The burgeoning days of the smartphone were led consecutively by Palm, Blackberry and HTC. Designing from scratch, the trio created innovative products that were far superior to anything offered by the legacy feature phone makers at that time. They also exploited the then nascent microchip technology to marry the latest hardware and software capabilities. As advances in chip technology lowered the barrier to entry, however, their first mover advantages dwindled. Eventually, the smartphone world became dominated by Apple’s iOS and Google’s Android. In the latter camp, the scale and vertically- integrated components of Samsung allowed them to prosper, with the rest of the market squeezed out by the low-cost Chinese players.
The automotive industry is undergoing a similar revolutionary transition to electric vehicles (EVs). The incumbents have proved reluctant to embrace this trend, given their internal combustion engine (ICE) business models; belatedly, they are now reacting. But like their feature phone cousins, this has often been compromised by trying to repurpose an ICE design and supply chain to EVs rather than starting with a blank slate. Tesla’s Model 3 was a wake-up call to the industry. Now we are seeing automakers go all-in on EVs, with bold future targets.
Impact on automakers as EVs evolve
As the EV industry grows and matures, the sustainability of Tesla’s initial advantages and long-term implications for the industry remain to be seen. Merchant battery cell makers are rapidly closing the gap with Tesla, while VW and Ford have announced ambitious plans to vertically integrate batteries. Naturally, as battery densities improve and EV range extends, consumer ‘range anxiety’ will fade. This will also negate the need for a proprietary charging network that will also become increasingly standardised.
Incumbent automakers have finally recognised the need for better EV design, resulting in high quality new EV models emerging. Bringing to bear their existing manufacturing scale and expertise, costs are also coming down rapidly. Consequently, Tesla has been losing market share in the US and Europe. In today’s ICE market, no automaker has more than 15% market share and it remains a highly fragmented market (Figure 1). Tesla today is in the lead with 22.6% share in the nascent EV market (Figure 2). But with a plethora of EV models being launched by incumbent automakers and a host of new EV start ups emerging globally, the sustainability of Tesla’s lead is debatable. Meanwhile, the rumoured entry of Apple into the market only clouds the picture further.
Figure 1: Global auto market share in 2020
Figure 2: A fragmented market: global EV market share in 2020
Investing in sustainable transport
Perhaps the most important takeaway from the smartphone era is to focus less on the hardware. In the same way smartphones have become fairly commoditised, it is likely that so too will EVs. The car will become yet another client for the delivery of internet services. As such, controlling the operating system and therefore gateway to these EV clients will be key, in the same way it was for Microsoft in the PC and Apple and Google in the smartphone eras. Will that be open source like Android or a walled garden like Apple has created? If the latter, will Tesla or a new entrant become dominant? Will the automotive incumbents successfully pivot their companies to be software centric?
Figure 3: The battle for EV dominance
Suppliers who can provide electrification reference designs will reduce time to market and enable new entrants in the same way as their smartphone forefathers. Power semiconductors are essential for the power management and charging of EVs, as is central processing power and a new ethernet networking architecture for autonomous driving.
As with smartphones, betting on the winning EV brand is difficult and competition is fierce. But there are opportunities to invest in key EV suppliers that are agnostic to which EV brands do well and have high barriers to entry and attractive margins. The road to a more sustainable future presents attractive investment opportunities for those who know where to look and learn from history.
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Glossary
Reference design: refers to a technical blueprint of a system, which third parties may enhance or modify the design as required. Electrification car design is driven by consumer needs and incorporates aesthetics and style, performance and drivability, and comfort and connectivity.
Commoditised: when goods or services become relatively indistinguishable from rivals and are only differentiated by price tags.
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