We are witnessing a monumental shift unfolding in the automotive industry in front of our eyes.
For some time now, the California-based electric car company, Tesla, has been worth more than the combined values of Michigan-based General Motors Co. and Ford Motor Co., and the newly formed Stellantis.
There is no shortage of arguments on either end of the spectrum on whether this is justified and rational, or a stock market gone wild. Regardless, the fact that GM announced intentions to be completely electric within a couple of decades, is clear indication that while the 20th century belonged to gasoline, the 21st century will be dominated by the battery. This singular fact will have deep reaching effects on the global economy. Here are four to watch for in the near future:
- Rise of Strange Metals
As we make the shift from gasoline and diesel power to electricity, we also need to shift our attention to the supplies of a completely different set of materials. Metals that did not elicit much interest in the past such as lithium, cobalt, and a collection of 17 rare-earth elements are fast becoming the superstars of this new world. Three countries collectively dominate the supplies of these new materials. China (rare-earths and lithium), Russia (rare-earths), and The Democratic Republic of Congo (cobalt) represent substantially more than 50 percent of supplies. Governments across the globe, including the United States, are waking up to this and will need to respond by securing supply lines and processing infrastructure either directly or via alliances, much like they needed to do for crude oil and other fossil fuels. The recent shortage of chips that has halted automotive production lines is a warning that we all need to heed.
- Turmoil in Oil
As demand for battery power increases, the demand for oil will experience a corresponding decline. Single-pillar economies that rely on high oil prices will see their global dominance wane and, if they do not respond quickly, will experience lower standards of living at best and social breakdown at worst. We have already seen the economic devastation that ill-conceived policies amplified by declining oil prices have wreaked in Venezuela. Some countries, such as Saudi Arabia, are racing to diversify their economies; others, it appears, may not be doing so.
- Digital First Mentality
One of the reasons that companies like Tesla are highly valued by Wall Street is that they are organized as software companies that happen to make cars. The fact that these cars run on electricity, the same juice that powers the computers that their software runs on, makes them vastly less complex than traditional vehicles. While modern cars are truly exceptional products, this change to electric power renders many design and engineering feats irrelevant. The playground of the mechanical engineer is being taken over by electrical and computer engineers. This has deep implications in both product (what the car does), design, and process (how it is made) design. The existential challenge is for the fine-tuned traditional automotive ecosystem to transform into a community of digitally integrated software businesses that happen to make a tangible product. Foundationally, this is a cultural and organizational problem, something history has shown is extremely hard to solve.
- Infrastructure and Clean Tech
Finally, all these batteries in all these cars will need to be charged. The electricity grid that we all use daily was not designed to charge two cars in every home. This means that across the board, there will need to be a commensurate investment in electricity generation and distribution infrastructure. While most of the world’s electricity is generated using fossil fuels, climate change and the advances in clean-tech technologies is making the latter more attractive on a purely economic basis. For example, for the first time, in 2019, the cost of producing electricity using a solar cell was below that of the cost of producing it with coal. Other challenges such as storage and distribution remain, but the momentum is too great to be reversed. That said, just because something is called clean tech does not mean we can give it a pass. The production of rare earths is notoriously damaging to the environment, leading to problems ranging from pollution to highly contaminated wastewater. Batteries and electronics that reach end of life will also have to be contended with. For the environmental promise to be met, next generation product creators will need to incorporate circular design techniques early in the inception phase.
The narrative that Michigan’s dominance as the automotive epicenter of the world has been diminishing has been going around for some years now. While each of these factors will have some effect, a fundamental disruption in the industry has the potential to make that narrative a reality. It is not a foregone conclusion, however. Executives in the industry are not sitting idle. Companies across the supply chain are making moves, creating plans, and executing to ensure that the 21st century’s automobile is designed and produced in Michigan.
Pavan Muzumdar is the COO for Automation Alley in Troy and a partner in Revalue, an investment advisory firm. He is CFA charter holder and a board member of the CFA Society of Detroit, a chapter of the CFA Institute. The mission of the CFA Institute is to lead the investment profession globally by promoting the highest standards of ethics, education, and professional excellence for the ultimate benefit of society.