How to profit from the rise of the electric car

Volvo turned a lot of heads the other week when it said that every car it launches from 2019 will have an electric motor.

In some cases, this will be alongside rather than instead of a petrol motor – hybrids rather than fully electric. But it’s a pretty significant statement of intent by the Chinese-owned carmaker.

And Volvo is not alone in making grand gestures. France wants to ban the sale of new petrol and diesel cars by 2040. Norway is targeting 100% sales of electric or hybrids by 2025.

Electric cars might not take over the world imminently, but they’re certainly here to stay.

So what does all of this mean for investors?

Volvo’s move makes good business sense

As you’d expect, Volvo’s announcement that it is to focus on electric cars isn’t just done out of the goodness of its corporate heart. It makes business sense. Firstly, despite all the “end of the combustion engine” soundbites, it’s not as radical as it sounds. We’re talking about new launches. Volvo will still be manufacturing earlier models with petrol engines.

Secondly, with the rules on emissions getting tighter all the time, hybridisation is one straightforward solution. If you stick a bigger battery in the car, it can take over from the petrol engine sometimes, driving emissions down. As Theo Leggett at the BBC put it: “Volvo is making headlines, but other manufacturers are doing much the same thing”.

Thirdly, as a Chinese-owned carmaker (it’s owned by Geely), it makes sense for Volvo to go electric. China is Volvo’s second-largest market (behind the US), and it’s also the fastest-growing market for electric cars.

As Russ Mitchell and David Pierson of the Australian Financial Review put it: “The Chinese government has poured subsidies into the electric vehicle market, driven by fears over urban pollution and a desire to make its local industry leaders in green technology”.

China wants to see electric cars account for 20% of all car sales by 2020 – that’s two million a year. No wonder Volvo is happy to ditch the gas guzzlers with that potential market and government backing behind it.

We can’t predict the future – but we can see what markets are pricing in 

So how do you invest for a potentially big change like this? Like the rest of you, I have no idea what the future will look like.

It does seem pretty clear that electric cars have reached a point where they’ll definitely be part of the furniture in the future. It seems highly unlikely that they’ll now die out due to lack of demand.

And who knows? In a decade’s time, maybe we’ll all be driving electric cars. Or the electric cars will be driving themselves, and we’ll just be passengers. Maybe we won’t even own them; maybe they’ll all be on an Uber-style network, and you just pay a monthly subscription or a mileage-based fee every time you use one.

Then again, maybe it’ll take a lot longer than that. Maybe electric cars will reach a natural ceiling due to some ecological or regulatory or capacity-related hurdle that we haven’t considered yet. Maybe self-driving cars will be impractical due to cybersecurity fears or the simple logistics of trying to introduce them in a world still filled with incompetent human drivers.

This is the problem with a rapidly changing landscape. The key to dealing with it – to my mind at least – is to not spend all your time fantasising about the potential future scenarios.

Instead, focus on what’s currently priced into markets, and then figure out what investors are getting over-excited about, and what they’re missing.

From that point of view, Tesla is the obvious “sell” on the electric car front. Tesla is the “Apple” of electric cars. Its cars have a lot of curb appeal, and I haven’t met anyone who’s driven them who doesn’t like them. It’s also one of those companies which has been rampantly overvalued for a very long time, yet keeps holding investors’ interest.

However, while I wouldn’t want to short the stock (too risky), I do think that Tesla’s latest travails (the share price has slid significantly recently) might signal a turning point.

Firstly, with the rollout of its Model 3, it’s effectively looking to move away from being a luxury carmaker, catering to minted Californians with nagging consciences. Instead, it’s trying to build affordable versions, to bring its nicely-designed products to the masses.

But there are already plenty of mass-market carmakers. And as Volvo’s announcement makes clear, they are turning in Tesla’s direction, just as Tesla is turning to their markets. That spells a lot more competition for Musk.

As Adam Jonas of Morgan Stanley pointed out in a recent research note, Tesla is about to come up against “very large, well-capitalised firms that will be making increasingly conspicuous efforts” to muscle in on its patch. And as the FT’s Lex column points out, “Tesla delivered only 76,000 cars last year”. That compares to ten million (of a global market of 90 million) for Toyota, Volkswagen and GM combined.

Dismissing these carmakers as dinosaurs is a dangerous assumption. Many of the biggest had their worst legacy costs stripped away during the post-financial crisis restructurings. And given that petrol cars will be with us for a while, there’s no reason why traditional carmakers can’t retool to compete with Tesla – most already sell electric cars of their own or are poised to release them.

Moreover, these companies are cheap. Price/earnings multiples are at their lowest levels in 20 years, notes the FT. “Even under more radical forecasts – UBS predicts electric vehicles, including hybrids, will account for 14% of sales by 2025 – there will still be plenty of petrol-powered cars.”

So rather than worrying about battery tech, lithium mining, or even manufacturers of sensor systems, I’d be more interested in trawling the traditional car manufacturers to find the best plays on that front. I’ll be looking at this in more detail in an upcoming issue of MoneyWeek magazine.

Meanwhile, in the latest issue of MoneyWeek magazine, out tomorrow, my colleague Merryn Somerset Webb suggests a really interesting play on electric cars. It’s one you almost certainly haven’t thought of already, and what’s more it involves everyone’s favourite obsession – property. Watch out for it (or if you’re not already a subscriber, sign up for the magazine now).