Struggle with nature has been an integral part of the evolution of homo sapiens. The Man has not only braved the inclement natural conditions for a million year, but also emerged victorious under most circumstances. They have crossed oceans; scaled mountain peaks; tamed raging rivers; built oases in deserts; braved extreme cold at the poles and extreme heat at the equator; and still survived and continue to evolve.
Cockroaches are an insect
group that is believed to have originated 300-350 million years ago. They have
shown extreme tolerance for a variety of climate – from arctic cold to tropical
heat, and thrived.
The common saying is that only
the human race and cockroaches may manage to survive an Armageddon due to their
adaptability and strong survival instincts.
Many young investors may
not have heard the term “peak oil”. This term was popular till the global
financial crisis in the later part of the first decade of this century. The
term was essentially used to denote that crude oil supply will soon peak out to
catastrophic consequences for the global economy; which relies heavily on
fossil fuels for their energy requirement. The term has however become
redundant in the past one decade. Most producers have cut the production of
fossil fuels in the past few years, as most economies have started to move away
from fossil fuels towards cleaner sources of energy. The factors like
demographic changes in developed countries and technological advancements may
also have contributed to lower fuel consumption.
I clearly remember
discussing this with a group of investors in mid-2008. This was the time when
top global brokerages were aggressively selling the theme of hyperinflation.
Brent crude was trading at US$130/bbl and Arjun N. Murthi, an analyst at
Goldman Sachs, had just created a sensation by forecasting the crude oil prices
to top US$200/bbl in the not so distant future. Fortunately, most of the
assumptions made by Mr. Murti did not materialize and a few months later, in
December 2008, the research team at Goldman Sachs cut their 2009 crude price
target to US$45/bbl. (Actually, oil prices peaked in July 2008 at US$148 and
fell to US$37/bbl by end of 2008).
In mid-2008 when oil
prices had crossed US$125/bbl for the first time, the Indian economy was
struggling with the mounting oil subsidies, impact of global financial crisis
and rise in bad loans at banks. The group of investors I was interacting with
was unanimous in their view that oil will be the nemesis of the Indian economy
in particular and global economy in general. “Peak Oil” was the Bogeyman
scaring them. I narrated this small bit of history of Man and Cockroaches to
the group. My point was, if we are not worried about the pile of Nuclear
weapons with hostile neighbours like Pakistan and China, why should we be
worried about “Peak Oil”. The human race which has never accepted defeat from
nature, how would it lose to dirty fuel! My view was that the world will find
an alternative much sooner than what most people might be expecting presently.
No surprises that less
than 15 years later, no one even hears the term “peak oil” any more. Non-fossil
sources are already beginning to dominate the energy landscape of many
developed economies. Many large emerging economies are targeting to become
carbon neutral in the next 25-30 years.
I considered narrating
this instance at this point in time to draw attention towards the euphoria
building in Electric Vehicle space. The prices of Lithium, carbon, rare earths
used in Lithium batteries, stock prices of EV makers/potential makers and their
ancillaries/potential ancillaries have seen sharp rise in the last one year.
I fail to understand how
transition to electric mobility will increase the sale of cars. For how many
customers, the only criteria for buying a car is the fuel cost; because this is
the only potential increment to the customer base.
Assume lower fuel cost
adds 20% to the existing customer base. A car manufacturer which sells 10000
conventional fuel cars a year, other things remaining the same, it may
potentially sell 12000 cars 10years later if we transition completely to
electric mobility. As of now it is not clear, but if we assume 20% higher
manufacturing margins for electric cars, this would mean 40% higher profit
after 10 years. ROCE may not rise as much due to incremental capex required for
the complete transition.
This sounds like a great
proposition for the OEM as well as ancillaries. But what if technology changes
in 10 years? Hydrogen cells become more viable and popular and battery cell
fuelled vehicles meet the fate of Nano. Multiple experts have already mentioned
that Lithium based batteries may not work for truckswith over 50tonne capacity.
I would consider that
transition to electric vehicle manufacturing is a survival endeavour for most
of the OEMs, rather than a more profitable diversification. It is the same as
your local Kirana store owner putting up a computer in his shop for accounting
and billing. Insofar as gains are concerned, this would be a transformative transition,
the gains of which will accrue to the entire economy, not only the auto sector.
For example, saving on fuel cost may boost spending on health and
entertainment.
Some more thoughts on the
new disruptor ‘ Green Hydrogen” tomorrow.
