Tuesday, February 26, 2019

Thin Line Capital newsletter, October 2018 edition

My firm, Thin Line Capital, puts out a newsletter to its subscriber base, which I realize is doing double work given I also have this blog channel.  However, until I sort that out, I thought I would start posting those newsletters up here for the broader community to read.


The Thin Line                                October 19, 2018
The Newsletter of Thin Line Capital                                   Aaron Fyke, Managing Director


Electric Vehicles

This addition of the Thin Line is going to talk about electric vehicle adoption.  Although I’ve witnessed the inevitable adoption of EVs both back in the 1990s, and again in the 2000s, it really seems like we are at the start of a wave of adoption that is here to stay.  Following the Thin Line thesis, we aren’t looking to invest in the companies that are making this happen (Tesla, GM), but we are looking for companies that will do well because of this wave.  Some opportunities have already been identified.

History

In the 1990s, Los Angeles pushed forward a policy for 2% zero emission vehicles in 2002 and 10% by 2010.  This led to a flurry of activity with fuel cells and battery electric vehicles.  I was heavily involved with two of the companies, Ballard and AeroVironment during this time.  However, high costs and low range (as well as internal politics within GM, scuttling the EV) caused electric vehicle anticipation to be premature.

However, critical to laying the foundation of EVs, was the launch of the Honda Insight and the Toyota Prius as hybrid electric vehicles, solving both the range issue, and allowing development into electric vehicle drivetrains to move forward.  Then, in early 2000s, with the explosion of laptop and mobile phones, Tesla was able to ride this wave of battery development to launch the Roadster (2006), the Model S (2009), the Model X (2013), and the Model 3 (2016).  Tesla’s success at high-end vehicles (which could bear a price point and volume which aligned with Tesla’s actual production capacity) encouraged GM to re-enter the market (first with the Volt, then the Bolt), and other companies followed.

Today’s Opportunity

Today we are witnessing the beginning of a sea-change in the transportation sector.  Around 4M passenger cars a year are produced in the US, and around 73M worldwide (up from 53M in 2007).  This is an example of a tremendous opportunity, which will reshape the automotive, oil and gas, and electric industries with this transition.  While the automotive industry is growing at 2%/yr, the EV industry is growing at 63%/yr.  A qualitative demonstration of the future is shown in the above chart[1].  In the next five years EVs will be materially cheaper then ICE vehicles, and at that point we enter the steep part of the S-curve.

Where is this Happening?

It’s easy to assume that all of the EVs in the US are being driven down Rodeo Drive or Sand Hill Road.  However, EV penetration, especially with lower-priced vehicles such as the Chevy Bolt (MSRP: $36,620) and the Nissan Leaf (MSRP: $29,900), has reached well into the middle class.  Beyond the US is the great opportunity that is China.

In 2016 the number of electric cars in China surpassed that of the US, and now in 2018 it is over double[2].  While opportunities in the Chinese EV market may be beyond the specific interest of Thin Line, the overall benefits to the ecosystem are not.  As the total number of vehicles manufactured (by all OEMs) increases, costs drop for everyone, due to greater efficiencies all throughout the supply chain.  As costs drop, adoption increases, and we move further along the adoption curve described above.

What Opportunities Are Revealed?

Thin Line Capital’s investment thesis is to pursue low-capex companies that take advantage of building themselves on top of existing megatrends.  There are two opportunities that Thin Line Capital is investigating now that follow this thesis.

The first company is an team out of Stanford, who had prior careers with O-Power and with Tesla.  They realize that there is a tremendous opportunity to help utility companies manage the grid by taking advantage of, and solving the problems caused by, the increased deployment of EVs.  A typical house uses around 2kW peak load, and most distribution grids are sized for this peak.  However, a Tesla charger, for example, draws 19kW peak and if several people come home and start charging their cars at the exact same moment, then there is real risk of the distribution grid failing and the local transformer burning out.  Even worse, utilities are very concerned about the liability of wildfires caused by these transformer burnouts, and yet they very much want to support EV adoption (which they see as a path for revenue growth). 
This company has an elegant, low-capex, software solution which can be deployed immediately to schedule remotely the charging of various EVs.  Each car owner wakes up the next day with a full battery, but the distribution grid did not have to suffer the effects of high peak demand.

The second company of interest has also developed a software solution.  However, this is an embedded control system to allow for what is called “inverter soft switching”.  Inverters (used in every EV, solar installation, or energy storage application) use lossy “hard-switching” to convert DC to AC electricity (and back again).  Soft-switching, with only 10% of the losses of hardswitching, was discovered in the 1990s, yet the ability to control the system wasn’t available.  Advances in computing power and control algorithms have allowed this company to bring this technology to market, and they are in discussions now with a large OEM to integrate their solution into the OEM’s electric vehicle product, increasing range by 12%.




[1] Data from PodPoint - https://www.slideshare.net/PodPoint/5-barriers-to-electric-vehicle-adoption/13
[2] International Energy Agency - https://www.iea.org/gevo2018/

No comments: