House Mountain Partners

Are Electric Vehicles About to Jump The Shark?

Chris BerryComment

By Chris Berry (@cberry1)

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As if vehicle electrification needed any more hype, Apple Inc’s. (AAPL:NASDAQ) rumored move towards producing its own EV by 2020 may have been the first sign that the whole idea of EVs has “jumped the shark.” For those of you unaware of this term, it refers to the 1970’s sitcom Happy Days when Fonzie was waterskiing and literally jumped over a shark. Happy Days was never the same and the show never quite recovered from this stunt to win viewers.

The rumors leaked last week about AAPL secretly working on developing its own EV have fanned intense speculation about how this would be accomplished. With $170 billion in cash on its balance sheet, obviously hiring the talent and research and development are non-issues. This is why the idea of AAPL buying Tesla Motors (TSLA:NASDAQ) makes no sense. First, AAPL management would need to justify TSLA’s current market cap (US $26.4 billion) and attach a premium. Given AAPL’s dominance in other industries and relative perceived inexperience in auto manufacturing, I think you could make a compelling argument that shareholder returns will be better driven by AAPL building its own auto ecosystem rather than buying one and integrating it. It appears that the company may be doing exactly that.

Whether or not this is a good idea is now a central question in the debate over how vehicle electrification can become “mainstream”. AAPL isn’t just competing with TSLA or Google (GOOG:NASDAQ), but will be competing with BMW (BMW:ETR), Toyota (TM:NYSE, 7203: TYO), Nissan (NSANY:OTCBB, 7201:TYO), etc all of who have developed their own versions of electric vehicles and spent decades perfecting their automotive supply chains.

As the EV industry is relatively immature, I suppose AAPL could use its cash and innovative talent to jump to the front of the pack, but this remains to be seen. The automotive business is a highly competitive industry with supply chains already in place and so AAPL would need to build its own or integrate into existing ones. With AAPL’s utter dominance in handheld technology and computing, it would seem that the company’s optimal strategy may be to avoid the automobile and just focus on the battery or integrating its technology with existing automakers. With AAPL recently named in a lawsuit brought forward by A123 Systems for poaching talent, the intellectual capital is becoming fortified in Cupertino, to be sure.

Given the much larger size of the energy storage business relative to EVs, one would think that AAPL shareholders would be better served by attacking the energy storage business rather than the automotive sector. Market research firm IHS has forecast the energy storage market to expand to 6 GW by 2017 and 40 GW by 2022 in annual installations from a base of .34 GW in 2012 and 2013, so the growth potential is there. This could be as large as $60 billion in size by 2023 from approximately $4 to $5 billion today.


Consolidation Has Begun

You can already see signs of consolidation in the battery business with two deals just announced this week alone. First, Polypore International (PPO:NYSE) announced the decision to sell itself in a two-phased deal with Asahi Kasei Corp (3407:TSE) acquiring PPO’s energy storage assets and with 3M (MMM:NYSE) acquiring PPO’s media separation business. According to Bloomberg,

Asahi Kasei plans to invest 1 trillion yen ($8.4 B) over five years to boost capacity and expand its battery and materials businesses in China, Thailand, South Korea and the U.S., according to a Monday presentation.”

The deal is valued at $3.2 billion.

Second, Samsung SDI’s (006400:KRX) purchase of Magna International’s (MGA: NYSE, MG:TSX) battery pack business (known as Magna Steyr) was made public soon after. While the financial terms of this deal weren’t disclosed, the move by the company is a clear statement of its intentions to gather as much market share as possible in this growing segment of the economy. Samsung SDI supplies BMW with batteries for its i3 and i8 model vehicles. 

For the record, I do not think EVs have jumped the shark and the industry can still grow at healthy CAGRs for the foreseeable future. There is a tremendous amount of brain power focused on building a “better battery” as the size of the prize is so potentially large. AAPL’s recent moves speak more to the blurring of lines between traditional industries – in this case automotive and technology. My questioning AAPL’s move into EVs has more to do with what the optimal use of its cash hoard is to drive shareholder returns more than anything else.

Whether or not AAPL builds its own EV is really immaterial to the debate over the viability of vehicle electrification. The fact is that the largest company in the world (by market cap) is now in the battery/EV space and this is a positive as the pace of technological adoption increases. Maybe I’m misinterpreting AAPL’s intentions as I prefer value plays to “momo” stocks, but regardless of your investment style, these disruptive forces in the automotive sector are exciting and promise extensive change – for the better – in the years to come.





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