Investing In Disruption (Or, Why EVs) - PART 2

investing in disruption

Written By: Thomas Donnelly

In my last article, I discussed the s-curve of technology adoption and how new technologies displace prior technologies. The key from an investment standpoint is understanding that new technologies can develop exponentially, meaning that the rate of change and disruption is accelerating as it goes along. Meanwhile, our brains tend to interpret trends linearly, which means we assume the rate of change and disruption remains constant.

disruption remains constant

The result of this misaligned thinking is that we often dramatically underestimate how soon new technologies could arrive and become widely adopted. When you are early in the s-curve of new technology, the linear trend line (green highlight above) isn’t very impressive. But how can you tell if growth is likely to turn exponential or not? The trick is in understanding price trends for the core underlying technologies.

The first mass-market automobiles of the early 20th century, which I discussed in my prior article, did not just appear overnight. Rather, then-called “horseless carriages” had been enjoyed by the wealthy as far back as 1880. But by 1910, decades of innovations had brought steel production costs down dramatically, while advancements in the oil refinement process provided a cheap and plentiful fuel source. And the assembly line allowed for inexpensive mass production. And all of these technological advancements converged, resulting in a product that provided ever more benefits to the consumer while also becoming much less expensive than traditional horse-drawn vehicles. Demand exploded, and automobiles completely disrupted the transportation market. The market share of horse-drawn vehicles dropped from more than 95% in 1905 to less than 5% in 1921, with 70% of that decline happening just in the nineteen-teens.

Electric Vehicles

The parallels to the rise of electric vehicles today are astounding. Advancements in a series of enabling technologies have brought us to an inflection point where EVs are cost-competitive with traditional internal combustion engine (“ICE”) vehicles. Indeed, the industry is being disrupted as we speak.

Specifically, advances in aluminum die-casting now allow manufacturing the vehicle’s unibody frame in fewer and fewer casting pieces. This reduces assembly time, thereby increasing vehicle production rates and reducing labor costs, making the vehicles lighter, a necessary consideration for electric vehicles.

Additionally, advances in battery technology now allow vehicles to go upwards of 500 miles on a single charge and “fast charge” to 80% battery capacity or higher in just 15 minutes. The batteries in electric vehicles are typically warrantied for 500,000 or more miles and theoretically could last enough charge and discharge cycles to power 1 million diving miles, giving EVs a significantly longer useful life over ICE vehicles.

Meanwhile, the electric motor itself is not only significantly more energy-efficient than traditional combustion engines, which lose 80% or more of the energy they generate to friction and heat, but it provides several benefits in automotive applications, such as instant torque and better “horsepower.” Because electric motors themselves have dramatically fewer parts compared to the hundreds or thousands in a typical combustion engine and don’t require ancillary drivetrain components such as a transmission, fuel pumps, or cooling system (each of which has dozens or hundreds of additional moving parts), there are fewer points of potential mechanical failure and thus significantly reduced maintenance costs for owners.

Indeed, a recent US Department of Energy report titled Comprehensive Total Cost of Ownership Quantification for Vehicles with Different Size Classes and Powertrains found that EVs were on average a whopping 40% less expensive to operate on a per-mile basis over their useful life than comparable ICE vehicles.

The problem to date has been that the initial purchase price of EVs tends to be higher, sometimes much higher, than ICE vehicles. While this is more than offset by 40% lower operating costs, that initial expenditure drives consumer behavior.

Change Comes Quickly

Here is where things get interesting. Kelley Blue Book reports the average transaction prices for new vehicle sales in the U.S. each month. As of August 2021, the average price of an EV was only 15% above the industry average for all vehicles, compared to 45% higher a year ago. This is not only because the average price of an EV has come down 13% in the past year, but also because the average price of all vehicles has increased by 10% over the same period. It appears that 2022 may be the year that the average cost to buy an EV will drop below the industry average for all vehicles, and that is even before Tesla releases their oft-touted $25k car, which is currently slated for 2023. This inflection point will likely stimulate massive demand, and that is without any of the government incentives that are likely to be included in the Biden administration’s tax legislation.

You may have heard of ”Moore’s Law,” which is based on the observation by Intel founder Gordon Moore who noted in 1965 that the number of transistors on an integrated circuit had grown at an exponential rate from 1 in 1959 to 64 in 1965. Since then, the growth has approximately doubled transistors every two years to an astonishing 50 billion transistors in Tesla‘s new Dojo supercomputing chip, which they use for training their autonomous driving algorithm. Even the M1 chip used in Apple’s new laptops has 16 billion (!) transistors. Moore’s law has proven to be a good rule of thumb for many other technologies, as well, and indeed it has helped many of us wrap our heads around the difference between exponential vs. linear growth.

There is a similar exponential rule of thumb for new technologies, which relates to declines in the cost of production. Theodore Wright was an aerospace engineer, who in 1936, noted that for every doubling of airplane production, the cost of production fell by approximately 20%. Now known as “Wright’s Law,” the key insight is that there is a learning curve to producing and manufacturing things, and the more we make something, the more we learn how to be more efficient and cost-effective in its manufacturing.

The clearest example of Wright’s Law related to EVs is the decreasing cost of batteries, measured in cost per kilowatt-hour. (Recall that batteries are the single greatest cost in EV manufacturing.)

cost in EV manufacturing

And these trends are unlikely to stop anytime soon. Tesla’s new 4680 battery technology, which should be in production sometime in 2023, is expected to cost $60-70 per kilowatt-hour. It is these cost reductions that will allow Tesla to sell the aforementioned $25k mass-market EV. EVs will become even more affordable for average consumers once $8-12k in tax credits are applied to the purchase. The Biden administration wants more people to transition to EVs, so they’re subsidizing them with massive tax credits. As they say in the public policy and economics fields, tax what you want less of and give tax credits for what you want more of.
Much like how automobiles grew to dominate the market over horse-drawn vehicles in a single decade once they became price competitive, EVs are currently poised to do very much the same.

Investing for Tomorrow

Geeking out over EVs is fun, but what does this have to do with your personal finances? The answer is that I believe investing in EV makers and related companies such as battery and charging companies could be one of the best ways to outperform the market as a whole over the coming decade. It’s important as an investor to be measured and avoid undue concentration in any single company or sector. But at the same time, I don’t believe there are many better risk-reward payoffs for investors today. Ultimately, I believe this sort of strategy — investing in technological disruption — has the promise to significantly outperform broad market indexes over the long term.

Most other financial advisors aren’t thinking about the future as an investment opportunity like this. Gerber Kawasaki is. And I think you should be, too. Next week, I’ll explore how similar fast-coming technological disruptions in the banking and finance world may present similar opportunities for forward-thinking investors.

Gerber Kawasaki Inc. is an SEC-registered investment firm with approximately $2 billion in assets under management as of 06/29/21. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Gerber Kawasaki does not provide legal advice. To determine which course of action may be appropriate for you, consult your financial advisor. No strategy assures success or protects against loss. Readers shouldn’t buy any investment without doing their research to determine if the investments are suitable for their situation. “All investments involve risk and one should consult a financial advisor before making any investments. Past performance is not indicative of future results.”