The Electric Car Race

March 17, 2021

Unlike many people I know, I am not a "car person." When it comes to choosing a car, I don't care how fast it can go, and I don't even care too much what it looks like (as long as it doesn't look totally ridiculous). If it can get from point A to point B consistently without falling apart, I'm good.

But cars will be a fascinating front to watch as we continue the transition to renewable energy. The world's largest auto companies have recently been tripping over each other to roll out aggressive plans for electric vehicles (EVs). General Motors made a major splash in the U.S. when it announced that it will sell only zero-emission vehicles by 2035.¹ Volvo then raised the bar by pledging to do the same thing five years ahead of GM.² Volkswagen has promised far cheaper batteries and much lower charging times.³

The battle lines here are beginning to resemble those in the energy sector. On one side are the more visionary new economy companies like Tesla. these companies have a first mover advantage, a brand identity that is purely electric, and EV technology that is generally more advanced. Across from them are the old school auto companies, attempting to play catch-up using the sheer force that comes with size and scale.

The eventual outcome is central to a debate among investors today. Are Tesla and other EV companies like Nio leading a charge that will render the old guard obsolete, or are their stocks just grossly overvalued? The total market value of Tesla's stock is far and away the largest of any automaker in the world. It dwarfs the market capitalization of Volkswagen, which is second, by a factor of almost three,⁴ in spite of the fact that Tesla sells far fewer cars.

With due respect to Elon Musk's eccentric genius, my opinion falls closer to the "grossly overvalued" camp. I think traditional car companies have a better chance to pull off a transition like this than fossil fuel companies do in the energy sector.

Having that opinion is fine, but knowing it might be wrong is also important. Diversified portfolios are designed to benefit from an overall trend like the growth in EVs without having to know in advance which companies will “win” in the end. That approach may be less exciting than making a large bet on Tesla or Volkswagen, but we think it’s more productive in the long run.