Recently, investors have been very enthusiastic about electric vehicle companies. Thanks to huge improvements in battery technology over the last decade, electric vehicles are now approaching cost parity with gas-fired internal combustion engines. When you combine this with concerns about global warming and the trend toward investing in ESG, the growth prospects for electric vehicles, which account for only 2.8% of new vehicle sales today, look really bright.
But before you invest in any of the EV companies – many of which are now going public to raise money for favorable ratings – pay attention to Warren Buffett’s 1999 warning to invest in growth industries. He issued the warning in 1
Remember cars and airlines
All-electric vehicles are a revolutionary transport innovation in the early 21st century, just as the internal combustion engine irritated investors in the early 20th century. Imagine you are an informed investor in the late 1800s and take a quick look at the first cars. No doubt many would invest in an invention that is sure to win the fortunes of early investors.
The same can be said for airlines. Obviously, the plane would revolutionize travel and change society forever. So it must have been a promising investment, right?
“The difference between making money and noticing a wonderful industry”
In 1999, Warren Buffett and partner Charlie Munger were asked about potential investment in Internet communications stocks, which jumped rapidly after the spread of the Internet in the early 1990s. Berkshire had not touched them, which means that Buffett was missing from a market that was booming at the time.
In response, Buffett said:
You know, the two most important industries in the first half of this century in the United States – probably in the world – were the automobile industry and the aviation industry. Here you have these two discoveries, as in the first decade – essentially the first decade – of the century. And if you predict in 1905 or after what the world will do, let alone this country, or what the plane will do, you may have thought that this is a great way to get rich. But very, very few people got rich as they were – riding the backs of this car industry. And they are probably even less rich, having been involved in the aviation industry during that time. I mean, millions of people fly around every day. But the number of people who have earned money by carrying it around is very limited. And capital is lost in this business, bankruptcies. It was a terrible job. This is a great industry. So you don’t necessarily want to equate an industry’s growth prospects with the growth prospects of your own net worth by participating in it.
Why didn’t we get very early investments in cars or airlines? There are a number of reasons, including the capital intensity of these companies and fierce competition.
The automotive industry has to build expensive factories to grow, and airlines have to buy or rent planes to serve customers. Both industries also have a history of combined labor. These features give everyone a high fixed cost.
If demand falls for some reason – whether from an economic slowdown or a competitor stealing customers – these costs remain, leaving airlines with half-full planes or car companies operating factories with less than full capacity. That is why so many airlines and car companies have gone bankrupt over the years.
The electromobile industry is similar
While electric vehicles are innovative and beneficial to society, some of these unfavorable business characteristics remain.
This does not mean that you should avoid the sector altogether. But if you have invested in any of these companies, you must sincerely believe that the company has an advantage over competitors through technology, brand power, financial power or management. This edge, or competitive ditch, will be needed to navigate the ups and downs of this high-cost industry and to protect your investment capital.
This is especially true as a number of electric vehicle manufacturers have just gone public to fight current leaders. Tesla (NASDAQ: TSLA) – not to mention almost every hereditary car company that is now turning to electric cars. Whether it is electric or gas, the automotive industry is likely to remain highly competitive for years to come.
If I had to bet which public EV company could have a ditch, it would be Tesla, thanks to its own capital and leading-edge battery technology, which it will update for investors on September 22nd. year, I think Tesla’s assessment is ahead of itself.
If you believe that you have really found a competitive EV company at a reasonable price, then be sure to invest. But if you do, listen to Buffett’s warning and enter the investment with your eyes open.
As Buffett himself says: Investing is simple, but not easy.