A preoccupation of mine is to think about big issues that confront humankind and think about where solutions might come from that have investable outcomes. This has led me to find opportunities before they become successful. Examples include investment in Enphase (ENPH) and BYD (OTCPK:BYDDF) when both stocks were valued at single-digit dollar values. A downside of this approach is that the wait can be long before success is realised, so I have a “bottom drawer” of stocks with strong upsides. The good thing is that these stocks don’t involve substantial capital allocation, but they become valuable if/when their potential is realised. I have found that by doing a lot of research around potential opportunities. I have a reasonable success rate, although in some cases, the wait is long for success to occur. Here I explore an idea about the electrification of transport which has potential implications for VivoPower International (NASDAQ:VVPR) and maybe Toyota (NYSE:TM).
I am convinced that the biggest issue that confronts humankind is climate change and I think the switch to the electrification of everything represents a massive opportunity. Transport is low-hanging fruit, with Tesla (TSLA) showing that the BEV (Battery Electric Vehicle) is not only a practical solution but also a revolutionary approach to wheeled transport. Today, almost all major manufacturers are adopting plans to switch manufacture from ICE (Internal Combustion Engine) cars to BEVs, with huge change expected by 2030.
In the US, light vehicle transport involves ~15% of total emissions (57% of transport emissions), so electrification of transport will be a big step along the path towards exit from fossil fuels. A switch out of ICE to BEV will have a disastrous impact on the oil industry (~44% of US gasoline production is consumed by cars), but it also opens up lots of investment opportunities in BEV manufacturers and also renewable energy projects, which will supply the electricity needed to power the vehicles.
The challenge for electrification is that there are 1.446 billion cars (or ~2 billion wheeled vehicles) on earth. Thinking about the huge challenge of replacing this fleet of ICE cars quickly explains why the oil & gas industry is complacent about the threat of the BEV. Even if Tesla can grow its vehicle production to 20 million vehicles annually by 2030 (up from 0.5 million vehicles in 2020 and ~1.5 million vehicles expected in 2022), this would amount to just ~1% of global vehicles replaced. The rest of a fully electrified car industry could take that number to 100 million vehicles. Note that in 2021, 79.1 million (mostly ICE) motor vehicles were manufactured (25 million in China), so these numbers are not impossible to imagine. However, to achieve substantial exit from fossil fuels (ICE vehicles), this rate of swap out means probably a couple of decades when scale-up of production is considered. The science says we need to get global emissions down by ~50% by 2030, so electrification of transport will struggle to make a major contribution. The exit from ICE needs to be faster.
The above got me thinking about other ways to speed the transition from ICE to BEV. An obvious one is to modify existing vehicles by swapping out the ICE and inserting a big battery. While modern BEVs are much more than a conventional car with a battery, a mass swap out could accelerate the transition.
Big opportunity to substitute big battery for ICE in existing car fleet
It is clear that a BEV-specific vehicle design is superior in a number of ways to a BEV built on an ICE platform. But some ICE car makers are using their ICE platform to build their first-generation BEVs. So, there is already significant experience of a BEV built on an ICE platform. Given the sunk cost of a near-new vehicle, swapping out the ICE and replacing it with a big battery might make sense in a rapid transition, because the alternative in transitioning is to scrap the ICE vehicle.
Maybe up to 400 million near-new ICE vehicles could be incorporated into a global swap program. The other benefit of this suggestion is that BEV production does not have to be scaled up so much to fully electrify transport, because a core group of cars could be repurposed ICE to BEVs. This might avoid the crunch of what happens after the removal of the ICE is completed (i.e., huge excess capacity of BEV production).
As a back-of-the-envelope calculation, say 100 million new BEVs were manufactured annually over a decade and 400 million ICE vehicles were modified to be BEVs over 5 years. This would produce essentially a fully electrified car fleet (1.4 billion BEVs) in a decade. It might get easier if autonomous driving comes on the scene early as this will surely mean less cars, as autonomous vehicles are likely to be operated more or less non-stop.
Who is switching out the ICE and inserting a big battery?
Four-and-a-half years ago, I noticed that Dutch company Tembo was repurposing Toyota vehicles as BEVs for underground mining applications. Since that time, Tembo has been acquired by VivoPower and the electrification program has been consolidated in Australia, with the involvement of wholly-owned Toyota subsidiary, Toyota Australia. A recent presentation from VivoPower claims global distribution deals in 2021 involving $707 million and 7,825 vehicles (presumably for the cost of the vehicles plus Tembo-eV conversion). Countries involved include Australia, Canada, Nordic countries, Mongolia, and 50 other countries. The deals involve purchase through 2026.
Therefore, from vague initial partnering with Toyota, it looks like a formal deal is getting closer, as there appear to be deals for electrified Toyota mining vehicles in several countries. VivoPower claims the Toyota partnership defined by an exclusive and binding LOI of June 2021 with Toyota Australia is a prelude to a Master Services Agreement (under negotiation), which could make VivoPower the exclusive partner of Toyota Australia for LandCruiser electrification for 5 years (+ 2-year option). It is claimed that Toyota Japan has commissioned Toyota Australia to identify a global partner for LandCruiser electrification. The actual state of play is that on May 20, VivoPower (through Tembo e-LV Australia) and Toyota Motor Corporation Australia Ltd have executed a Design Services Agreement for Tembo e-LV to be commercially engaged on the next stage of design of electrification solutions for the Toyota LandCruiser 70 for offroad applications in Australia. This announcement has barely halted the slide in VivoPower’s share price decline over the past 12 months, possibly because what is represented in the recent company presentation appears to be ahead of the actual state of play.
VivoPower claims the market for electrified mining and offroad utility vehicles/pickup trucks is $36 billion annually or $62 billion for all utility vehicles/pickup trucks. So, despite the small initial size of the Toyota partnership, VivoPower is optimistic about the prospects.
This could become a significant business opportunity, although I’m cautious about VivoPower/Toyota’s opportunity with modified vehicles for all utilities/pickup trucks, as this would bring them into competition with specifically-designed BEVs coming to the market, such as Ford’s (F) F-150 Lightning, Rivian (RIVN) vehicles, and probably many more to come (e.g., Tesla’s Cybertruck). However, VivoPower lays out global plans for the Toyota partnership. This year, world-class OEM manufacture of conversion kits for both the LandCruiser and Hilux Toyota vehicles is underway. It seems that the major assembly and production hub will be in Eindhoven in Holland, with facilities in Asia, the UAE, and Australia under evaluation. The global distribution channels are to be expanded, and there is a commitment to R&D by VivoPower in the Netherlands, UK, and Australia. VivoPower claims critical power services to 750 customers in the Australian mining sector. These include onsite renewable energy generation, batteries, microgrids, BEV charging, and emergency power backup. The VivoPower presentation is very optimistic, but there is no detail of the financials other than for electrification of the Toyota vehicles, which is minimal.
The curious thing about the Toyota partnership is that it seems that Toyota Japan is keeping the electrification of its LandCruiser and Hilux vehicles away from its corporate website. When I went searching for electrified LandCruiser on the parent company website, I got to the bZ4X (only electric car), but the header had it at the end of hybrid/plug-in hybrid/fuel cell electric/battery electric. I found no mention of electrified LandCruiser or Hilux vehicles. On the Australian website, it was even more curious because this site talked only of hybrids and hydrogen-powered cars as how Toyota plans to decarbonize its vehicles. No BEV was mentioned.
What does the ICE to BEV development between VivoPower and Toyota mean?
My take is that the above LandCruiser and Hilux electrification story has different meanings for each company.
VivoPower: The ICE to BEV conversion of the LandCruiser and Hilux seems like a big deal for VivoPower, as this seems the most significant program that the company has, although the real upside is not clear at this stage. I note that Seeking Alpha has VivoPower at high risk of performing badly and its 12-month performance is down 79.6%. The Q2 2022 earnings call transcript made depressing reading as regards to the financial position of the company. Management blamed this on a tough 6 months with COVID disruptions, but the situation looks pretty dire.
Toyota: As I’ve come to expect from Toyota, developments involving full electrification (BEV) seem not to be spoken about by Toyota Japan other than when they have to be. Hence, almost the only real consideration Toyota gives BEVs concerns the minimalist release of the bZ4X, which is only available in small number through lease in Japan.
It is hard to get a sense of the opportunity for Toyota’s modified BEV LandCruiser 70 and Hilux for mining and offroad use. Toyota is certainly not drawing attention to it.
Participating in the global exit from ICE vehicles through repurposing the existing ICE car fleet to BEV is an opportunity on a completely different scale, but it is not being talked about (yet). Toyota has the VivoPower arrangement to understand the intricacies of making the switch. Toyota also has a lot of experience with hybrid vehicle developments and now emerging BEV capacity. It is also one of the world’s biggest carmakers. It would be an obvious choice to be a major player to modify a large fleet of near-new used ICE vehicles.
What is needed to make a scaled-up ICE to BEV makeover work?
Modifying a very large fleet of recently produced ICE cars to become BEVs (and hence zero emissions) will only become feasible if there is global action at Government level to electrify wheeled transport. Due to the costs of accelerating climate change (see below), I think that this is possible. It is clear that dramatic emissions reductions are needed and cars are a quick way to achieve substantial emissions reductions.
The cost of not doing it
The US Office of Management and Budget (OMB) has recently released reports on the escalating cost of climate change-related damage and potential economic losses due to climate change. The figures are confronting with potential Federal revenue losses to US GDP of $2 trillion by end of the century and annual spend on just 6 types of Federal expenditure could increase by $25-$128 billion annually.
Deloitte has just released an even more confronting report “The Turning Point; A Global Summary”. A tag line for the report is: Time is up and we know it.
Some statistics help focus the mind:
49% of 23 countries contributing to Deloitte’s 2022 Sustainable Actions Index Survey reported experiencing a climate-related event (drought, wildfire, extreme heat, severe storms) in the previous 6 months.
89% of C-level executives agree that there is a “global climate emergency”. Deloitte argues that this is because senior executives understand that the cost of inaction is substantially more than addressing the need to reduce emissions. Deloitte concludes that without checking climate change, the cost to the global economy in terms of net present value is $178 trillion in the period 2021-2070. The human cost is estimated to be far greater. Achieving net-zero emissions by 2050 (which requires ~50% emissions reduction by 2030) could increase the net present value of the world economy by $43 trillion in the period 2021-2070.
The Deloitte report is worth reading to get a sense of the current situation. It is but one of many that convince me that soon the urgent need to decarbonize will be addressed.
If that happens, then my contention about the need to swap out ICE from a substantial segment of the global car fleet to rapidly advance electrification has some credibility.
This article fits in my “mad schemes” portfolio, where I explore investment opportunities that are “out there” but definitely address a huge market opportunity. Here I’ve explored what might happen if the world gets serious about urgently addressing the end of the ICE. Of course, there are problems such as the scale of battery manufacture needed, which might limit the number of BEVs. However, there is a small industry today in swapping out ICE for BEV for specific applications (e.g., mining). It is intriguing that Toyota is involved in one such business, VivoPower, that is adapting Toyota LandCruiser and Hilux vehicles. Concerning the mining and offroad, BEV-adapted, Toyota LandCruiser and Hilux opportunity which VivoPower claims to be a $36 billion market, it is too soon to come to a conclusion about upside for VivoPower in this market. My take on this is that Toyota seems lukewarm about the opportunity as it doesn’t feature in any release that I could find from the Toyota parent company.
I raise the argument that Toyota is well-positioned to take a significant role if there becomes pressure to rapidly exit the era of the ICE by taking a role in switching a large number of cars with an ICE to become BEVs. If the climate emergency continues to bite, this could be a possible major windfall for Toyota, and it could be that VivoPower could also benefit. I’m putting this on my watchlist of opportunities that might be worth considering.
I am not a financial advisor but I follow closely the climate developments that suggest that electrification of transport might become a very urgent priority due to the need to decarbonize the global economy as a matter of urgency. I hope that my commentary gives you and your financial advisor another way of looking at where the ICE to BEV switch fits in the global climate efforts.