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Traditional Automotive OEMs & the "Amazon Effect"

Romans Chapter 13 verses 6-7 state, "This is also why you pay taxes, for the authorities are God's servants, who give their full time to governing. Give to everyone what you owe them: if you owe taxes, pay taxes; if revenue, then revenue; if respect, then respect; if honor, then honor."


It's not always easy for me to accept circumstances where I can create my own idea of what's right and wrong. But the Bible clearly explains what I am to do. Recently, I missed paying my property taxes by one day. Ironically I read this verse soon after and despite feeling frustrated that while I always pay my taxes, and now, I would need to pay a penalty (my mind thinking I shouldn't have to), the fact is I missed the date and I owed this money to my tax assessor. Of course I paid, as I owed it, and hopefully, will not make that mistake again.


When it comes to investing, the same logic can apply where I feel that I am "owed" an investment return based on expectations. However, it doesn't always work this way, especially over the short-term. Far too often, the pressures of those that can drive market prices, impacts an investment thesis, notably, when it comes to aggressive growth opportunities.


But there's something wrong when today's innovators are being placed behind yesterday's leaders that have stalled from both a technology and an investment perspective. This is precisely what has occurred in the automotive OEM industry. When it comes to electric vehicles, EVs, there are a couple ways a leader can be defined. First, it can relate to technology and efficiency, and second, it can relate to volume and scale.


Tesla, Inc. (TSLA), regardless of anyone's opinion, is the clear EV leader today when it comes to both technology and efficiency and volume and scale. Newer innovative entrants including Lucid Motors (CCIV) and Rivian are also looking to become market makers and takers, similar to Tesla.


But something has changed over the past six months or so. All of the sudden, Ford Motors (F), General Motors (GM), Volkswagen (VWAGY), and Daimler (DDAIF) are the hot topics when it comes to EVs. Morgan Stanley has been pumping GM for some time now, pushing the narrative that they should be considered an EV play (mostly through spin-off). Most recently, GM announced a new battery plant to be built in partnership with LG. VW, Daimler, and others continue to jump in the fray with their EV promotions and mid-term trajectories for production, including specifics on new makes and models.


In this "bizzaro world", companies like GM, VW, and Daimler now have the power of the "Amazon Effect" whereby they simply need to announce a new EV event or marketing pitch (often for something that isn't going to be available for a year or two, sound familiar), and market makers and takers like Tesla and Lucid Motors' Stock Prices, SPs are impacted. In this world, claims are made regarding the likes of GM and VW, among others eventually taking the lead on EV battery technology, and that investments to the tune of tens of billions will be poured into ramping up EV production scale.


Let's be clear here, Wallstreet analysts have had this game set up a while back. And as the narrative has been pushed, momentum has intensified. This brings me to a critical point of where this is going, and it's not going to be pretty for traditional automotive OEMs. New market makers and takers are innovators. They are leading the cutting edge battery technology movement today, but this isn't the end goal. For companies like Tesla and Lucid Motors, it's about autonomous vehicles and transportation-as-a-service, TaaS. Even the likes of Fisker, Inc. (FSR) are focused on shifting how consumers subscribe rather than directly purchase or lease vehicles.


This is where it gets really interesting. While GM and VW and others claim that they can beat Tesla and Lucid Motors' battery technology, the irony is that these companies are still years away from even getting increasing makes and models produced. In essence, they have stolen the "playbook" from the SPAC universe. Promise the rosy future and watch the stock pump work. The truth is, the same risks associated with execution, start of production, SOP, and milestone targets is identical for traditional automotive OEMs. The only difference is, they can mass-produce vehicles effectively, but this mass-production will come at the expense of efficiency and technology innovation. This gap of efficiency and technology will further exacerbate the transition of EVs to autonomous vehicles for traditional automotive OEMs.


We all know that traditional automotive OEMs will inevitably produce millions of EV vehicles. It's no surprise that that the future will see a much more diversified EV world. But as is the case today, not all EVs will be created equal. This relates to battery range and efficiency technologies, as well as the cost of charging. I wouldn't be surprised to see a lower cost EV have a higher cost of charging the vehicle, directly resulting from increased charging need and higher cost over time. As EVs become more ubiquitous, there will be substantial inflationary pressure for the cost of energy, regardless of infrastructure density, which will ultimately rival oil price volatility. Battery efficiency will be critical to offset this.


The other important risk for traditional automotive OEMs, is that a transition to EVs by cannibalizing ICE vehicles today will not clearly generate an increase in margins let alone Revenue growth acceleration beyond today's near-term expectations. Companies like GM and VW have 14% and 9% OCF margins driven primarily by vehicle product mix. There is no guarantee that tomorrow's EV world will lead to a substantially better financial position for traditional automotive OEMs. Assumed leading battery technology allowing for further Revenue diversification and margin improvement are premature, as lower production costs will likely equate to lower vehicle sales.


Tesla has grown from nothing to producing 500,000 vehicles a year, while generating an OCF margin at 18%. This is a company that has successfully created a new market, and taken market share away from traditional automotive OEMs. As an investor, the risk of investing in another company looking to replicate this model, in many ways is the same or even potentially less risky than the task ahead for traditional automotive OEMs. They aren't market makers or takers, but legacy/incumbents looking to flip the script, while leveraging an existing supply chain model that has lasted for decades. But the future of direct-to-consumer and subscription vehicle models will not necessarily fit into this model as time goes by.


To this point, Lucid Motors, Rivian and fringe competitors like Lordstown Motors (RIDE) and Fisker are all market makers and takers. These are entirely new brands that are directly going to potentially be taking away buyers from the traditional automotive OEMs. As they scale further, their brand and penetration get stronger. Cannibalization by traditional automotive OEMs also present a challenge with respect to numerous models and makes - just take a look at the Ford Mustang Mach-E. Any weakening of traditional automotive OEM brands from EV rotation will only help market makers and takers.


But back to the end game - this is ultimately about autonomous vehicles and the TaaS model. Tesla is by far the leader for this future opportunity, and companies like Lucid Motors and Rivian are going to be pursuing this as well, replicating the vertical EV OEM model. To this point, traditional automotive OEMs had no choice but join the rosy promise narrative and pivot to producing EVs. I don't doubt that traditional automotive OEMs will begin producing more EVs, but when it comes to the progression of EV technology to autonomous vehicles and TaaS, this is where the rosy promise of legacy businesses becomes highly questionable. The primary weakness of legacy/incumbents is that they cannot shift quick enough to move towards a business model that is going to be contrary to the current capital intensive nature of the supply from suppliers to consumers.


It is going to take much more than a legacy automotive OEM to create a software-based service model, including algorithms and artificial intelligence, or AI, using vehicles to optimally provide consumer transportation needs and services. Just looking at the shift towards used car e-commerce sales and the substantial growth for companies like Carvana, Inc. (CVNA), and Vroom, Inc. (VRM) is testament. Ford as an example, has slowly begun to consider how to compete in this arena, and continues to fall further behind. They don't have the human capital which is most important, and resources are spread too thin.


EVs are one step in the direction before TaaS. The bottom line is that traditional automotive OEMs are not today's technology leaders, including many innovations for EVs. While they will clearly end up making millions of EVs, the gap to overcome what market makers and takers have achieved, and will continue to develop, is not something that can be accomplished quickly without fail. This is especially the case for the variety of makes and models, as well as with competing human capital resources.


Wallstreet has pushed the rosy perceived outcome narrative as far as it can go for traditional automotive OEMs. The story has played out time and time again over the years regarding technology-based innovators becoming market makers and takers. This has been the case whether it was Amazon versus Wal-mart/Target/traditional retail, LinkedIn versus Facebook/Monster.com, Netflix versus Wal-Mart/Blockbuster/Amazon, Roku versus Comcast/Time Warner/Disney/Amazon/Google/Apple, and many others that will play out over the decades to come. Since the late 1990s, legacy/incumbents have been getting weaker and weaker as technological advances afford new business models to focus directly on paradigm shifts. Tesla, Lucid Motors and Rivian are the new technology innovators and market makers and takers for the automotive industry. Legacy OEMs will be a part of the shift, but will likely only witness marginal benefits, with no material improvement in unison with their rosy promises.


For investors, employees, and consumers we are at one of the most amazing and transformative times in history with respect to the automotive industry. The convergence of technology and automotive design and production, and direct-to-consumer and transportation service models is going to continue to push limits. For investors, this means big opportunities. For me, I'm going to continue to place my stake in leading innovators for this paradigm shift, as I see no clear indication that traditional automotive OEMs are poised to lead the charge. Instead, I see a stolen playbook, using brand power and old-school supply chain production scale as justification. The future is not going to fit into this legacy system structure.


I am going in big as companies like Lucid Motors, get pummeled as the onslaught of marketing keeps coming from traditional automotive OEMs. Lucid Motors is the largest holding in the portfolio at 6.7%. I recently initiated a position in Tesla which now stands at 1.7% of the portfolio. I have been increasing the stake in Lordstown Motors, now at a 3.1% weighting. And I also own Fisker with a weighting at 0.9%. All-in-all, I have put 12.4% of the portfolio's stake in the mid-term EV future through non-traditional automotive OEMs. I will likely consider increasing the position in Fisker this upcoming week, and I will initiate in Rivian once the company goes public later this year.




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