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The rise of EVs and the fall of Elon Musk

Assif Shameen
Assif Shameen1/5/2023 05:52 PM GMT+08  • 10 min read
The rise of EVs and the fall of Elon Musk
One concern is that Tesla CEO Musk (pictured) may have lost his focus, putting more time and effort into Twitter and the culture wars he is raging with his right-wing friends / Photo: Bloomberg
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Though electric vehicles (EVs) may still be a novelty in Southeast Asia, an increasing number of new vehicles sold are now battery electric cars in the developed world. If you don’t believe the age of electric cars is finally upon us, consider this: In Germany and the UK, 32% and 33% of all new cars sold last month were EVs. And in China, EVs now make up 35% of total new car sales and are expected to soar to over 40% by the end of the year. North America’s under 8% of new car sales are now zero-emission vehicles, from just over 2% or so three years ago.

From just over 60 million units in 2009, the number of passenger vehicles sold worldwide grew to around 92 million by 2018 and 88 million in 2019, according to the International Energy Agency (IEA). In 2020, at the height of the Covid-19 lockdown, global passenger vehicle production collapsed to just over 73 million.

Last year, just 79 million passenger vehicles were produced. S&P Global Mobility expects new vehicle sales globally to reach 83.6 million units in 2023. 13.7% of new cars sold last year were EVs. Over 20% of all cars sold worldwide will likely be electric within three years. The portion of plug-in hybrids is rapidly declining as consumers prefer battery electric vehicles to hybrid versions.

That includes battery electric, plug-in hybrids as well as fuel cell vehicles. Though final numbers for the whole of last year haven’t been compiled yet, most estimates for total global EV sales in 2022 currently range between 10.5 and 10.8 million vehicles.

While that’s far short of some of the more optimistic forecasts of 12.5 million EVs (or nearly 17% of global vehicle sales) that were making round early last year, the shortfall was mainly due to supply chain disruptions of EV components, particularly automotive chips, and production stoppages in China due to its Covid-19 policy rather than any demand issues. In North America and much of Europe, buyers of new EVs can still get generous subsidies and tax breaks that make the switch from internal combustion engine-based vehicles powered by petrol or diesel to EVs more palatable.

Global automakers have pledged to spend US$1.2 trillion ($1.6 trillion) to make 54 million electric vehicles annually by 2030. Even if 100 million passenger vehicles are sold at the turn of the decade, EVs will have over 50% share of the total market by then.

See also: Tesla nears preliminary deal for Indonesia electric car plant

Governments and private firms have pledged to spend tens of billions on EV charging infrastructure in North America, Europe and China. And EV battery makers are investing tens of billion in new plants around the world while big mining firms like BHP, Rio Tinto, Glencore, Albermarle, China’s Tianqi Lithium, Chile’s Sociedad Química y Minera (or SQM), Argentina’s Allkem and others are spending billions to mine more lithium, cobalt, nickel, graphite and other minerals as they rush to keep pace with the needs of battery makers.

The rise of Tesla

The poster child for battery electric cars is Tesla, run by South African-born billionaire Elon Musk. Over the past seven years, I have written several pieces in this Tech column about Tesla and Musk. More recently I have written about Musk’s purchase of the microblogging social media platform Twitter. Tesla is the world’s largest maker of battery electric vehicles, with a 67% market share of EV sales in the US though China’s EV giant BYD is a bigger player if its plug-in hybrid vehicles (PHEV) are also taken into account.

See also: E-scooters may take investors far

Unlike mechanical gasoline-powered vehicles — which are all about hardware — EVs are driven by software. Think of an EV like Tesla as a software and chips-driven iPhone compared to a petrol-based subcompact internal combustion engine car like Corolla akin to the old pre-2008 Nokia handset, which was just hardware. A new Toyota Corolla uses 350 computer chips, while Tesla Model Y uses over 3,500 chips that run the car’s infotainment systems, touchscreen, power windows, and many advanced driver-assistance gears. And oh, Tesla sends software updates to all its cars over the air.

EV makers are benefitting global efforts to combat climate change through progressive transportation policies. Massive government subsidies have helped boost EV sales across Europe. Germany offers new car buyers an incentive of EUR9,000 ($12,808) to switch to an electric car.

Berlin’s goal is to have 15 million electric vehicles on the road by the end of the decade as part of its drive to clean up road transport and keep the country’s auto industry competing against the likes of Tesla and the Chinese EV makers that are making inroads in its traditional markets. Volkswagen AG, Bayerische Motoren Werke AG (BMW) and Mercedes -Benz AG have bet big on EVs and are rolling out new models. Still a laggard in the EV space, however, high-priced is Japan, once the powerhouse of vehicle production, where Toyota Motors, Nissan Motors, Honda Motors and others have dragged their feet in the switch to electric cars.

EV makers in the US are likely to be a beneficiary this year from new EV tax credits of up to US$7,500 per vehicle from US President Joe Biden’s clean energy initiative under the Inflation Reduction Act (IRA). But because it sells high-priced models to higher-income customers’ income and vehicle price caps in the law, Tesla vehicle and buyer eligibility could face limits. EV credits limit eligible sedans to prices of US$55,000 or less.

Analysts expect Tesla to cut US prices to qualify for IRA rebates. With EV credits looming, some aspiring Tesla owners had delayed purchases or taken delivery until after the start of the New Year, but Tesla had rolled out its incentives like one-year free charging and up to US$ 7,500 in rebates to lure buyers.

So, why is Tesla’s stock down 73% from its peak last year and still being pummelled? In the final quarter of 2022, Tesla delivered 405,300 cars or 3% shy of analysts’ consensus expectations. That took the annual sales tally to 1.3 million cars, or around 40% growth over 2021. While that’s impressive growth by any yardstick, Musk said early last year that he expected Tesla to grow car deliveries by over 50% a year for the next several years or an estimated 1.45 million in 2022 and over 5 million by 2025.

Tesla’s unwinding

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Tesla stock plunged 15% on the sales miss. The stock is down over 60% since Musk took over Twitter nearly three months ago. Until recently, Tesla was a massively overvalued stock poised to fall. Rising interest rates, a massive Wall Street sell-off, and an unhinged Musk after his grossly miscalculated Twitter purchase have only helped hastened the pace of Tesla’s unwinding in recent months. Even after a 70% decline, Tesla shares are trading at around 30 times this year’s earnings compared to other automaker peers that sell at a third or less.

Tesla fanboys say that it is a pioneering EV maker and is not a traditional car company but a tech company that deserves software-like earnings multiples rather than hardware multiples that the market ascribes to traditional makers of automobile hardware.

To its detractors, Tesla is the ultimate ‘meme’ stock that is only now coming down to earth. Until recently, Tesla made money from selling carbon credits rather than electric vehicles. There is a huge difference between a good company and a good stock. A good company could have a ridiculously overvalued dog of a stock, and a mediocre company could be grossly undervalued by the market and look like a great buying opportunity even amid a bear market like the one we were in.

Yet, Tesla’s business model differs from legacy peers like General Motors, Ford Motors and Germany’s Volkswagen. It has no unions like its peers and no legacy infrastructure. It has no dealer network. It sells its cars through its showrooms or online. Tesla makes its batteries and develops its software. It designs many of its chips. It also has a good grip on its supply chain. It has ventures in mining materials like lithium, nickel, and cobalt that are used in batteries. That keeps gross profit margins high and operating costs low.

In the last quarter, Tesla had gross margins of 26.6%, compared to 14% for General Motors, 15% for Toyota, and 16% for BMW. As Tesla increases production to 5 million units in three to four years, its margins will likely improve as it gets better economies of scale. Joseph Spak, an auto analyst for RBC Capital in New York, believes Tesla can improve its margins over time.

Detractors say the sluggish global economy and withdrawal of government subsidies and incentives over time will hurt Tesla. China is already starting to withdraw subsidies for EVs. And Europe is likely to follow soon. Moreover, the real competition is coming. Unlike in the past when Tesla’s Model Y SUV and its entry-level Model 3 had the field to themselves, these days EV buyers have an array of choices like electric crossover SUVs Volkswagen’s ID.4, luxury cars like BMW’s i7 or iX3 as well as Mercedes Benz EQE Sedan or Audi Q8 e-Tron, sports cars like Porsche Taycan or Ford Mustang Mach-E and pick-up trucks like Ford F150 lighting or Rivian’s R1T.

A bigger problem for Tesla is China. In its number two market, an array of domestic players are growing market share and mindshare. Not only are the Chinese automakers a threat to Tesla in their homemakers, but they are also giving Tesla a run for its money in Europe and other European automakers.

Chinese automakers are spending tens of billion to meet high European safety standards. NIO’s ET7 and BYD’s Atto 3 have made serious inroads. China’s Geely Automobile Holdings also controls Sweden’s Volvo Cars, whose Polestar subsidiary has an array of EV models on sale in Europe and North America. Geely has another upmarket pretender brand called Zeekr. Fitch Solutions estimates the Chinese manufacturers’ share of Europe’s battery-electric market could rise to 15% in 2025 from about 5% last year.

Though competition is likely to get tougher, “Tesla is still likely to extend their EV advantage over peers”, notes RBC’s Spak. A bigger concern is that Musk may have lost his focus as he has opted to put more time and effort into his new plaything Twitter and the culture wars he is raging with his friends on the extreme right who are allied to former US President Donald Trump. The reputational damage suffered by Musk and, by extension Tesla, just as competition is intensifying, has been huge. Moreover, Musk has sold US$39 billion worth of Tesla shares since they peaked in November 2021. The last batch of sales was last month when he vowed he won’t sell more Tesla stock until 2025.

Until now, Tesla’s problem was to meet the growing demand for its iconic EVs. Now it has a huge capacity in the US, Germany and China, it has new competitors waiting in the wings, and demand is softening for the first time in history. In a recession, consumers put off purchasing big-ticket items like cars. And the extensive charging network the US government is helping build to promote EVs will undermine the competitive advantage Tesla had gained by building its own charging network.

Assif Shameen is a technology and business writer based in North America

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