Tesla Model 3: IT’S ALIVE!!

Elon Musk has often been compared to the Marvel comic character Tony Stark but for me he is more like a cross between Victor Frankenstein and Steve Jobs. Or perhaps he’s most like Nikola Tesla*, the man he named his company after… which is appropriate. Like Nikola Tesla, Musk is obsessive, difficult to work with, highly intelligent, wealthy, visionary and almost irrationally ambitious. He is also prone to exaggeration and inclined to make ill-judged (some might say arrogant and stupid) public statements. His negative traits have come to the fore in the second and third quarters of 2018, creating unnecessary distractions which, ironically, are overshadowing what could be a breakthrough period for him and the company he founded. Investors should always pay attention to the negative traits of any CEO they are backing and this is especially important with Tesla, considering how tied the founder-CEO is to the brand. So this begs the question, is the Model 3 more akin to the Frankenstein Monster or the iPhone?

Demand S-Curve for Electric Cars

Regular readers will know that I have been very positive on the coming adoption of electric vehicles for about two years. I believe that the broad launch of the Tesla Model 3 (the first mass market fully electric premium car costing $30-$40k) will be the catalyst for widespread global adoption of electric cars. I expect new electric car sales will shoot up from around 3% of all cars sold today to >15% within 5 years.

Mid sized premium sedans – US market share

Tesla reported their second quarter 2018 results on the 8th August and whilst analysts and the media focused on Elon Musk, near-term profitability and the Model 3 production rate (important questions for Tesla shareholders), my focus was on the Model 3 demand curve. The subsequent conference call included some interesting comments. I’ve appended some quotes from the call at the bottom of the article but the key insights for me were the following:

1. Market Share: The Model 3 is taking a huge amount of market share. Very quickly.

2. Aspirational and climate conscious consumption: The top 5 non-Tesla cars people are trading in for a Model 3 are the Toyota Prius, BMW 3 Series, Honda Accord, Honda Civic and Nissan Leaf. Mostly lower priced cars than were expected, suggesting consumers are willing to pay more than they normally would for a car due to the Tesla brand and personal concerns about the environment. In short, the addressable market is bigger than was previously assumed.

3. Viral growth: Tesla customers are their best salespeople. Local demand is surging in locations where Model 3’s are being delivered. Previously unaware consumers are having their ‘Ah ha!’ moment when their neighbours take them out for a drive.

4. Critical acclaim: Despite the negative press around Musk, the Model 3 is getting fantastic reviews from fans and cynics alike.

Click here for Auto Express review
Click here for Clean Technica review
Click here for Top Gear review
Click here for Autocar review
Click here for Car Magazine review

Conclusion.. Maybe we do need 3’s 

Whilst Musk may seem more Professor Frankenstein at the moment, it appears the Model 3 has more in common with the iPhone in terms of product-market fit. Model 3’s are certainly not monsters. Tesla have designed a fantastic product that customers really want and the planet really needs. We are not Tesla shareholders, nor Elon Musk acolytes. They have serious production and financing challenges ahead. But as sustainable investors, we aim to benefit from burgeoning EV demand by investing in companies that can capture value from the growth ahead. We are focused on niche, high quality suppliers to all of the EV manufacturers (including Tesla) as car buyers rush to go green. Maybe where we’re going we do need 3’s after-all – Exponential Growth.. as easy as 1,2,4


* Nikola Tesla was a genius. He invented the world changing AC induction motor which makes long distance high-voltage power distribution possible. But he also built Wardenclyffe Tower in an attempt to transmit electricity wirelessly across the Atlantic Ocean and also thought he could use the tower to communicate with aliens.



Quotes regarding Model 3 demand from the recent Tesla Q218 Conference call:

“The result you’re seeing is that the Model 3 market share has surpassed all competitor premium, mid-sized sedans combined. So Model 3 market share is now a majority. July was a majority of all premium sedans. That trend is, we think, likely to continue.” Elon Musk

“We’re also getting great feedback on the Model 3 from our customers, and we’re now delivering the performance dual-motor and all-wheel drive versions. And the Model 3 reviews are outstanding, [we] really couldn’t ask for better reviews from some of the toughest critics in the world.” Elon Musk

“…the thing that we’re recognizing is that the more Model 3s we deliver to the field, it’s actually causing viral growth of our sales. So we deliver our Model 3 to somebody, they love it, they tell all their friends, they are actually — really, our customers are our primary sales force. They love their car and take their friends for a drive, and that’s the thing that fundamentally drives our sales.” Elon Musk

“This is very interesting. So we looked at what people who are buying Model 3 cars in the United States are trading in. What we found is throughout this year, from January to July, the top 5 non-Tesla cars people are trading in to get into a Model 3, they are Toyota Prius, BMW 3 Series, Honda Accord, Honda Civic and Nissan Leaf.Robin Ren (Head of Sales)

“Yes, they are surprising because they are not the traditional premium sedans. They are actually — many of them are mainstream midsized sedans.” Elon Musk

About the author

Craig Bonthron is an investment manager in the Equities team, responsible for co-managing global equities portfolios. He joined us in 2014 from SWIP, where he was investment director in global equities. In addition Craig also had analysis responsibilities for the tech, energy and utility sectors. Prior to SWIP, he was a portfolio manager at Kleinwort Benson Investors, a member of the global environmental equity team. Craig has a 1st Class honours degree in Building Surveying, an MSc with Distinction in Business Information Technology Systems from Strathclyde Business School. He has 17 years’ industry experience (as at 30 June 2018).

Sign up to receive our fortnightly Soapbox email

Climate change: Five key investor questions… answered

  1. When will renewables be cheaper than fossil fuels?

According to the annual Lazard LCOE (levelised cost of energy) study, renewables are already cheaper without any subsidies than fossil fuels in most parts of the world. Indeed, in some areas, the most expensive form of solar energy is cheaper than the cheapest form of conventional energy on an LCOE basis. In addition, fuel-price inflation or volatility is less of a risk for renewables because wind and sunshine is relatively predictable compared to fossil fuel prices, making it easier to lock in long-term prices. Finally, renewables projects are much simpler to undertake from an engineering perspective. As such, the projected cost at the start of a renewables project is much more likely to be accurate than a conventional energy project. According to the Union of Concerned Scientists, the average nuclear power station project runs over budget by approximately +107%, whilst wind and solar project costs overrun by less than 10% and less than 1% respectively.

The average cost of energy (unsubsidised)

Source: Lazard estimates.

2. Will we be able to entirely replace fossil fuels with renewable energy? 

Yes. We believe this is not a question of if but when. The reality is that it will take decades to completely wean ourselves off fossil fuels, even if we invest heavily now. But renewables should continue to get cheaper due to relative technological immaturity and scaling up of the industry. In the future, the areas with the best wind and sunshine will probably export renewable energy, much like they do fossil fuels today. Below is a thought experiment from Quora which was referenced by Forbes:

If we cover 43,000 square miles of the Earth with solar panels, even with moderate efficiencies achievable easily today, it will provide more than 17.4 TW power. The Great Saharan Desert in Africa is 3.6 million square miles and is prime for solar power (more than twelve hours per day). That means 1.2% of the Sahara desert is sufficient to cover all of the energy needs of the world from solar energy. The cost of the project would be about five trillion USD, a one-time cost at today’s prices without assuming any economy of scale savings.1

If $5 trillion is anywhere near correct, it is very cheap indeed. A recent estimate (see chart below) estimates $2.1 trillion of capex on renewables by 2050. We view this as a conservative estimate. For context:

  • Estimated $7.9 trillion capex has been spent on the oil and gas sector since 1998.
  • Estimated $1.5 trillion has been spent on the recent US tax cut
  • World GDP is about $50 trillion annually.
  • The equivalent estimated cost 17.4 TW of nuclear power would be $52 trillion cost (pre cost overrun)

The IMF estimates that we are actually subsidising fossil fuels indirectly to the tune of 300bn euros per year if environmental damage is taken into account. According to Munich Re, losses from natural disasters are on the rise; they estimate that the cost in 2017 alone was $330 billion. Like I said, a $5 trillion one time cost is cheap.

1 https://www.forbes.com/sites/quora/2016/09/22/we-could-power-the-entire-world-by-harnessing-solar-energy-from-1-of-the-sahara/#716fa859d440

Annual Global Renewable Energy Capex (billions of 2015 USD)

Source: DNV GL as of 30/09/17. Data from 2015-2050 is estimated or forecast

3. When will electric vehicles with decent range be cheaper than the equivalent oil burner?

If you can afford to (and want to) spend over £50k on a car, then you can get an electric vehicle today that is equivalent to, or cheaper on a three-year cost of ownership basis, than the equivalent oil burner (i.e. the Tesla Model S is cheaper than the BMW 7 Series). In 2019, with the release of the Tesla Model 3 in the UK, drivers will be able to get an electric vehicle for under £40k that is equivalent to a BMW 3 series. Whilst this serves a broader portion of the economy, and is a potential game changer for the electric vehicle adoption, it will probably take a further 2-3 years before affordable cars become available for mass adoption at the sub £20k price range. However, there are multiple car manufacturers launching such cars in the near future. Remember, the largest proportion of and EV cost is the battery, which continues to decline in cost every year.

Lithium-ion Battery Pack Prices – Price ($/kWh)

Source: Bloomberg New Energy Finance

4. Will we have the resources and energy grid to cope with electric vehicle demand?

The disruptive adoption of a new technology requires innovation. The prevailing assumption that the electricity grid of today will not adapt to renewables is flawed in our view. Utility-scale storage is becoming economical for storing excess supply and it can be fed into the grid during peak demand. New ways to offer on-street charging, like lamppost charging points, combined with bi-directional charging (i.e. using consumer’s electric vehicles as a battery which absorbs excess power and then returns it to the grid during peak demand) are examples of innovations that enable charging and disrupt the traditional utility model.

Interestingly, peak demand for electric vehicle charging will be at night, when demand for other electricity is at its lowest. Morgan Stanley has estimated $1.7 trillion capital expenditure is required on electric vehicle infrastructure by 2040. As referenced earlier, this is just 20% of the $7.9 trillion spent on oil & gas capex since 1998. The resources required to support the building of batteries and renewables are generally abundant and, as the industry scales, the vast majority of materials used will become recyclable and reusable.

5. What companies should we invest in to benefit from these disruptive trends?

The companies most easily linked to a particular trend are rarely the best companies to invest in. Disruptive companies tend to come from the ‘left field’ and offer something new and innovative that the incumbents either haven’t thought of, have found too difficult or have tried to prevent due to the threat it poses to their existing business. Mature incumbents are therefore the last place we look for investment ideas to play disruptive trends.

Furthermore, companies that become synonymous with a particular trend (i.e. electric vehicles = Tesla) might be good investments but suffer from two main issues:
1) They are very well known and intensely analysed by market participants, and
2) Tend to quickly attract elevated valuations which can be very difficult to live up to.

So where do we look? We have three key preferences when investing in disruptive trends:
1) We prefer innovative and disruptive, typically not mega-cap, companies that are in growth mode.
2) We prefer companies that are unheard of by the wider public and have little sell-side coverage.
3) We demand that they have a powerful enough position in the value chain to consistently capture a return above their cost of capital as they grow.

The last point is important because too often investors make the mistake of chasing a trend and investing in commoditised products and services which are temporarily benefiting from a trend but which have no discernible competitive advantage.

More questions? Perhaps we’ve already answered them in previous soapbox articles:

Just one thing (most common questions about electric vehicles) here
Joined up thinking (Cross sector inefficiencies when investing in disruptive trends) here
Statistically significantly wrong (difficultly forecasting disruptive trends)  here
America’s new pollution king (cars now emit more CO2 than coal) here.

About the author

Craig Bonthron is an investment manager in the Equities team, responsible for co-managing global equities portfolios. He joined us in 2014 from SWIP, where he was investment director in global equities. In addition Craig also had analysis responsibilities for the tech, energy and utility sectors. Prior to SWIP, he was a portfolio manager at Kleinwort Benson Investors, a member of the global environmental equity team. Craig has a 1st Class honours degree in Building Surveying, an MSc with Distinction in Business Information Technology Systems from Strathclyde Business School. He has 16 years’ industry experience (as at 31 October 2017).

Sign up to receive our fortnightly Soapbox email

All hail America’s new pollution king

US coal is dead. Coal use for electricity generation in the US has plummeted and in turn so have electricity CO2 emissions.

In fact, electricity CO2 emissions have fallen sufficiently that America has a new pollution king! Transport is now America’s largest source of CO2 (as of 2016 data, the most up-to-date available).

“Look over there! It’s coal that’s the problem”. So said the oil industry. But that argument is beginning to look less beguiling, especially since 71% of petrol is used for transportation in the US. But we’ve done a Soapbox on that already

What about the US auto industry then? Well in a ‘nice’ confluence of data points, the US Environmental Protection Agency (EPA) recently released the US car industry’s CO2 performance for 2016. (Like the equivalent European scheme, the US National Program is designed to increase fleet efficiency/reduce emissions year-on-year). And for the first time ever in the history of the National Program, the US auto industry ‘missed’ its EPA targets.

This isn’t an immediate problem, because the Program participants have EPA credits that they can (for now) use to offset non-compliance. But longer-term, based on the historical rate US auto manufacturers have cut their tailpipe emissions (slower than Europe), by 2020 the market in EPA credits begins to look very tight.

To remain internationally competitive, Ford recently announced it is going ‘all in’ on electric vehicles, with $1bn of investment and 40 electric vehicles by 2022. US auto manufacturers must either start to invest more in technologies that reduce CO2 emissions faster or potentially leave their fate in the hands of their competitors (assuming no regulatory changes). A rapid rise in the price of EPA credits could reduce profits by greater than $1 billion per annum for the big three US manufacturers by 2020*.

Coal demise is a consequence of its environmental impact and technological change. The same dynamics are now at play in the auto sector.

*Source: Redburn


Electric vehicles are part of the solution to the world’s sustainability problems

We believe electric vehicles (EVs) will be a key factor in mitigating climate change, pollution and other sustainability challenges. As more manufacturers begin to offer electric options, adoption will accelerate. But still, we hear many of the same arguments against EVs. Often these arguments begin with the ‘one key thing’ stopping a prospective buyer from purchasing an EV. In fact, there are many key things that trouble buyers, all of which have remarkably straightforward answers.

In the name of supporting EVs to help solve some of our global sustainability problems, we seek to provide answers. So here are thirty-one reasons not to buy an EV, but as you will hopefully agree, most of them are myths. As investors, we believe we can invest in the firms who are driving EVs forward either by manufacturing them or as part of the supply chain. It lets us support a more sustainable future and pick up some investment alpha along the way too.

1. EVs don’t have enough range: Cheaper models can drive between 250km and 383km. More expensive models can have a range up to 600km. Charging at home means you will leave home fully charged.

2. EV batteries decline in range: Tesla batteries have shown an approximate 10% decline in capacity after 250,000km, a better decline rate than traditional engines.

3. Extreme weather conditions reduce their range: They do, but most of us live in temperate zones where extreme temperatures are rare. Driving in those same conditions will also reduce traditional engine range too as you turn up your air con or heating.

4. I don’t want to wait for hours at a charging station: The traditional ‘fill up’ model will not be applicable. 94% of journeys in the UK are less than 25 miles. We will charge our cars like our phones, at home and work. Charging points will also let us top up while we shop

5. EVs have poor performance: The Tesla S P100D does zero to 60mph in 2.4 seconds

6. EVs are not safe: Combustion engines are a huge safety problem in front impacts, a car without one is much safer. Statistically, fires are occur less often in Tesla’s than combustion engine cars.

7. Most people don’t have driveways: According to the National Grid, 57% of homes have off-street parking. Those who don’t will use converted lampposts at home and other innovations will appear.

8. There is a lack of choice: By 2020 there will be 131 pure electric vehicle options.

9. EVs are too expensive: EVs are getting cheaper due to scale and battery density improvements. On the flip side, costs of combustion vehicles have been rising due to regulation and falling residual values.

10. EVs might depreciate faster: So far, Tesla vehicles have held their value better than most competing cars. Partly through rarity but also through low maintenance costs, high levels of reliability and high customer satisfaction. Conversely, diesel engine residual values are falling due to the VW scandal

11. Are they really cheaper to run: Tesla Model S is between $2 and $4 per 100km versus $5 to $8 per 100km for the equivalent BMW 5 series

12. What about maintenance costs: An EV drive-chain has 20 moving parts versus combustion engine with 2000. Nissan and BMW’s EV service plans are between 50 and 70% cheaper than their non-EV service plans.

13. There aren’t enough materials for the batteries: Most 2030 demand forecasts (50% penetration) indicate less than 1% of known reserves will be required

14. Rising material costs will make EVs too expensive: A 200% rise in the price of Lithium will increase a battery pack cost by about 1.1%

15. More carbon is produced manufacturing an EV: A false dilemma. Lifecycle emissions of EVs is much lower. Also, this does not include the carbon emitted producing fuel. Oil is much more carbon intensive to produce than energy from wind and solar. 151 tonnes of CO2 produced per 1000 tonnes of oil.

16. What about all the battery waste product: Unlike oil, batteries materials can be reused and recycled and the materials used to make them are not toxic.

17. We can’t build the infrastructure: US road infrastructure was built out in 13 years. In the UK, the government has just announced funding for further EV infrastructure.

18. The cost of the infrastructure will be too high: Estimates put the cost of EV infrastructure at $1.7 trillion by 2040. Sounds high, but oil and gas capital expenditure in the last 19 years was $7.9 trillion.

19. And what is the cost of climate change? The recent hurricane season is estimated to have cost $100 billion, mostly picked up by the US taxpayer.

20. It’s not just cars that use oil: Greater than 40% of oil is used in transport on the road. EVs would significantly reduce oil demand

21. You will be getting power from the grid and that’s just coal: Coal is quickly declining in the mix while renewables are rapidly increasing. We think the ongoing speed of this change is very underappreciated.

22. Renewables are too expensive: The levelised cost of renewables is already close to or better than existing fossil alternatives without subsidy. And remember, the cost of the fossil alternatives never includes the economic, societal and environmental cost of climate change, which is huge.

23. What about the cost of stranded fossil assets and lost jobs: What about climate change? What about all the jobs created in the renewables and EV industry?

24. Renewables can’t replace coal or nuclear base load: Utility-scale Lithium-ion batteries are now available. Distributed residential battery packs and EV’s themselves will provide off-peak storage. This allows excess renewable energy to be efficiently stored and then used when needed.

25. The power grid will be overloaded: Peak charging times for EVs will be between 11pm and 7am when we’re sleeping. This is when the grid power demand is at its currently lowest.

26. I still think the shift to EVs will be a slow burn: Forecasts of EV penetration have been shifting up every year for the last 5 years. History suggests a classic ‘hockey stick’ or S-curve adoption

27. Hybrids will ultimately be a better solution: They still emit carbon. The lower bound of hybrid costs must be higher than combustion or pure EV because you are deploying two technologies into one car. In fact, pure EVs are already cheaper than hybrids.

28. What about hydrogen fuel cells: The Japanese carmakers have been focused on this for over 20 years and still don’t have a solution. No infrastructure in place either.

29. But it must be a hassle owning an EV? A 2016 Consumer Report ranked Tesla as No.1 globally against all other carmakers on their satisfaction survey (91% would buy again).

30. EVs don’t look good: Completely subjective, we think a lot of them do.

31. Donald Trump’s policies will make EVs uncompetitive: Too late Donald.

When will it become socially unacceptable to drive a SUV?

In a solutions-based world we compete against many alternative ways to invest sustainably.  The recent VW scandal (followed by a raft of anti-Diesel legislation) combined with falling costs of Electric Vehicles (EVs) means that government push and consumer pull are approaching an adoption sweet spot.

The latest announcement by Volvo that all cars produced from 2019 onwards will be either a hybrid or wholly electric powered firmly cements this trend. This is something we have been closely watching for a while and we anticipate the shift to EVs creating a very large market (80-100m vehicles annually), presenting opportunities for sustainable investors.

We can see a fast approaching tipping point in demand. We are therefore hunting for exposed businesses that can capture value via sustainable or growing returns. It is my opinion that these businesses will rise in importance and we have to consider whether the move to EVs will make it socially unacceptable to drive a gas guzzling SUV.

Consider the CO2 and NOx emissions and respective costs. Some of these SUVs are surely becoming obscene in the context of equivalently priced EV alternatives. With new EV launches approaching, the same is beginning to happen for smaller cars (like my own!). I’ve noted below a quick comparison between Tesla’s Model X and a typical SUV:


“The recent VW scandal (followed by a raft of anti-Diesel legislation) combined with falling cost of Electric Vehicles means that government push and consumer pull are approaching an adoption sweet spot.”


Favour falls firmly on the side of the Model X. If you’re still in denial, anger or bargaining phases, or own a SUV you may point to the difference in range. Well, it’s time to get over your anxiety! Even if you travel greater than 250 miles round trip every day and can’t find an electricity supply at your home or destination, current fast charging stations can provide 250 miles of charge in 20 minutes and this is expected to be 10 minutes by 2020. Personally, an EV would save me about 15 minutes a week refuelling as I would leave the house 100% charged every day. I for one have a deposit down for a Tesla Model 3 and can’t wait to ditch the diesel.

So how do we take this trend and apply it to sustainable investment management? We already have been doing so. For our sustainable Fund, we see our key sources of investment alpha as:

1. Unappreciated sustainability of returns;
2. Unappreciated size of market and;
3. Unappreciated tipping points.

We have so far identified and invested in three companies which we think meet this criteria:

1. Albemarle (US): the leading producer of Lithium globally (the key input material for lithium-ion batteries),

2. Aumann AG (Germany): a specialist in automated production lines for winding electric motors (for Auto Original Equipment Manufacturers including Tesla) and;

3. Shimano (Japan): a market leader in the design of electric motors for e-bikes.

The ongoing social acceptability of driving SUVs is one to watch. The pivot towards EVs is positive in our view, and from an investment standpoint this is a move that we feel we have been ahead of the curve on. We have conviction here, both in the fundamentals of the businesses and in their ability to contribute towards a positive and sustainable outcome for our planet.

One last thought: given the EV performance advantage over traditional vehicles there’s a chance even Jeremy Clarkson will convert before we break the Earth.