Trading in an EV World

Super Bowl LV makes it official. No, not that Tom Brady is the best quarterback in the National Football League; we were already convinced of that. The novelty is an old-line auto manufacturer’s high-profile commitment to electric vehicles.

Auto execs have been saying all the right things about battery-powered cars for a good while, even as their assembly lines churn out highly profitable gas guzzlers that will be spewing greenhouse gases into the atmosphere for decades to come. But now, jealous of Tesla’s insane price-earnings ratio — as of today, its stock sells for 293 times projected 2021 earnings per share, compared to about 14 times for Toyota and 9 for Volkswagen — the incumbent automakers are desperate to convince the world that they are committed to an all-electric future. Which is why GM spent megabucks to tout its forthcoming electric Cadillac Lyriq and Hummer SUV during the Super Bowl.

The first house I ever purchased cost $16,000, so you can guess what I think about spending $90,000 for the Lyriq’s platinum version or six figures for the battery-powered Hummer. But I do want to point out that the impending shift to electric vehicles, which promises to be rapid by auto-industry standards, is going to cause major dislocations across the industry’s value chains.

Note that I wrote “value chains,” not “supply chains,” and for a good reason. The auto industry and its suppliers are about to travel the same road the apparel and electronics industries have been on for decades, adding value mainly by engineering and marketing, not by bashing metal and molding plastic.

This past week, for example, Volkswagen confirmed that it now employs 5,000 people to write software, which it described as a core part of its business. Meanwhile, news broke that Apple is negotiating with the Hyundai-Kia conglomerate to build Apple-branded vehicles. Apple sells hundreds of millions of smartphones each year but manufactures no phones or components itself; similarly, its contributions to the Apple Car are likely to involve design, engineering, and software, not stamping bodies and installing wire harnesses supplied by a plant in Mexico, Vietnam, or Romania.

The auto industry’s transformation is possible largely because electric vehicles are akin to battery-powered computers on wheels. They lack the engines, transmissions, and exhaust systems that make gasoline-powered vehicles so complicated to produce. An EV is likely to have several thousand fewer parts than its gasoline-powered counterpart. The proliferation of EVs will change the geography of automotive manufacturing. There will be less need for parts factories and for workers who make parts and assemble vehicles, which means manufacturers will have less reason to farm production out to low-wage countries. The major component in electric vehicles, the battery, is heavy and bulky, and several recent investment announcements indicate that the most sensible place to make a battery is near the assembly plant where it will be installed in a vehicle.

The logistics industry has a major role in motor vehicle manufacturers’ value chains, and electrification will hurt it. Truckers and railroads that haul parts from Mexico to the United States will see that business shrink. Ship lines that move containers of auto parts between continents will lose a large amount of cargo. In countries with large auto parts industries, jobs will vanish, factories close. And international trade in goods, temporarily feverish due to the pandemic, will settle in to a much slower rate of growth.

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