Wolf here: occasionally I highlight a comment that adds a different angle or flavor or an illustration or more depth to an article published on Wolf Street. This is a comment by “Crazy Cooter” on my article, BMW Smacks Down Elon Musk’s Tesla Collaboration Hype. Actually, it’s a response to comments posted by “MarleyChil” on that article.

By Crazy Cooter:

I have a few concerns regarding EVs and how they will eventually be adopted in the global marketplace.

Let’s start with IP (e.g. design and patent). Where is all the IP in an ICE (internal combustion engine) vehicle? Back in the 70s, it was simple enough the working man could pretty much do anything that needed fixing. Enter the EPA and manufacturers are piling up patents/design (a.k.a. assets) as they comply with the law. This STILL goes on (i.e. the EPA changes stuff around and manufacturers have to change designs/parameters).

Extremely complicated control systems (i.e. computers, sensors, etc.) had to be integrated into the design of the ICE. Did you know the wiring harness on a vehicle is the single most expensive part? It isn’t because of all the lights!

With that said, how much IP do y’all think is in the steering system? Brakes? Air conditioning? Body? Material sciences.

In fact, one metric I have not seen, but would like to see, is a comparison of distinctive parts and moving parts between EVs and ICEs. I think this would clearly show which is the more complicated vehicle. Think about it; how many moving parts are on an EV?

Anyway, when you look at an EV, much of the EPA madness falls away; batteries don’t pollute (excluding crashes).

So where is all the IP for an EV? The battery! EVs have a flat power curve and none of the complexities you get with ICEs. This begs the question: where is Tesla’s IP?

See, here is the first big problem with EVs; any company that sells one is potentially selling a low margin differentiated product. Why? Because whoever owns the battery IP is going to make all the money.

Let’s say in two years a company in Canada, partnered with a mining resource play, announces a new battery that is 100% better at half the price. Whoever uses it has a car that is twice as good, so everyone is roped. Consumers will simply buy a product with the new battery and all the manufacturers are going to try to sell their product by using approximately the same inputs.

With ICEs and the accompanying EPA regulations, you don’t have a risk of a pile of assets on the books becoming “short lived”, nor is your profit at risk when a research company introduces a new product that has to be integrated into your product line.

That is the first dynamic I think everyone needs to realize about all the big automakers; EVs are a risk to their current position of strength. They are nice and comfy in a market where they are heavily protected by regulation.

Another dynamics folks don’t think about is what does success really look like? Let’s say EVs grow to 5% of the new car sales market share in the US. A quick google shows 15 million a year, so we are talking about 750,000 batteries. How much crazy-ass rare earth raw material is going into each one? Are there mines and global supply to support that kind of demand, and if so, at what price? Further, batteries only last so long and have to be recycled, so the demand for batteries will be significantly more as folks replaced them on cars sold in past years.

Reports on this vary, but it appears that this “giga-factory” would consume a significant percentage of global lithium supply. It just doesn’t seem to pencil out in the sense that the average middle class American can drive an EV instead of an ICE, which is a quarter billion passenger vehicles on the road today according to wiki. Take 5% of that and you are talking 12.5 million battery packs, each needing to be replaced after 5 years. And this excludes all other car markets globally.

So, let’s recap.

Tesla is losing money on small production runs, and unless something changes, will simply lose larger amounts of money on larger production runs. Its stock price is grossly out of whack compared to its actual value and ability to earn profits.

The core value of the Tesla product is in the battery packs, IP which is purchased from a vendor and not exclusive to Tesla. This creates a situation where a competitor can step into the market and sell a differentiated product, reducing Tesla’s margins. Tesla would need large scale production to reduce unit costs, an advantage many other manufacturers have that Tesla does not.

If EVs are adopted at a sustained rate, battery supply chains will become a bottleneck, a problem that is compounded by the need to replace batteries after some years (i.e. battery production will have to be significantly greater than the number of new units sold).

With all that said, I like EVs. They actually make a lot of sense in some places and that is where they should be used. But the idea that middle class American is going to be driving EVs instead of ICEs is a pipe dream. By “Crazy Cooter” in response to BMW Smacks Down Elon Musk’s Tesla Collaboration Hype.

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