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(ROBERT GALBRAITH/REUTERS)
(ROBERT GALBRAITH/REUTERS)

strategy lab

I bet on Tesla because most investors don’t understand electric cars Add to ...

Chris Umiastowski is the growth investor for Globe Investor’s Strategy Lab. Follow his contributions here and view his model portfolio here.

Last week, I shared my thoughts on some growth investing trends that I think are worth paying attention to in 2014. I hope most readers understand by now that I’m a long-term investor, so these growth trends, while important in 2014, are not limited to this calendar year. I invest in trends that often require a decade or longer to play out. I briefly touched on the future of electric cars: I think it serves as a great example of long-term thinking versus short-term crowd mentality.

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I talk to a lot of people about electric cars, and most people understand that a small market exists for them today. Beyond this, most consumers hold false beliefs about the technology. I hear people say electric cars are just glorified golf carts that are slow and unable to travel very far. People also worry that it will be a hassle to recharge their battery, and that after three or four years, it will die, because that’s their experience with laptop computers.

Most people don’t realize that electric cars have impressive acceleration because electric motors deliver full torque from a standstill, unlike internal combustion engines. They’re also quiet, because there is no combustion of an explosive fuel. They’re cheaper to operate: Not only is electricity much cheaper than gasoline, but electric cars have fewer complex systems to maintain. There is no ignition system, exhaust system, piston-timing system, or engine-cooling system. In subzero weather, electric vehicle owners can use smartphone apps to remotely turn on cabin heating. And forget about getting gouged at the pump before a long weekend: Just plug in at home and wake up with a fully charged battery every day.

But what about road trips? Tesla Motors Inc. is removing the distance barrier. Their Model S sedan can travel over 400 km on a single charge. Even more impressive, they’re building a network of supercharging stations that Tesla owners can use for free during road trips. They deliver power to the battery 12 times faster than most public charging stations, and can replenish your battery’s charge during the time needed for a typical food and bathroom pitstop. Tesla guarantees the car’s battery for a full eight years, and actual data from Tesla’s first-generation sports car backs up the expectation of an even longer battery life.

Battery cost and low production volume are, in my view, the two main drivers for high prices in the electric vehicle market today. The Nissan Leaf, a battery-powered hatchback, starts at about $32,000 in Canada and serves as a great commuter car with its real-world 120-km range. The Tesla Model S, a luxury sedan, starts at about $79,000 in Canada, and has far superior range. The Model S is the only long-range pure-electric car on the market right now. It’s entirely accurate to say that long-range electric vehicles are luxury items.

Most new product categories start out with high price tags and then go on to see staggering price drops over time. Remember video cassette recorders? My parents bought one for about $600 in the early 1980s. By the time the gadgets were bordering on obsolescence, the inflation-adjusted price had dropped about 95 per cent and can be chalked up to both improving technology and enormous volume increases. Electric car prices will benefit from these changes as well.

Think about battery volume alone. Tesla’s goal is to ship 700,000 cars in 2019, which requires a 24-fold growth from production volume last quarter. This would give Tesla about 0.7-per-cent global market share but force the entire battery industry to more than double production just to meet Tesla’s demand. Imagine if 10 per cent of cars on the road were battery-powered. This would likely require a 20-fold increase in global battery production. Tesla’s chief technical officer, JB Straubel called this a “massive revolution in industrialization, on a scale that is kind of hard to imagine.”

Maybe it’s not so hard to imagine. It has happened in other industries before, and it only makes sense to me that it will happen again. Today, the cost of building a high-quality electric car puts the price tag beyond the reach of most people. Combine that with a general lack of knowledge on the part of the investing public and you have a recipe for lots of non-believers.

That’s how most growth markets operate. It’s nothing unusual.

Today, a long-distance electric car only makes sense for those who can afford luxury price tags. Cheaper electric cars make sense for commuters, or as a second family vehicle. But I think by 2017, Tesla will be able to compete with mid-range cars such as the BMW 3-series or Audi A4. Fast-forward another five years and I suspect enough manufacturers will be producing so many battery-powered cars that they become a no-brainer purchase for many people who have access to a plug at their residence.

The car market is at the start of a major transition. I bet on Tesla because I believe they are the clear leader in the electric-car market, which faces an enormous growth curve that is not well understood by the general public.

 

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