Tesla Motors Inc (TSLA): Electric Car Boom Just Around The Corner?

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March 8, 2016 3:01pm ETF BASIC NEWS

electriccarTony Daltorio:  It seems like we’ve been waiting for the electric car boom for a very long time. After all, at the turn of the 20th century, 38% of U.S. autos were powered by electricity.

In the modern era, the prime evangelist for electric vehicles is visionary Elon Musk. He consistently maintained that the long-term strategic goal of Tesla Motors Inc (NASDAQ:TSLA) was to create affordable, mass market electric vehicles.

electric car

Tesla is finally unveiling its mass market Model 3 on March 31. The company will even begin taking $1,000 deposits on the Model 3 on that date. The initial price tag for the vehicle is $35,000 before government electric vehicle incentives. So the final price tag may be closer to $25,000.

electric car pricing

Source: Bloomberg

Of course, the question still remains whether Tesla can crank out enough cars to meet demand. The company is notorious for lengthy delays in vehicle production.

But let’s look beyond just Tesla. Let’s try to find the outlook for the electric vehicle market as a whole.

The Key: Battery Prices

The future for the electric car is bright according to Salim Morsy, the author of a study from Bloomberg New Energy Finance (BNEF). He said, “We project that the cost of manufacturing electric vehicles will fall dramatically, and faster than most people realize.”

One key for Morsy’s prediction to come true will be what happens to the costs of batteries, which account for about a third of the cost of an electric vehicle.

BNEF expects battery prices to drop substantially in the years ahead. Lithium-ion battery costs have already dropped by 65% just since 2010. The current cost is around $350 per kilowatt hour. BNEF forecasts that the cost will fall to below $120 per kWh by 2030 – and even more in the years ahead.

Battery prices will lead the way down in electric vehicle prices. In fact, BNEF says that during the mid-2020s, electric vehicles will become a “more economic option than gasoline or diesel cars in most countries.”

An Electric Future

Falling prices makes up the core case for BNEF’s outlook on electric vehicle usage.

It forecasts that sales of electric vehicles will soar to 41 million by 2040. That would be 35% of light duty vehicle sales (25% of total market share) in 2040. And it would be 90 times what the sales were in 2015. Sales last year amounted to less than 1% of light duty vehicle sales.

If that occurs, it would change the world’s energy landscape. Bloomberg says about 13 million barrels a day of oil would no longer be needed. But electric usage would jump by 2,700 terawatt hours. That’s the equivalent of 11% of electricity demand in 2015.

Do the predictions of BNEF have a good chance of coming true?

One big positive definitely has to be China.

Adoption of electric vehicles is a strategic goal for China as it battles pollution. The central government has mandated that 50% of new state vehicle purchases must now be electric – including those purchased by provincial and local governments. Government incentives for buying electric vehicles are scheduled to continue to 2021.

Both the Chinese government and automakers like Nissan Motor Co. (OTC: NSANY) forecast that the production of electric and hybrid vehicles in the country will grow sixfold to 2 million annually by 2020. The government’s stated goal is to sell 5 million electric vehicles by 2020.

China’s BYD Co. Ltd. (OTC: BYDDY) – a Warren Buffett investment – is expected to double electric vehicle sales every year for the next three years.

Of course, much of this depends on China upgrading its infrastructure. That means both improving its electric grid and increasing the number of charging stations for electric cars.

Questions Remain

The very same question about China’s infrastructure applies elsewhere, including the United States.

Our electric infrastructure is aging and car-charging infrastructure is still in its infancy. A lack of progress on infrastructure would shoot a hole in Bloomberg’s rosy scenario for electric car adoption.

And if oil prices remain below $50 a barrel, it again changes the outlook for rapid adoption of electric vehicles. Even BNEF says oil trading in the $20s for a long period of time would push their scenario back by about a decade.

The question about government subsidies for electric vehicles remains too. Even “green” Germany is quibbling about the amount of incentives to give for buying electric cars. And most governments will be phasing out incentives for electric vehicles around 2020.

By then, the cost of buying an electric vehicle will have to be below the average cost of a regular car. Or else, again Bloomberg’s sunny scenario may fall by the wayside. And as I stated earlier, much of that lower cost may end up relying on batteries. That in turn will rely on Tesla’s lithium-ion Gigafactory and whether it can crank out batteries efficiently and cheaply.

I hope BNEF is right. It stated in the report, “The electric vehicle revolution could turn out to be more dramatic than governments and oil companies have yet realized.” My fingers are crossed.

This article is brought to you courtesy of Tony Daltorio from Wyatt Investment Research.

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