Pragmatism is Back, And Companies Better Follow

Jan 18, 2024
Pragmatism is Back, And Companies Better Follow

I couldn’t help but chuckle when I read the headline…

Rental giant Hertz dumps EVs, including Teslas, for gas cars

Knowing that it was a mainstream media headline, which is always prone to sensationalism and distortion, I was skeptical but wanted to learn more.

Hertz has been an interesting case study, as it was a victim of the pandemic.

The rental car business was already difficult prior to the pandemic. But when almost all travel stopped, Hertz was forced to declare bankruptcy quickly after the lock downs in May of 2020.

With the help of private equity firms Certares Management, Knighthead Capital Management, and Apollo Global, Hertz emerged from bankruptcy with an opportunity to modernize and rebuild the company in a different light.

So it wasn’t a surprise when Hertz announced in 2021 that it would be spending $4.2 billion to purchase 100,000 Teslas…

It would be making a big push to rebrand the company as an electric vehicle company instead of an internal combustion engine company.

To Hertz, the price didn’t matter either.

It came as quite a surprise when Tesla’s CEO, Elon Musk, confirmed at the time that there was no deal with Hertz… and that Hertz would have to pay the same price as consumers for its cars.

Tesla had, and still has, so much demand for its cars, there was no need to discount its prices for Hertz.

Musk even went so far as to say, “Hertz deal has zero effect on our economics” when referring to Tesla’s business.

So what was going on? Why was Hertz so eager to pay full price for such a large number of electric vehicles (EVs)?

It’s simple, really.

And the answer exposes a gut-punching truth in how real “sustainable” solutions are today.

So Green and Squeaky Clean

Hertz was attempting to “greenwash” the company.

It’s the corporate equivalent of virtue signaling.

The goal was to appear to be green and clean… so that Hertz would be seen as an attractive investment to institutional investors looking to make ESG (environmental, social, and governance) investments.

This was the strategy set forth by the private equity investors. It was designed to solve one major problem: How to get Hertz’s share price to rise, considering a largely unattractive business.

Their thought was — despite the higher costs of the EVs — if they successfully positioned Hertz as an ESG businesses, that would drive institutional capital into the stock.

And if that happened, they — the private equity investors — would make massive profits.

An executive of one of the private equity firms backing Hertz summed the strategy up nicely when he said, “This should be one of the best ESG investments in the market today.”

However, the reality is quite different, as savvy investors know.

The Truth About EV Emissions

An electric vehicle (EV) only displaces where carbon-based fuels are burned.

The details are important on this subject, which is always glossed over.

An EV doesn’t eliminate emissions, as most people incorrectly believe. Emissions may not come out of the EV’s exhaust, but they do come out into the atmosphere. Just from a different place.

In the U.S., the majority of electricity today is produced by natural gas and coal.

Natural gas and coal are burned at the power plant. And electricity is distributed over the power grid, losing anywhere between 7-15% between the powerplant and the EV.

The inconvenient truth is that while the EV itself doesn’t have emissions, the powerplant sure does.

And the fossil fuel powerplant needs to produce extra electricity to account for the distribution loss.

This isn’t just a U.S. issue. It’s the same issue in just about every country on the planet, with very few exceptions (i.e. Iceland — geothermal, and Norway — hydroelectric).

So what does this have to do with Hertz?

Hertz’s exciting “all in” announcement back in November 2021 to remake itself as an electric vehicle company should have done the trick right?

This stock chart below tells a different story.

Hertz Global Holdings (HTZ), July 2021-January 2024

 It didn’t pan out as the private equity movers and shakers planned.

Hertz has collapsed about 75% from its November 2021 high.

As it turns out, the demand was quite weak for EVs at the rental car company… forcing the sale of 20,000 EVs, representing about 30% of its entire EV fleet.

And the most ironic part is that Hertz will use the proceeds to buy more internal combustion vehicles powered by gas. I can’t make it up. I don’t need to — the truth is too funny.

It’s pretty safe to assume that Hertz won’t be moving forward with its planned purchase of 100,000 Teslas, 175,000 EVs from General Motors, or 65,000 EVs from Polestar. These were all previous Hertz announcements made with great ESG flag-waving fanfare.

This isn’t a condemnation of EVs at all, or of the underlying technology. It is just a reality about consumer preferences when they travel.

When EVs Become Inconvenient

Let’s put aside how “dirty” EVs actually are to manufacture and fuel.

I wrote about that pretty extensively in my January 5, 2024 Ask Me Anything, which can be found here.

The real benefit of EVs to consumers is their convenience, which assumes the owner has the ability to charge at home.

There’s nothing better than getting home, plugging in, and never having to rush to a gas station. Sure, the electricity is from natural gas and/or coal, but the convenience is pretty incredible.

And the same priority is true for travelers. Except the issue is reversed. Renting an EV from a rental car company is inconvenient.

When we travel, we’re typically time constrained. And we don’t have a home charger to plug into.

If it’s leisure, we want to enjoy every minute, not spend time waiting in a charging line for an hour, or if we’re lucky, sitting for a half-hour to “fill up.”

And if it is a business trip, there is even less time to spare. Fueling up needs to happen in five minutes or less.

Not to mention what happens when temperatures go below freezing.

A friend sent me a funny reminder of this hard reality in Chicagoland this week, which gave me a good laugh. The truth is that this is happening everywhere it’s really cold.

The media reporting on the issue was terrible, as usual.

The journalists stated that it was so cold that the charging ports no longer work. Nope, that’s not true at all.

The problem is that the batteries were too cold to charge.

The lithium ions in the lithium-ion batteries move slower through the liquid electrolyte in the battery the colder it gets.

That means that it becomes very difficult for the battery to accept a charge from a charging port, and it is also harder for the battery to release any energy from the battery to the vehicle.

Making matters worse, because it’s so cold outside, consumers use what little energy is left in the battery to keep the car warm while they’re waiting.

There is an easy solution, but I’m sure most consumers aren’t too familiar with it.

EV batteries need to be warmed up before receiving a charge. They need to be pre-conditioned. It’s an easy thing to do right from the Tesla smartphone application.

And it needs to be done in advance. It typically takes 30-45 minutes to “warm up” an EV’s battery before it can be charged. That either means driving for 30-45 minutes before stopping at a charger, or pre-conditioning for 30-45 minutes before driving to a nearby charger.

It’s pretty easy to understand why that is not an attractive proposition for anyone traveling and on the go.

Hertz overlooked all these factors.

Putting aside these consumer behaviors — which resulted in a dramatic lack of demand for EVs at Hertz — there was another dynamic that hurt Hertz’s share price…

The cheap façade of “sustainable” investments deemed as ESG-compliant has been lifted.

The “game” has been revealed.

A Concrete Example of a Shift Away from ESG

The term ESG was abused so heavily for years that it no longer had any meaning. 

Companies like Philip Morris, Exxon Mobile, or Saudi Aramco were considered ESG companies.

The same for JP Morgan and Goldman Sachs.

It got to the point that it didn’t matter what the company was. Even a mining company could manipulate ESG metrics in a way to become an ESG company.

It became absurd. Laughable. Lipstick on a pig.

The market didn’t buy it. And they didn’t buy Hertz stock.

Globally, institutional investors decreased their investments in “sustainable assets” from $35.3 trillion in 2020 to $30.3 trillion in 2022.

In the U.S. alone, those numbers were more pronounced. $17 trillion of ESG investments in 2020 dropped to $8.4 trillion in 2022. I can’t wait to see the 2023 final numbers…

Bloomberg actually had a great headline that would have been unthinkable a couple years ago:

“The Virtue Economy is Over”

That about sums it up.

That last few years have been extremely hard for consumers.

We have been consistently told things that we know not to be true.

Discretionary income has dried up, and that means consumers are putting their dollars where they matter the most.

It’s clear now that to consumers, virtue signaling means so little.

It’s back to the basics now.

We want things to work, to be convenient, and to be at a reasonable price. And we’re no longer willing to pay just to appear to be virtuous.

The last few years have ushered in a new wave of pragmatism and a desire for the good days and freedoms that we so often enjoyed. People are tired of the BS, and they are taking back control of their lives.

As for the EV industry, it will be fine, and it will still represent strong investment opportunities.

But the spoils won’t be evenly distributed.

Scale, simplicity, quality, range, and price matter.

And only a handful of companies will come out ahead.

What do you think of this issue of Outer Limits? As always, we welcome your feedback and questions, and look forward to them. We read each and every email and address common questions in the Friday AMA issues. Please write to us by clicking here.

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