ELECTRIC VEHICLE MARKETS: EASY TO INVEST IN?

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Traditional automotive manufacturers are being forced to innovate and compete against new entrants. Many startups secured seed and early round funding from Venture Capital firms between 2007-2011 before the influx of Private Equity investors. However, several of the company’s successful in raising capital, such as Lucid Motors and Coda Automotive, eventually found themselves facing financial struggles, and, in some cases, bankruptcy. Although the electric automotive market is experiencing rapid growth with sales expected to exceed 4.5 million units per year by 2020, the potential varies drastically across regions.

To evaluate expected growth of the electric vehicle market, one must consider the financial and political factors governing development and sales. The financial incentives provided to consumers to purchase cars include rebates, tax credits and grants. They are most effective at increasing market share when provided at point of purchase on long range cars, allowing dealers to lower the sticker price. Furthermore, the effectiveness depends on the duration for which they are provided. A study of Georgia’s EV market by the Alliance of Automobile Manufacturers showed that the sales dropped by more than 83%. This implies the market is nascent and extremely sensitive to changes. The US federal government has also legislated tax breaks, fleet acquisition incentives, manufacturing incentives and authorizations for research and development of Electric Vehicles. Public and private sectors have partnered to procure EVs at all levels. The US Congress introduced a tax credit of $2500-$7500 per vehicle in 2008 and 30% of sales were attributed to the tax credit. Other countries such as Norway, the country with largest EV market share of 21.52 - 28.76%, promoted consumption of Electric Vehicles with the reduction of license, purchasing and registration fees and implementation of 29% annual VAT based on vehicle emissions. They have also removed import taxes and installed fast charger stations every 31 miles to help EVs gain 100% market share. On the other hand, China has the largest absolute sales of EVs but lowest market share of 1.37%. They provide incentives of $8.4 billion and free license plates to all consumers. These incentives have played a large part in the success of manufacturers in those regions while manufacturers in other countries have suffered from the lack of governmental support.

A study by Accenture on market attractiveness placed countries into distinct categories based on EV market size and growth potential – High Potential, Best-In-Class and Hesitators. These categories can be evaluated using financial and political frameworks similar to those discussed in the previous paragraph. The Best-In-Class category, including USA and China, is characterized by high market size and growth potential. As observed in the previous paragraph, these countries are heavily backed by governmental expenditure on charging stations and credits. The political and legal framework supports investment in these markets. The next category, High Potentials, are characterized by low market size and high growth. Investors should be aware of the changing political and financial incentives in these markets and prepare to capitalize on those companies that show the capability to maximize growth by adapting to changes in the market. For example, European countries such as France and Norway are rapidly changing laws and regulations to favor consumption of electric vehicles and investors must identify those companies that can scale rapidly to capture maximum market share. The third category, Hesitators, includes countries with a low market size and expected growth rate. Countries in this category (India and Brazil) typically have many restrictions, such as low fuel costs and low income per capita, that limit consumption of electric vehicles. Hence, it is not possible to take advantage of economies of scale and increase market size. Investors should avoid these markets in the present but track developments that could make the country attractive.

Electric Vehicles are expensive to manufacture and have high fixed costs that can only be recovered in the long-run. Most companies file for bankruptcy, face operational challenges while increasing scale, or are forced to raise more capital to survive. While the electric vehicle space as a whole might only reward investors after long periods, the most lucrative opportunities to capitalize on the growth of EVs exist in those countries that have high growth potential (governed by political and financial incentives) and significant market size.