Your Quarterly E-Zine
Edition 11 • December 2019

This website contains the latest edition of Forsyth Barr Focus, a quarterly on-line magazine written by senior members of Forsyth Barr's investment team.

If you experience any difficulty in accessing Forsyth Barr Focus,
please call 0800 367 227, or e-Mail editor@forsythbarrfocus.co.nz for assistance.

 

ELECTRIFYING CARS

Internal combustion engines have been the most efficient source of power for transport over the last 100 years. This is all about to change as Tesla’s Model 3 is tipping the scales for electric cars.

Even while the cost of petrol has ebbed and flowed, the incentive for car manufacturers to invest in research for alternative and renewable sources of power has been limited by the shortcomings of alternative - read “battery” technology - range anxiety.

A vehicle that limits travel to within a 50 to 100 kilometre radius before requiring a recharge taking 30 minutes or more, has limited the appeal of electric vehicles (EVs) until recent breakthroughs in technology.

The hydrocarbon industry has a well-established infrastructure built and developed over the past century. The barrier to entry for alternatives has been high and without the infrastructure to support new technology, owners and adopters have felt as though they were taking a big risk, rather than feeling special.

This is about to change. In New Zealand, where 85% of the country’s electricity is generated from renewable sources, the emission reduction benefits of EV’s are greater than in other countries. The government has pledged that one in three cars in its fleet will be electric by 2021. With a government fleet in excess of 15,000 cars, this will go a long way to achieving the target of having 64,000 electric vehicles in New Zealand by 2021.  The government has also established an annual contestable investment fund for innovation in low emission vehicle projects as well as law changes to allow EVs to use bus lanes and high occupancy lanes on the state highway network.

Prime Minister Bill English has said the “light-box moment” for him was when he first got into an electric car in Australia. He was surprised at how quiet, yet powerful it was.

The same response has been generated by the launch of Tesla’s Model 3 in the United States at the end of July. While the global anticipation for the car had been building close on two years, due to clever marketing by Tesla, the actual product has probably surpassed expectations based on reviews.

Priced in the mid-range, at NZ $48,000, the Model 3 boasts the ability to drive 350 kilometres on one charge, with an option to upgrade to a larger battery that will take you as far as 500 kilometres before needing to recharge.

The Model 3’s looks have also been compared favourably to mid-priced BMWs, Mercedes-Benz C-Class and Alfa Romeos. Its performance has been gushingly compared to that of an Olympic slalom skier.

Tesla has only produced about 50 Model 3s at launch date, most of which were for testing, but the company has global orders for over 500,000 cars. So it will be some years before this car is widely seen on roads around the world.

While the commercial distribution of a desirable electric vehicle may be the chicken before the egg, the significant implication of Tesla’s pre-launch marketing and release of the Model 3 has been the response from Tesla’s competitors as well as law-makers that recognise the mainstream benefits in EV technology. 

Tougher car emission targets in major developed economies are putting pressure on car manufacturers to produce vehicles with lower carbon output. The European cities of Athens, Paris and Madrid have pledged to ban diesel vehicles by 2025, while the UK has announced a ban on sales of diesel and petrol vehicles by 2040.

Car manufacturers are also responding with investment in electric vehicles increasing dramatically. Daimler, Mercedes, Fiat, Toyota and Volvo have all announced plans to offer electric vehicles within the next two years. Volvo is the first company to state that all of its new models would be fully electric or a hybrid from 2019.   

With oil prices having halved in the last few years, the sales pitch for alternatives becomes more challenging. The investment by car manufacturers, governments and owners is substantial if the status quo remains a cheaper option. However, as competition and technology continue to improve choice for owners, regulatory changes provide incentive for infrastructure support and the lifestyle of adopters makes them feel special, the tipping point for electric vehicles may have arrived.

Kevin Stirrat
Head of Investment Strategy