Morgan Stanley Says Shared Mobility and Autonomous Cars to Drive EV Growth (TSLA)

June 16, 2015 1:05 PM EDT
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In a note today that has positive implications for Tesla (NASDAQ: TSLA), Morgan Stanley analyst Adam Jonas said they are 'Serious EV Bulls Again.' In his report, Jonas argues that while electric vehicles (EV) have failed to achieve mainstream success given inferior economic payback, shared mobility and autonomous cars could help EVs make a major comeback.

1. Shared mobility. Mobile technology and relatively simple software increases driving utilization rates by an order of magnitude bring taxis and chauffeur services to the masses. This transforms the auto business model from B2C ownership to B2B shared. Enabling each car to drive a far greater number of miles per year helps amortize the up-front cost of a battery far more rapidly, shrinking the payback. Greater numbers of EVs enable OEMs and contract manufacturers to achieve unprecedented scale economies in battery pack production, yielding further benefits.

To take the point of vehicle utilization vs. EV payback rates to the extreme, imagine that the owner of a 50KWh battery car used the vehicle for the very rare Sunday drive of 100 miles/year… the extra premium paid for the car vs. owning a 40mpg car at $3/gallon gasoline would take 2,778 years to pay off. To break-even vs. an internal combustion engine, such a vehicle would have be purchased in the 8th Century BC, at the founding of Rome or during Homer’s epics (ignoring inflation). If the same car were used 1,000 miles/year the breakeven payoff would be 278 years, or purchased when George Washington was a 5 year old lad rambling around the fields in the Colony of Virginia. On the flipside, if the EV were operated 100,000 miles/year, the payback would be 2.8 years. To achieve the same 2.8 year payback by only shrinking the battery cost (holding miles driven flat at 10,000/year) would require $25/KWh… a 90% reduction from Tesla’s current claimed level of cost achievement. $25/KWh would require technological breakthrough, while 100k miles/year just requires a smarter use of technology that already exists.

2. Autonomous cars. Eliminating the human from the driving equation can further improve utilization to even higher levels and efficiency and lower cost per mile. By far the largest cost of today’s ride sharing service is the person behind the wheel. Replace the driver with a few million lines of code and some commoditized sensors and the savings can really begin. Shared autonomous fleets address many other problems with today’s EV model, such as slower charging time, lower charging station density and range limitations. Out of a total autonomous taxi fleet of say 10,000 vehicles, perhaps 10% or 20% would be involved in some portion of the charging process. Please note, we are not considering any material differences in maintenance/repair costs between an EV and an ICE vehicle.

Jonas also sees a potential 'Apple effect'. If Apple were to design and engineer a car, they are convinced it would be 100% a battery electric propulsion system. Apple's potential ‘sponsorship’ of the so-far beleaguered EV technology could have transformational ramifications for the industry, he said.

Further, Jonas said a fully autonomous car is meant to be shared, not owned. "Why is autonomous car technology so important to the development of EVs? It’s simple, a fully autonomous car (as in no steering wheel, no pedals) can work 24 hours a day. Will consumers buy a car capable of doing all the work itself just to have it sit idle for more than 23 hours a day? Why are you buying all this technology only to amortize it over 4% utilization? Perhaps you may spend more time in your own car… but really more than 2 hours a day? If run by a business as a taxi service, the autonomous car can be generating revenue for as much as 40% of a 24/hour day on our simulations… nearly 10 hours/day on average. Some days more, some days less. The higher utilization means expensive EV tech can be far cheaper on a per mile basis."

The analyst said for Tesla, the end-game is to offer mobility services as an Uber-like ride sharing app. "Tesla is currently targeting the premium performance car market as a funding strategy for its longer-term mission to democratize electric transport. While today’s Tesla customers enjoy a high level of human driving pleasure and performance, we see the future Tesla customer enjoying mobility as a service in a model nearly unrecognizable to what we have known for the past 100 years of our relationship with the automobile. The shared car, the autonomous car and the electric car are inextricably linked. Around 12 months ago, my 4 year old son asked me: “Daddy, when the robots drive all the cars, why will people buy a Tesla?” The answer: they probably won’t buy a Tesla. They won’t drive a Tesla either. Swipe, click… off you go."

Commenting on other stock implications from the rise of EVs, Jonas said: "Parts suppliers with exposure to internal combustion technology must look to diversify or innovate their way through the changing revenue pie. Our discussions with OW-rated BWA suggest a lucid awareness of the technological headwind to changing propulsion systems over time. UW-rated TEN may face more disruptive trends in their core light vehicle exhaust systems business. There are any number of other implications with respect to the technological enablers, raw materials, infrastructure and sales/service side of the business model investors must consider as the EV business model advances."

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