As you may recall, I recently wrote about Tesla’s 3rd quarter sales being much better than some of its competitors in terms of year-over-year change — especially GM’s. Despite the chip shortage, Tesla announced record sales in Q3, while GM and a few other automakers saw big drops in their Q3 sales. Is it really the chip shortage, or is it something else? ARK Invest CEO Cathie Wood had a thought about this.
Today, $TSLA announced that in the third quarter it sold 241,300 vehicles globally, up 73% year over year (YoY) and 20% quarter over quarter (QOQ). Meanwhile, $GM blamed the ~33% YoY decline in its US sales on chip shortages. What? #EVs require 3-5x more chips per car produced!
— Cathie Wood (@CathieDWood) October 2, 2021
In her thread, she pointed out that electric vehicles need three to five times more chips per car produced. So, it doesn’t really make sense that GM would blame the chip shortage on the reason for its sales if Tesla, which uses more than GM, is breaking records. She also shared that from ARK Invests’s perspective, traditional auto manufacturers have been building up their chip inventories since April. In April, she pointed out, their sales in the US peaked at over 18 million units, and then dropped to 12.2 million over the course of five months. Continuing her thread:
“Addressing the chip shortages in the last two weeks, the Biden Administration has threatened to invoke a traditional war-time measure, the Defense Production Act, which would force companies to disclose supply chain information, including chip inventories
“We would not be surprised to see chip supplies loosen up considerably, perhaps turning the problem from a shortage into a glut given the weakness in gas-powered auto demand. Elon Musk, $AMD’s Su, and $GM’s Carlisle are on record saying chip supply constraints are easing.
“Chips are not alone. After the disproportionate spending on goods that caused shortages before vaccinations became available this spring, the shift to spending on services could transform other commodity shortages into gluts, pushing prices down and dissipating inflation fears.
“Since spring, prices of lumber have dropped 64%, iron ore -51%, DRAM chips -20%, and copper -15%. When companies build inventories in anticipation of demand that does not materialize and inventory losses threaten their financials, they sell, exacerbating the price declines.
“Back to the #auto industry, the inventory glut is not on dealer lots: auto manufacturers have only 17 days of supply in the pipeline, much lower than the normal 60+ days. As is the case for many goods that we stocked during the last year, the inventory is in homes and garages.
“Because consumers bought new and used cars to avoid mass transit during the past year, the V-shaped recovery in autos was more dramatic than that after most of the more prolonged recessions during the past 50 years.
“As mass transit and ride-sharing continue to recover during the next year or so, many consumers could conclude that they have prepaid too much for transportation in the form of those extra cars.
“By the time autos recover strongly, if Sam Korus’ analysis is correct, the sticker prices of #ElectricVehicles will be at or below those of like-for-like gas-powered vehicles, suggesting that traditional auto companies will have to transform from ~95% gas to majority electric.”
I am not sure which analysis by Korus she was referring to, as he has several excellent ones, but I did find something interesting — a time capsule, if you will. In 2016, Korus wrote an article titled, “2022: The Year Electric Vehicles Leave Gas Cars in the Dust.”
He said that by 2022, which is approaching rapidly (it’s already October 2021), the automotive industry would be at a profound inflection point.
“By 2022 the demand for electric vehicles (EVs) will begin to outpace that for gasoline-powered cars. As the cost of lithium-ion cells falls faster than most analysts have anticipated and the cost to manufacture traditional Internal Combustion Engine (ICE) powertrains increases, ARK Invest’s analysis suggests that 200-mile range EVs will be cheaper to the consumer than the majority of ICE vehicles within five to seven years. If 200-mile range EVs accommodate the travel needs of 80% of Americans, then-current forecasts significantly understate the demand for EVs in 2020.”
He wrote that battery costs accounted for around 20% of the total cost and that these are critical to the future of EV adoption. In the six years since that article was published, we have seen significant drops in battery costs as well as the advancement in battery technology. He added that at that time, EVs were selling at a premium price compared with ICE vehicles but that ARK anticipated that a 200-mile range EV with the same amenities of 2016’s best-selling Toyota Camry would sell at a lower price point in 2022.
A 2022 Toyota Camry starts at $25,295 and the base Tesla Model 3 starts at $35,690 (update: the initial $35,690 price here was “after potential savings,” as provided on the Tesla website, and the price actually just went up a day later by $2,000, making the actual purchase price today $41,990). When we look back at Tesla’s achievements and how far it has come in regards to making EVs mainstream, we can see we’re getting close to that. Although a Camry is still cheaper with regard to upfront costs than a Model 3, neither of the prices reflect the differences in value, savings, or amenities. Also, there are big operational differences. For example, a Model 3 doesn’t require fuel, oil changes, or as frequent maintenance as a Camry would.
And let’s not forget that 200 miles is no longer a challenge for a semi-affordable electric car, as it was thought to be back then. The Tesla Model 3 SR+ comes with 262 miles of range, while the Long Range version has 353 miles of range.
During Tesla’s Q2 2020 earnings call, Elon Musk said:
“If people do not have enough money in their bank account to buy the car, they simply cannot. So then you used to have this cycle or something that nobody can buy, so it is important to make the car affordable. And we will not succeed in our mission if we do not make cars affordable. Like the thing that bugs me the most about where we are right now is that our cars are not affordable enough.”
Alex Voigt shared something this week that was similar to Cathie Wood’s tweet. Alex cited a “credible source” who had internal data which only certain Volkswagen employees have access to. He noted that “70-80% of weak deliveries are due to demand constraints,” not semiconductor shortages. In other words, Volkswagen is having low sales mostly due to a lack of demand, according to this.
A small correction for the sake of accuracy: The information does not come from the official VW order book, but from internal data to which only VW employees (probably limited employees) have access.
— Alex (@alex_avoigt) October 3, 2021
We are quickly approaching the inflection point and I think Cathie Wood may be onto something here with her thread. Perhaps a real reason for GM’s low sales is lack of chips, but perhaps that’s just a small portion of the explanation and bigger one is the fact that people want EVs and are delaying their purchases. This second point could be reflected by Tesla’s high volume of sales, production, and deliveries.
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