The EV Market

The Electric-Vehicles (EV) Market, with its catchy acronym, has been a hotbed for investor interest, both directly and indirectly. As the policies surrounding emissions controls, via congestion charges, indirect taxes, and fore-planned bans on petrol/diesel vehicles by governments such as that of the UK have evolved with time, the general opinion has been that electric vehicles and the EV market as a whole will become a leading sector undergoing significant growth with endless possibilities. It is not just Tesla, and not just Elon Musk.

Upon the onset of the developments in Ukraine from February 2022, market sentiments have largely geared towards one of excessive optimism for the EV market (at the initial point of writing, September-2023). The basic economic reasoning lies with the anticipated rises in fuel prices, and the subsequent shift in demand into a substitute product-offering, one whose market share and market-capitalisation have been growing apace. Hybrid-models (market-positioned in between traditional petrol/diesel models vs. EV), as popularised by Toyota, through to BYD, China's leading EV-brands, and lesser known Chinese businesses such as Xiaomi (better known for its smart-phones and Apple-esque business-model), NIO, Li Auto and XPENG, are all jumping on the bandwagon and making their best attempts towards revolutionising the traditional petrol/diesel vehicles that we have grown to be so accustomed to. More long-standing market incumbents such as BMW, Audi, Hyundai, Infinity have all increasingly moved towards developing Hybrid as well as fully EV models.

Here-in lies an interesting line of economic analysis once we start to factor in second-order effects, one that offers a way of understanding why the EV market hasn't taken off in the fashion that certain market analysts might have expected over the year-and-a-half leading into end-2024 (subsequent revision). Foresight could very well have paid off, although as always, predictions and forecasts are never easy when it comes to the things that matter; hindsight will always be the understanding that comes too late.

For one, as energy prices have risen over time, so too have electricity bills. And what do EV vehicles run on if not just another form of energy, whose prices have risen more or less concomitantly with those of gas and petroleum. Moreover, to compound on the problem with energy-prices faced by the EV market, we ought to consider the raw materials that go into the production of the kinds of batteries which electric cars run on, a component whose costs weigh heavily in the overall cost-structure to EV models.

State-of-the-art EV batteries are based on designs that hinge on rare metals such as lithium, as well as lanthanides such as cerium, lanthanum and neodymium. The supply-chain to these rare earth metals have come under strain post-Covid-19; some metals that would not even typically be considered as rare have experienced bubble-behaviour to their price movements, e.g. copper simply by virtue of the demand for its conductive/ductile properties. 'Copper as the new oil' has caught on in some circles, and hyped-up by the press in May-2024 (added subsequently). The subsequent limits to trade (metal imports/exports), and the prior over-reliance on China for rare-earth metals, more down to the environmentally damaging consequences of acid-leaching rather than the actual intrinsic scarcity of certain metals, has meant that the costs faced by EV firms have come under strain like most other sectors.

One further complication that has beset this industry has been the overwhelming amount of subsidisation which the Chinese government has pumped into its EV-market. As President Xi has tried to promote the development of strategic industries, the EV-market has been a 'hot cake' that has attracted over-subsidisation on all accounts. There has been gross over-production, and stocks of finished and semi-finished autos are lying around with indefinitely impending bulk orders which will never be fulfilled by real demand. Tesla has only lost out when it has attempted to engage the Chinese market with price competition.

Nonetheless, we would expect this to be a sector that will still see significant growth, towards a new level once mature, and more widespread, technological capabilities over-come current mileage-constraints posed by how long/far a single-charge is currently capable of lasting; with more-adequate levels of general (global) availability of charging-ports.

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