Real Mettle: GM's Electric Vision
Traders, Portfolio Managers, Investors, CEO’s, heck, everyone, drag around a lot of biases. Successful traders are lucky, they usually get immediate feedback and learn to adapt when biases skew their thinking.
In today’s modern corporate culture, immediate feedback is rare and our biases can run counter to our best long-term interest. Ownership bias, recency bias, confirmation bias, loss aversion (career risk), etc tend to persist in organizations. It’s most obvious in hiring. We tend to identify with people who are like us even though research clearly shows that diverse organizations outperform and candidates with varied backgrounds (“Range”) tend to be more successful in the long run.
Breaking the chains of biases takes some flat out courage, especially in a world where we are crushed by an onslaught of short-term noise. Having data on your side and good analytics helps ground decision making. It’s why the great decision makers, like Buffett or Gates, look at decisions through a long-term lens; strong signals are more clear when short-term noise (bias) is ignored.
Instead of diving into all the great decisions Buffett has made (survivorship bias?!) I'd like to write about a recent decision we can watch play out in real-time.
Mary Barra, GM CEO, has some serious mettle. Her courage is smashing the chains of bias. She recently committed GM to building 1 million EV’s (electric vehicles) a year in the very near future. That’s roughly 12.5% of the 8.5 million cars GM makes each year. Let that sink in. Here is a woman, a dyed-in-the-wool GM gear head, deciding that the internal combustion engine is no longer the future.
One Million. I got to thinking about that number and its implications. There are currently roughly a million EV’s on the road out of a total of 268 million vehicles in the US, a tiny fraction of the whole. If you start adding a million new EV’s each year, out of the 17.5 million vehicles sold each year, that’s 6% of total sales. That’s some meat. Before her announcement, EV’s were already projected to be about 7% of total vehicles by 2030.
GM, by betting its future on EV’s, is clearly sending the message that most vehicles in the future will be EV’s. How many, hard to say, but probably more than 7%. As a thought exercise, let’s extrapolate and say that at some point in the future 100% of the vehicles will be EV’s. What does that mean? Where will we get the electricity needed to power them? How much electricity would we need? There are lots of questions when you go down this path.
Right now the US produces 4178 Billion kWh (killo-Watt hour) per year. That level of production has been roughly flat since 2007 for a variety of reasons. American’s drove 3.2 Trillion miles last last year (yes Trillion). The average EV currently gets 3.3 miles per kWh. So, IF every vehicle were an EV, we would need to consume an ADDITIONAL 960 Billion kWh’s. However, electrical grids have a problem, impedance, so for every 1 kWh produced at the power plant only about .65 kWh makes it to your house. So we really need to produce an additional 1478 Billion kWh, or 35% MORE electricity each year to replace the internal combustion engine completely. That’s a lot of watts.
35% more electricity.
How do we produce that much more? Our current electrical grid has problems in many parts of the country during heat waves. How will it handle the greater load of just the projected 7% much less a full 100%? It’s easy to do a bit of hand waving and say we’ll figure it out, technology will find a way. Possible. For EV’s to be a “clean” solution we’ll also have to figure out how to replace the 27% of the electricity that is still produced by coal.
50% of the kWh needed in the future will have to be created. 2662 Billion kWh.
I’m not sure where we will find the extra watts. It is clear that the utility sector will have to dramatically change. More power will need to be generated and transmitted. Current infrastructure will have to get upgraded, new infrastructure will have to be created, gas stations will become charging stations, the list is long. We will end up paying a lot more per kWh to make these changes happen and utility regulations will probably have to change to encourage flexibility and growth in the sector. Essentially, over time, we will be transferring the oil industry’s revenue to the utility sector.
On many metrics the utility sector is already a good area to invest. Mary Barra is betting on a future that many people haven’t digested; we’re too mired in our short-term biases to catch up with her long-term thinking. The data seems to be on her side, and if it is, the watts needed to power her vision will have to catch up. That puts the utility sector front and center in the next decade.