Show Transcript
Sales of electric vehicles have been charging ahead in recent quarters. But as legacy auto companies retool their lineup to be more electrified, some are finding the conversion comes at a cost. David Mau, Portfolio Manager at TD Asset Management, looks at the state of the EV market.
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From any automaker is electric vehicles are the future, but the research and development to get there does come at a cost. We got the latest reminder of that in recent days when Ford announced their TV division lost $2 billion in 2022 alone and is likely to lose another 3 billion this year. Joining us now with his outlook for the EV market, David Mar, portfolio manager with TD Asset Management. Great to have you back on the show.
Good to be here, Greg.
So let's talk about that. That was a big piece of news that sort of hit. And it was interesting that as Ford breaks out their different segments, we're sort of seeing the cost of getting to the EV future. What did you make of it?
Yeah, I mean, I think it's actually great for for the market, great for investors that Ford has decided to go ahead and break out their separate divisions. It gives investors a lot more visibility into how the EV division itself is doing and it gives investors, you know, a good way to measure the progress that Ford is going to make over the next few years. And already mentioned that, you know, the EV segment for Ford had lost $2 billion last year in 2021. That actually lost $1,000,000,000. So the losses have been growing and they're going to lose expected $3 billion this year. So, you know, what that translate to translates to right now is that Ford is earning a -40% profit margin on every single car, every single electric vehicle that they sell. Now, they're targeting to go from a -40% margin to positive 8% margin by about 2026. So we'll call it, you know, three, 3 to 4 years from now. They expect to be able to scale up and find the efficiencies and become a better basically a better producer of electric vehicles where they can turn that negative margin into a positive margin. Obviously, the market is going to continue to grow. The demand for EVs is going to continue to grow. So, you know, that's their projections right now. I think for pretty much every automaker out there except for Tesla, you should expect their electric vehicle segments to to lose money for the first few years. And even Tesla itself, you know, Tesla became a public company, I want to say, in 2010. They lost money every year for the first ten or 11 years of their existence as a public company. It just in the last kind of two or three years, Tesla has started to turn a profit. So I don't think it's surprising. I think investors know this. I think the market understands this. So what's going to be important is how, I guess, profit margins and the the the quality of these EVs that are being produced by other car companies evolve over the next few years.
Now, when I think about the equation there, I mean simply, obviously. And so you find that scale of production, it allows the production costs to come down. You're going to be losing money. Is it trying to sell these cars that are at an attractive price point for the market and taking that loss for a while until you try to gain some share?
Yeah, that's exactly it. And, you know, just to put some numbers out there for you in terms of the actual overall market, last year in 2022, electric vehicle sales were about 8 to 10% sales penetration. So that means one out of every ten cars sold last year was an electric vehicle. Not too long ago, I won't say three or four years ago, that number was only 2%. So, you know, it's the market is growing rapidly just over the last few years. And by 2028, so we're talking about five years from now, we're expecting 30 to 35% of all new cars to be electric vehicles. So that means one in three new cars sold in five years is going to be an electric vehicle. So the market is really growing quite, quite rapidly.
What do you think about the market growing rapidly and the different players fighting for share? Obviously, I think it was even at the end of last year, but definitely beginning of this year, you start getting Tesla bringing down prices to try to maintain that part of the market and the share that they already have. How tough is that going to be for some of the bigger competitors in the next couple of years? They have a plan to get to profitability when it comes to electric vehicles, and then you have sort of the leader of the group or at least the superstar cutting prices.
Yeah, I mean, that's absolutely right. Like Tesla is the cost leader in electric vehicles these days. They've got a they've got a very wide lead. And, you know, Tesla has been cutting prices over the last few months, depending on where you are in the world, the price cuts differs and which model you're looking at. But for example, here in Canada, the Tesla model three, which is the lower end model of the Tesla lineup, the starting price went from 60000 CAD to 55000 CAD. So that's almost a 10% drop in price. And so what Tesla is doing, like you said exactly, is they want to they want to attract more customers by lowering the prices and putting out a, I guess, quite a good product. So what this does to other automakers is that it definitely does pressure them on the profitability front and on the market share front. So, you know, Ford is going to probably have to look at cutting prices. We've seen, especially in China, BMW, Mercedes, looking at reducing prices and not just on electric vehicles, on their internal combustion engine vehicles as well, because as the market matures for electric vehicles, people are. Considering, you know, for 40 or $50,000, I can buy an electric vehicle. That's the future. I'm going to save on gas. I'm going to save on maintenance. Or I can buy, you know, a 40 or $50,000 internal combustion engine, which I know is going to be phased out over time. So Tesla and the EV makers in general are going for that target audience who are, you know, kind of on the fence, but they will eventually migrate over to to EVs.
You mentioned China. That's an interesting market for electric vehicles because we think from our North American perspective with names like Tesla, you know, the Detroit automakers like Ford trying to get in the game, the BMW of the world. There's automakers that perhaps aren't getting a lot of attention in the West who are very competitive in China, where Tesla does have, you know, production influence or a production presence is the word I'm looking for. How does that market play out?
Yeah, well, China is actually one of the most oversaturated car markets in terms of automakers in the world. You know, by some estimates, China has about 300 EV makers, and that's just way too many. Most of them, you know, there's a wide range of models that they sell, you know, super budget models, something that you can buy for about five, five or $6,000 all the way up to something comparable to a Tesla. But there's just too many of them that the the quality of the product is not great. They don't have the scale, they don't have the reach. So, you know, there's going to be a ton of small car companies in China that go out of business. Most of these companies will we've never heard of and we'll never hear about. But that industry has definitely got to consolidate. And I think, you know, the reason that these companies even exist in the first place is because the Chinese government over the last few years has provided a lot of subsidies, a lot of incentives for people to enter the EV market, for companies to enter the market and start producing cars. And any part of their strategy was get as many companies as you can to start making cars. The strong ones will survive and the rest will eventually just disappear. But that's fine because those strong ones, they're going to be the flagship brands for China and not just for China. Domestic consumers, those brands are going to have a target of exporting their cars to the rest of the world.
And a final thought on this space is all of these, you know, global players try to get competitive in electric vehicle space, a pretty ambitious targets as to how much of the fleet will be electric in just a couple of years. What about everything it takes to go into a site and electric vehicle? They're trying to bring costs down, but everyone's going to be competing, I guess, for copper, all the other metals, minerals that go into these vehicles.
Yeah. So what we've seen is many of the materials prices after actually rising quite rapidly over the last couple of years, have started to to come down a bit. So that's that's what's allowing companies like Tesla or the other companies to start to think about cutting costs and they've been able to scale up better. There's certain I guess materials are still going to be scarce, but for the most part, battery prices have come down, the technology has improved. And overall, you can see these companies, I guess, getting to more profitability quicker as prices compress on on the raw materials.
From any automaker is electric vehicles are the future, but the research and development to get there does come at a cost. We got the latest reminder of that in recent days when Ford announced their TV division lost $2 billion in 2022 alone and is likely to lose another 3 billion this year. Joining us now with his outlook for the EV market, David Mar, portfolio manager with TD Asset Management. Great to have you back on the show.
Good to be here, Greg.
So let's talk about that. That was a big piece of news that sort of hit. And it was interesting that as Ford breaks out their different segments, we're sort of seeing the cost of getting to the EV future. What did you make of it?
Yeah, I mean, I think it's actually great for for the market, great for investors that Ford has decided to go ahead and break out their separate divisions. It gives investors a lot more visibility into how the EV division itself is doing and it gives investors, you know, a good way to measure the progress that Ford is going to make over the next few years. And already mentioned that, you know, the EV segment for Ford had lost $2 billion last year in 2021. That actually lost $1,000,000,000. So the losses have been growing and they're going to lose expected $3 billion this year. So, you know, what that translate to translates to right now is that Ford is earning a -40% profit margin on every single car, every single electric vehicle that they sell. Now, they're targeting to go from a -40% margin to positive 8% margin by about 2026. So we'll call it, you know, three, 3 to 4 years from now. They expect to be able to scale up and find the efficiencies and become a better basically a better producer of electric vehicles where they can turn that negative margin into a positive margin. Obviously, the market is going to continue to grow. The demand for EVs is going to continue to grow. So, you know, that's their projections right now. I think for pretty much every automaker out there except for Tesla, you should expect their electric vehicle segments to to lose money for the first few years. And even Tesla itself, you know, Tesla became a public company, I want to say, in 2010. They lost money every year for the first ten or 11 years of their existence as a public company. It just in the last kind of two or three years, Tesla has started to turn a profit. So I don't think it's surprising. I think investors know this. I think the market understands this. So what's going to be important is how, I guess, profit margins and the the the quality of these EVs that are being produced by other car companies evolve over the next few years.
Now, when I think about the equation there, I mean simply, obviously. And so you find that scale of production, it allows the production costs to come down. You're going to be losing money. Is it trying to sell these cars that are at an attractive price point for the market and taking that loss for a while until you try to gain some share?
Yeah, that's exactly it. And, you know, just to put some numbers out there for you in terms of the actual overall market, last year in 2022, electric vehicle sales were about 8 to 10% sales penetration. So that means one out of every ten cars sold last year was an electric vehicle. Not too long ago, I won't say three or four years ago, that number was only 2%. So, you know, it's the market is growing rapidly just over the last few years. And by 2028, so we're talking about five years from now, we're expecting 30 to 35% of all new cars to be electric vehicles. So that means one in three new cars sold in five years is going to be an electric vehicle. So the market is really growing quite, quite rapidly.
What do you think about the market growing rapidly and the different players fighting for share? Obviously, I think it was even at the end of last year, but definitely beginning of this year, you start getting Tesla bringing down prices to try to maintain that part of the market and the share that they already have. How tough is that going to be for some of the bigger competitors in the next couple of years? They have a plan to get to profitability when it comes to electric vehicles, and then you have sort of the leader of the group or at least the superstar cutting prices.
Yeah, I mean, that's absolutely right. Like Tesla is the cost leader in electric vehicles these days. They've got a they've got a very wide lead. And, you know, Tesla has been cutting prices over the last few months, depending on where you are in the world, the price cuts differs and which model you're looking at. But for example, here in Canada, the Tesla model three, which is the lower end model of the Tesla lineup, the starting price went from 60000 CAD to 55000 CAD. So that's almost a 10% drop in price. And so what Tesla is doing, like you said exactly, is they want to they want to attract more customers by lowering the prices and putting out a, I guess, quite a good product. So what this does to other automakers is that it definitely does pressure them on the profitability front and on the market share front. So, you know, Ford is going to probably have to look at cutting prices. We've seen, especially in China, BMW, Mercedes, looking at reducing prices and not just on electric vehicles, on their internal combustion engine vehicles as well, because as the market matures for electric vehicles, people are. Considering, you know, for 40 or $50,000, I can buy an electric vehicle. That's the future. I'm going to save on gas. I'm going to save on maintenance. Or I can buy, you know, a 40 or $50,000 internal combustion engine, which I know is going to be phased out over time. So Tesla and the EV makers in general are going for that target audience who are, you know, kind of on the fence, but they will eventually migrate over to to EVs.
You mentioned China. That's an interesting market for electric vehicles because we think from our North American perspective with names like Tesla, you know, the Detroit automakers like Ford trying to get in the game, the BMW of the world. There's automakers that perhaps aren't getting a lot of attention in the West who are very competitive in China, where Tesla does have, you know, production influence or a production presence is the word I'm looking for. How does that market play out?
Yeah, well, China is actually one of the most oversaturated car markets in terms of automakers in the world. You know, by some estimates, China has about 300 EV makers, and that's just way too many. Most of them, you know, there's a wide range of models that they sell, you know, super budget models, something that you can buy for about five, five or $6,000 all the way up to something comparable to a Tesla. But there's just too many of them that the the quality of the product is not great. They don't have the scale, they don't have the reach. So, you know, there's going to be a ton of small car companies in China that go out of business. Most of these companies will we've never heard of and we'll never hear about. But that industry has definitely got to consolidate. And I think, you know, the reason that these companies even exist in the first place is because the Chinese government over the last few years has provided a lot of subsidies, a lot of incentives for people to enter the EV market, for companies to enter the market and start producing cars. And any part of their strategy was get as many companies as you can to start making cars. The strong ones will survive and the rest will eventually just disappear. But that's fine because those strong ones, they're going to be the flagship brands for China and not just for China. Domestic consumers, those brands are going to have a target of exporting their cars to the rest of the world.
And a final thought on this space is all of these, you know, global players try to get competitive in electric vehicle space, a pretty ambitious targets as to how much of the fleet will be electric in just a couple of years. What about everything it takes to go into a site and electric vehicle? They're trying to bring costs down, but everyone's going to be competing, I guess, for copper, all the other metals, minerals that go into these vehicles.
Yeah. So what we've seen is many of the materials prices after actually rising quite rapidly over the last couple of years, have started to to come down a bit. So that's that's what's allowing companies like Tesla or the other companies to start to think about cutting costs and they've been able to scale up better. There's certain I guess materials are still going to be scarce, but for the most part, battery prices have come down, the technology has improved. And overall, you can see these companies, I guess, getting to more profitability quicker as prices compress on on the raw materials.
