The 4 Horsemen of the Auto & Oil Industry Apocalypse

This was originally posted on October 1st 2020. Since today is Friday the 13th of October, it seems fitting to republish it. Enjoy.

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It's October, it seems appropriate to start the month off with an epic horror story.

 

The automotive and oil industries are, collectively, the largest industry on the planet. We fight wars for oil resources, their lobbyists hold sway over every aspect of our government. The value of assets under their control is worth trillions of dollars... 

Regardless of their massive size, things are about to change. There are four megatrends that will ride roughshod over this behemoth. During times of inflection, giants can fall: Kodak famously missed the digital revolution; Blockbuster missed the transition to streaming. During this transportation transition, which brands or companies that we know today, that seem indelible, will fall to Death's scythe and fade into the annals of history?

We still take photos, just not with Kodak cameras. We still watch movies, just not from Blockbuster. Soon, we might be saying; we still drive cars, just not powered with petrol. 

The 4 Horsemen that are upending the 100-year-old status quo are: 

1. Electrification of Transportation 
2. Declining Ownership & Mobility as a Service 
3. Self-driving Cars
4. Pace of Innovation 

These 4 will shake up the auto and oil industry more in the next decade than we've seen since Henry Ford reinvented the vehicle production line. New players will emerge, some old players will adapt, others will die as we start a new chapter in human history. As a species, we're now evolving beyond petro-sapien and the world will be reshaped. 

Let's look at each of the Doomriders.

Horseman #1 Electrification of Transportation

Our first and biggest harbinger of doom is Electric Vehicles (EVs).

California Governor, Gavin Newsom, issued an executive order on September 23rd, 2020 that requires all new cars and passenger trucks sold in the state by 2035 to be zero-emission. California is one of the largest car markets in the US and if the other gang of 13+ CARB states follow, this will seriously curtail gas car sales. A lot can change in 15 years, but the direction is clear. 

The legacy automakers are heavily invested in their internal combustion infrastructures. The factories and supply chains they've established are not simple to change from combustion vehicles to electrically powered ones. Converting them will be expensive and auto companies are not flush with cash. The assets and know-how that once enabled them to be profitable are now (or are soon to be) stranded assets and liabilities. Legacy automakers have been reducing their dividend payments as their stock prices decline and their debts grow. Declining combustion vehicle sales will reverse the economies of scale that these vehicles enjoy today; further pushing the downward spiral of the auto-pocalypse.

While the legacy automakers are tied to an anchor pulling them down, Wallstreet seems to be tripping over themselves to fund electric car start-ups. Tesla has had round after round of capital raises, most recently a $5B capital raise in 2020, and $2.7B before that in 2019. The market has rewarded Tesla with a higher stock price each time they raise money, viewing these as 'growth accelerators'. This applies to other EV upstarts as well; investors seem far more interested in small start-up companies in the growing EV market rather than large companies in the declining ICE market.

Tesla recently shared the below graph at their Battery Day event. 

This graph is for the 1st half of 2020 and you could argue that 2020 had been anomalous in many ways and not a valid sample for future predictions. However, times of crisis accelerate transitions so perhaps this is a better view of the future. Bloomberg estimated that at least 50% of global car sales in 2040 will be electric. If the trend in the above graph continues, many of the legacy automakers will not survive. 

Several trends are driving EV adoption: 

• Battery technology has been continuing to improve by 5%-7% per year. This means that each EV generation is slightly more capable than the previous. Range, towing, recharging time... are all related to the battery, and all are improving each year and projected to continue to improve into the foreseeable future. 
• Battery cost has similarly continued to decline (see graph below). This allows capable EVs to move into lower price-points. A recent Forbes article said that Tesla's upcoming $25,000 EV would be "game over for gas and oil". Additionally, this price reduction allows larger packs, with more range and more performance, to be used in high-end EVs. There are now multiple EVs with more than 500 miles of range announced for 2021. Five hundred miles! 
• EVs are popular with buyers because they are smooth quiet rides that require less maintenance and are far more affordable to fuel. JD Power reports that EV buyers have very high satisfaction rates and most never want to own another gas-powered car after owning an EV.
• Government incentives. Many municipalities are encouraging EV adoption to meet CO2 reduction targets. The incentives use a range of carrots and sticks. These could be tax incentives, sales tax waivers, parking privileges, carpool (HOV) lane access even with a single occupant, increased gasoline taxes (making EVs a better alternative)... 

All of these trends are pushing more of the market into electrified transportation, whether the legacy automakers are ready for it or not. The impact of this transition will not only be felt by the auto industry but also by gas and oil.

According to TradeArabia, EVs are expected to offset oil demand by 1.2 million barrels per day by 2025. ExxonMobile, once a stalwart of the Dow Jones Index, was recently removed from the index after serving 92 years as a member of the elite company list. The transition to electric 'fuel' is in its infancy, and the impacts are already causing giants to stumble.

Horseman #2 Declining Ownership

“The things you own end up owning you.” ― Chuck Palahniuk, Fight Club

Next on our list of creative destruction is a generational change in how cars are viewed. If you were born in the US before 1990, when you turned 16, you wanted a car. A car meant freedom. Freedom to go see your friends, to go on adventures, to go on dates and (if it went well) to steam up the backseat windows looking for paradise by the dashboard light.

Teens today live in a different world. Much of their social life is online. They don't need a car in order to hang out with their friends. Cars are no longer viewed as the iconic symbol of freedom. A car is just a method to get from A to B (if travel can't be avoided).

The mentality of a car as merely a tool opens up many opportunities for change. If you live in an area with a dense enough population, rideshare or scooters are options for most trips. If you want dinner, meal delivery is only a few taps away on a smartphone; similarly, grocery delivery is just another app. On the rare occasion that you need a car for something like a weekend getaway, you rent one (Getaround, Turo...). Collectively, these are called mobility as a service (MaaS). 

As the Fight Club quote goes, “The things you own end up owning you,” and this is especially true with cars. Owning a car is demanding both financially and timewise. Using MaaS means that you don't have to buy a car, pay for gas, buy car insurance, pay for maintenance, fluids, tires, parking... If all of your mobility needs can be met without owning a car, this is appealing to many.

MaaS is easiest in an urban or suburban environment and the percentage of the population in these sections of the country has been steadily increasing for decades. This means that MaaS adoption trends will likely continue to increase too. 

Another trend that is enabling the decline in car ownership is working from home. The pandemic has caused many employers to rethink their office policies. If you are not commuting daily, the need to own a car is also reduced. 

Horseman #3 Self Driving Cars

Our third disruptive horseman (or should that be horseless carriage man) is autonomous cars. This technology is not yet here in any significant manner, but it. is. coming.  And when it does arrive, many fleet managers and vehicle shoppers will not consider buying a car without it. 

This technology puts automakers in competition with big tech companies like Google (Waymo), Amazon (Zoox), and Tesla; as well as a swath of start-ups. This is not a fight that legacy automakers are equipped to win. They will have to find technology partners and hope the partnership is fruitful. Again this is a gauntlet that some legacy automakers may not survive.

This threat is enabled by the first two horsemen. When vehicles are fueled by electricity, they are cheaper to operate. When the driver can be removed, they can run 24/7 further amortizing the cost thereby making them yet again cheaper to operate. The first company to make a seven-nines reliable autonomous driver AI system will be in high demand.

Horseman #4 Fast-Paced Innovation

Our ultimate horseman sits atop the fastest thoroughbred of this apocalyptic harras, Innovation.

Transportation is likely to change more in the next 10 years than it has in the last 100 years. These extraordinary technological advances are causing an epic shift to multiple trillion-dollar industries. Before the emergence of this wave of EVs, starting with the Volt and the Leaf in 2010, the industry had stagnated. California tried to use mandates to force automakers to bring EVs to high-volume production in the 1990s, but the automakers sued the state and the mandates were overturned (See Who Killed The Electric Car?). Fighting innovation with legislation can (at best) delay it, but it's not a winning long-term strategy.

Cars of the future will be connected, voice-activated, frequently updated, self-driving, have real-time traffic, streaming content, productivity apps, entertainment, and things that are yet to be invented. The software-driven high-technology in-car experience will mean that new software will be needed on a regular interval. The days of releasing a model year and then only touching it again if there's a recall are soon to be over. 

Can automakers attract the talent needed to provide all of this in-car software or will they cede this part of the market to the likes of Car Play and Android Auto?

Expecting a group of laggards and Luddites to change gears and become technology leaders is a big ask. The cultures ingrained in many of these companies will not allow this to happen. Hybrids have been the only significant drive-train breakthrough in decades and even that technology has never crossed the chasm to become mainstream. An industry that is used to a new transmission or valve timing method every 10 years or so, is not prepared to deliver "computers on wheels" that act more like smartphones than cars. 

Conclusion

The giants of the past are getting hit with a perfect storm of change. The role that cars play in our lives is changing, the expectations of personal transportation are changing, the fuel source is changing, the ownership model is changing. Perhaps these giants of the past could have navigated any one of these changes, but the near-simultaneous confluence of all 4 Horsemen will mean that they must adapt quickly or die. Some will acquire or partner with innovative start-ups in hopes of catching up. The culture clash will be enormous and this is unlikely to make it a fruitful alliance. We'll see which companies can reinvent themselves and which will fade into history along with the buggy-whip manufacturers that they once displaced. 

It is not too often that a change this big comes along. We certainly live in interesting times. 

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Creative destruction (German: schöpferische Zerstörung) is a concept in economics that describes the "process of industrial mutation that continuously revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one".

Disclosure: I'm long Tesla