This article first appeared in The Edge Malaysia Weekly on January 9, 2023 - January 15, 2023

ALTHOUGH electric vehicles (EVs) may still be something of a novelty in Southeast Asia, in the developed world, an increasing number of new vehicles sold now are battery electric versions . If you don’t believe the age of electric cars is finally upon us, consider this: In Germany, 32%, and in the UK, 33% of all new cars sold last month were EVs. And in China, they now make up 35% of total new-car sales and the number is expected soar to over 40% by the end of the year. In North America, just under 8% of new-car sales are now zero-emission vehicles, from a little more than 2% three years ago.

From just over 60 million units in 2009, the number of passenger vehicles sold around the world grew to around 92 million by 2018 and 88 million in 2019, according to the International Energy Agency. In 2020, at the height of the Covid-19 lockdown, global passenger vehicle production collapsed to just over 73 million. Last year, only 79 million passenger vehicles were produced. S&P Global Mobility expects new-vehicle sales globally to reach 83.6 million units in 2023. Last year, 13.7% of all new cars sold were EVs. Within three years, over 20% of all cars sold worldwide are likely to be electric.

That includes battery electric, plug-in hybrids as well as fuel-cell vehicles. Although final numbers for the whole of last year have not been compiled yet, most estimates for total global EV sales in 2022 range between 10.5 million and 10.8 million vehicles. While that is far short of some of the more optimistic forecasts of 12.5 million EVs (or nearly 17% of global vehicle sales) that were making the rounds early last year, the shortfall was mainly due to supply chain disruptions of EV components, particularly automotive chips, and production stoppages in China due to its Covid policy rather than any demand issues. In North America as well as in much of Europe, buyers of new EVs can still get generous subsidies and tax breaks that make the switch from internal combustion engine-based vehicles powered by petrol or diesel to EVs more palatable.

Global automakers have pledged to spend US$1.2 trillion (RM5.3 trillion) to make 54 million EVs annually by 2030. Even if 100 million passenger vehicles are sold at the turn of the decade, EVs will have a share of over 50% of the total market by then. Governments and private firms have pledged to spend tens of billions on EV charging infrastructure in North America, Europe and China. And EV battery makers are investing tens of billions on new plants around the world while big mining firms like BHP Group, Rio Tinto Group, Glencore plc, Albermarle Corp, China’s Tianqi Lithium Corp, Chile’s SQM or Sociedad Química y Minera de Chile, and Argentina’s Allkem Ltd are spending billions to mine more lithium, cobalt, nickel, graphite and other minerals as they rush to keep pace with the needs of battery makers.

The poster child for battery electric cars is Tesla Inc, run by maverick South African-born billionaire Elon Musk. Over the past seven years, I have written a number of pieces in this column about Tesla and Musk. More recently, I wrote about his purchase of microblogging social media platform Twitter. Tesla is the world’s largest maker of battery EVs with a 67% market share of EV sales in the US, though China’s EV giant BYD is a bigger player if its plug-in hybrid vehicles (PHEV) are also taken into account.

Unlike the mechanical gasoline-powered vehicles that are basically all about hardware, EVs are driven by software. Think of an EV like a Tesla as a software- and chip-driven iPhone, and a petrol-based, subcompact internal-combustion engine car like the Toyota Corolla as akin to the pre-2008 Nokia handset, which was just hardware. A new Corolla uses up to 350 computer chips while the Tesla Model Y uses over 3,500 chips, which run the car’s infotainment systems, touch screen, power windows as well as many of the advanced driver-assistance gear. And oh, Tesla sends regular software updates to all its cars over the air.

EV makers are benefiting from global efforts to combat climate change through progressive transportation policies. Massive government subsidies have helped boost EV sales across Europe. Germany offers new car buyers an incentive of €9,000 (RM42,000) to switch to an electric car.

Berlin’s goal is to have 15 million EVs on the road by the end of the decade as part of its drive to clean up road transport and keep the country’s auto industry competitive against the likes of Tesla and the Chinese EV makers that are making inroads in its traditional markets. Volkswagen AG, Bayerische Motoren Werke AG, or BMW, and Mercedes-Benz AG have bet big on EVs and are rolling out new EV models. Still a laggard in this space, however, is Japan, once the powerhouse of vehicle production, where Toyota Motor Corp, Nissan Motor Co Ltd, Honda Motor Co Ltd and others have dragged their feet in making the switch to electric cars.

EV makers in the US are likely to be a big beneficiary this year of new EV tax credits of up to US$7,500 per vehicle from President Joe Biden’s clean energy initiative under the Inflation Reduction Act (IRA). But because it sells high-priced models to higher-­income customers, the income and vehicle price caps in the law mean that Tesla buyers could miss out. The EV credits limit eligible sedans to prices of US$55,000 or less. Analysts expect Tesla to cut prices in the US to qualify for the IRA rebates. With the EV credits looming, some aspiring Tesla owners had delayed purchasing or taking delivery until after the start of the new year but Tesla had rolled out its own incentives like one year’s free charging and up to US$7,500 in rebates to lure buyers.

So, why is Tesla’s stock down 73% from its peak last year and still being pummelled? In the final quarter of 2022, the company delivered 405,300 cars, or 3% shy of analysts’ consensus expectations. That took the annual total sales tally to 1.3 million cars or around 40% growth over 2021. While that is impressive growth by any yardstick, Musk had said early last year that he expected Tesla to grow car deliveries by over 50% a year for the next several years or an estimated 1.45 million in 2022 and over five million by 2025.

Tesla stock plunged 15% on the sales miss. The stock is down over 60% since Musk took over Twitter Inc nearly three months ago. Musk, who was the world’s richest man a year ago with a net worth of US$360 billion, has seen the net value of his assets fall to US$139 billion, according to the Bloomberg Billionaires Index.

Tesla was a massively overvalued stock that was poised to fall. Rising interest rates, a huge sell-off of tech stocks on Wall Street and an unhinged Musk in the aftermath of his grossly miscalculated Twitter purchase has only hastened the pace of the EV pioneer’s unwinding in recent months. Even after a 70% decline, Tesla shares are trading at around 30 times this year’s earnings compared with other automaker peers that sell at a third or less.

Tesla fanboys say it is not a traditional car company but a tech company that deserves software-like earnings multiples rather than hardware multiples that the market ascribes to traditional makers of automobile hardware.

To its detractors, Tesla is the ultimate “meme” stock that is only now coming down to earth. Until recently, the company was making money from selling carbon credits rather than EVs. There is a huge difference between a good company and a good stock. A good company could have a ridiculously overvalued dog of a stock and a mediocre company could be grossly undervalued by the market and look like a great buying opportunity even in the midst of a bear market like the one we were in.

Yet Tesla’s business model is different from legacy peers like General Motors (GM), Ford Motor Co and Volkswagen. It has no unions like its peers and no legacy infrastructure. It has no dealer network. It sells its cars through its own showrooms or online. Tesla makes its own batteries and develops its own software. It designs many of its own chips. It also has a good grip on its own supply chain. It has ventures in mining materials such as lithium, nickel and cobalt that are used in batteries. That keeps gross profit margins high and operating costs low.

In the last quarter, the company had gross margins of 26.6%, compared with 14% for GM, 15% for Toyota and 16% for BMW. As Tesla increases production to five million units in three to four years, its margins are likely to improve as it gets better economies of scale. Joseph Spak, auto analyst for RBC Capital in New York, believes the company can improve its margins over time.

Detractors say the sluggish global economy, and withdrawal of government subsidies and incentives over time will hurt Tesla. China is already starting to withdraw subsidies for EVs. Germany began reducing its subsidies as of Jan 1, while Norway is ending subsidies this year. Sweden ended its subsidies last month and the UK is also winding down its subsidies. Moreover, real competition is coming. Unlike in the past when Tesla’s Model Y SUV and its entry-level Model 3 had the field to themselves, these days EV buyers have a smorgasbord of choices. They include electric crossover SUVs like Volkswagen’s ID.4, luxury cars like BMW’s i7 or iX3 as well as the Mercedes-Benz EQE sedan or Audi Q8 e-tron, sports cars like the Porsche Taycan or Ford Mustang Mach-E, and pick-up trucks like the Ford F-150 Lightning or Rivian’s R1T.

A bigger problem for Tesla is China. In its No 2 market, an array of domestic players is growing market share and mindshare. Not only are the Chinese automakers a threat to Tesla in their home market, they are giving the company a run for its money in Europe as well alongside other European automakers. Chinese automakers are spending tens of billions to meet high European safety standards. The NIO ET7 and BYD Atto 3 have made serious inroads. China’s Geely Automobile Holdings Ltd also controls Sweden’s Volvo Cars whose Polestar subsidiary has an array of EV models on sale in Europe and North America. Geely has another upmarket pretender brand called Zeekr. Fitch Solutions estimates the Chinese manufacturers’ share of Europe’s battery-electric market could rise to 15% in 2025 from about 5% last year.

Although competition is likely to get tougher, “Tesla is still likely to extend their EV advantage over peers,” notes RBC’s Spak. A bigger concern is that Musk may have lost his focus as he has opted to put more time and effort into his new plaything Twitter and the culture wars he is waging with his friends on the extreme right who are allied to former US President Donald Trump. The reputational damage suffered by Musk and by extension Tesla at a time when competition is mounting should not be underestimated. Moreover, Musk has sold US$39 billion worth of Tesla shares since they peaked in November 2021. The last batch was sold last month when he vowed he would not sell more Tesla stock until 2025.

Until now, Tesla’s problem was to meet growing demand for its iconic EVs. Now, it has huge capacity in the US, Germany and China, it has new competitors waiting in the wings with models that are just as good, and for the first time in history, demand is softening. In a recession, consumers put off purchasing big-ticket items like cars. And the extensive charging network the US government is helping to build to promote EVs will undermine the competitive advantage Tesla had gained by building its own charging network.

Assif Shameen is a technology writer based in North America

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