EV’s Running Out of Customers? We’ve Seen This Movie Before!
The title this week was prompted by a headline on Business Insider ”EVs are running out of customers — and some dealers don’t want them anymore”. Not long ago, this headline seemed unfathomable. The move toward green tech seemed unstoppable, and EV demand seemed insatiable, but that was 2022.
Here is the critical paragraph from Business Insider: “Plug-in-vehicle availability is increasing rapidly, a sign the EV-adoption growth curve is about to hit a serious slowdown. A switch from enthusiastic and wealthy early adopters to more apprehensive and budget-minded car shoppers is throwing the electric-car transition for a loop, forcing car companies to change their outlooks and pull back on ambitious EV production goals.” The story continues that while there are 54 days of overall vehicle inventory at dealerships, EV inventory is about double that level. Long waiting lines to get an EV are quickly becoming a thing of the past. Tesla’s recent price cuts, while initially surprising, make a lot more sense in this light. Manufacturers that have committed to 100% EV’s over the next few years could be in for some rough sledding. (See the links at the bottom for the full Business Insider story.)
How many times have we seen this movie? Something sparks a surge in demand; supply can’t keep up; shortages become the norm; prices and profitability rise; and suppliers increase capacity based on a flood of orders; and then buyers seem to disappear. But they don’t really disappear, they just work down excess inventory. Consumers faced with shortage instantly want more. Remember how toilet paper flew off the shelves during Covid? They bought as if toilet paper was going to be unavailable for years! When a storm approaches, we flock to the grocery store to buy milk, as if there wouldn’t be any more milk for weeks. It is a predictable human behavioral response.
At the corporate level, the reaction is similar. For buyers, it drives double and triple ordering of hard-to-get parts, just to make sure they get what they really need. The reaction of producers to a shortage, perceived or real, is to increase production to meet the demand, usually without considering whether the shortage is perceived or real. The focus is on increasing market share. Eventually, the demand is met, usually earlier than anticipated, and prices and profitability come back to earth. This is something that is very rarely considered by industry analysts, who extrapolate the hockey stick growth, only to cut their overly optimistic forecasts when the problems are obvious.
This isn’t even the first time this has happened in the automobile industry. In the early 20th century, as autos began to replace horses, there were hundreds of auto manufacturers, but by 1929, there were only 44 left and the ‘Big Three’ already had about 80% market share. The handwriting was on the wall for the 41 others. Demand that appeared insatiable, was actually satiated fairly quickly and only the strong survived.
The attention given to NVIDIA, which we view as an excellent company with a large technological lead, leads us to draw the obvious analogy. As NVIDA reports spectacular revenue and profit growth and as Wall Street tends to extrapolate that growth for the long term. At what point does the current shortage of AI chips become satiated, by NVIDIA and/or other manufacturers? We are already seeing the beginnings of this cycle. In last weeks Pulse, we included a link to an interview with Snowflake CEO Frank Slootman, who said “There’s frenzy out there because the hardware is very, very scarce… We are actually part of that equation… We will literally buy GPUs whether we can use them or not because we think we will be using them, but we’re speculative and ahead of the curve. So, we have absolutely not settled into some semblance of stable demand. We’re nowhere close to that.”
That doesn’t mean NVIDIA will not succeed, but it does imply that the demand for AI chips may have a very hard time maintaining the current pace of demand and at some point, that brings disappointment as the sky high expectations for the industry are difficult to meet. Grab some popcorn, the movie is just getting started.
Farrell’s Ten Rules
Bob Farrell, the former Merrill Lynch strategist, famously penned the ‘Market Rules to Remember”, which apply more broadly than financial markets because they are driven by human behavior. The first three came to mind when this was written.
- Markets Return to the Mean Over Time – When faced with extreme optimism or pessimism, markets tend to reverse back toward the average.
- Excess Leads to an Opposite Excess – A pendulum never goes too far in one direction. The further it goes one way, the further it goes in the opposite way.
- Excesses Are Never Permanent – There is a tendency to look at positive situations (and negative situations) and think they will last forever. They won’t.
Jobs and manufacturing data were a mixed bag this week. The US added 187K jobs in August, which was better than the consensus expectation. Nonetheless, the unemployment rate to 3.8% (3.5% expected). This seemingly conflicting data came as a result of an increase in the participation rate, which has been climbing since the end of the pandemic and is now back at 2018 levels. In addition the job gains were mainly for part time positions. Bonds rallied on the news
Manufacturing PMIs remained in contraction, but were better than expected. On top of that Dell reported strong earnings and said that it appeared PC demand had bottomed. Might this be the end of manufacturing recession? Bonds reversed course. The Fed’s next move remains unclear.
What We’re Reading
Billionaire investor Jeff Greene: We’re in the first inning of the commercial real estate correction
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