Celebrate Electric Vehicles, Soberly
(Bloomberg Gadfly) -- Cue the buzzkill.
China's plan to set a deadline for automakers to halt sales of fossil-fuel-powered vehicles sent shares soaring for electric-car makers including BYD Co., backed by Warren Buffett, and BAIC Motor Corp. Let's not get ahead of ourselves.
Phasing out gas guzzlers in the world's biggest car market will certainly speed up the global push toward electric fleets. But investors should treat the phenomenon as a mega-goal, like landing a man on the moon or finding a cure for cancer.
With enough money, smart engineering and focused government support, abandoning the internal combustion engine will happen. But it might take a generation or two -- and a lot can change between now and then.
Which is partly why BYD has dramatically underperformed Hong Kong's Hang Seng Index over the last 12 months, even with the latest gain.
An early leader, BYD still sells more battery-only and hybrid electric vehicles in China than anyone else. But it lost more than half its market share to competitors in the past year alone.
And that's before China eliminates generous government subsidies. Such grants accounted for 10.8 percent of BYD's pretax profit in 2016, and Bloomberg Intelligence's Steve Man reckons the carmaker's net income could drop as much as 30 percent as subsidies are cut.
While investors might be turning to BYD as a pure-play EV investment, the company actually derives only 20 percent of car sales from electric vehicles. The rest comes from traditional-fuel cars. And all those auto sales account for only 55 percent BYD's revenue. Another 38 percent is from mobile-phone components. Just 7 percent comes from battery-related products.
Judging share momentum on the fundamentals of an electric-car company like BYD or Tesla Inc. today seems as fraught as trying to predict the trajectory of Amazon.com Inc. or Alibaba Group Holding Ltd. based on their balance sheets in the early days of e-commerce. They didn't trade on the same basis as traditional retailers like Wal-Mart Stores Inc., and the same can be said for EV manufacturers, which aren't weighed alongside Hyundai Motor Co. or Toyota Motor Corp.
The lesson there was that e-commerce did succeed, though the winners weren't necessarily the obvious ones -- consider the big IPO failures of the day, like Webvan and eToys. In the same way, investors should note that today's EV leaders might not lead the pack tomorrow.
Consider, too, that traditional automakers now committed to electric vehicles, such as Volkswagen AG, Toyota, Nissan Motor Co. and Geely Automobile Holdings Ltd., can eventually use their big pockets, engineering experience, and massive distribution networks to accelerate right past the likes of BYD.
China's plan for a fossil-fuel deadline comes as officials weigh delaying or dialing back a mandatory cap-and-trade program for electric cars, because automakers aren't yet able to fulfill emissions goals.
The relaxed rules, which could be out as soon as this week, suggest Beijing realizes the path to the future won't be a straight line, and that China will have to adjust its ambitions for reality from time to time. Investors should do the same.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Shelly Banjo is a Bloomberg Gadfly columnist covering industrial companies and conglomerates. She previously was a reporter at Quartz and the Wall Street Journal.