Posted on 09/13/2014 9:21:07 AM PDT by ckilmer
September 13, 2014 | Comments (0)
Elon Musk has as much as $10 billion, not to mention his own personal fortune, riding on the growth of Tesla Motors (NASDAQ: TSLA ) EV sales and SolarCity's (NASDAQ: SCTY ) solar and energy storage system growth. It's one of the biggest bets ever made on renewable energy and it's made him a household name across the country.
To dominate EVs, solar energy, and energy storage Musk is trying to build out battery capacity before competitors can gain traction, and thus far he's executed well on that strategy. There's really only one place with the resources and wherewithal to derail Musk's hopes to dominate both EVs and energy storage -- China. The problem is that they may be doing just that.
China betting big on electric vehicles
The latest rumor out of China is that the country will levy a hefty gas tax and pour the revenue generated into expanding electric vehicle usage in the country. This could add billions to an industry that's already being supported by a government that's purchasing EVs for its own use in mass. In many ways, the concept makes sense for China's future and follows a path the country has taken in the past.
Chinese cities are congested with smog from everything from coal electric plants to the amount of gas burned by the growing middle class. So, there's an environmental driver for EVs.
But China also likes to be an early mover in new industries, particularly when large scale manufacturing is involved. EVs and batteries could be a huge growth market for China over the next few decades, and it's only logical that they would make a push into being a major supplier for the industry. China has used state-run banks to build out capacity in industries it wants to dominate, like electronics and solar, and I think batteries could be next, but I'll cover that below.
The biggest driver of China's push into EVs could be the country's growing reliance on foreign oil. You can see below that the gap between China's oil production and consumption is growing each year and it now has to deal with countries like Iraq, Iran, and Syria just to meet its energy needs.
China Oil Consumption data by YCharts
If EVs can reduce China's reliance on foreign oil it would be logical to push their adoption. The economic benefits would be a side effect of the improved energy security, something China's leaders have to be considering at the moment.
SolarCity's energy storage unit built by Tesla Motors. Source: SolarCity.
Why this is a problem for Elon Musk
You may think that China's expansion into EVs would be good for Tesla and on some levels that would be right. It would open up a new market for the Model S, Model X, and future Model 3, something that could be a positive for Tesla.
But if China decides to pour billions of dollars into electric vehicles and battery manufacturing it could be devastating for Tesla. Musk is spending $5 billion to build battery capacity at the Gigafactory in Nevada, and he now has to find end market demand for not only cars but batteries as well.
Part of the logic in building the Gigafactory was to lower costs and make EVs and energy storage more competitive in the market. But if China floods the market with low-cost product it could reduce Tesla's potential margin from batteries and create a competitor both in EVs and energy storage. It's something the country has done before in renewable energy.
China has played this game before
This isn't some far fetched idea I'm making up to scare Tesla or SolarCity investors, it's something we've seen play out before.
In the late 90s and 2000s when China decided it wanted to be a computing powerhouse the country's state-run banks poured billions of dollars into building out manufacturing capacity to compete with U.S. companies. Eventually, PC manufacturers in the U.S. either went bankrupt, sold to Chinese competitors, or decided to outsource electronics manufacturing to China. When China wants something -- it gets it.
More recently, the solar industry was upended by a massive expansion in Chinese capacity, funded by Chinese state-run banks. Billions poured into the market, flooding the solar industry with product and pushing out suppliers that didn't have the cost structure or financial backing to keep up. Most U.S. and European solar manufacturers went bankrupt leaving Chinese suppliers like Yingli Green Energy and Trina Solar who are supported by Chinese banks to this day.
If China decides to put billions into building out EV capacity -- particularly batteries -- it would put downward pressure on costs that currently don't exist. If China does make the investment in EVs that's been rumored, we could see a similar dynamic to what happened in the solar industry in the late 2000s and early 2010s. Investors had put huge multiples on solar companies, and when China flooded the market the stocks collapsed as U.S. companies struggled to survive under the pressure.
Here's a small snapshot of happened to solar investors from 2008-2012 -- and these are two companies that survived. Many more went bankrupt because of Chinese oversupply.
China is the threat Elon Musk should be watching
Anytime I see that China is going to put billions into an industry I cringe at the effect it will have on U.S. companies. Without some sort of technological advantage over Chinese competitors it becomes a price war, even for a company like Tesla.
Remember that a significant percentage of capacity (around 30%-40%) in Tesla's plant is earmarked for energy storage for SolarCity. But if Tesla's batteries aren't cost competitive with Chinese commodity batteries it would be a competitive disadvantage for SolarCity to stay with Tesla.
At the very least, this is a threat worth watching for investors. Both Tesla Motors and SolarCity are priced as if they'll grow profitably for years to come, but if China decides it wants to own EVs or the future of battery manufacturing it could be terrible for both companies. China has done this before, and I wouldn't bet against them doing it again.
Bad news here.
the Chinese are thinking about getting into electric cars/battery development on the same scale —with their state banks — as they did with computers in the 90’s and solar in the 00’s.
If the Chinese do so, the demand for oil will collapse in under 10 years and so will the price of oil. The consequence of low oil prices will be the shut down of high cost US oil production and oil production around the world until supply and demand balance at lower levels. Its going to be a wild ride but the competitive race between ever cheaper & higher mpg internal combustion engine cars and ever cheaper electric cars & batteries and cheaper natural gas trains trucks and buses will continually put downward pressure on the price oil over the next decades.
This will be good for industrial economies but bad for gas station economies and the governments that depend on oil to pay for their bureaucrats. In the USA, this will be bad for the mid continent and good for the coasts.
Because the electricity for these cars will magically appear at your wall socket?
Because the electricity for these cars will magically appear at your wall socket?
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will demand for electricity explode if you have 1-50 million cars needing to plugin to recharge?
You bet.
Will US electricity production rise faster?
You bet.
>> Will US electricity production rise faster? You bet.
...and what will we burn to make all that electricity? Yak dung? (...or maybe oil and NG?)
...and what about our fragile grid? You didn’t mention that.
Production from what? Coal? Nuclear? Nope; can't be built anymore. Solar? Wind? Don't make me laugh. Gas and oil, only, can meet any such posited demand. How then can demand for oil collapse as you asserted?
I'm not too worried, anyway. No one's going to be driving electric cars in vast numbers. The three-headed beast of winter cold, electric rates and the environmental costs of the batteries will see to that. The green fetish will lose it's fashionable luster as the gods of the copybook headings assert themselves.
...and what about our fragile grid? You didn’t mention that.
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Ok you win. It will not all be easy,.
Doesn’t really matter. Nobody wants electric cars anyway.
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Right now a Tesla is too expensive for the middle class but if prices come down, demand will go up.
I’ve already seen the Tesla S class cars at classic car shows.
China is also investing in Thorium Nuclear energy which would effectively end windmills and solar cells for the time being like gasoline cars ended steam powered cars...
[ Will US electricity production rise faster?
Production from what? Coal? Nuclear? Nope; can’t be built anymore. Solar? Wind? Don’t make me laugh. Gas and oil, only, can meet any such posited demand. How then can demand for oil collapse as you asserted? ]
Don’t worry, China will sell us Thorium Based nuclear reactors or they will build them here and SELL us the electricity...
The same reactors the US Govt. decided not to pursue in the late 60’s....
That said, I'm not a Musk fan. You don't scale up production to achieve lower costs on a technology that is changing so rapidly. By the time you've opened the factory it is obsolete.
There is no energy arbitrage for batteries in China. The energy source for those Chinese batteries will still be petroleum, nuclear, hydro and more expensive sources. There is no price advantage to natural gas in Asia, where NG is close to oil on a BTU basis.
I think someone at Fool just had nothing to do yesterday, so they spun this little fantasy to justify their paycheck.
If the US gubmint would free-market Lithium 6 and build Thorium plants, it would check the Chinese and put the sheiks n Russians in the poor house.
won’t hold my breath...
Production from what? Coal? Nuclear? Nope; can’t be built anymore. Solar? Wind? Don’t make me laugh. Gas and oil, only, can meet any such posited demand. How then can demand for oil collapse as you asserted?
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According to the EIA (The US Energy Information Agency)In July 2014 100% of new electricity capacity came from renewables. 379 megawatts (MW) of wind, 21 MW of solar, and 5 MW of hydropower.
http://www.renewableenergyworld.com/rea/news/article/2014/08/renewable-energy-accounts-for-100-percent-of-new-us-electrical-generating-capacity-in-july
I’m not too worried, anyway. No one’s going to be driving electric cars in vast numbers. The three-headed beast of winter cold, electric rates and the environmental costs of the batteries will see to that. The green fetish will lose it’s fashionable luster as the gods of the copybook headings assert themselves.
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What keeps oil prices up is vast demand from warm places like India and China. Half of the USA is fairly warm.
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gods of the copybook headings
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yeah I like kipling too his point is not applicable here. Especially since the Tesla is also setting off a major investment push by all the other big car companies around the world.
Hydro is ok as makes economic sense. The wind and solar are frauds on the taxpayer. They make no engineering or economic sense and can only exist through massive subsidies extracted from taxpayers by threat of force. The cost of these cannot be justified long-term. As more people come to understand that these are just schemes by the likes of Steyer to bilk billions their political viability will diminish.
What keeps oil prices up is vast demand from warm places like India and China.
Again,, you said the price of oil would collapse. As 2-3 billion Indians and Chinese demand more and more energy oil prices will only go up. Also, better check an atlas. There's a lot of China that gets pretty dang cold.
yeah I like kipling too his point is not applicable here.
Kipling's 'Gods' represent reality. His point is that reality always, ALWAYS wins. You can worship at the Gaian temple all you want but she ain't gonna give you any free energy.
No one is talking about building vast numbers of electric cars.
Musk says he needs these batteries for the Model 3 which is supposed to be available in 3 years. It is a low cost electric to compete with the Leaf, except Leaf has a 70-100 mile range and the Model S has a 150-200 mile range. Apparently, surveys show that buyers will buy the 150-200 mile range vehicle.
Musk's ultimate capacity on the Model 3 is 500,000 vehicles per year, but the new battery plant won't reach the needed capacity for 10 years.
Which implies that in 3 years, Musk will be building only 100,000, 150,000, or 200,000 Model 3s per year. Then as the output of the battery plant increases, he will be able to build more batteries/more cars per year, peaking out in 10 years. Or maybe 15 years.
A 100,000-200,000 cars per years is not very many cars.
China is also investing in Thorium Nuclear energy which would effectively end windmills and solar cells for the time being like gasoline cars ended steam powered cars...
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Yeah, this is what kills me.
I wish the US government could make a priority of this. Instead the US energy dept is helping the Chinese do their development while starving US thorium companies.
The DOD of course is above looking out for US strategic interests.
One thing China can’t or won’t do is increase gas/oil hydrocarbon production significantly; as we have.
That fact trumps the others regarding niche renewables, and niche automobiles. But the media are into niches when it comes to energy. They are better publicists than engineers.
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