From Blueprint to Blue Chip: Are EVs public market appetite or a venture capital game?
In 1942, Joseph Schumpeter, published what would become his magnum opus, Capitalism, Socialism and Democracy, an intellectual inquiry into the nature of economics and history. Through this, he coined the term creative destruction, a phenomenon whereby new product or process innovations would slowly but surely completely displace its older counterparts, eventually rendering the old obsolete. Today, many speculate that creative destruction is yet again taking place en masse, this time targeting the way we move from point A to B.
The rise of the electric vehicle (EV) is said to revolutionize the way we transition to a carbon neutral future. A Cambridge study conducted in France and Sweden has found that the average lifetime emissions of EVs are up to 70% lower than those of conventional internal combustion engine (ICE) cars.
Look around at the market, and it seems increasingly crowded with manufacturers. A stumbling block for EVs has always been pricing. However, even that barrier is being circumvented slowly. Some models, such as the Tesla Model 3 and the Nissan Leaf, have already reached an affordable price range of approximately US$30,000 - US$35,000. With more scale, this may tell us that EVs are at the cusp of making the breakthrough for widespread adoption, unlocking a key market that public investors simply cannot miss out on. These indications may build a prima facie case that the EV market is simply a late game for venture capitalists to enter.
However, consider that the EV market still faces one great barrier for widespread market usage: the problem of charging. A further look would reveal that the charging aspect of the EV ecosystem is still very nascent. EVs still command insufficient market demand from consumers and commercial buyers. Beyond just price, the average consumer has two considerations when deciding on making the switch to electric: absence of range anxiety and charging inter-operability.
The current stage of EV evolution has not eliminated the range anxiety problem. Users want wide distance coverage, and when energy is needed for recharging, there must be ample charging points to meet such needs and charging times must be fast. While indeed, vehicle ranges have improved, charging facilities (especially in inter-city passages) are still limited. Moreover, slow charging solutions still take too long. Given these constraints, consumers and fleet operators have less incentive to make the switch. After all, even in the most advanced markets, gas stations still outnumber EV charging points. For the consumer, this relegates EV usage to within the city, while for commercial fleets, the logistics of EV usage is still a bottleneck.
Similarly, vehicle inter-operability with charging points is still yet to be addressed. Go to any gas station, and the nozzle would fit any car you drive. This happens due to market standardization, a process which simply has not occurred yet for EV charging and indeed among EV manufacturers. Taking the Indonesian market as an example, there are currently three plugs: the CHAdeMO, Type 2 AC plug, and the DC Charging Combo Type CCS2 (DC fast charger). However, not all charging points provide all three.
Moreover, charging infrastructure providers have little to no economic incentive to expand the network of charging points, as the market demand for EVs is still too small. The costs for building charging stations still remain extortionately high. According to a UBS report in 2017, the average cost to install a Tesla supercharging station, equipped with 6 -8 DC fast charging stalls each delivering 120 – 150 kW, would be in the ballpark range of US$250,000. Taking Indonesia in context, the state-owned electricity company (PLN) estimates that the country needs at least 31,000 charging points. Assuming Tesla’s cost is standard, the required total investment amount to ensure sufficiency of fast charging points would be US$7.75 billion, 10x Tesla’s net profit in 2020.
Thus a chicken and egg problem emerges, whereby consumers are reluctant to buy EVs due to the lack of charging infrastructure, however charging providers are unwilling to expand charging infrastructure as not enough people are buying EVs.
The charging problem provides a reminder that the EV market is more than just the vehicles themselves, it also made up of the larger EV ecosystem that support vehicle usage. This means the market for charging, batteries, and even the second-life battery applications. Currently, the larger EV ecosystem is still in its infancy. Where it is too early for public markets to dabble with, is where VCs can find bountiful opportunities. There is a case that the EV ecosystem is still early enough to be venture funding territory.
Take the market for charging. Currently, charging is either too slow for consumers or too expensive for providers to install en masse. Newer and nascent innovations (often VC-backed) are emerging, providing more creative solutions around the problem. The battery swapping solution posits itself as a promising alternative to conventional plug-in charging. Swapping providers install cabinets or facilities whereby fully charged batteries are stored for EV drivers to switch with when needed. Swapping stations are much less capex intensive to build, especially when catered to electric motorcycles, where only cabinets for smaller batteries are needed and can be placed in convenient locations, such as convenience stores. Through this, swapping stations can access better reach to EV users, and thus build an ecosystem for EV usage to thrive. There are no clear market leaders in the swapping segment yet, thus it is likely that we will see competition in funding the various swapping companies before a winner can be declared.
While pricing has become more affordable, innovation in creative financing solutions for EVs have not kept in pace with price reductions. Many emerging market consumers such as in Indonesia, find that while the long-term costs of EV usage may be cheaper, the upfront costs of purchasing the vehicle is still far too high. According to Indonesia’s auto industry association, GAIKINDO, close to 98% of the four-wheeled automobiles in the country are in the price range of IDR 300 million (~US$21,000) or lower. Meanwhile most EVs sold in the country are priced above that range. Even in more developed markets, EV is not as widespread just yet. What financing solutions can still incentivize EV usage despite the high price? That is still a subject of ambiguity that creative start-ups and businesses must answer. However, intriguing solutions have been tried in Britain which opens the realm of possibilities. When Renault wanted to sell more of the ZOE model (its EV line) in 2014, it drew up a creative scheme whereby buyers can simply buy the vehicle without the battery. Meanwhile the battery is leased for a lower monthly rate, allowing buyers to pay as low as £49/month. This is brilliant, mainly because batteries are the most expensive component, making up 30-40% of the vehicle’s upfront costs. Leasing also helps to spread out the cost burden while easing consumers’ fear of replacement costs. After all, a depleted leased battery is less of a hassle to replace than if you own the battery.
Furthermore, the absence of a second life market provides a golden opportunity for VCs to capitalize on. Consumers want some reassurance that after the end of usage, the batteries from their vehicles still retain residual value. Disposal is a costly option. Lithium-ion batteries used in EVs contain toxic components and are flammable. However batteries sit on a pile of gold mine. The minerals that can be extracted from batteries are almost as good as new. According to JB Straubel, Co-founder and CEO of Redwood Materials (a company recycling used EV batteries), up to 98% of the materials in used lithium-ion batteries can be extracted. This includes cobalt, nickel, and copper, materials that are in high-demand and short-supply in the global supply chain. Not only does a second life market provide residual value, it provides a worthy business model.
Schumpeter got the basics right, the future of mobility will inevitably be electric as ICE vehicles would slowly fade into obsolescence. The only question is when? While Tesla and the like may have already become household names and commanded sky high valuations worthy of the blue chips, however the less sexy aspects such as EV charging solutions and second-life processing are still in the periphery of consciousness for most individuals. These are the frontier technologies that VCs have traditionally eyed for. Such innovations will pave the way not only for future returns, but to move the needle forward. After all, overcoming the existential problem of climate change requires every bit of creativity in business and dauntless investors to fund those creative possibilities.