Overview
To thrive, businesses need a supportive environment. Whether we realize it or not, the environment has shifted dramatically over the past couple of years, making it nearly impossible for some businesses to thrive. As usual, we write this installment from the perspective of sophisticated institutional investors and risk managers in an attempt to identify potential future developments.
The Irony
The irony is that although the EU leads the globe in a focus on green initiatives, it has failed to engender any global leaders in the new “green” areas such as solar panels, EVs, or wind farms.
Our Premise
As a result of recent developments, some geographic areas have become much more attractive to businesses, and others the opposite.
Momentum
We often focus on the automobile industry because it is rapidly undergoing massive changes and most people can relate to it. Our view is that although Tesla has more or less invented the electric vehicle market (“EVs”) and remains a leader, it is becoming increasingly obvious that the legacy manufacturers are having difficulty adjusting to the change. (Our view is that legacy firms rarely manage significant technology shifts gracefully).
Rapidly challenging Tesla are BYD and Xiaomi, which have introduced some highly competitive models and appear to be pressuring nearly every industry manufacturer.
A similar development has taken place in solar cells and batteries, where although the base technology might have been developed elsewhere, Chinese manufacturers have quickly assumed leadership.
Caveat: Tesla sales growth has slowed dramatically, shipping slightly fewer cars in 2024 than in 2023 (down 1.1%). Further, EVs have faced faster depreciation than internal combustion vehicles. The average depreciation over 5 years for a Tesla Model 3 is 46.7% compared to a Toyota Carola’s 26.3%.¹
Durability
A worthwhile question might be whether the recent gains are real—that is, whether the firms can stand independently. In our opinion, the answer is easy: these globe-leading businesses are highly durable, and if needed, will receive support from their government. For those who bemoan the heavy hand of the government in private industry as unfair, perhaps it is helpful to review the massive support provided to the domestic chip firms and domestic auto manufacturers recently² ³.
Other Jurisdictions
We have discussed American and Chinese manufacturers; what about the European manufacturers? For those who study the automotive industry, there continues to be a shift in the fortunes of many European manufacturers over the past couple of decades. The English, French, and Italian manufacturers have all been relegated to second-tier status at best, and perhaps need further consolidation to remain viable. Even the Japanese firms (Nissan and Honda) are taking drastic measures in an attempt to remain competitive⁴.
While we have not heard from the Korean firms, it would not be surprising if they, too, were forced to make significant adjustments.
Entry Barriers (Formal and Informal)
Like Japan, China has allowed key international firms into the market to learn and then created effective barriers for the benefit of its domestic firms. Hence, as we speak, China has become a leading producer of electric automobiles, solar cells, and batteries.
An Emerging Paradigm
If Tesla and China manufacturers are rapidly becoming leading firms, it raises the question of what characteristics are helpful in engendering leaders. Our view is that success leads to success. A technology firm has the greatest chance of succeeding if it is close to the “breeding grounds” for other tech companies as it can benefit from the extensive amount of expertise required to launch a successful tech venture (e.g., software engineers, product specialists, consultants with ties to major players, etc.). Likewise, the same appears to be true in the manufacturing area. There is a reason most of the domestic automobile firms were based in the Detroit area as originally there were experienced machinists as a result of Detroit’s position on the Great Lakes, access to rail and ship transportation, a critical mass of engineers, etc.
After a painful couple of initial years, Tesla has developed a cadre of talented engineers who have established the firm’s credentials as a leading manufacturer. Perhaps, over time, its robots will become more effective than humans in many tasks. However, our view is that like other tech developments, it will take longer than expected but also be better than expected. Returning to the paradigm, hopefully, the chart below is useful:
Template for Determining Success in Vehicle Manufacturing
Regarding the last item, government support, many times this can be a hindrance as there are often significant conditions that come with such support. Additionally, in some countries, industry is viewed more as a problem than a solution, and various barriers are created to impede progress. (Perhaps this is most evident in the contrasting views on growth adopted by a state such as Texas versus that adopted by California).
Lastly, central government support historically has not had a particularly attractive history as political considerations often outweigh economic decisions.
Future developments in robotics
It is reasonable to conclude that the “breeding ground” on which EVs and other emergent hardware (such as drones) have developed will be fertile soil for general-purpose robotics. Given their broad potential use and high value-add, general-purpose robotics are likely to be a higher-value market than transportation. While many American firms have led the research into general-purpose robotics, it appears that China maintains a significant advantage in production and supply chain. It is yet to be seen if design and manufacturing will be split among different vendors (as is the case with Apple and Foxconn) or largely integrated into one firm (as is the case with Tesla).
Conclusion
Sophisticated institutional Investors and risk managers would be well-served via a more nuanced understanding of the drivers and components needed for sustaining a thriving industry. Hopefully, this installment aids in that understanding.
Sources
[1] https://www.iseecars.com/compare/tesla-vs-toyota
[2] https://www.cnbc.com/2024/07/11/doe-to-award-nearly-1point1-billion-to-stellantis-gm-for-ev-production.html
[3] https://www.theregister.com/2022/07/26/doe_gm_battery/
[4] https://www.wsj.com/business/autos/honda-nissan-say-they-plan-to-merge-in-2026-87c2aa4c