Investing in the Electric Vehicle Space

By Pranav Srinath

According to the Bloomberg New Energy Finance forecast, the cost of manufacturing electric vehicles is decreasing quicker than previously anticipated. Lithium-ion batteries, key components of electric vehicles, make up a large percentage of the total cost of the car and the price of these batteries have been observed to fall due to increased production and a possible over-supply. Bloomberg predicts the prices of electric vehicles to be competitive without subsidies by 2025 and that a third of the auto market will be occupied by electric vehicles by 2040. This is further supported by the economic benefits offered by the low cost of charging electric vehicles and incentives provided by governments and companies.

Hence, the electric vehicle market can be seen as a sensible space to invest in. With prices perceived to be drop rapidly and demand to increase steadily, one may desire to take advantage of the increased production of these vehicles. One may choose to invest in particular companies and conduct their own due diligence by looking at a particular manufacturer’s balance sheets and management. Another option could be to invest in unit trusts and open-ended investment companies and let a professional fund manager manage your investments for you. However, one must not only keep in mind the volatility and cyclical nature of the technology sector but also the risks associated specifically with the electric vehicle market.

Firstly, electric vehicles are not as economically viable as they may seem. Currently, electric vehicles are only $6000-$14000 more expensive than regular internal combustion engine vehicles. However, this estimate takes into consideration subsidies provided by the government. The cost difference without subsidies ranges from $13000-$19000. Furthermore, these differences could increase if companies decide to revert to normal corporate profitability.

The next difference between perception and reality has to do with the batteries used in these vehicles. While the battery cell may seem to be decreasing in price, the battery packs used in vehicles consisting of cells and mechanical parts will not drop much due to the relatively fixed cost of mechanical parts. Subsidies provided by the government might appear beneficial in the short run. However, the high costs to manufacturers and low profitability can lead to decreased innovation and reduced investment in research and development. This would have the direct opposite effect to what is generally expected of the electric vehicle market.

It should also be noted that a high percentage of government revenue is generated from carbon and gasoline taxes. Once there is a decline in consumption of these taxable goods, there will be a decrease in revenue and the government may no longer be able to provide subsidies to the Electric vehicle industry. This would also be accompanied by increased costs in raw materials used in the production of batteries, mining and the source for electricity production.

Consumers will only be interested in going green and adopting electric vehicles as long as they see an economic benefit. Once the economic benefit starts to decrease and costs to the consumer increase, the future of electric vehicles being projected might not appear as bright as it currently does. Hence, one must understand the potential risks of investing in this space. With companies like Tesla burning large amounts of cash on a daily basis with the promise of returning investments in the future, one might be tempted to enter this space. However, it would only be sensible to take into account all the potential risks associated with making the decision to invest.