Welcome to Season 2, Episode 27 of Meet the Expert® with Elliot Kallen!
In this episode, Elliot Kallen brings on Jonathan Bauman to discuss everything you need to know about the electric car industry and sustainable investing. They cover the future of electric batteries and hydrogen in the energy world, the key drivers of the electric car industry, and whether sustainable investing can be economically smart.
Meet Our Guest
Vice President | Senior Client Portfolio Manager | CFA
Jonathan Bauman is vice president and senior client portfolio manager for American Century Investments, a premier investment manager headquartered in Kansas City, Missouri. He is a member of the Global Growth Equity discipline and is responsible for communicating investment strategy and results to the firm’s clients and consultants. Jonathan has also been providing guidance to clients about the financial markets and the firm’s investment strategies. Prior to that, Jonathan was a senior financial analyst, responsible for providing fundamental research for several of the firm’s U.S. growth equity strategies. Jonathan is a former member of the Board of Directors and a past president for the Kansas City CFA Society.
What is sustainability and where are we going with this?
Elliot Kallen: Good morning and good afternoon, everyone. We’re gonna make sure that we understand today the trend of the marketplace when it comes to environmentally social governance, the electric car industry, alternative energy, and how that works.
Not just understanding it from an investment standpoint. Something that the younger generation is so interested in because there’s no doubt about it that from the vehicle world, from the power world, we are going away from fossil fuels. So, we’re going to talk about that a little bit today.
We’re going to talk with Jonathan Bauman. Jonathan is the vice president of American Century Investments. Very exciting, Jonathan, thanks for being here.
Jonathan Bauman: Sure, thanks for having me.
Elliot Kallen: Great. Let’s ask Jonathan some questions. He’s got a CFA. He’s got all types of credentials in sustainable energy. We’re gonna get rid of those concepts on sustainable energy and see if we can grill him a little bit, so we all understand what’s going on in that business.
Let’s just define it. Let’s define what is sustainable. What does that word mean? Because I don’t think it’s sustainable. I think of crops. When I think of energy, I don’t think of that being sustainable because the wind is just so so and solar is just so so. You know, cloudy days, dry days, and so forth. What is sustainable and where are we going with this?
Jonathan Bauman: Obviously, there’s a lot of talk about sustainability and ESG in the marketplace today and you know, as we think about sustainability, it’s ultimately things that can be durable over long periods.
So, you think of fossil fuels. There’s a finite amount of fossil fuels available, right? But the wind, even though it doesn’t go all the time, it pretty much blows consistently every day. Most days. Sun doesn’t shine every single day, but we have a pretty good idea that the sun is going to continue to shine. To be able to harness those forms of energy alongside storing that energy and being able to distribute that energy.
Ultimately, we believe over time it can be more sustainable and power the economy that continues to grow. It continues to demand more and more power needs, right?
It’s that transition away from a finite resource, to something more durable. Ultimately, that sustainability can be more of a generator of economic growth moving forward.
What’s the deal with batteries?
Elliot Kallen: Right, so let’s just go right into this, and that’s talking about batteries because all this is based on batteries. I’m a little confused when we don’t have a hydrogen industry, but I’d love for you to touch on that.
Let’s talk about what we do have which is batteries, cars with batteries, homes with batteries. Solar is going to batteries. The big brand out there is Tesla and everybody knows that. It’s a trending thing. People buy Tesla’s because they want to be in front of the curve and so forth and so on.
Let’s talk about the batteries and what’s going on with that because we’re still in three, four, or 500 miles per charge. What do we need to do to get to 1000? What’s going on up there?
Jonathan Bauman: Yeah, so you know, I think if you think about batteries in general they come a long way in their capabilities, right? The amount of energy that they can store and transmit officially, and also they’ve come down significantly in price.
If we just think from an autos perspective, if you look at the price of the battery pack and vehicle, we’ve seen that come down over 80% just in the last eight years in terms of the amount of cost per kilowatt-hour, if so for the amount of energy that you’re getting. That’s been a big driver in this inflection that we’ve seen in demand for electric vehicles because the cost has become more achievable, if you will, to the average investor or student.
The average consumer, to your point, Tesla was was the early leader here. They’ve always had a premium product, right? They started with the Model S which was a very expensive sedan, the Model X a very expensive SUV, and then in recent years have launched more which you can define as more mainstream sedans and SUVs, the model three and the model Y and that was driven by lower cost of batteries, more efficient batteries, and lower cost and at the same time as you’ve seen cost come down.
You’ve also seen the efficiency of the battery and therefore the miles that you can go on to charge an electric vehicle increase. Most vehicles coming out to the market today are over 300 miles range. You think back to the Nissan LEAF which was one of the early vehicles out there and sort of the middle of the market from a pricing standpoint. It was 75 miles to a charge, which for most people didn’t work very well.
I think as we’ve passed the 300-mile range or some cars now that are you know, like the Lucid Air that that’s turning 500 miles. Some of the newer larger vehicles like SUVs that are coming out but because they’re larger have more capability to have more batteries on board and are going to also target larger distances. So, I think that it’s sort of complementary.
Effective costs coming down and efficiency going up are helping scratch that itches for consumers around the price point to buy an electric vehicle. Also, the concern that they may have had around the range is now less of a concern.
That’s been the driver of this sharp increase in growth, really almost 100% year over year growth in electric vehicles in the US in 2021 versus 2020. That’s an environment where we have supply chain issues and the auto manufacturers can build as many cars as they could probably sell, and so we think that trend continues and we can expect to see very strong growth going forward.
If we want to we can dive into some of the drivers of that but in general, kind of back to your original question. No batteries have allowed us to store and transmit energy much more efficiently and at a lower cost and we’re able to do
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Who are the leading drivers in the electric car industry?
Elliot Kallen: I want to go back to the word driver. I don’t mean the person driving the car but what was driving the industry because we’re seeing unbelievable growth. Now profitability and making money is a whole other conversation.
I do want to talk about as an investor, how does one take advantage of this, or is this one of those long-term plays here? Let’s talk about what are the key drivers. Tesla seems to be leading the charge but there are a lot of key drivers in the industry.
Jonathan Bauman: Yeah, so I’d say if we think about the key drivers of the adoption of battery electric vehicles, it falls into three buckets. The first is what we’ll call the regulatory sticks or admission mandates. That’s probably needed to move ahead, and those things are increasingly driven by the government. Right. Europe, for example, has a fit for 55 Climate plan where they’re targeting a 55% reduction in emissions by 2030.
In the US, we have the CAFE standards. Sometimes that’s mandates, right. So in the case of governments putting mandates out there and targets that they want to hit. The administration, for example, is targeting 50% penetration of zero-emission vehicles by 2030 and recently signed an executive order targeting 100% zero-emission vehicles for the government by 2035.
I know Elliott, you’re based in California, they’ve got a model saying that 20% of new sales must be zero-emission by 2025, which is not that far away, and are targeting 100% by 2035. Of course, outside of the US and other parts of the world and Europe and China. There are similar types of mandates.
In that first bucket, those regulatory sticks are you know, changing the rules of the road if you will to mix metaphors there and ultimately driving consumer behavior because essentially, it’s the law.
The second bucket is what I’ll call the incentive carrots. You have sticks and you can provide people with these carrots to hopefully entice them along with. Similarly, these are driven primarily by the government. Ultimately, it’s tax incentives or subsidies, not that we have those here in the US in terms of subsidies, but they are widespread in Europe and China.
In fact, in Europe, there are certain countries and vehicles we can get up to 9000 euros and sent in a subsidy to buy an electric vehicle. In the US, we’ve done it more from a tax incentive. So most new electric vehicles in the US, there’s a $7,500 federal tax rebate essentially, that is phased out for manufacturers once they reach 200,000 vehicles.
Tesla and GM have run out of those tax incentives at this point, but there is talk and new legislation that’s being proposed that would remove that 200,000 unit cap for manufacturers, and ultimately, even potentially increase from $7,500 to $10,000 those tax and segments. It’s more to come on that in terms of what legislation they’ll play to make it through the current administration, but those incentives are a big driver as well.
The last bucket is the addressing of the consumer concerns that held many consumers back up to this point. It’s things like the range, right, we’ve talked about how ranges have increased significantly, to help reduce that range anxiety. It’s the proliferation of charging points, so you know, Tesla’s built out their network.
Many local municipalities in partnership with utility companies are building out charging stations, again, back to the Biden ministration. Their goal is to build out 500,000 charging points as part of the infrastructure bill that was recently proposed.
Then the last thing again is the falling battery prices and the fact that in reality, internal combustion vehicles have gotten pretty expensive. You’ve seen this narrowing of the gap right between an electric vehicle and a traditional internal combustion engine vehicle.
By the way, electric vehicles in general have a lot of characteristics that consumers like really good acceleration. The lower maintenance costs, you don’t have to do oil changes, and you don’t have to worry about all these internal parts that can break down in an engine. So you’re seeing all those consumer concerns being addressed as that third driver of this acceleration and adoption that we’re seeing.
Why aren’t we talking about how bad batteries are for the environment?
Elliot Kallen: Now, on the negative side of electric vehicles. I’m an environmentally conscious person, no matter what I did. I don’t think I’m over the top with it, but I’m trying to be very aware of what’s going on around me and I know that the disintegration of batteries is just awful.
They go in landfills, and they basically will last forever with horribly destructive poisonous materials, cadmium, lithium, and heavy metals that cause all types of terrible things when they get into the water supply or whatever. These are in every electric vehicle.
So, I know environmentally conscious people are buying electric cars because that’s one of the drivers but nobody’s talking about this. Why aren’t we talking about this?
Jonathan Bauman: I think part of it is that it’s not an issue today. Oftentimes we tend to focus on what’s right in front of us instead of what’s maybe a concern 10,15, 20 plus years down the road. Today you think of most electric vehicles on the road. They haven’t been around long enough for their batteries to degrade and have to be scrapped, right.
So there just isn’t that concern that people are talking about, but you bring up a very good point. It is a real risk and the manufacturers are already thinking ahead of us and addressing that. If Tesla, for example, has recycled every single-use Tesla that’s no longer useful, and use all of those materials that are in those batteries to go towards the manufacturing of new batteries.
Ford made a huge investment and a battery recycler. Other auto manufacturers are doing similar things. You’re already starting to see this battery recycling industry take off. None of these are publicly traded companies yet, but there are the materials that come out of the manufacturing process of batteries that are currently being recycled anyway.
Then, if you add these expired batteries, for lack of a better term to the recycling food chain, that’s going to continue to eliminate those larger batteries that end up in the landfills and also help reduce the cost of manufacturing future batteries right because you’re recycling those materials that you don’t want to happen.
So you know, I think there’s going to be this curve where we still have to mine a lot of materials that go into these batteries and a lot of that can be more harmful to the environment.
But once we have those and have the process of recycling and reusing those materials to manufacture fresher batteries that go in newer vehicles, that reduces the environmental risk that you could see potentially being a challenge for this industry.
What’s the future of electric cars if we don’t have access to international parts in the future?
Elliot Kallen: I want to stay on that same subject for a second and that is the metal is being used and batteries come from some areas of the world that are fairly unstable like Africa and China. We used to have a love affair with China. Then we slowly began a love-hate affair with China. And that love is getting tarnished, now.
I like them and I hate them all at the same time and it’s fair. There’s no doubt about it that China with its Silk Road policy has captured the markets on these batteries metals. So what’s the future there if we’re unable to get materials. If we ever want to go to war with China are all of our electric tanks die?
Jonathan Bauman: Yeah, that’s a great question. It kind of reminds me of the same concerns we had back in the 70s when our oil came from the Middle East. But you know also we’ve had love-hate affairs within our politically unstable relationships, right?
It’s always a challenge whether you’re talking about internal combustion engines or electric vehicles. You know, the fuel that you need isn’t necessarily in your backyard, right? I do think over time, technology wins and we’ll either figure out a way to use other materials in the production of batteries that are going to be less dependent, if you will, on those parts of the world that can be more challenging.
You know, so I think that’s part of it. We haven’t explored you know, other ways or other places. Where it can be manufactured either, right? We didn’t produce any oil in the US hardly, right? You look at the technology that enabled us to become self-sufficient in the production of fossil fuels in the US that he will become a net exporter at one point in time.
You know, I wonder if some similar capabilities and technologies can be found to address the electric vehicle space going forward as well. So I think that’s an important component. But you’re right. I mean today the global cell suppliers are largely Asian companies like Panasonic, SK innovations, and LG. And you know, they source their materials from other parts of the world. That you do have to worry about demand if you will be outstripping supply at least in the near term, but there’s a lot of investment, a lot of technological innovation going on in this space. And ultimately, you know, we think that the even battery technology was changing to where some of those materials like cobalt, for example, may or may not even be needed in future battery technology.
Should an oil investor be worried about the future of energy?
Elliot Kallen: So let’s say I’m an oil company or I’m an investor in the oil company. If we are in the Chevron, Mobile, Exxon, and Shell world, shaking in our boots, should I as an investor run? Where should they go? What’s the future here?
Jonathan Bauman: Yeah, so you know, it’s something that I think is interesting in that, you know, the answer to that question may be different 50 years from now than it is today. But, if you look at the market share of electric vehicles in the US, we ended 2021 at a little over 3%. The opposite of that is what’s called a little less than 97% of vehicles on the road, still need fuel.
Those companies aren’t going away. Clearly there’s going to be demand for their products. Ultimately, you know, they’re not going to zero anytime soon. But I do think many of those companies have recognized the importance of diversifying, if you will, their exposure to fossil fuels and investing in other forms of renewable energy.
Also, recognizing that there are potential financial risks to their business models if they don’t adapt. That comes in the form of what we call stranded assets. So the oil that they get credit for today that’s in the ground may never have to come out of the ground, or it can be in the form of potential fines and increased regulations.
Well if we continue to see a lot of the regulatory environment pushing away from fossil fuels, so companies, you know, large companies, I’d say that the US companies are a bit behind the European ones like, you know, Royal Dutch Shell or BP in terms of, you know, investing in renewables, but they’re moving in that direction. And ultimately, we’ll be addressing those concerns over the coming years and decades.
Elliot Kallen: We’re gonna get back to oil a little bit later to show here. Tesla is a leader, there’s no doubt about it. They make a great product or because Elon Musk is just a Maverick, and brilliant, and the Einstein of our time, and all the other great accolades.
Jonathan Bauman: I think it’s probably a bit of both, you know, they do make a very good product. They had the benefit of not having a legacy automobile business, which is you know, challenging to try to thread that needle of still supporting internal combustion engine operations and manufacturing and marketing and, and all that while also trying to launch electric vehicle.
They were able to start with a clean sheet and build from scratch and vertically integrate and that’s key. Right? They control everything. The research to design, the manufacturing, the hardware, the software. You know, they’re a technology company, more so than a vehicle company. And that differentiation has allowed them to create a better product. Their technology has given them a significant advantage over other manufacturers, in terms of you know, their batteries, the energy density, the power, the weight, the cost, all that, they lead the industry in which has allowed them to be successful from the battery standpoint.
In manufacturing, they’ve done a good job, right? They went through as Elon Musk call it the manufacturing hell when they were first scaling up, but they’ve kind of come through that now and have figured out a model and I’ve even replicated that elsewhere in the world to be able to mass-produce vehicles efficiently. On that too, and soon three continents.
Then lastly, I’d say the fact that they own their software has been a competitive advantage to them the ability to do over-the-air updates consistently. You know, anytime there are issues to be able to address those without you having to take your vehicle into a dealership. That’s been a huge advantage for them as well. You know, especially as you compare them to the traditional auto manufacturers that outsource a lot of that to other manufacturers and don’t control that in a product as much as Tesla does.
So to summarize, they were early which helped them build a brand and a reputation. They’ve done a really good job with the products that they launched and there have been some manufacturing issues. You’ve heard of your concerns around gaps and panels and, you know, software glitches and things. That’s all normal for newer companies, but they’ve addressed most of those and improved and so that’s made them that leader in the clubhouse right.
If you look at their market share in the US today, it’s over 75% or close to 75%, and the model wise got 39% of the battery electric vehicle market. Model three is 29%, less than about five. So you add all that up here a little over 7%. But you know, that’s a big chunk of what’s still a really small time.
While they’re the current leader, I do think their overall share of the battery electric vehicle market will decrease over time. I don’t think they can hold that 70 plus percent. But because the overall pie is going to continue to expand, we think they can continue to grow significantly into the foreseeable future.
Do companies like Ford and GM have a chance at taking on Tesla?
Elliot Kallen: My father was a staunch GM supporter, and I’m a Ford product person for as long as I can remember. I drive a Lincoln and an Aviator and, you know, it used to be a Navigator before that. I like these companies. I want Ford to succeed doing this, but I’m concerned that these companies, GM with his pension that didn’t get fixed when he filed bankruptcy, the overheads killing him. It him out of business. Am I worried for nothing? Do they have a shot at taking on Tesla?
Jonathan Bauman: I think they have a shot. In fact, the Mustang Mach B which I don’t know if you take a look at that, Elliot, seems like that might be in the wheelhouse. You know, it’s now up to 6% market share in battery electric vehicles. So, it’s number three, behind model one and model three. That’s a very short period that product just came out last year. So I do think the legacy manufacturers have an opportunity here.
One, they have a huge scale. So to your point, they’ve got big r&d budgets, they can put that to use to develop battery and platforms for brand awareness on some of the way. Brand awareness and sort of that brand loyalty, if you will, is very powerful. I think Ford especially and GM have been smart about leveraging very popular vehicles right the Mustang Mach E, the F 150.
Lightning right there, their new electric truck that’s coming out later this year. GM is bringing back the Hummer brand but doing an electric vehicle. They’ve got this brand awareness that’s powerful, that other startup companies just don’t have.
Then a third point. the marketing muscle. They have huge marketing budgets. You probably watched the Super Bowl over the weekend. There were a high number of electric vehicle ads, not a single one was a Tesla or you know Rivia nor any of these other startups they were all major manufacturers and leveraging that marketing muscle.
I think there’s there are opportunities for them to increase that overtime. Just the complexity of electric vehicles is lower, as we talked about, right, fewer moving parts. They’ll have a greater share in the economics, the more of that manufacturing that they control. And so some of the economics that Tesla’s able to glean because of that vertical integration, I think that can ultimately benefit the traditional auto manufacturers once they navigate through that transition.
Candidly, that’s going to be the hardest part. How do you shift from internal combustion engine manufacturing to electric vehicle manufacturing? How do you navigate through the challenges of, you know, a unionized workforce that now needs to be retrained and repurposed, right? Because the engine guys, what are they going to do? They’re not making engines anymore. So you have to think about all those potential issues, stranded assets, things like that.
That could be more of a challenge in the near term. But I think they’re positioned well, again, given all those things we talked about around their scale of brand awareness, their marketing muscle. I think they’re taking the right approach to essentially just build electrified versions of vehicles that people already know and love.
What’s the future of electric car start ups?
Elliot Kallen: Jonathan, let’s talk about the stories besides Tesla because the early 20th century was filled with car companies that don’t exist today. Hudson, Plymouth, DeLorean in late 1970s. Lots of cars that don’t exist are worth a lot of money. They have them today. I wish I had a handful of Packer cars in my garage. I lived for a while right by the old Packer plant in Boonton, New Jersey. So I know what that is.
Let’s talk about some of the startups the Rivian, the Lucid Motors, and so forth. I have clients that say let’s get me this. Let’s give you that. I feel like sometimes we’re in the wild west of electrical car startups just like Bitcoin and Etherium are the wild west of coins. What’s their future, if you would?
Jonathan Bauman: It’s a good question. To be fair, there are lots of brands that are were once part of Ford and GM or Chrysler that no longer exists either. A Pontiac, Mercury you know that those no longer exist.
Consumer preferences change. Brands evolve.
I think that’s going to be the same for electric vehicles as well. There’s startups that will survive and become reasonable companies and then there are many that probably will just go away or get absorbed perhaps by some of the manufacturers, just to gain credit, greater scale, and technology. But you know, there are some that we do think are positioned based on what we’ve seen so far.
All of them benefit from the same sort of dynamic that Tesla’s from, and there’s none of the baggage from legacy assets or workforce or processes. You really get to start fresh with a clean sheet and design from the bottom up these vehicles, the software, all of the materials and stuff that goes into them. This gives those companies a lot of flexibility and enables them to scale. So I think that the challenge that all of them are going to have is finding their share of voice and finding customer loyalty.
You know, Tesla didn’t build it overnight. It’s taken them quite a while and now, you know, especially in California reality. They’re ubiquitous, almost ubiquitous 10% market share Tesla now has in the state of California, which is pretty impressive.
Do I think all of these startups can get there? Of course not. But we think some are positioned well given the niche that they focused on. So, the one that we’re most excited about is really a company that we could meet with all their management tour their plant before public last November. I think they’re positioned well given their focus on what they call “venture vehicles,” but essentially its pickup trucks and sport utility vehicles that currently haven’t been addressed by the battery electric vehicle market.
Now obviously, there’s up coming models from the major manufacturers, but I think Rivian got enough of a head start and enough of a product at a price point that seems very attractive relative to what you’re seeing from some of the other options that are out there. We are excited about what they’re doing. They have, as you probably know, huge investment from Amazon. They’ve got a contract to produce 100,000 electric delivery vehicles for Amazon. They’re not just giving them the chassis. They partner with Amazon to create software and workflow management tools, really get these back to the basics that are needed for their business.
That gives them opportunities to do that for other delivery companies as well. So that provides, I think, some potential safety nets if you will, beyond just the consumer vehicles that they have. But so far everything that we’ve seen on their truck, which launched towards the end of last year, and the nurse has only really launched to their founder, but it’s coming later this year. Just very impressive in terms of capabilities in terms of the quality of the build and the materials. Actually, the jury’s still out on how quality will exist by 10 years from now, but from what we’ve seen so far, we think that likely a survivor and can benefit and scale quickly has very strong demand.
In that more niche area of the market around adventure vehicles. It’s kind of similar in terms of brand philosophy to that of a Jeep for example, right, but not going to do today, at least any sort of passenger vehicles sedans focused on that. People that like to get out and have more of an adventure-type experience or candidates that just like to look like they’re having an adventure in the mall. But at any rate, you think of the types of vehicles that are out there today. Land Rovers, BMW SUVs and your Volvo CDs, right? Those are all sort of ubiquitous, and I think plugged into that very well at the moment.
Elliot Kallen: Now, Rivian was part of Ford, and then spun off as Ford got 30 or $40 billion, give or take with a billion here a billion there because they took a public that they own part of them. Isn’t Ford also the beneficiary here?
Jonathan Bauman: They weren’t technically part of before but they were an early investor along with Amazon, along with some other investment companies, though they were all early investors and Rivian when it was private, so it was still owned that the founder RJ Scaringe. But Ford definitely had an equity stake, if you will, in Rivian. There was talk early on that they were going to partner Rivian and the technology they have the way they build their vehicles, they call it a skateboard. So you can visually think of a skateboard which is essentially the battery pack and then an electric motor on each of the four wheels. And so it was taught early on that you can basically take a Ford f150 chassis and just sort of sit it on the rivet skateboard. That might be a quicker way to get to market and obviously Ford’s decided to kind of go their own direction.
I think back to the comment that they’d rather control and have more vertical integration where they can. But as a result of that, though, you’re right Ford was an investor. They benefited from the IPO, a massive one time game, and their q4 results and again, helped Rivian get to where they are today because these companies do not become viable without big investors up front because it’s huge, huge as you can imagine, cost to build a brand new company from scratch.
That’s very capital intensive. You got to build a manufacturing plant. You got to source all the materials and you got to build the whole network of salespeople and service people and everything else. Amazon, for others, really provided that initial chunk of assets. And then when they went public in November of last year the capital markets helped provide another big chunk that really allowed them to spend and keep building manufacturing plants over the coming years, even though they have no revenues at this point.
Is there a future of hydrogen in the energy world?
Elliot Kallen: I want to ask you one more question about vehicles if I could, Jonathan, because this has been great information for a lot of people and I know for some people it’s dry. It’s like sitting in a college classroom and like, “Oh my goodness, this professor is this the same guy that wrote the book. I’m dying over here.”
So it’s hard to put humor in here, but I do want to talk for a moment about the hydrogen car because I was an early proponent of a hydrogen car, and I tried to invest in that world. I thought, this summer we’re going to come up with a safe hydrogen car that’s not going to explode with from the compression of hydrogen. Then, when I was jazzed up, I found out there was a hydrogen pickup truck from Europe is a hydrogen pickup truck being tested. I think it’s coming out of Poland.
It turned into water vapor, and they had a little water cooler inside the pickup truck that was filling up your bottle with purified water. It’s an amazing concept on that. But I don’t see how I’ve gone from excited about it to disillusioned that it may never happen. Is there a hydrogen future anywhere in this country now? In the energy world?
Jonathan Bauman: I think there’s a future for hydrogen but I think it’s going to be in heavier vehicles than passenger vehicles, and what I mean by that is your tractor-trailers transporting goods. The reason for that is really just the space that you need in order to store enough hydrogen to deliver the energy to get you where you need to go.
It’s really hard to get that into a vehicle because you know, hydrogen really is not as efficient at sort of that production of energy, as we’re getting currently from batteries, right. So the challenge with batteries with a tractor-trailer is you need so much of them and they take up a ton of space. Ultimately, you know, it’s just not very efficient. But you know, if you can do it in hydrogen, you do see with tractor-trailers the ability to have more compression, more storage, and ultimately deliver the power that you need.
We think that likely is where hydrogen will go. It’s early. The challenge you have with hydrogen is to produce it today takes a lot of electricity, right. So in order to produce hydrogen, whether you’re in air products or airlift, either one of the major manufacturers there, it takes what they call electrolysis. Ultimately, you lose a lot of energy in the process of doing that.
So again, this is kind of in the weeds, if I want to get too far in the weeds.
Ultimately, our view is hydrogen for vehicles is going to be more challenging given the properties of hydrogen. The ability to convert hydrogen into electricity is more of a challenge. We do think that the infrastructure may get there for heavier vehicles to make it more interesting going forward. Especially for where batteries maybe don’t work as well for heavy vehicles but are better or more attractive in passenger vehicles.
Why aren’t we replacing diesel engines with propane engines?
Elliot Kallen: Speaking of heavy vehicles for a moment, we all know that America wins our trucks. There’s a move to go self-driving trucks given what just happened in Canada. And how many people are employed in the trucking industry? I think that’s a big political football on trying to get rid of 3 million drivers in this country and replace them with computers. I don’t see that happening tomorrow but we’ll see.
I don’t understand why we know everybody has been behind trucks that spew out black smoke from the diesel. They’re not just burning but most of the diesel that you receive is unburned diesel. It’s even worse for diesel. It’s just going into the air un-captured.
I don’t understand, maybe you could tell me, why there’s support if we want to go clean again or want an environmentally conscious world that we want to be clean. Why aren’t we replacing every diesel engine in America with propane, propane engines, and propane tanks when we have an almost unlimited supply to put our hands around this liquid gas propane gas?
Jonathan Bauman: Yeah, I think it’s just the sheer infrastructure challenges. If you drive across the middle of the country, like Kansas today, there’s pretty much a massive truck stop every other exit. They’ve got diesel and the infrastructure to refuel vehicles.
I think you’ve seen companies that control their fleets and you know, like UPS, for example. They have increased to more natural gas-powered vehicles and compressed natural gas vehicles. I think the technology is there when you have your refueling plan and you kind of go back to the same place every day. The infrastructure is not there.
If you’re a truck driver and you’ve got to pull off the road to refuel once in a while. Well, it just hasn’t been as big of a focus as maybe it should be to get the technology there. But that’s to me today. The biggest limiting factor is just that infrastructure to get the propane or natural gas refueling, if you will, infrastructure in the same places where we currently have diesel.
What’s sustainable investing as does it make economic sense?
Elliot Kallen: Okay, so it’s the infrastructure problem. Let’s leave the electric car industry for a moment and come back to it if we could. Instead, let’s talk about a little broader like the sustainable market, sustainable investing, and investing in sustainable companies. You’re in that world every day, and you’re investing in the portfolio’s that you manage. It’s sustainable because that’s what your title is, sustainable.
We have your products in many of our portfolios on sustainable investing. Of course being in California, we get asked that question. In the last few years we’ve been increasing the amount of exposure to sustainable environmental investing only if it makes sense, not just for the sake of doing it. So let’s talk about what that means in a broader sense, not just about the electric cars but about sustainable investing, and whether that is that makes economic sense or not.
Jonathan Bauman: Yeah, I think it depends on how you do it. What we’ve seen in the last five or 10 years now and the last market is this transition away from how most people thought about ESG or sustainable investing. In the past, it was typically I don’t want to own whatever right now, whether it’s I don’t want to own energy, or I don’t want to own certain stocks. It was more about excluding companies entirely. We’ve now seen this transition more to a viewpoint to integrate environmental, social, and governance risk factors into our traditional analysis.
There are financial things that are important to the value of a company, but there are these other intangible things that relate to their impact on the environment and how they treat their employees, how they protect their customer data, and how their board is structured.
There’s good oversight in that all those things are potential risks and opportunities that all companies face. The question is: Is there a way to identify which companies are managing those risks better than other companies that you can invest in and integrate that into your analysis?
As we think about it with our sustainable equity portfolio, it’s less about trying to exclude entire sectors or industries but more about which companies can outperform others over time. Will that be because they’re managing these risks better, or because they’re taking advantage of opportunities that relate to impact on the environment, social issues and governance issues?
So, it’s about that more integrated approach. We can take it a step further and we sort of intentionally overweight what we call ESG leaders and underweight ESG laggards. We believe over time that allows you to outperform a broad market more consistently, because you’re mad that you’re managing risk. It’s really about risk management.
You get benefits from it as well, right? For those investors that want to own companies that do have less impact on the planet, we can say our portfolio holdings produce fewer greenhouse gas emissions, they use less energy, they use less water, and we can illustrate that to investors. Yes, the companies they invest in are doing better than if they just own the s&p 500 more broadly. But more importantly, we do it because you get those benefits in addition to better relative performance over time. That’s different than if you just exclude certain parts of the economy because, in our view, there are times where certain parts of the economy can work well.
By excluding those it makes your performance less consistent, right? Last year is a great example? Energy was up almost 100%. So you had a lot of strategies that exclude energy struggle to deliver good performance last year. If you can say ConocoPhillips energy, who has a net-zero target, has been reducing their carbon footprint, and divesting high carbon-intensive things like Canadian sands, can outperform that company, then let’s avoid these others that aren’t making the same investments.
We’re still going to have some energy exposure but it’s we think the cleanest shirt in the dirty laundry, if you will. Over time, those companies are outperforming.
Elliot Kallen: As you know, as we are on the frontlines here, I have to tell you. Something our clients say is “how am I doing?,” which is the first question after “how are you?” I have to say, well, you’re down because it’s been a funky market this year, or you’re up to because it wasn’t a funky market or wherever right spot very hard to make money right now. It’s such a choppy market. Nobody says, well, that’s okay. As long as we have a zero corporate footprint. I don’t get that as a follow-up.
Jonathan Bauman: Yeah, no, and I think you’re right. First and foremost, we’re all capitalists, right? We invest to, you know, save for retirement or say for our kid’s college like that’s why we invest and so we want to do that but if you can do that in a way that delivers potentially more consistent performance and have less impact, that’s sort of what we’re striving to do.
Is it possible to still make a profit while investing sustainably?
Elliot Kallen: I know when we talk about the Oracle of Omaha here, he’s the number one owner of railroads in the world I think at this point. The railroads don’t run on batteries. They run on coal and diesel and he certainly does not have a zero carbon footprint.
He’s had his biggest carbon footprint, probably like the state you live in, Kansas, or Missouri over there. Nobody’s challenging that thing. Oh yea, he’s only up to X number of percent in the last 40 years. What does he know because he’s polluting the world. That’s just not how people think. Right? We all want cleaner air, water, and an environment better for our children. We had it yesterday, but we all want to make money at the same time.
Jonathan Bauman: Yeah, I think the good thing is now, just to kind of take a little quick segway here, is because of the increased focus by investors on ESG issues, if companies are paying attention then they’re aligning CEO compensation goals to their environmental footprint. They’re really incentivized.
It’s important to reduce that environmental impact where they can so you do get that long-term benefit. It still doesn’t completely eliminate greenhouse gas emissions, but to the extent that companies are incentivized to pay attention to these things more so than they would have 10, 15 years ago is increased because investors are demanding. I think that’s important.
What do we tell clients when their green investments are tied to politics?
Elliot Kallen: Just to throw politics in here, if I could because there’s all these decisions about sustainability that are also based on political decisions and not just economic decisions. So, it’s very interesting. Just a few years ago, we declared ourselves energy independent, and we no longer need Mideast oil. But you know, politics is an ebb and flow world that we live in. Then, you got who’s in office and who’s not.
I’m not criticizing either party or either side right now. But the party in power today has said I’d rather not see energy produced in the US because it’s not clean to produce energy. Even though we are the cleanest producers in the world of it. It’s better out of sight, put it offshore, put it where it belongs, which is in the Middle East, the biggest polluters for producing energy in the world. But, because we don’t see it, it must be okay.
Then the complaint about well, I don’t want to see, you know, 10 square miles of solar batteries in front of me. Obviously, that’s gonna mean that solar mirrors in front of me because it’s an eyesore, so let’s put it somewhere where you can’t see it anymore. There’s the politics of that too. Then the politics of we’re not putting any money into the power grid in the US, because nobody cares. That’s the politics of it. Not that we shouldn’t do it, but that’s the politics of it.
Then, there’s also the politics of the people that say. I love these ESG companies. I’m gonna pick on Apple for a moment. You and I’ve talked about Apple. In some portfolios that are ESG friendly, Apple is the number one holding. I know it’s not number one with you. But Apple produces every product in China, or parts of every product are made in China. China is horrible. As an ESG friendly manufacturer, they have a horrible track record. They’re producing coal plants at record levels more than almost any other part of the world combined.
They remind me of what happened in Japan in the 1920s and 30s when we were selling them all our scrap metal and they were producing bombs and airplanes to be used against us in the future. So I worry about my children’s future. When you know big, big corporate America is in love with Chinese money right now. So, here’s throwing politics in there. I know you’re not a political prognosticator, and I’m not asking you to take a stand.
There are a lot of things that don’t align with the core values of environmentally sensitive investing. They align with political values.
So what do we tell our clients that say, “I want to be clean and I want to be green. I want to be this, but I want to make money so give me more of this.” What do we tell them?
Jonathan Bauman: Yeah, it’s tough. Honestly, I think it’s really hard to be 100% clean, if that term is even a thing. For a VA large cap, multinational corporation, it’s virtually impossible. That’s why we have to take a relative perspective and say which companies are at least doing better than their peers in which companies are doing worse. Let’s be overweight to those that we think are doing better and underweight those that we think are doing worse.
Recognizing that, you’re right that politics play a huge part of it. They change incentives, they change consumer behavior, and they change corporate behavior. We have to be mindful of those things when we evaluate companies and where are the political ones going. So whether that’s large cap technology companies and concerns over data privacy, them being too big and having too much power, or whether that’s your Apple conversation where things are manufactured. Those are all things we have to think about. I think at the end of the day, it’s really a function of figuring out what do we think the future enterprise value of a company is going to be? How much are we willing to pay for that? What potential roadblocks get in the way of that?
Some of those can be financial. But increasingly, if you look at companies today, the majority of what’s driving their value is not physical things. It’s not their property plant equipment. It’s their brand reputations, their patents. It’s their human capital, all these things that are really harder to put dollars and cents around but have an important component of that company. That’s where we’re spending increasingly more of our time. But it’s a big blunder. You have to throw it in there.
There are some things that are good and some things that are bad, right, you sort of hide the vegetables in the the blender there, so the kids still eat whatever it is you’re making. It’s the same sort of thing, right? There’s companies that have really good aspects of what they do. And then they have some things that aren’t so good and you have to weigh all that together and figure out when you compare them to their peers, are they at least taking steps to get better at the things that are good and reduce the things that are bad. That’s really where we spend a lot of our time.
What’s the maintenance on electric vehicles?
Elliot Kallen: I do have one more question for you as we begin to wrap this up. Maybe you can’t answer this, but its about maintenance. I buy my Tesla. I buy my Rivian. I buy my car or lease it. It doesn’t matter. I have to maintain it. Traditionally, I know from having internal combustion engines for my lifetime, I’ve got to get the oil changed. I have to get the tires rotated. There’s Jiffy Lube, let’s grease that’s oil.
It’s all these ancillary things and then once every 100,000 miles we change the spark plugs. That used to be every 20, now it’s 100,000 miles. They’re not even called spark plugs anymore, these complex plugs or whatever we call them. The ears of the air filter that needs changing every now and then and these brake fluids. What has to be done on these electric vehicles?
Jonathan Bauman: Not much, and I think that’s one of the benefits. You obviously don’t have any of the maintenance that comes with the traditional engine, transmission, cooling system, all those sorts of basically everything that’s under the hood of your internal combustion engine today. That all goes away and none of that needs to be maintained anymore.
You don’t need everything that sort of sits on the pallet barrier, air conditioning, compressor, all that sort of stuff is not connected to the engine anymore so you don’t have those.
Traditional things like tires, those are still going to wear out. In fact, one of the hidden things that people maybe don’t realize with electric vehicles is they are typically heavier than their internal combustion counterparts. Batteries are heavy. I don’t how you drive, but maybe a little more wear and tear on your tires than an electric vehicle might have on an internal combustion engine.
Brakes, interestingly enough, and this is maybe contrary to what you might think, brakes actually last long on most electric vehicles. They all, for the most part, use something called regenerative braking. So when you let off the accelerator of an electric vehicle, it automatically uses the engine braking to regenerate electricity and charge your battery. Most of the newer vehicles allow you to dial in and choose how much of that you want.
So it’s kind of weird for you because whenever you let off the accelerator, you’re sort of lurching forward as the vehicles braking for you. You can dial that back, but you can also dial it up. I press the accelerator pedal, but as soon as I let off, most vehicles will almost come to a complete stop automatically using that regenerative braking.
So, your brakes don’t wear out as quickly on an electric vehicle as they do on internal combustion engineering. I haven’t seen studies comparing the total cost of ownership, year to year candidly. A lot of electrical cars have been around long enough to see but the maintenance overall is lower.
Also, because the software tends to drive a lot of these electric vehicles, technical issues can be done over the air with a software update. That’s much more convenient than to take your vehicle to your nearest to get updates in the internal memory.
How does an electric car accelerate so quickly?
Elliot Kallen: That’s great. Just from a technical side my last question maybe people don’t understand that. It typically I’ve got an engine I’ve got a transmission I’ve got a powertrain and it’s the energy is shifting from the up and down piston or for the piston going and then ship to a transmission which goes to the powertrain and as the warm-up and go from zero to 10 to 20 to 30. How is it that electric engines can go from zero to 100? Or zero to 60 in two or three seconds, but it takes me on my Aviator 10 seconds.
Jonathan Bauman: It’s just the efficiency with which the power is delivered, and increasingly, it’s the torque. Not to get too nerdy, but there’s two metrics people talk about with traditional internal combustion. The first uses your horsepower, which everybody kind of says, “Oh, more horsepower is great.” And then there’s your torque. Torque is sort of, you know, how much or how quickly that power can get applied.
So if you think of a super duty vehicle like your Ford F 250. Their big diesel engine having about 1000 pound feet of torque is like super acceleration. That’s a heavy vehicle. Batteries have very high torque so they can apply that acceleration very quickly, but they don’t have all the inefficiencies of those moving parts.
You’ve got the engine pumping up and down. I think as you mentioned, to the powertrain to the transmission to the wheel hub, and all those are parts that are integrated. You sort of lose efficiency along the way.
On most electric vehicles, engines are connected directly to the wheel. It’s instantaneous torque and instantaneous acceleration, very different. And again, back to what I said earlier. That’s what’s appealing to a lot of people on electric vehicles because it does drive differently. In a good way.
We look forward to hearing from you.
Let’s set up a Zoom meeting to review what you have and the opportunities we see available for you.
All my best,
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