What rising demand for hybrids could mean for the EV market

* The automotive industry has spent years investing heavily into their electric vehicle offerings. But in recent months, there's been a pretty dramatic shift taking place. Joining us now to discuss, David Mau, VP, director, and portfolio manager with TD Asset Management. David, great to have you back on the show. * Thanks for having me, Greg. * For the longest time, the narrative was electric vehicles were the future. As we said, the auto companies were investing heavily. But the consumer sort of spoke up, and there's been a bit of an interesting shift. Walk us through it. * Yeah. Look, EV sales as a whole are still growing. If we look at the numbers in 2023, electric vehicle sales were up about, I want to say, 47%. And this is globally. That's about 18% of all new car sales last year. So it was pretty meaningful. * But what you're talking about is a slowdown. And we're definitely seeing that for 2024. This year, 2024, the sales growth is expected to slow from that 47% down to about something in the low 30s. So we are seeing a pretty meaningful decline in new EV demand. * The numbers here in North America, so the US and Canada, is actually a lot lower than that 47% that I just mentioned. That's because a lot of the growth in EV sales is actually coming from countries outside of North America, places like Europe and China. So I think the OEMs are going to be facing a bit of a challenging situation for the next, let's call it couple of years until consumers can get to a place where they can absorb these higher prices, because EVs generally cost more. That's a main sticking point. And that's one of the reasons that we're seeing a sales decline. * And the second issue with EV demand is that people are realizing that the charging infrastructure out there is just not robust enough for them to commit to buying an electric vehicle and having that as their only car. * Now it's interesting, as we see the softness in the EV market, every time I see either commentary from the CEOs of Ford, or GM, or the other big automakers, if they're not completely in EV play like Tesla is, they have a mix. They start talking more about that mix, particularly about hybrids. * Yeah. No, that's a very good point. A lot of attention over the last few years have been on electric vehicles. But we are definitely seeing a shift and more attention being paid and more interest being paid to hybrid vehicles. And the reason for that is hybrids actually address two of the main challenges that I just mentioned, right? * Hybrids are actually cheaper to make, cheaper to sell-- so it's cheaper for the consumer to buy-- and hybrids, as the name implies, has a electric motor and a gas-powered engine. So there isn't really that same kind of range anxiety for hybrid owners, because when the electric motor runs out of charge, the car will still keep running on the gas engine alone. * So I think that addresses two very important points for hybrid buyers, especially on the price front, right? If you look at a typical hybrid vehicle, like a Honda Insight or a Toyota Prius, the starting prices for those cars are kind of around $30,000, $35,000 US starting price, whereas most electric vehicles, we're talking mid-range electric vehicles, they're going to have a starting price of something in the low to mid $40s, maybe high $40,000 US. So that's actually quite a big difference. And it is a stumbling block for new buyers to come into the market. * Now, I understand there's something called the Toyota 1-6-90 rule. What is this? Walk me through it. * Yeah. Yeah, no, that's very interesting. The Toyota 1-6-90 rule is actually part of an internal memo that Toyota had circulated to its employees and its dealers. And as you can imagine with any good internal memo, it was leaked immediately to the public. So what the 1-6-90 rule is is, based on Toyota's studies and research, they've come to the conclusion that the amount of raw materials-- and I'm talking about things like the minerals that go into an electric vehicle, so things that come out of the Earth like cobalt, nickel, lithium-- the amount of resources that are needed to build one electric vehicle, so that's the one, can build six plug-in hybrid vehicles or 90 regular non-plug-in hybrid vehicles. * And they came to the conclusion that when you look at the lifetime carbon reduction of one electric vehicle versus 90 hybrid cars, those 90 hybrid cars actually reduce carbon emissions by 37 times more than one single EV. So the whole point of the memo was to inform their dealers and their employees that Toyota is going to focus on hybrids as opposed to investing a ton of time and money into electric vehicles, because the payoff from hybrids is actually much better, both financially and from an environmental point of view, than electric vehicles. * That sounds like the kind of argument that, if it got wider traction, could really undermine, I guess, even the central thesis of the electric vehicle. Could this be a challenging couple of years ahead for EVs? * It could be. But as you and I both know, there's always improvements going on in the manufacturing of electric vehicles, and batteries are getting better all the time, prices are coming down, and production is ramping up. So at some point, we'll reach a kind of a balance point where hopefully EVs and hybrids are somewhat comparable. * Let's talk about some of the challenges that we've seen in the EV space. And obviously means if there's softening consumer demand and if people are looking at hybrids, I mean, the pickup truck is still a very popular option in North America-- the traditional pickup truck with an ICE engine. * I want to talk about the delayed EV plans. That's what I'm trying to get at here-- we're seeing delays and actually plans, pushing out plans. * Yeah. Like you mentioned, Tesla is actually going to lay off 10% of their global workforce. That's a pretty big number. And closer to home here in Ontario, Ford, the Oakville Ford plant, was scheduled to start producing electric vehicles in 2025. Ford has announced that they're actually going to push that back to 2027. So that's going to be a two-year delay. * And the reason Ford gave is that they want to give the market some time to develop-- so, basically, they're waiting for demand to come back. And hopefully in two years' time, technology has improved so they'll be able to do things more efficiently and more cheaply. * Now, right now, I know another issue when it comes to EVs, we're sort of laying out a lot of roadblocks for them right now, the resale value as well. You talk about technology moving on very quickly-- what does that mean for actually someone who buys an EV thinking they're going to sell it a couple of years down the road? * Yeah, no, that's a very interesting point. And I've seen some studies that show resale values across all cars-- so all types of cars, we're talking internal combustion, hybrid, and EVs-- the typical depreciation rate over a five year period is about 40%, right? And that's across all categories of cars. When you specifically look at electric vehicles, the depreciation rate is actually higher. It's about 50%. So if you bought a $100,000 EV, in five years, it's, at most, going to be worth about $50,000. * And there's a couple of reasons for that. One big thing is that, as new EV models come out, as manufacturers start to push out more and more new EV models, one of their big goals is to lower the price, right? * So imagine if-- Tesla has already done this a couple of times in the last year, where they've cut prices-- so if Tesla cuts the price of their Model Y by $10,000, all of these existing Model Y's out there on the road are also going to be worth less. So that's one big factor as companies continue to reduce prices. * The other thing is, and we mentioned this already, is technology is improving very, very quickly. So if you look at an electric vehicle from four or five years ago, that battery technology has improved tremendously since then. So new EVs today are probably going to have a battery with better range, quicker charging. And the other things like onboard technology-- so the operating system that runs the car, that runs the driver assistance features, the safety features, even the entertainment features have improved drastically. So people are starting to realize that within a couple of years, maybe three, four years, that brand new EV that you bought a few years ago is starting to become outdated, and in some cases it's becoming obsolete. * So I think that's keeping some people on the sidelines. So not only is the car becoming outdated very quickly, the resale value is also not as good when compared to other types of cars. So that's actually weighing on current demand as well. * So we spoke earlier about the shift in demand, that's also not helpful for demand today, because some people who care about resale value are going to say, you know what? Why don't I wait another year or another two years for technology to catch up before I buy an electric vehicle. * I want to ask you, we put all this together, what should investors be mindful of when they're looking at the space? * I think for investors who are looking at OEMs, you've got to understand where their competitive position is within the industry. Are they a market leader, or are they someone trying to catch up to the market leader? And obviously, valuations are important. * And again, Tesla is the only automotive company that has a valuation, at least a P/E valuation, that's significantly higher than everyone else. Most of the traditional mainstream automakers trade at P/Es of mid-single digits, definitely less than 10. Tesla, I actually don't know after today's move, but I think their P/E is probably in the high 40s or 50s. So that's definitely something to take into account.

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