VW

Tale of the gold coin chocolate & a warning for Tesla Disciples

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It hadn’t really hit until going back to read the conditions of Musk’s new executive compensation package but the first thing that struck me was the risk of the old adage of paying too much attention to the share price. The collection of all 12 tranches for CEO Elon Musk only kicks in when his company hits $650bn in market cap. The first thing to pop in the head was that of Japanese mobile phone retailer Hikari Tsushin back during the tech bubble. The rather eccentric CEO Yasumitsu Shigeta had gold coin chocolates made embossed with “Hikari Tsushin: Target Market Cap Y100 trillion.” One could only conclude he believed in his own BS.

It was at that moment where the only thing that crossed the mind was ‘this spells trouble’. There were magazines like Forbes touting how Shigeta was one of the richest men in the world and analysts fell hook, line and sinker for this unrealistic dream forecasting he’d be #1 before long. The only rational conclusion for the Contrarian Marketplace was to tell them that “bet he won’t be in the top 100 next year.”  Low and behold the tech bubble collapsed and Hikari Tsushin – that believed it was worth 2x the market cap of then highest valued corporation in the world, General Electric – fell over 95%.

While Musk may not yet have printed target market cap $650bn gold coin chocolates, what the incentives are saying to the market is that his company needs to be worth more than Daimler, BMW, VW, GM, Ford, Toyota, Nissan, Honda, Renault, Fiat-Chrysler Ferrari and Porsche combined. Just read that last sentence again. Do investors honestly believe that Tesla which consistently misses and is going up against companies that have been in the game for decades, seen brutal cycles, invest multiples more in technology and forgotten more than they remembered will somehow all become slaves to a company which has no technological advantages whatsoever?

Once again, this compensation package screams of gold coin chocolates in mentality. Instead of running the business and letting the share price do the talking, the mindset is focused on launching convertibles into space and distracting investors from increasingly dreadful financial results which eventually must come full circle if the results continue to miss. Broader Tesla report here.

Trust in Japan? Strangled by sontaku 忖度

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Trust and Japan used to go hand in hand. It was a hard earned reputation.  A mining executive once told me that “when you sign a contract with the Japanese, that is the contract. When you sign a contract with the Chinese that is the beginning of the negotiations.” Hardly a subtle difference. Yet here we are in the last few years where a plethora of scandals from Japanese companies have come to light. Houeshold names too – Olympus, Toshiba, Kobe Steel, Subaru, Toray, Nissan, Mitsubishi Motors, Takata, Mitsubishi Materials, Asahi Kasei, Obayashi, JR Central, Nomura etc etc. It is almost as if there is a coming-out of sorts so the crimes are somewhat diluted in the midst of others. Syndicated scandals? Expect more to come out. Perhaps the worst part about it is the limp wristed approach by the regulators. ‘Sontaku’ (忖度) in Japanese is a word meaning ‘glossing over’ which is exactly what the regulator is doing over scandals involving household names. Hear no evil, see no evil, speak no evil.

In October I was invited to give a lecture to 70 bureaucrats at the Ministry of Finance’s attack dogs – the Financial Services Agency (FSA) and the Securities and Exchange Surveillance Commission (SESC) on foreign perceptions of Japan’s handling of corporate  crime. In the interests of objectivity the first slide pointed to how no corporate governance system is perfect citing the minefield of foreign corporations caught up in bad behaviour – VW, Petrobras, Parmalat, HealthSouth, Lehman Brothers etc etc. I also highlighted the sentencing of executives who commit crimes – many received lengthy jail sentences, personal fines while the corporates faced eye-watering penalties.

Ironically much of the crime committed by corporates here is at a relatively pithy level. Instead of billions being massaged into or from the books, Japanese corporates tend to commit the equivalent of falsely submitting a $20 taxi receipt to your boss as a business related expense. One almost could conjure up a scenario that if Toshiba was ever able to make back the money to cover the accounting fraud they’d have broken into corporate HQ in the dead of night to put it back in the safe.

I touched on Kobe Steel which conveniently broke the news that it had falsified the true contents of its products to customers. While pointing out such behaviour was regrettable a chart which showed a heavy shorting of the stock on the day it announced it to its duped clients displayed the bigger problem. A question was asked directly to the regulator – “do you intend to investigate the heavy short selling of Kobe Steel stock 3 weeks before the company announced this to market?” No answer.  The following slide showed that a person that was able to short the stock 3 weeks before the announcement would have cleaned up a tidy 60% profit. Again no plans to investigate the insider trading. Why bother having the FSA if it is a toothless tiger?

The following slide showed the types of fines dealt to both the broker (Nomura was a regular feature in the leaks) and the investor (at the time Chuo Mitsui Asset). The fines were the equivalent of $500 and no suspension of license was pursued by the regulator, When the following slide that compared it to the types of fines meted out to foreign banks – lengthy jail terms, lifetime suspensions and monster fines in the the millions and billions jaws didn’t so much drop but celebrate the idea “thank God we live in Japan”. Truth be told the FSA did punish one dying asset manager $150mn but that is an exception. That is the problem. It is too conditional where convenient.

Rolling onto the next slide the discussion looked at how ‘sontaku’ was a problem. Whereas the FSA & SESC heavily pushed for license revocation of foreign investment companies that it found to break rules, it let off all the domestic companies that had ‘brand names’ to protect. What message is the regulator sending if local corporations know they can pretty much get away with anything. In what way is that a fair system? If foreigners will be turfed on a whim then why do the locals get special protection?

When looking at agency funding, the FSA was put up against the US SEC and Australia’s ASIC equivalents. The US was there for illustrative purposes. Yet Australia was the market that made the point clearest. Despite having a total market cap 5x the size of Australia and 30% more listed companies, Japan spends 20% less than the antoipodeans. Even worse it had fewer numbers of staff and its budget was shrinking.

When analyzing market surveillance, in 2014 the Aussie market issued 36,000 speeding tickets (alerts to potentially suspicious trading). The sophisticated systems are designed to catch any wrong doing. The Japanese issued around 180 speeding tickets. I suggested the FSA go cap in hand to ASIC and the ASX and ask if they can buy the software off the shelf. Safe markets attract capital because all actors feel adequate protections are in place to prevent crime. Higher liquidity attracts more liquidity. It is a win win.

Several years ago the fanfare of the Corporate Governance Code was thrust into the faces of the intenational investment community that Japan Inc was changing. After visiting multiple staff inside the FSA and the TSE there is absolutely no pulse of proactively to be seen anywhere. Even my slight nudge to get the FSA to tap the shoulder of the TSE to suggest listed corporates provide English language materials to encourage more transparency for foreign investment met with the response, “it might help if you spoke directly to the Deputy PM & Minister of Finance Taro Aso.”Not a word of a lie.

How can the Japanese authorities look to appropriately handle a slew of corporate scandals if the encouragement of English language documents requires someone (a gaijin no less) outside the agency to ask the Deputy PM to suggest it back down to them. It is an embarrassment.

In closing perhaps we can look to these corporate scandals breaking out as endemic of a greater underlying problem. While the knowledge that the regulator is likely to do next to nothing provides mild comfort, the reality is that Japanese companies have been strangling themselves for decades. The corporate fabric is fraying. The world is far more competitive than it was. For Japan to assert its ‘quality and/or engineering gap’ dominance now means profits likely suffer. In order to  get around that hurdle it seems that to maintain profit margins, corporates now lie about specifications hoping a history of ‘trust’ and ‘time honoured’ traditions can keep the bluff going. As mentioned earlier the scale of the ‘cheating’ is pitiful yet the shame it brings is multiples larger.

Japan’s cultural rigidities are on full display. Unfortunately they couldn’t arrive at a worse time. Clumps of companies confessing crimes to soften the collective blow is only the start of many more. I suggested in my speech that the authorities introduce a 3 month amnesty period for companies to fess up to any wrong doing. That way they can clear the decks and make it clear that any wrong doing after that date will be met with harsh repercussions. Of course it won’t happen but expect the list of companies above to have many join them at the table of shame.

Tesla – 30 reasons it will likely end up a bug on a windshield

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Contrarian Marketplace ー Tesla – 30 Reasons it will likely be a bug on a windshield

Contrarian Marketplace Research (CMR) provides 30 valid reasons to show Tesla (TSLA) is richly valued. Institutional investors have heard many of the financial arguments of its debt position, subsidies, cash burn and other conventional metrics. What CMR does is give Tesla all the benefits of the doubt. Even when extended every courtesy based on Tesla’s own 2020 production target of 1,000,000 vehicles and ascribing the margins of luxury makers BMW Group (BMW GR) & Daimler (DAI GR) the shares are worth 42% less than they are today. When stacked up against the lower margin volume manufacturers, the shares are worth 83% less. There is no fuzzy math involved. It is merely looking through a different lens. We do not deny Tesla’s projected growth rates are superior to BMW or DAI but the risks appear to be amplifying in a way that exposes the weak flank of the cult that defines the EV maker- ‘production hell’.

Follow social media feeds and Tesla’s fans bathe in the cognitive dissonance of ownership and their charismatic visionary, CEO Elon Musk. No-one can fault Musk’s entrepreneurial sales skills yet his business is at the pointy end of playing in the major leagues of mass production, which he himself admitted 18 months ago was a ‘new’ challenge. Let us not kid ourselves. This is a skill that even Toyota, the undisputed king of manufacturing, a company that has coined pretty much every industrial efficiency jargon (JIT, Kanban, Kaizen) has taken 70 years to hone. It might have escaped most investors’ attention but Lockheed Martin called on Toyota to help refine the manufacturing processes of the over budget F-35 Joint Strike Fighter. If that is not a testament to the Japanese manufacturer’s brilliance Tesla is effectively Conor McGregor taking on Aichi’s version of Floyd Mayweather.

Yet Tesla’s stock has all the hallmarks of the pattern we have seen so many times – the hype and promise of disruptors like Ballard Power, GoPro and Blackberry which sadly ended up in the dustbin of history as reality dawned. Can investors honestly convince themselves that Tesla is worth 25x more than Fiat Chrysler (a company transformed) on a price to sales ratio? 10x Mercedes, which is in the sweet spot of its model cycle?

Conventional wisdom tells us this time is different for Tesla. Investors have been blinded by virtue signalling governments who are making bold claims about hard targets for EVs even though those making the promises are highly unlikely to even be in office by 2040. What has not dawned on many governments is that 4-5% of the tax revenue in most major economies comes from fuel excise. Fiscal budgets around the world make for far from pleasant viewing. Are they about to burn (no pun intended) such a constant tax source? Do investors forget how overly eager governments made such recklessly uncosted subsidies causing the private sector to over invest in renewable energy sending countless companies to the wall?

Let us not forget the subsidies directed at EVs. The irony of Tesla is that it is the EV of the well-heeled. So the taxes of the lawnmower man with a pick-up truck are going to pay for the Tesla owned by the client who pays his wages to cut the lawn. Then we need look no further than the hard evidence of virtue signalling owners who run the other way when the subsidies disappear.

To prove the theory of the recent thought bubbles made by policy makers, they are already getting urgent emails from energy suppliers on how the projections of EV sales will require huge investment in the grid. The UK electricity network is currently connected to systems in France, the Netherlands and Ireland through cables called interconnectors. The UK uses these to import or export electricity when it is most economical. Will this source be curtailed as nations are forced into self-imposed energy security?

So haphazard is the drive for EV legislation there are over 200 cities in Europe with different regulations. In the rush for cities to outdo one another this problem will only get worse. Getting two city councils to compromise is one thing but 200 or more across country lines? Without consistent regulations, it is hard to build EVs that can accommodate all the variance without boosting production costs. On top of that charging infrastructure is an issue. Japan is a good example. Its EV growth will be limited by elevator parking and in some suburban areas, where car lots are little more than a patch of dirt where owners are unlikely to install charging points. Charging and battery technology will keep improving but infrastructure harmonisation and ultimately who pays for the cost is far from decided. With governments making emotional rather than rational decisions, the only conclusion to be drawn is unchecked virtuous bingo which will end up having to be heavily compromised from the initial promises as always.

Then there are the auto makers. While they are all making politically correct statements about their commitments to go full EV, they do recognise that ultimately customers will decide their fate. A universal truth is that car makers do their best to promote their drivetrains as a performance differentiator to rivals. Moving to full EV removes that unique selling property. Volkswagen went out of its way to cheat the system which not only expressed their true feelings about man-made climate change but hidden within the $80bn investment is the 3 million EVs in 2042 would only be c.30% of VW’s total output today. Even Toyota said it would phase out internal combustion in the 2040s. Dec 31st, 2049 perhaps?

Speaking to the engineers of the auto suppliers at the 2017 Tokyo Motor Show, they do not share the fervour of policy makers either. It is not merely the roll out of infrastructure, sourcing battery materials from countries that have appalling human rights records (blood-cobalt?) but they know they must bet on the future. Signs are that the roll out will be way under baked.

While mean reversion is an obvious trade, the reality is that for all the auto makers kneeling at the altar of the EV gods, they are still atheists at heart. The best plays on the long side are those companies that happily play in either pond – EV or ICE. The best positioned makers are those who focus on cost effective weight reduction – the expansion of plastics replacing metal has already started and as autonomous vehicles take hold, the enhanced safety from that should drive its usage further. Daikyo Nishikawa (4246) and Toyoda Gosei (7282) are two plastics makers that should be best positioned to exploit those forking billions to outdo each other on tech widgets by providing low cost, effective solutions for OEMs. Amazing that for all of the high tech hits investors pray to discover, the dumb, analogue solution ends up being the true diamond in the rough!

Kobe ‘Steal’ – why this scandal could get much uglier

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Kobe Steel is the next in a growing list of Japanese corporates embroiled in data falsification. Kobe Steel has been supplying lower spec material to customers than advertised. In a sense stealing. Sure VW is no better in lying about its emissions but Kobe Steel has the potential to be more like Takata than Mitsubishi Motors in terms of impact. The issue here has to do with Kobe Steel products being in structures of aircraft, trains (including bullet trains) and cars. While much is being made of ‘little risk’ attached to these slightly lower spec products the reality is that ‘metal fatigue’ is calculated in the resesearch, development, testing and evaluation of such products.

For instance when planes are in the development phase FAA certification depends on making sure products can meet certain tolerances, cycles and stress tests. Once certification is granted, if subsequent production is met by sub-standard intermediate products unbeknownst to the manufacturer of the part then the trail becomes a much more serious matter. It is easy enough to determine which Honda’s had defective airbags as it is a specific part on specific models. Yet Kobe Steel steel products shipped all over the globe may have been used in different parts. Then those discrete parts would need to be traced to the next intermediate stage and then on to the finished part to which may be fixed to an airline on the other side of the world. Boeing is naturally not raising any alarms until they can assess the issue.

JR has already noted 310 sub standard parts in wheel bearings in its bullet trains which will be replaced at the next scheduled service. It is likely that the JR parts are over spec for the extra margin of safety.

None-the-less aircraft could turn into a much bigger problem. There is only one spec that is supposed to be met. Failure to meet it could cause planes to be grounded until parts are replaced. This could be massively costly as planes not in the air earning money cost millions on the ground. Not to mention the risk of the US government fining the company for reckless behaviour.

Kobe Steel has seen revenues track sideways for the better part of a decade. Profits have been all over the shop. Much like Toshiba tried to fiddle the books with one division in the hope that in time it would be able to put the money back and no one would notice. As for Kobe Steel, there was obviously a plan to try to boost profitability by lowering specs and charging prices for superior spec. Even then the contribution has been poor. Hardly surprising when the cash conversion cycle has exploded from 38 days a decade ago to around 82 today. To be faker most of the big steel companies have a similar CCC which hasn’t changed much over the last decade.

What we can be pretty sure of will be the soft touch of the local authorities. Even with such willful deceit, it is unlikely anyone will see inside of a jail cell or pay multi million dollar fines in Japan. However the tail risk here is the likes of Boeing who will extract every pound of flesh with the help of its authorities to rent seek from Kobe Steel if certain parts are found to be ultimately faulty because of negligence. This is not a staged Nissan-Mitsubishi Motors leak to force a cheap entry into the latter. Still, 37,000 employees at Kobe Steel will be seen as a sizable number to protect at a national level hence a limp wristed response to follow.

One final point. Do we honestly think that Kobe Steel can conduct an honest audit of its deceit? Surely flagrant data fiddling will be milled down to more acceptable cheating.  It is a time honored tradition to leak a bit, then a bit more so as to minimize the shame.

Until Japanese listed corporates face far harsher penalties for such malfeasance, it will be hard to shake off the cynicism that the corporate governance code has introduced anything more than mere lip service. That is OK if that is what Japan wants to project to the world that shareholders are not a priority.

Will Greenpeace Be arrested and charged with trespassing?

Greenpeace has disrupted a business which is already paying billions in fines. If only Greenpeace had the first clue about diesel emissions and the reality of the CO2 footprint of EVs at the production stage and charging.

100% EVs from 2040? Don’t bet on it

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PDF REPORT HERE

It might look fashionable but don’t fall for all EV cars from 2040

It isn’t a big surprise to see national governments virtue signal over climate abatement. The UK swiftly followed French plans to ban the sale of petrol/diesel cars from 2040. However, let’s get real. Government proactivity on climate change may appear serious but the activities of the auto industry are generally a far better indicator of their lobby power. As a car analyst at the turn of the century, how the excitement of alternatives to internal combustion engines was all the rage. Completely pie in the sky assumptions about adoption rates. In 1999 industry experts said that by 2010 electric vehicles (EV) would be 10% of all units sold. Scroll forward to 2017 and they are near as makes no difference 1% of total vehicle sales.

Volkswagen makes an interesting case study. After being caught red handed cheating diesel emissions regulations (a perfect example of how little VW must believe in man-made global warming) they were in full compliance at the 2017 Frankfurt Motor Show telling the world of their $80bn investment in EVs out to 2030, 300 new EV models comprising 3 million units in 25 years of which 1.5mn would be sold in China.  3 million cars would be c.30% of VW’s total output today.

We cannot ignore the huge tax revenues governments generate from fuel excise. Fuel duties in the UK are expected to fetch around £35bn in 2017 or c.5% of total tax receipts. In Germany that number is around €40bn, the third largest intake after income tax and GST.

On top of this, massive electric infrastructure will be required in many countries. Not just installing more charging points but meeting higher electricity demand with new power generation to replace aging infrastructure and the push by many governments to install unreliable renewable energy. Governments relying on other countries for back-up power is fraught with risk. Yet it seems countries like the UK aren’t properly prepared to meet the excess demand they are trying to force on the hand of consumers by loading a grid they can’t sensibly ensure can be charged. Battery technology will improve but whether commerciality can be achieved is another question.

We should also think of how EVs, which are being pushed as the backbone of self-driven cars, affect the insurance industry and the auto makers. After-all if a driver puts his/her car into auto-pilot and the safety systems fail to avoid an accident which results in death/injury either of the driver, passenger or pedestrian is the auto maker at fault? This will require legislation to define responsibility. This will also need to be extended to the potential of ‘hacking’ autonomous cars where willful remote action could lead to deaths. Emergency service providers have made it clear that traditionally powered vehicles to function properly.

Cars need to meet customer utility not just be electric for EV’s sake

What governments must also consider with car purchases is utility. Why is it that SUVs remain one of the most popular vehicle classes around? In the US, SUV sales have surged from 16.4% in 1980 to around 36% today. Could it be that the man who likes to sail needs a V8 Toyota Land Cruiser to haul his 7000lb boat. While he might like a Tesla Model S with 22” rims it can’t manage even half of the Toyota’s towing capacity. Could it be that a mother with 3 kids who often takes her parents on trips to the beach needs a minivan? Have they considered the single bachelor who wants a BMW sports car? Or the DINKs couple who want a Range Rover because they love to ski in the winter. In niche sectors, it may not be profitable for car companies to fill those segments with EVs.

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Source:   www.afdc.energy.gov/data/

 Has the auto industry been properly consulted?

Have the UK & French governments consulted the auto industry? It wouldn’t seem so. Having a zero emissions target is one thing. Why not tell auto makers they need to get to zero emissions but give them complete technological freedom to hit those targets. If the auto makers see necessity as the mother of invention, who are regulators to dictate the technology? If an internal combustion engine can achieve zero emissions does that not meet the goal? There is a very important reason for this.

Talk to an automaker in private and they will admit they are against full EV because it ruins the most fundamental part of their DNA – the drivetrain. When you read all the blurb on automakers’ brochures what is the one area they can milk consumers? Power and performance. Mercedes can sell you a base model C180 for a little bit of profit and absolutely gouge out your eyeballs for the top-end high performance C63 which will vaporize your wallet with the options list. Auto makers don’t want to go full EV for this very reason. EVs will turn cars into the equivalent of an iPhone vs. a Samsung Galaxy. Brand and style with very little differentiation outside of packaging.

A 2014 study conducted by Penton Research produced this telling chart about how they aim to meet government fuel efficiency regulations by 2025.

Fig.2: What have automakers in the US been focusing on to improve economy

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As Fig.2 shows, automakers want to lighten materials to boost economy. Electrifying the vehicle ranked third. This also included hybrids. As this was an American survey it isn’t surprising to see the low weight of diesels as a solution.

Companies such as Daikyo Nishikawa (4246) have seen strong growth driven by the shift toward plastic panels which are lighter and cheaper to produce. The Mazda Roadster is full of supplier’s plastic panels for cost effective weight reduction. Daikyo Nishikawa has also managed to cut out the painting process by a technology that allows the paint to be impregnated into the plastic panel with finish quality properties as good if not superior to steel

Fuel economy – which vehicle is burning?

Scroll toward to fuel economy. The Federal Highway Administration looked at average annual fuel consumption. Taking a simple sum of Class 8 trucks, annual sales which comprise around 1.5% of passenger cars, they consume 42% the amount of equivalent fuel. While US haulage distances are larger than those in the EU, the relative gaps to passenger cars is similar. Put simply trucks relative impact is 27x higher than automobiles.

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Source:   http://www.afdc.energy.gov/data/

Sensible EV subsidies?

Take California’s new $3bn plan to support EV sales – effectively a deeply Democrat state fritting away tax dollars to subsidize the wealthy. The poor chap who has to drive a 20-yo petrol pick-up truck because he can’t afford a new one is probably paying taxes to subsidize the guy who pays him to mow his lawn to buy that Tesla. It is a serious question.

Have governments considered that consumers are already clearly showing their belief in ‘climate change abatement’ by the cars they buy? When the subsidies were torn from Tesla in HK, sales went to zero while in Danish Tesla registrations fell 94%. Isn’t that evidence enough of how these vehicles are only tax avoidance devices, not the action of deep seated ecologists?

A reminder of the risks of green subsidies in other sectors

So before running for madder green schemes to save the planet perhaps governments should remind themselves of past failures. Moreover, when governments get heavily involved in subsidizing industries it generally results in disaster by creating massive oversupply like we saw in solar and wind industries. Spain perhaps provides the strongest evidence of this. Around 2004 it wanted to get 1GW of solar under its feed in tariff over 4 years. Instead it got 4GW in 1 year meaning its budget exploded 16x and it had €120bn in tax liabilities over the course of the promise. In the end, the government reneged. So much for the assurance of government run programs.

Germany’s failure in bio-fuel legislation last decade

The German authorities went big for bio-fuels in 2008 forcing gas stands to install E-10 pumps to cut CO2. However as many as 3 million cars at the time weren’t equipped to run on it and as a result consumers abandoned it leaving many gas stands with shortages of the petrol and gluts of E-10 which left the petrol companies liable to huge fines (around $630mn) for not hitting government targets.

Claude Termes, a member of European Parliament from the Green Party in Luxembourg said in 2008 that “legally mandated biofuels were a dead end…the sooner It disappears, the better…my preference is zero…policymakers cannot close their eyes in front of the facts. The European Parliament is increasingly skeptical of biofuels.” Even ADAC told German drivers to avoid using E10 when traveling in other parts of continental Europe.

The 2017 Frankfurt (Virtue Signaling) Motor Show

The Frankfurt Motor Show this year was used to introduce a truckload of EVs across all brands to show automakers had caught the enviro bug.

Fig.4: Frankfurt Motor Show 2017 – roll out the EVs

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As mentioned earlier, VW said it aims to be 30% EV by 2042. That is undoubtedly a realistic goal when assessing production cost, development, infrastructure roll out and ultimately consumer demand. While the UK and France may have drawn a line in the sand, reality is that Westminster and Paris are at the mercy of the manufacturers and the supply chain to meet the ambitious target.

Our contention is that these targets get peeled back and pushed out. We have seen many delays in the US Corporate Average Fuel Economy (CAFÉ) standards. The U.S. Environmental Protection Agency (EPA) and the NHTSA began the development of regulating greenhouse gas emissions from vehicles in 2007.

The standard for passenger cars had stayed at 27.5 mpg from 1990 until 2007. In 2009, the government set a fuel economy standard of 34.1 mpg for cars and light trucks by 2016. In 2012, it set a new target of 54.5 mpg by 2025. Trump is looking to push out the April 2018 deadline to hit 49.7mpg and the 2025 potentially out to 2030.

A study commissioned by the Alliance of Automobile Manufacturers estimates the cost of compliance to EPA regulations is around $1,249 per vehicle.

Below we see the evolution of power trains in the US market in the last decade by number of new model introductions. Note that the EV slice includes the Plug-in hybrid EVs (PHEV). Hybrid shares have grown while petrol and diesel have shrunk relative.

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Source:   http://www.afdc.energy.gov/data/

The dangers of autonomous driving

So much faith is put in the hands of computers nowadays but the idea of driverless cars is still fraught with danger.  Car & Driver reported;

Researchers at the University of Washington have shown they can get computer vision systems to misidentify road signs using nothing more than stickers made on a home printer. UW computer-security researcher Yoshi Kohno described an attack algorithm that uses printed images stuck on road signs. These images confuse the cameras on which most self-driving vehicles rely. In one example, explained in a document uploaded to the open-source scientific-paper site arXiv last week, small stickers attached to a standard stop sign…using an attack disguised as graffiti, researchers were able to get computer vision systems to misclassify stop signs at a 73.3 percent rate, causing them to be interpreted as Speed Limit 45 signs.”

One step beyond tricking on-board systems as aforementioned, a full hack of a car has far more risky implications. NHTSA launched an investigation when Chrysler cars could be manipulated to hijack the brakes and accelerator. It took five years for Chrysler to fix the full takeover hack and required a 1.4 million vehicle recall.

Which then begs the question of ultimate liability for insurance companies.

Fig. 7: tricking the driverless detection systems

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Source:  University of Washington

Insurance payouts versus auto maker negligence

It is not too hard to envisage the scenario where a sophisticated hack of an autonomously driven vehicle causes death or injury. We do not have to look back far to the Bridgestone/ Firestone-Ford Explorer tyre blow-out scandal which ended up in the deaths of over 200 people. Besides the negative brand image associated with the recall and investigation it is quite possible to see insurance companies refuse accident payouts due to the flaws in the auto-pilot systems.

Car companies could end up being on the hook for billions if these vehicles are compromised. While the software in the cars can always improve there is no reason to suggest the hackers get more creative and sophisticated.

Big Brother

While one might think autonomous vehicles are the future, consider the privacy implications. Your car will be remotely controlled. Your data of where you travel, when you travel and what you do will become available.

Do people wish to have such tracking in their lives? Were such data hacked, thieves could use the data to work out when you were out of the house, where you shop, bank and where your kids go to school. Think of how many post to social media where they are going on holiday and what not. Many are already loose with public information to then have applications and systems that monitor your every move.

Even if it sounds like conspiracy theory, this is something few have considered.

Emergency Services are not convinced by EV

What about emergency services vehicles? Have these governments considered the impact of having reliable heat exchangers (from combustion engines) to power lifesaving equipment in ambulances? It is easy to believe politicians have had no such discussions with the people that are most affected. An Australian paramedic made the issue clear,

We have Webasto heaters in our cars in the colder areas. Running off the diesel they can operate 24/7 if needed. If we don’t have them some of our equipment doesn’t work like our tympanic thermometers, the blood glucose reader and then there is the problem of having cold fluids in the car. This is a problem if we are giving these IV because we can make a patient hypothermic if it’s cold. Then there’s just the general environment inside the cab. It needs to be warm in winter.”

What about LCVs? Will light commercial vehicles be exempt? Just watch the auto makers classify their SUVs as LCVs and dodge the rules. The Hummer is a perfect example of this. It was so heavy that it managed to be excluded from the passenger vehicle qualifications on fuel economy. So auto makers did not need to include it in their CAFÉ calculations.

Why is government forcing adoption of EVs?

It stands to reason that to question those with the least idea on the technology being the ones trying to dictate the future. The zero emissions appeal of EVs is an effective virtue signaling device to voters. However if we look at Euro emissions regulations introduced since 1993, one can see the progress made in the last 20 years. Euro 6 started in 2015. For diesel particulate matter, emissions are 97% down on Euro 1 (1993) and NOx down by 95% over the same period, Fig.8.

Fig.8: Diesel emissions cut – Euro 1~6 – 97% lower in 20 years

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Source: Delphi

By sheer virtue of the scale of emissions reduction in 20 years for internal combustion engines, why not charge the auto makers to hit a zero emissions target by 2040 in any form they choose provided it is met. All auto makers should be given the power to go full electric of their own volition. Why not allow the spirit of innovation to come to the fore and allow auto makers to defend their brands in ways where they take the risk?

In 1999 I had the same discussion with Beru AG (now Borg Warner), a German diesel glow plug maker. The CEO said that in 20 years the ability to cut emissions by almost 100% would be achievable. Indeed he was correct.

Taking into account life cycle costs of EVs

Unfortunately depending on what a country’s actual electricity generation mix is the charging of EVs can have a larger impact on total emissions.

The IVL Swedish Environmental Research Institute was commissioned by the Swedish Transport Administration and the Swedish Energy Agency to investigate lithium-ion batteries climate impact from a life cycle perspective.

The report showed that battery manufacturing leads to high emissions. For every kilowatt hour of storage capacity in the battery generated emissions of 150 to 200 kilos of carbon dioxide already in the factory. Regular EV batteries with 25–30 kWh of capacity will result in 5 metric tonnes CO2, which is equivalent to 50,000 km driving in a regular, fuel-efficient diesel vehicle

Another study by the International Council on Clean Transportation (ICCT) showed that depending on the power generation mix, an all EV Nissan Leaf in the US or China was no better than a 2012 Prius. Countries with higher relative nuclear power generation unsurprisingly had lower CO2 emissions outcomes for EVs. By deduction countries with higher shares of coal or gas fired power negated much of the ‘saving’ of an EV relative to gasoline power.

Fig.9: Electricity generation mix impacts on CO2 saving with EVs

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Source: ICCT

Electricity Prices & Infrastructure

This is a sticky point. When the UK announced it was following France in the zero gasoline/diesel directive by 2040, the concern of being able to power up to millions of EVs (from the 90,000-odd now) and the impact on the grid rose to the surface.

Some industry pundits have argued the UK will need a range of technologies to manage the projected jump in power consumption by 15% in overall demand and spikes of up to 40% at peak periods. Renewable energy sources (including wind, wave, marine, hydro, biomass and solar) made up 25% of electricity generated in 2015. The UK aims to generate 30% of its electricity from renewable sources by 2020 in line with EU guidelines.

Britain is staring at the prospect of capacity issues in the early 2020s as old nuclear reactors are decommissioned and remaining coal-fired plants are phased out by 2025. Hinckley Point C will add around 3.2GWh to the grid. Up to 50 terrawatt hours (TWh) could be needed to charge all the EVs expected by 2040. While some argue that charging EVs overnight alleviates much of this fear the reality is most people charge their iPhones when they need it with little or no thought to others. If you wish to charge your EV and the grid is at risk of collapsing, how will the government regulate this? Will they mandate rationing? Enforce peak power pricing?

The UK electricity network is currently connected to systems in France, the Netherlands and Ireland through cables called interconnectors. The UK uses these to import or export electricity when it is most economical. In 2015, the UK was a net importer from France and the Netherlands with net imports of 13.8 TWh and 8.0 TWh respectively which accounted for 5.8 per cent of electricity supplied in 2015. Total net exports to Ireland amounted to 0.9 TWh.

The growing problem with the push for renewables as a larger part of the mix is the paradox of loading more power consuming elements onto the grid (i.e. EVs) and looking to accommodate it with systems that have a proven inability to provide reliable baseload power. South Australia is a perfect example of this.

By pursuing a 40% renewables energy policy South Australia has suffered multiple blackouts. It has relied on the neighbouring state of Victoria to provide backup baseload power from its Hazelwood coal fired plant. However Victoria has now closed Hazelwood meaning South Australia will be forced to spend around $600mn to install new gas-fired capacity to offset the gap in supply capacity and demand. It will also add a $100mn battery plant to provide the state with 90 seconds of back-up power in the event of a blackout.

South Australia has the world’s most expensive electricity prices, the highest unemployment rate in the country and the slowest growth. The irony is that while the gas generation is being built, diesel generators burning 80,000 litres of diesel per hour will provide the backstop until its operational. Fig.10 shows the sharp rise in Australian electricity prices as more renewables have been added to the grid

Fig,10: Progression and forecast of residential Australian electricity prices

20408.pngSource: Jacobs International

At some point governments will be forced to realise that in order to guarantee a pledge of 100% EV sales from 2040 it will require very sound policy on the generation front to combat the risk of power shortages. Relying on other countries to provide alternative power could prove a fatal flaw in the 2040 deadline. The construction of new energy capacity is never an overnight affair. The location, the energy source, the local neighbours, the size of the output and the people and materials to construct it all play a part. From start to finish, a decade is not an unreasonable time frame yet if countries like France are relied upon to import electricity any policy change on their side can have very damaging side effects.

In short we have governments deliberately loading a grid at the same time it is making it far less reliable. This will have to play a part in a 2040 solution. In any event electricity prices are likely to rise putting further stress on households.

Fig.11: Progression of household UK electricity GBp/KWh (2004-2015)

20409Source: OVO Energy

In the last ten years the real price of electricity in the UK has risen by 63%, This is before EVs enter the electricity grid in earnest.

In any event rising electricity prices drives down the relative economic rationale for EV ownership.

Battery Technology Advances

Of course we cannot rule out advancements in battery technology which by deduction will offset any prices hikes in electricity by greater range. There is high anticipation for Toyota’s solid state battery technology which in theory will speed charges, improve the performance of the per cell power stack and reduce materials. Such advancements would also weigh on the aforementioned electricity grid considerations but the question will still come down to commerciality, the ability to access raw materials and gear the supply chain to meet such demand.

Charging Infrastructure

The roll out of fast chargers is growing. Where to install these ‘charge stands’? Traditional petrol stations will be marginalised to serve a larger proportion of commercial vehicles. That could mean that local gas stands go out of business or require a major overhaul in operations. If charging times take 20-30 minutes, cycle time will be poor.

It should not surprise that the faster the charge time the more expensive the initial outlay costs. The latest high end fast EV chargers can cost over $250,000 per unit.

According to the International Energy Agency (IEA) EV charging outlets surpassed 2 million in 2016.  Electric cars still outnumber public charging stations by more than six to one, indicating that most drivers rely primarily on private charging stations.

Fig.12: Global EVSE outlets, 2010-16

204010.pngSource: IEA

The IEA stated in its 2017 report that,

“The growth of publicly accessible chargers accompanies the increase in the number of electric cars on the road: the growth rate in the number of publicly accessible chargers in 2016 (72%) was higher, but of similar magnitude, to that of the electric car stock growth in the same year (60%). The higher rate of growth for chargers than electric cars is consistent with the need to deploy chargers as a prerequisite for EV adoption and the nascent nature of most of the electric car markets.…Publicly accessible EVSE growth was primarily driven by the rapid increase in the number of fast chargers, largely attributable to China, where fast chargers grew sevenfold to nearly 90 thousand units.31 Even when China is not considered, the growth rate for publicly accessible fast chargers in 2016 was still greater than publicly available slow chargers…”

Fig.12: EV stock & publicly available EVSE outlets, by country and type of charger, 2016

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Source: IEA

By 2020 China aims to deploy 4.3 million private EV charging outlets, 500,000 public chargers for cars and 850 intercity quick-charge stations, among other targets. The EU Directive on the Deployment of Alternative Fuels Infrastructure (EC, 2014) required EU member countries to define electric charging point targets for 2020. France has stated its ambition to deploy 7 million charging outlets by 2030.

The IEA makes the claim of using EV cities to drive the adoption. While in theory larger city centres are subject to greater restrictions of access, parking and congestion zones, the idea that a rural town copying the program of a big city would unlikely result in similar adoption rates.

Fig.13: EV city policies that drive EV adoption

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Source: IEA

In its conclusion the IEA noted,

In the next 10 to 20 years the electric car market will likely transition from early deployment to mass market adoption. Assessments of country targets, OEM announcements and scenarios on electric car deployment seem to confirm these positive signals; indicating that the electric car stock may range between 9 million and 20 million by 2020 and between 40 million and 70 million by 2025.”

Regardless of the adoption rates, it is worth nothing that governments are setting policy against estimates that are wider than an aircraft hangar door. Therefore investment decisions in the basket of EV related companies is likely to be a risky investment. EV related stocks have done exceptionally well to date but as ever when reality dawns, the downside is a gaping chasm. A look at the history of Ballard Power in Canada is a good yardstick for looking what happens when the wind is taken from a theme’s sails.

Fig.14 – Ballard Power – a history of EV hope that failed to eventuate

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Summary

EVs are coming. There is no point trying to ignore it. The question remains how rational setting targets such as 2040 are achievable. The auto industry employs around 9% of the workforce (directly and indirectly) so it is a powerful lobby group despite past failures and bail outs. If auto companies tell governments that the supply chain needs longer to catch up we will see this 2040 target slip to 2045 or 2050. Supply chains don’t end at the gate of the end supplier but right down to the capacity and investment in raw materials procurement, the intermediate refiners and packagers. All levels of the supply chain have to be on board.

Nonetheless we must also accept that consumers have vastly different needs and auto makers must make sure they can make products that fill the market segments profitably. Most importantly car makers’ drivetrain DNA is a vital component of their brands. EVs will do serious damage to this defining quality which will turn profitability back toward distribution networks and scale efficiency.

Electricity generation and energy policy will be bigger swing factors in ultimate hard targets on the sales of EVs. While making optically appealing eco-policies look good in the eyes of the electorate, those same people will turn on politicians in time if these schemes end up costing them far more in terms of their daily consumption other than their driving habits. Rolling out new charging stations to meet demand is a moot point given the wide range of predictions of how big or small the market may end up being.

The expansion of unreliable renewable energy sources as a percentage of total generation adds unnecessary risks into the EV equation. We have too many examples of the poor implementation of energy policy which gullibly relies on optimistic assumptions and the goodwill of neighbours we have no control of.

The advent of automated driving has the potential to open a whole new can of worms. The insurance market will feel the urge to blame accidents on faulty technology (not faulty humans) and expect consumers to get their claims covered by the manufacturer.

Finally governments have got to allow industry decide how they achieve emissions regulations. In 20 years Euro 6 has proved that emissions can be cut 97%. What is to say in the next 20 years that auto makers can’t drive that to zero? If car makers want to be a differentiator all they need do is fight the battle of internal combustion with zero emissions. Why are amateurs in technology (government) dictating to the professionals on what consumers may or may not want? Governments, for all the good will in the world must look at their involvement in renewable energy back at the turn of the century to remind themselves how disastrous their policies were in bankrupting so many companies that over invested in promises that were later reneged on.

EVs are here to stay but to this author 2040 is nothing more than an idle promise by which time those politicians proposing it most likely won’t be in office. Await the delays as the lobby groups explain the harsh realities to the law makers.

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Warned to be mild

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Steppenwolf coined the “born to be wild” moniker which became synonymous with Harley-Davidson. Harley is all about conspicuous consumption. It has generally been a good indicator of discretionary income. Harley is not so much about transport but lifestyle. Harley-Davidson’s sales fell 9.3% in the U.S. and 6.7% globally in Q2 2017, ending June 25th. Harley also stated it had lost ground in the big-bike market (601cc and above), dropping from 49.5% market share to 48.5%. Matt Levatich, President and CEO, Harley-Davidson. “Given U.S. industry challenges in the second quarter and the importance of the supply and demand balance for our premium brand, we are lowering our full-year shipment and margin guidance.” Q3 shipments are expected to be down c.20% (39,000-44,000 units).

Harley-Davidson sold 262,221 motorcycles last year and forecast a flat market this year but has downgraded those numbers to a forecast of 241,000 to 246,000 units (-7~8%). US shipments were well below expectations in the US.

Harley-Davidson is suffering from divine franchise syndrome. It has failed to modernize its line up until very recently. While it has plans to put 2mn new bikers on the road over the next 10 years, its competitors do not seem to be suffering with BMW, KTM and Triumph hitting new shipment records. The European makes have much broader product line-ups which adds to the rumours that Harley may wish to bid for Italian sportsbike maker Ducati from Audi to plug the segment gaps in its line up. Harley has had a failed attempt in the sports category via Buell but the Italian maker brings a proper platform to the party vs an in-house employee wanting to rev up Harley products out of a barn.