Berkshire Hathaway’s CEO, the legendary Warren Buffett, recently addressed the tumultuous landscape of the electric vehicle (EV) market during the company’s annual meeting. In a display of his shrewd insight, Buffett emphasized the unpredictability and ever-changing nature of this industry, expressing his skepticism about the existence of a clear victor in the race.
To illustrate his point, Buffett drew upon the historical example of Ford Motor Co., which once held a dominant position in the automobile market thanks to the revolutionary success of the Model T. However, as time passed, Ford faced significant losses and experienced a downturn in its fortunes. This cautionary tale serves as a pertinent reminder for Tesla Inc., the reigning giant in the realm of EVs. Despite Tesla’s current market dominance, it faces mounting competition from various contenders. Admittedly, these competitors are yet to achieve Tesla’s level of success due to challenges in the supply chain and funding concerns.
Over the past year, Tesla has witnessed a decline of up to 21% in its stock value. As the EV market, including Tesla, grapples with obstacles to growth, some retail investors have turned their attention towards the promising startups in this field. Civilized Cycles, for instance, launched on Wefunder and has generated substantial interest and investment from retail participants.
Recent reports indicate that several U.S. EV startups are struggling to make tangible progress while burning through their cash reserves, all within the backdrop of a challenging economic climate marked by diminishing EV demand. Thomas Hayes, the chairman of hedge fund Great Hill Capital, voiced concerns about companies hemorrhaging money and possessing low valuations, thereby highlighting the vulnerability of EVs in this regard.
Surprisingly, even established industry players like General Motors Co. and Ford find themselves wrestling with financial difficulties within their own EV divisions. General Motors, despite its goal to stem cash burn by 2025, continues to face struggles in this area. Ford, on the other hand, recently reported a staggering loss of $722 million in the first quarter alone for its EV division, equating to over $66,000 per vehicle, as energy market analyst Robert Bryce astutely disclosed.
Tesla, too, confronts its fair share of challenges. It must navigate the delicate balancing act of reducing prices to maintain demand while grappling with the impact of inflation on raw material costs, which significantly affect profit margins. The potential exacerbation of these issues arises from federal government subsidy plans under the Inflation Reduction Act.
Berkshire Hathaway, with its vast holdings across numerous industries, including a dealership group representing 27 automakers across 10 states, faces a pivotal decision. However, Buffett and his trusted associate, Charlie Munger, have made it unequivocally clear that expanding further into the auto business is not part of their plans.
Buffett reiterates his long-held belief that the auto industry is an exceptionally formidable sector, remarking, “Charlie and I have always felt that the auto industry is an incredibly challenging one. It’s a business where you face fierce competition on a global scale, with no signs of retreat. It might appear that certain companies are winners at any given time, but that doesn’t secure them a lasting position.”
This sentiment aligns with their cautious approach, despite their current holdings, which include roughly 40 million shares in General Motors. This number represents a reduction from the 50 million shares they held in 2022.
Munger echoes Buffett’s stance, acknowledging the remarkable surge of electric vehicles while underscoring the associated capital costs and risks involved. He remarks, “The electric vehicle is undeniably gaining significant traction, and it’s an intriguing development. However, it currently necessitates substantial capital investments and entails substantial risks, both of which I find unappealing.”