles per quarter. Models S and X together did not reach the 20,000 units. Some issues and uncertain financial results drove Tesla shares valuation as low as $176. Along with this, the official presentation of the new Model Y has been delayed to 2020. This new crossover according to Musk should outsell all the other models combined, which is arguably likely considered the current market trend with SUVs and crossovers sales.

WHAT HAS HAPPENED EXACTLY THEN TO MAKE TESLA SHARES SKYROCKET THIS WAY?

First of all two of the biggest commitment of early 2019 were maintained. The first was to sell between 360,000 and 400,000 vehicles in one year, 500,000 even, if deliveries in the new Gigafactory in China had started early enough. Tesla closed the year reaching sales of 367,500 units. Secondly, the Shanghai Gigafactory did not start its deliveries in 2019 but was indeed established very quickly, setting Tesla in a really favourable position for the future. Because now, not only it is within the largest automotive market in the world, but it is also an industry regulated by a Government that is investing massively in developing an EV infrastructure and market as quickly as possible. Moreover, avoiding import tariffs will likely play an important role in Tesla’s endeavour in China. Its shareholders and new investors showed their trust and satisfaction at this news right away. Its shares in just two days, from October 23rd to the 25th jumped from $250 to almost $330, as can be seen in the graph below.

Moreover, Tesla is the first foreign automotive company in history, to be allowed to set up a wholly-owned subsidiary in China without being imposed a 50-50 Joint Venture with a Chinese partner, as it happened to every other competitor before. This naturally grants the American company to preserve its technology and know-how while avoiding potential risks with tariffs and delivery costs.

In the meantime, Volkswagen Group has been gradually recovering the shareholders’ trust after the emission scandal of 2015 through a major rebranding and massive sales. Its figures this year reached almost 11 million units and has been steadily the highest or second highest-selling brand in the world for the past few years.

How a company that sold just over 350,000 cars in one year is valued more?

The new Gigafactory in Shanghai, as mentioned before, has definitely played an important role in this growth. Secondly, the marketing machine has worked well and consistently all the time. Whether it is the company with new achievements, innovative features, and unforeseen unveilings (i.e. roadster and cybertruck) or its peculiar owner grabbing the media attention with new entrepreneurial initiative, bold claims and even collaborations with social media stars, the spotlight on Tesla never turns off. It works like a proper clickbait machine. This factor made the share ‘hot’ (especially for speculators) but should alert investors.

There are different tools that can be used to select an investment-worthy stock. Rules defined and observed by some of the most successful investors in history, starting from the approach: ‘The only thing you can be confident of while forecasting future stock returns is that you will probably turn out to be wrong’.

A starting point for growth-stocks whose excellent prospects are already well recognised is to look at the price-earnings ratio. Over an almost 10-year period Tesla, being a young company in a capital-intensive sector, rarely registered a profit, meaning its cyclically adjusted P/E ratio (CAPE) would be strongly negative and lose its significance. Despite the profit and positive EPS registered in Q3 and Q4 of 2019, the P/E ratio overall would still be negative.

*Tesla Net profit/Loss ($ million), EPS, and Outstanding shares volume (2010-2019)

A similar conclusion can be drawn for Tesla’s book value per share. The trend is observable for especially attractive companies, like tech or highly innovative ones. As they improve their prospects, the respective shares are likely to increase in price reflecting less and less their intrinsic value. For this reason, some companies, as great as they might be, risk becoming highly speculative exposing an investor to excessive fluctuation in their stock price which becomes largely unrelated to their actual book value. Finally, Tesla has never paid dividends to its shareholders.

This is just to mention a couple of observable metrics that (along with others) help reflecting a company’s position regardless of the future returns expectations of investors, especially after the entry in the Chinese market. Nevertheless, the trust of its shareholders shows confidence in this renewed industry growth potential but discounts some relevant external factors. Above all, the potential political risk for the Chinese domestic market.

The same metrics for the just overtaken VW, with shares trading at €165.6 and market cap at almost €82 billion, are instead much different. For instance, its CAPE (calculated in euro) is 7.02, with the emission scandal in 2015 that seriously affected the company’s financial outlook. For 2018 alone (2019 annual report is not available yet) is 6.97. VW has also a steady dividend payment record.

Finally, it is mainly due to the 2015 scandal then, that the company, despite the rebranding efforts and the aggressive electrification strategy has not regained yet its previous market value. So, on one hand, there is an attractive company that despite the production and financial difficulties is incredibly attractive and shows good prospects, on the other one that has probably still some time to go to completely recover from its wrongdoing despite the market success.

As of right now then, using value investing criteria, Tesla shares seem risky and significantly overpriced, even for the growth opportunity of the market. Along with the high volatility due in part to its great popularity, there are still numerous factors that could significantly hinder its growth both political and economic. Moreover, the competition in the EV segment is getting fiercer by the day, with new and improving alternatives, many of which just coming from China. The company’s track record is also unstable, even though relatively short and in a very capital-intensive industry. For this reason, while the company looks on a good path to become strong and consistently profitable, it is probably worth waiting for it to stabilise and see if some of these prospects will be realised even when the spotlight turns off. At that moment, Tesla might become a really solid investment in the industry.

Comment below if you don’t agree with this point of view, or if you agree but wish to add your perspective!

China wants to take the future of supercars by storm. A new generation of start-ups challenging the supremacy of Porsche, Ferrari, Lamborghini, McLaren, and others in the field of luxury cars – sleek, powerful, and fast - is emerging in the fast-growing automotive market. So, should traditional European and American luxury supercar manufacturers be on the lookout?

In the last couple of years, we have seen the Chinese NextEV Nio, funded by tech giants Tencent and Baidu among others first winning a Formula E title, and then releasing its track car Nio EP9 that established the Nürburgring record for electric cars. Many more fresh names are emerging in this burgeoning market, such as the start-up TechRules with its GT96 and AT96 TREV (Turbine-Recharging Electric Vehicle).

By Jengtingchen - Own work, CC BY-SA 4.0, https://commons.wikimedia.org/w/index.php?curid=66784814

The efforts put by the government to increase the production and ownership of electric vehicles are finally paying off. The two major expected consequences are, of course, the crucial reduction of greenhouse gasses and the improvement of China’s image in the eyes of the rest of the world. But the technological innovation deployed to achieve these goals has been an astounding achievement in itself.

And what a market this is. Only in the last year, China’s domestic share of electric vehicles (EV) sales surpassed 3%, way ahead of the rest of the world with over a million units, and it doesn’t seem to stop. China is aiming for 1 million EV sales in 2018, and the numbers look favourable. In April EV sales reached 84,000 units and 94,000 in May, both growing year over year.

China’s automotive market is still the biggest in the world, despite a “modest” 3% growth in 2017 if compared with the staggering growth standards set in previous years. It is also dictating the trends, with a huge SUV share of 42% in the passenger vehicles segment, above the global average of 34%. However, despite losing shares of the SUVs segment in favour of Chinese manufacturers, foreign firms are still dominating.

It might come as a surprise then that the New Energy Vehicles (NEV) sector is exactly the opposite. China has the lion share of its own market. So, what is going to happen to the supercar market? Is this trend going to reflect on the luxury segment too?

Undoubtedly, big brands are gradually adapting to the new trends and society’s requirement for greener vehicles. Ferrari, McLaren and Porsche’s last generation of hypercars, new models delivering even more extreme performances, all featured the hybrid technology, even though applied in very different ways.

Luckily these historic brands are not spooked by the competition and rightly so. Surely not more than by the risk of losing their identity. As Lamborghini’s CEO Stefano Domenicali said in an interview it would be impossible for the company to suddenly shift toward pure electric technology. Such change requires time and the right technology, in order for them to remain faithful to the brand’s values. Customers do not buy Lamborghini (or other luxury supercars) just for the image, but mainly for each car’s specific driving experience, made of excitement, vehicle behaviour and engine sound. Against all odds, they recently showed their potential and vision of the future with the fully electric Terzo Millennio, like Porsche is doing with its Mission E. The customer and fan base though would most likely refuse to accept the abandonment of these brands’ roaring legacy. 

The same must be true also for the other big competitors, that still follow the laws of the market and sales in the dominating trend of SUVs diffusion. While Porsche has by now a long-established presence in the segment, amidst many critiques by purists, Lamborghini unveiled a few months ago the Urus, its own very personal 650 horsepower idea of a sport utility vehicle. Ferrari also will soon follow releasing its own SUV that should properly address this growing slice of the market while creating a new breed of cars that has already been defined as Super SUV.

Di Alexander Migl - Opera propria, CC BY-SA 4.0, https://commons.wikimedia.org/w/index.php?curid=67287264

In the meantime, in fact, established European supercar brands, still rely greatly on the US market that is the largest for this segment, but in China environmental policies’ restrictions have not affected significantly their sales. Porsche represents an exception with yet another success in 2017 thanks to a +10% sales in China that remains its biggest single market. More importantly, in the end, the import tariffs reduction announced by President Xi will positively affect mainly luxury brands that rely only on imports.

Going back to the NEVs popularity surge then, as of right now, it touches only the farthest segment from the luxury one. The 20 best-selling EVs in fact are all small and cheap cars that accommodate consumers thanks to the low prices and the ease of obtaining a license plate instead of long and expensive auctions or lotteries necessary in tier-one cities.

Finally, we will probably see more and more opting for a solid hybrid solution, closer to Porsche’s 918 idea. But it looks like for quite a few years more, the customer base that can actually afford one of these wonderful pieces of engineering will keep preferring the character and excitement of the roaring internal combustion engine over the silent but apparently soulless electric one. No need to hurry then!

"If cobalt falls into the hands of the Chinese, yeah you won't see electric vehicles (EV) being produced in Europe, etc. They are waking up too late.

I think it's because the car industry has never had a supply chain problem before".

During the 2018 FT Commodities Global Summit in Lausanne, Switzerland, Ivan Glasenberg, CEO of Glencore, the biggest cobalt-mining company shared with Reuters his vision of a future in which “[China is] not going to sell batteries to the world, more than likely they’ll produce batteries in China and sell electric vehicles to the world”. Much anxiety spreads over the development of this commodity’s market because cobalt is a key chemical element of the new generation of batteries powering consumer electronics and EVs, for which is the most expensive component.

To avoid the risk of a monopoly, companies acknowledge the need for a shift from cobalt. Decreasing the industry reliance on it has also other important benefits, such as reducing exploitative extractive practices in the developing world and helping tackle climate change faster and more effectively.

But is there any viable alternative for these Western batteries and EVs manufacturers that are – in the words of Ivan Glasenberg – “waking up too late”?

First, why is this question so important? Nowadays, the price of an EV battery averages the $200 per Kw/h, making it still too expensive compared to the benefits it can provide in the eyes of the average consumer. Despite a price drop of 70% in just six years, it is increasingly difficult to further reduce costs while improving battery efficiency. Analysts say that EVs will be comparable to those of internal combustion engine (ICE) cars price when the Kw/h cost falls to $100, and they forecast this will happen around 2030.

Most of the global cobalt reserves come from the Democratic Republic of Congo, and about 80% of the chemical mined is refined in China. Other resources shipped especially in Finland, are still owned by China Molybdenum, the second-largest mining company after Glencore, and partially owned by the government. 

Many experts are worried about the potential Chinese monopoly over global cobalt resources. In fact, not only China owns the bulk of the global cobalt chemical production (), but GEM, a Chinese battery recycler, also signed an agreement with Glencore itself for a third of its cobalt production over the next three years.

An expected surge in EVs popularity could push the cobalt demand from last year’s 9,000 tonnes up ten times in less than 10 years. This would eventually sharply increase prices as well. Fairly stable in 2016, varying from $22,000 per tonne to $29,000, 2017 has seen a continued growth that peaked just on March 1st, 2018 at over $93,000 per tonne.

A research by Xianlai Zeng and Jinhui Li of Tsinghua University in Beijing, published in November 2015, claims that due to its scarcity and the increasing demand for consumer electronics and electric vehicles in China, cobalt reserves would sustain the market only until 2021, even if all the end-of-life products were recycled. To extend the supply potential up to at least 2035 an effective recycle loop of cobalt-containing waste is also needed.

The scarce nature of cobalt, the increasing prices, and the fear for a monopoly over this crucial market are bound to push forward alternative and more efficient technologies. There is also the very relevant ethical problem of cobalt mining that often involves children labour. Different companies are researching and none other than Panasonic might already be onto something.

The battery manufacturer, Tesla’s partner since 2010 and sole batteries supplier, has already substantially cut down the use of cobalt in its own batteries says Kenji Tamura, the head of Panasonic’s EV batteries business. In fact, Tesla’s recent Model 3, achieved the highest energy density in a battery while reducing the cobalt use and a Kw/h price below the industry average at $190.

Forecasting a cobalt shortage in the not-so-distant future, Panasonic is actively developing a new technology to eliminate the dependency on the rare chemical. While in initial models cobalt accounted for a quarter of the active metals in a battery, the proportion has already been brought down to around 5% with the aim to reduce it to 0.

Panasonic is not the only one researching for a breakthrough in lithium-ion battery technology. In Ithaca, in the state of New York, a start-up called Conamix founded in 2014 has also raised several million for its project of a cobalt-free electrode.  

This single new technology development is extremely interesting to follow as it will have a notable ripple effect on many aspects of society’s life, from human rights to climate change control, to the balance of countries’ economic power. 

A look at China's strong will to become the world’s leader in the new energy vehicles (NEV) market through cycles of policies and the implications of it for foreign manufacturers. Big car manufacturers may well have claimed victory when China’s Government finally shook its domestic market restrictions – but it’s a victory tainted by some important setbacks. The Middle Kingdom is showing real signs of openness, having relaxed regulations of over 20 years’ standing. However, the overall situation is less simple than it appears, and investors should approach this new development with healthy scepticism.

A few weeks back President Xi confirmed a reduction on car import tariffs from 25% to just 15%, which while still being higher than those in the US and EU (respectively 2.5 and 10 percent), represents an important signal toward greater openness. More importantly, China’s state planner is finally abrogating the 50% ownership limit in joint-ventures for automakers entering the Chinese market. This policy would come into effect in the internal combustion engine (ICE) segment by 2022, by 2020 for commercial vehicles and for EVs as soon as this year, probably along with the 2018 revision of the Catalogue of Industries for Guiding Foreign Investment (外商投资产业指导目录). Some say that this decision should ease the disputes on trade with the US and the tensions with president Trump threatening higher import tariffs on Chinese goods. The hypothesis though does seem too weak for such a drastic change, and Chinese officials publicly denied it.

Finally, there is the matter of battery packs, the most expensive component of EVs, and the stage where most of the technological competition is fought. Despite having fewer media coverage, some protectionist measures could strongly influence foreign automakers' strategy and competition with the local ones. The Ministry of Industry and Information Technology (MIIT) published a list of EV battery manufacturers whose supplies would make a car model eligible for subsidies. For over a year all foreign companies were excluded. This created a big case with the Korean LG Chem and Samsung SDI that were forced to either close their plants or rely on export, to the advantage of Chinese major players CATL and BYD. If this regulation is maintained, in the long run, it would force foreign manufacturers to rely on Chinese firms for the supply of this expensive component (VW and Daimler already signed agreements with CATL).