An Introduction to the Global Mobility Revolution

We now turn our attention to the global ‘Mobility Revolution’, set to be one of the defining investment thematics of the 21st century. An opportunity on par with the introduction of the World Wide Web in the 90s and the rise of mass production in the early 20th century. In doing so a key focus will be on the economics of adoption, the likely winners (both geographically and company wise) as well as, taking a normative stance within the broader context of policy intervention.

What is the ‘Mobility Revolution’?

Author: Sid Rutalla

When talking about the global mobility revolution as a whole, we are broadly splitting this into three key pillars:

1. Electrification; 
2. Sharing/Connectivity; and 
3. Autonomy.

Most are probably at least somewhat familiar with the end manufacturers in this space, companies like Tesla, while the more adventurous may have seen, if not profited from,  the price action of the commodities that underpin this revolution, such as lithium, copper and nickel. But this begs the question, what are the underlying demand structures that are shaping the market? And, perhaps more importantly, what are the economic implications?

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Let's begin with the economics. Electrification of mobility - moving both people and things - and its adoption is vital to the broader focus and shift towards carbon neutrality and a low emissions future. As it currently stands, this may be a while away given that the gradual adoption of electric vehicles (EVs) will place increasing requirements on the generation of electricity. This may potentially drive up requirements for production in nations such China, India, US and Russia. China, despite their ambitious targets to reach peak CO2 emissions by no later than 2030, has continued to see increasing requirements from older and fossil fuel intensive generation. Coal currently makes up more than 53% of China’s energy generation mix and they look set to continue building new coal-fired power stations. The situation in India is quite similar with diesel and coal still making up the vast majority of their footprint.
 
The reasons for the above can be said to be twofold. First, high population density and, second, cost. At present, the cost for fossil fuel generation remains significantly lower when compared to greener alternatives like solar or wind (this is changing though). A simple concept to illustrate this point is that of energy in vs energy out. That is, how many units of energy is required to produce a given output. Fossil fuels in this instance remain incredibly efficient, delivering 100 units for every 3 units in. Solar farms, and the intensity of commodities required by way of inputs (e.g. copper), remain at a ratio 70 in/100 out. Wind is slightly better at 30 in/100 out.

As it currently stands and assuming the current energy mix, it is entirely possible that in the absence of changes to the generation component EVs leave a greater carbon footprint than ICEs (Internal Combustion Engines). So, why does this still make sense within the context of green policy push then?
 
Put simply, if the sources of power generation are green then it is indisputable that the emissions from EVs will be much less than that of internal combustion engines (ICEs). Policy as it currently stands is oriented more toward changing the demand side of the equation with the focus to then shift to the energy mix. It is far easier and makes more sense to change the composition of the fleet and build out the related infrastructure first. Following this, one can then look to focus on changing the source. Indeed, this is the reason why many nations, like Denmark, UK and India, have already moved to place an outright ban, or are at least considering a ban, on the sale of new ICEs within the decade.
 
While there is currently a green push on both fronts (vehicles and energy generation), the transition will broadly occur in two stages. The transition of the end user base is simply likely to happen faster. This will inevitably cause shorter term spikes in emissions while focusing on the upstream infrastructure as we ascertain greater economies of scale.
 
This brings us to the actual transition towards electric vehicles. If one were to base the case solely on a policy perspective, it is likely to occur in a shorter timeframe than the broader transition to renewables as mentioned. So, let’s look at the incentives.

​ What are the other incentives?
 
One of the biggest arguments against electrification is the sheer scale of government intervention in the market. These range from outright subsidies for auto producers to tax incentives. Denmark, for example, has a 180% tax on ICE vehicles while Germany and the US are both providing subsidies to auto makers. 
 
But here is the caveat, one could argue that it is based on self-interest. The role of government within the transport sector has been a phenomena throughout history, from the creation of Volks-Wagon in Nazi Germany in order to create a car for the middle class to the generous subsidies in the US as a result of the War Economy during the mid-20th century (not to mention the bailout of the three big automakers in 2008 which, amusingly enough, ended up being a JV between the US Treasury and the Chinese Communist Party given GM’s joint venture with SAIC).
 
Aside from the climate imperative, this is one aspect that sits front and centre. The next generation of industries and, ironically, national security.

As it currently stands, China remains responsible for about 80% of the chemical refining involved with converting base metals such as lithium and cobalt into the required battery ingredients while the technology needed, including semiconductor design and software, are primarily in the hands of a combination of Japanese and German companies. One thing is for sure, we will continue to see massive government incentives to sensitive industries and the development of technology as we move forward. Having government backing does tend to help de-risk an investment somewhat; how many in Australia, for example, invest in the Big 4 banks because of the notion of “too big to fail”?
 
We will dig deeper into the cost and efficiency arguments for and against EVs later but, for now, we are already seeing the cost of EV production fall significantly to be competitive with ICEs. 

Aside from this, looking at the macroeconomic side, there are certain nuances in the development of this particular revolution that differ from what we saw during the last industrial revolution.

1. Stagnant Wage Growth & Income Inequality: When Ford first introduced the Model T in 1908, he had an America just coming into its own. While most remember the period between World Wars as dominated by the Depression years of the 30s, many forget the Roaring 20s. The US came out of the 1920-21 depression aided by the Federal Reserve and expanded massively over the next decade. For Ford, increasing consumer discretionary spending, a captive market and first mover advantage allowed the business to grow leaps and bounds through the decade until the 30s. Seems rather familiar? This time however, the EV market comes into a market encumbered by long-term declines in wages (and consumer spending) as well as increased levels of inequality, perhaps on a level not seen since the late 19th century. What does this mean? Briefly, it is an interesting consideration for our broad mobility thematic on a number of levels. Think sharing, we are likely to see longer term declines in outright ownership and thus emphasis placed on alternatives such as ride sharing. Autonomy also comes into play here. Given the feedback loop of low wages reducing spending power, it would make sense for companies to automate as much of the process (including the driving aspect) as possible. Think about the long-term cost benefits of driverless cars to a company like Uber. On the other hand, increased income inequality continues to bode well for the luxury and premium segments of the market.
2. Low Cost of Capital: In many ways manufacturers and suppliers find it easier than ever before in sourcing capital with an increased risk appetite. This, in our view, can be at least partially attributed to an aging demographic, creating excess liquidity. Assuming that rates stay lower for longer, we will not only see higher multiples paid for access to the potential growth but a significantly lower cost of capital than would otherwise be the case. Tesla’s 5-year bonds, for example, are currently trading at 3.5% p.a. (despite a rating of B+/B3). Given the current valuation, we would not be surprised if the company chooses to issue another round of capital to retire the existing debt. A seemingly more ridiculous example is Fuji Electric, which manufactures insulated-gate bipolar transistors (IGBTs),  who pay around 0.4% to its debt holders for the privilege on its 2028 series. At that rate the investors are arguably paying the business to take their money.

So, to conclude our brief introduction to the investment thematic, below are some key take-aways:
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1. There is a global policy imperative for the adoption of EVs and, despite it not seemingly putting any great downward pressure on emissions (at least in the initial stages), it should be seen as the first step in the process. 
2. The mobility revolution, for better or worse, will define the next generation of industries and employment dynamics. This is in addition to being strategically sensitive. 
3. The macro-factors are in many ways similar to the first mobility revolution of the 20th century but are combined with some uniquely 21st century nuances that change the equation.

 
This has been an introduction to the Global Mobility Revolution, keep an eye out for the white paper exploring each of our three pillars in greater detail.