Tesla and BYD, the companies spearheading the BEV transition
Visionary people making the future possible
I’m breaking some rules here in terms of length, but I’m new to this stuff, so maybe you might prefer to read this in a couple of sittings. I think this works as a cohesive story that would not have the same impact if broken into bits. Comments please about the length. Should this be covered over 3 posts?
The start of wheeled transport
Believe it or not, electric cars were there at the beginning of motoring, but the internal combustion engine ended up dominating personalised (and all wheeled) transport early in the 20th century. The famous pair of pictures from the Easter parade in New York in 1900 and 1913 tell the story. That period spans the horse and cart to motorised transport revolution in New York. At that time there was a solid emissions problem (horse manure!) which was resolved by the arrival of the Internal Combustion Engine (ICE). Of course that heralded the much bigger emissions problem resulting from burning gasoline (and later diesel). Quite soon we’ll look back at today and see a similar dramatic shift resulting in full electrification (BEV, Battery Electric Vehicles) of all wheeled transport. The amazing thing is that this change has been driven by two visionary individuals who have broken all of the rules about reasonable change. Here I summarise the shift. I suggest that we are too close to see what is going on clearly, but we’ll look back to the start of the 2020s to see how rapid and dramatic the change was. For investors this makes for opportunity/risk now as the legacy industries (both conventional vehicle makers and oil & gas industry) work hard to slow things down. I suggest that the electric horse has bolted.
As with attempts to mechanise transport around 1900 and before, the history of the modern transition to electrification of transport is chequered, with lots of false starts. In the late 1990’s and early 2000’s there was some momentum generated towards electric cars. General Motor’s excursion into the electric vehicle was always half-hearted. The initial cars were just leased to customers and subsequently withdrawn and the cars destroyed, as documented in the movie “Who killed the electric car?”.
How did we get to the reality of BEV takeover?
I argue that the switch which we see today would not have happened without the disruption by two driven individuals, one in the US (Elon Musk), the other in China (Wang Chuanfu). These individuals have built companies (Tesla and BYD respectively) that have developed and adopted new technology (notably use of lithium batteries, but the changes are much more comprehensive). A third genius, who I shall cover in another article, is Chinese entrepreneur Li Shufu who controls the Zheijiang Geely Holdings Group, which has a huge and influential ownership of electric car developments.
Today virtually the whole wheeled transport industry is accepting the end of the ICE, although few traditional vehicle transport companies have clear plans for the switch to the BEV. And Toyota remains a major spoiler seeking to prevent the end of the ICE; I’ll cover this story later.
The current car industry
In the early days of the ICE motor industry, manufacturers built their own cars. Over the past 30 years this has shifted so that manufacturers rely heavily on outsourced parts manufacture. A big downside of this approach became clear with COVID as supply lines froze, leading to huge problems for manufacturers. Just a small number of missing parts means inability to finish vehicles.
There is also huge dependence on benefiting from investment in the ICE and, notably in the case of Toyota, hybrid technology. There is massive resistance with in the legacy motor industry to exit manufacture of the internal combustion engine because of this investment. The fact is that key engineers in many traditional ICE companies have invested their whole career in making the ICE more efficient, but at the same time more complicated.
China is the country with the biggest commitment to the BEV. With 26% of new vehicles sold in China in 2023 fully electric, it is also the country that drives BEV adoption.
The change agents, Tesla and BYD
Elon Musk and Wang Chuanfu recognised the problem of greenhouse gas emissions from wheeled transport and both committed to address the problem through exit from the ICE and development of fully electric vehicles. They are driven by acknowledgement of the massive risk to survival of humans and other animals caused by climate change. They also understand the urgency and recognise that there are better and cheaper ways for wheeled transport.
There is nothing simple about a genius …..
The two individuals are very different in their approaches, with Musk being aggressively “out there”, while Wang Chuanfu’s mode of operation is to “talk less and do more”. Both are self-made billionaires; Elon Musk is an Engineer and Wang Chuanfu a Chemist. Their companies exemplify their characters. Tesla is definitely “out there”, while I see BYD as “Tesla without the drama”.
Elon Musk, Tesla
Elon Musk got involved with Tesla as a founding investor. He was busy disrupting the space industry with plans to build rockets to enable human settlement of Mars, but he was also acutely aware of the need to electrify transport here on Earth. Being Musk, he soon got involved with defining how Tesla would make its way in changing the world by electrifying transport. This led to some fights because the founders had a smaller vision of building electrification modes to sell to the major manufacturers. Musk’s view was that the existing industry would, as happened earlier at GM, not be receptive to the change when they were so invested in the existing ICE industry.
Musk’s view was that dramatic change is expensive at the start and the way forward would be to build a luxury BEV which would allow some costs to be recouped. Equally important, Musk saw the development of a BEV car that answered all of the criticisms of the ICE industry, as another crucial part of enabling the change. The “Tesla Roadster” was the vehicle that set that change in motion. A huge advantage for Tesla was that the company was 100% invested in a BEV future, with no baggage of an ICE core that had to be wound down. There were many twists and turns and curiously Tesla’s survival is probably significantly due to SpaceX’s (Musk’s rocket company) successful rocket launch in 2008.
The above is spelled out in detail in Walter Isaacson’s biography of Elon Musk, which is essential reading for investors interested in Tesla. It is a great read!
The thing is that Musk is a genius with extraordinary attention to detail who embraces risk with gusto. At SpaceX his team has rewritten the space industry by forging new ways of developing sophisticated space equipment, cutting costs dramatically and instituting change that the legacy industry found difficult to comprehend, until SpaceX took their business and forced a change in the way that they operated.
So everything was on the table in Tesla, starting with the simple detail of getting rid of an expensive dealer network of a conventional car manufacturer by making purchase of a Tesla a matter of going online and putting together a purchase order, with no haggling and lack of clarity about “how much” and “where” to pick it up. The vehicle itself is simpler and cheaper to manufacture, with heavy items like the battery becoming part of the structure of the vehicle.
Tesla’s genius was on show at the Master Plan 3 day in March 2023, where many novel things were revealed. The scale and scope of the changes being wrought by Tesla is astonishing. I’ve summarised my take on the day.
In considering the scale of the problems to be solved, the Master Plan 3 had some interesting insights. Electrification is really efficient compared with using fossil fuels, so the amount of energy needed in a fully electrified world is less than 40% required by fossil fuels. For wheeled transport, comparing BEV with ICE vehicles, the BEV is between 4.2 (class 8 trucks) and 4.8 (passenger cars) times more efficient. The Master Plan 3 addresses the entire energy needs (not just wheeled vehicles) and this gives a clue that Tesla has interests beyond vehicles to include overall energy provision. This makes more understandable Tesla’s role in emerging energy balancing through large scale battery storage initiatives. The Master Plan 3 covers the overall aspects of decarbonization, including space needed for renewables, materials and mineral needs. The document which I’ve referenced above is well worth a read.
The above gives the big picture story, but the Master Plan 3 day did much more. It wasn’t well received by analysts because it didn’t reveal a prototype of a $25,000 BEV. Instead it did much more, with analysis of the market for a $25,000 vehicle and, more importantly, the kind of innovation needed to make it happen. The scale of revolutionary technical developments revealed at the Master Plan 3 day is breathtaking. A little patience is needed as I think we need to wait until the Mexican Gigafactory gets built and starts operating.
I’ve summarised 6 new things elsewhere but briefly these include:
i) Outsourcing is dead; Tesla makes everything and this rewrites the rules of manufacture;
ii) Tesla has a 20-30% more powerful permanent magnet motor that costs $1,000 and has no rare earth elements;
iii) Tesla has implemented new revolutionary battery manufacture based on automated dry coating at scale;
iv) Tesla will own 100% of controller manufacture in a $25,000 car (Model 3 has 50%, Cybertruck 85%);
v) Tesla is moving to 48V controllers of everything; this is a big deal as the existing motor industry relies on 12V controllers;
vi) There is a 40% reduction in manufacturing footprint and manufacturing steps are massively simplified.
Tesla started with the Roadster and followed this with four vehicles: Model X, Model S, Model 3 and the Model Y. Recently it has released its Semi and Cybertruck. There is a cheaper BEV in sight and an image at the Master Plan 3 day showed (with cloth cover) what might be a light transport vehicle. The Tesla suite of vehicles help prove that electrification of wheeled transport means all wheeled vehicles. The recently released 80 ton Tesla Semi is a loud statement about the capacity of batteries to power huge trucks over long distances (forget hydrogen). The Cybertruck is a tough off-road vehicle that many have believed could not be competitive as a BEV.
Wang Chuanfu, BYD
While much less is known about Wang Chuanfu, key elements of his success parallel Musk’s story. Wang Chuanfu grew up in a poor farming family and his parents both died while he was still in school. He was driven to succeed and got a good education in Chemistry, then showed an entrepreneurial capacity in building a company (BYD, Build Your Dreams) in Shenzen in 1995. It was based on innovative battery technology which set out to compete with Japanese battery manufacturers. He started with batteries as new chemistries were emerging and at one stage BYD commanded half of the mobile phone battery market. While still a significant player in the mobile phone components market, in more recent times (since 2003) BYD has made major strides in electrification of transport, with electric buses and now in the electric car market.
BYD emerged on the US investment radar when Charlie Munger convinced Warren Buffet to buy a 10% stake in the company for $232 million in 2008. A CNN report from that time is headlined “Warren Buffet Takes Charge”. This report is interesting as it gives a flavour as to why Charlie Munger was convinced of the investment, but the headline misses the point about Wang Chuanfu. Initially Buffet wanted to buy 25% of BYD but Wang turned him down. Wang Chuanfu was attracted to having Berkshire as an investor but he wanted to stay in charge and he remains in charge today. The Berkshire stake rose to 21% in 2021, which probably means interesting times for all parties, but recently Buffet has sold down to an 8% holding, with one recent report suggesting that Berkshire doesn’t want to compete with Tesla. Probably taking profits and concern about a fractious US-China relationship had a big role in the Berkshire sell down. However (the late) Charlie Munger and Warren Buffet have been very respectful of Elon Musk, and Elon Musk in turn is now very respectful of Wang Chuanfu and BYD, after initially being somewhat dismissive of a Chinese car maker.
The (US) market got nervous about Berkshire selling down but, when your initial investment becomes worth more than $7 billion, taking profits is not silly. I became an investor in BYD (OTCPK: BYDDF) when its share price was grossly undervalued and I have kept my stake because I think the BYD story has a long way to run. While its major market for its electric cars is China, BYD has much more global ambitions and it has several outstanding well-priced fully electric vehicles that are starting to make waves in Europe, Australia, SE Asia and South America. I am the very happy owner of a BYD Atto 3 in Australia, which was much cheaper than a comparable Tesla and it was also cheaper than a Toyota RAV4 hybrid. For the moment BYD has chosen not to try the US car market, probably after encountering hassles for its electric buses in the US and also taking note of the current US-China difficulties. BYD has huge markets in China and the rest of the world, to make the US market not a must-be-in-it.
BYD, like Tesla, is big on controlling all steps of manufacture. Cost cutting and excellence in manufacture is at the core of the company. There seems to be very close attention to manufacturing steps, with more emphasis on incorporating cheaper Chinese labour costs.
BYD started out as a battery manufacturer, and it remains the second largest battery company in the world. A key innovation has been the commercialisation (in parallel with another key Chinese player, CATL) of a more robust and cheaper lithium iron phosphate (LFP) battery, which has no cobalt, manganese or nickel. It is also less fire-prone than the earlier lithium batteries. The LFP battery was first published in 1996 by Nobel Prizewinner John B. Goodenough from the University of Texas. The Chinese companies have made robust LFP batteries that are revolutionizing the BEV industry. My BYD Atto 3 has a decent range (480km) via a BYD blade (LFP) battery, which will most likely outlast the car. A bonus is that the Atto 3 has bidirectional charging, which means that when the power goes out in our house in the bush, the car plugs in and runs the house in emergency mode (8 hour outage uses ~5% of the battery!).
Defining differences between Tesla and BYD and the rest of the industry
A key difference that Tesla and BYD both exhibit is a complete focus on full electrification. Tesla was born BEV and BYD has ceased to sell vehicles powered only by an ICE. It does have hybrids, but its international focus is largely on just BEV vehicles.
The thing about both BYD and Tesla is that the innovation is relentless. Quite recently Toyota’s engineers pulled apart a Tesla Model Y and announced that the Model Y is a superb vehicle. The point is that at the same time Toyota was examining the Model Y, which was the world’s best selling car in 2023 (including ICE vehicles), Tesla’s Master Plan 3 day (see above) announced a series of dramatically new developments which once again will transform the industry. I’ve highlighted a flavour of these new innovations above. It is noteworthy that these changes are likely to impact industry well beyond motorised transport. For example a more efficient, cheaper electric motor that has no rare elements will surely have very broad application.
Conclusion
The above discussion gives my take on the massive changes coming as wheeled transport gets electrified. My view is that Tesla (NASDAQ:TSLA) and BYD (OTCPK:BYDDF)(OTCPK:BYDDY)(HKG:1211) are forcing the pace of change. This comes at a crucial time as climate emergencies are confronting Governments all over the world. These companies have eccentric geniuses leading them and that is why the transition is happening faster than most legacy companies can believe. In the last quarter of 2023 BYD sold 526,000 BEV, while Tesla sold 484,500 BEV, making BYD the world’s biggest seller of fully electric vehicles. Clearly BYD and Tesla leading a big change!
While I’m not a financial analyst, I am an investor and I use my research in informing my own investment decisions. I write about qualitative issues that transcend a narrow focus on daily news and quarterly reporting. Perhaps you and your financial advisor might find my commentary of some interest, but of course investment decisions in this emerging area are your own. For what it is worth, my first position is to avoid investment in companies wedded to technologies that are in decline, or will be soon. Hence I have no oil & gas (see my take on Exxon Mobil here) or indeed any fossil fuel investments. I do have investment in a range of new energy stocks including those involving solar PV and its management, as well as energy storage companies. I’ll refer to these investments in future articles. You can get a flavour of my coverage on Seeking Alpha.
Nor have I invested in vehicle companies with a core focus on the internal combustion engine. Some time ago I invested in BYD (BYDDF) because I believed that BYD was serious about electrification in a way that other legacy car makers were not. It has followed through on this goal, being the only legacy ICE car maker than I am aware of which no longer produces ICE-only vehicles. There is a still a way to go as BYD does make hybrids in China. BYD’s (BYDDF) year high share price was $US36.75 and today it trades ~$US26.75. I’m not selling as I think there is a long way for BYD’s share price to run. Its market cap at $US78 billion remains a fraction of Tesla’s $US755 billon. I missed the early days of Tesla and I worry about Tesla’s market capitalisation that exceeds that of the next 8 leading car companies by capitalisation combined (Toyota, BYD, Porsche, BMW, Mercedes-Benz, Stellantis, Volkswagen, Ferrari). I did take a stake in Tesla early in 2023 at an entry price of $US113 and sold it in early July 2023 at $US277. I’ll probably reinvest in Tesla some time in the future.
The bottom line is that there is money to be made in stocks that end up driving a major energy transition, but it is not straightforward. For example, there have been some opportunities for investing in Ford (F) when its share price fell below $US5 in early 2020 and it peaked briefly above $US20 in early 2022. Today Ford trades at $US11.86. My challenge with Ford is that, while CEO Jim Farley has vision, the company is yet to find a way to plan an exit from the ICE.