The automobile has been with us now for well over a century. Though it might not seem like it, once the basic technology was developed, the auto really changed very little.
There have been countless tweaks, from the automatic transmission, power steering and brakes, seatbelts, airbags, and antilock brakes to the most recent innovations like satellite navigation and radio and wireless integration with communication and music devices. Yet at the end of the day, the auto is still a chassis powered by a gasoline (or diesel) internal combustion engine.
Now, however, a fundamental change to automobile technology is cresting the horizon: the transition from gasoline power to electric power. With the advent of an exciting new technology, it is natural to look for investment opportunities, especially given the explosive growth of other new technologies such as the personal computer and the mobile phone in recent times.
To understand the investment environment for electric car technology, you must first understand the product lifecycle. (We have included a handy graphic to assist you.) Products pass through five phases: development, introduction, growth, maturity, and decline. As you can see, in the development phase no revenue is being generated, since no commercially-viable product exists yet.
The introduction phase is when “early adopters” begin buying; at this point the product is typically very expensive and sales are low. (Think of both examples mentioned before—personal computers and mobile phones.) In the growth phase, the product moves into the mass market, and sales skyrocket.
At maturity, the product achieves saturation of the marketplace; competition is strongest as new companies enter the market, and as a result over time many suppliers leave the market (whether voluntarily or otherwise).
The last phase, decline, sees sales begin to fall off, usually because a replacement technology has entered the marketplace.
At this point, the electric car market is still very early in the introduction phase. Commercially-viable models are being sold, but adoption is still very low, and limitations of the current technology mean these models are not practical for a large portion of the market. Moreover, most of those sales have been of gas-electric hybrids, which are a bridge to all-electric vehicles.
All-electric models remain expensive and relatively limited in range, not to mention hamstrung by a lack of recharging infrastructure, and in addition manufacturers are still putting plenty of money and effort into improving existing internal combustion technology.
All of this means a couple of things for investors. First, plenty of companies will enter the market and fail. They may focus on a technology that is inferior or simply doesn’t get adopted for whatever reason (think the Betamax videotape format and the HD DVD format). They may be unable to gain market share, or they just may not compete as effectively. It will be years before solid industry leaders are clearly visible—excepting only the fact that in this case, existing auto manufacturers are active in the sector alongside newcomers like Tesla.
Second, many companies won’t have much of a track record to analyze. Investors will have to make judgments about subjective things like prospects and research and development much more than historical sales and financial performance. This requires a somewhat different approach than traditional analysis and carries substantially much more risk.
In closing, keep in mind that the electric car sector is about much more than cars. Electric cars will require batteries—batteries unlike what exist now. They will require a vast infrastructure of charging stations that doesn’t exist yet, and the business model will have to be different from the gas station because of the time required for charging compared to pumping a tank of gas. They will require repairs and maintenance. Producing a marketable product may even require entirely new technologies.
In short, there are investment opportunities surrounding this new technology that go well beyond the direct and obvious. The company that can solve key problems that smooth the electric car’s path to market will probably be positioned to make huge profits, so don’t forget to identify and research those key problems and find out who’s trying to solve them.