Episode Summary
In this episode of Signals, Nick Mazing sits down with Xavier Smith, Director of Research, Energy/Industrials at AlphaSense Expert Insights. They dive into the evolving industrial sector, focusing on key trends such as the adoption of electric vehicles and the ongoing energy transition. Smith’s insights shed light on how interest rates are shaping the construction cycle, a critical aspect of the industrial landscape.
Xavier first discusses the more dynamic “tech adjacent” sectors of industrials: EVs and energy transition, as well as the IRA (Inflation Reduction Act) effect on both. On the EV side, the episode covers costs, charging standards, range improvements, affordability, adoption curves, and more. On the energy transition side, Xavier discusses industrial battery storage, costs vs fossil fuels, geographic aspects, as well as newer technologies like offshore solar.
In more traditional industrials, we discuss construction and building materials, and, more specifically, the bifurcation between home building holding up despite the increase in interest rates versus the difficult situation in office CRE.
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Guest-at-a-Glance
💡 Name: Xavier Smith
💡What he does: Director of Research, Energy/Industrials
💡Company: AlphaSense Expert Insights
💡Noteworthy: Xavier is the Director of Research for Industrials and Energy at AlphaSense, former hedge fund and long-only firm professional.
💡 Where to find Xavier: LinkedIn
Key Insights
Historic Shift: Clean Energy Investments Outpace Fossil Fuels
For the first time, investments in clean energy are set to outpace those in fossil fuels. A whopping $1.7 trillion is projected to be invested in renewable energy in 2023, almost double the CapEx number for fossil fuels. This shift is a clear indicator of the growing interest and confidence in renewable energy sources.
Energy Storage: The Game Changer in Energy Transition
Energy storage, particularly industrialized batteries, is revolutionizing the energy transition. These batteries address the intermittent nature of renewable energy sources like wind and solar, allowing power usage to be shifted according to need. The industry has tripled over the last three years, from a $50 billion business in 2020 to $160 billion today. This growth is expected to continue, making energy storage a key player in the energy transition.
Interest Rates and Their Bifurcated Impact on Construction
Interest rates are significantly influencing the construction cycle, creating a bifurcated market. Despite high interest rates, home builders are performing well due to the difficulty in purchasing existing houses. However, the commercial real estate sector, particularly office space, is experiencing challenges.
Episode Highlights
Meet Xavier Smith: From Hedge Funds to AlphaSense
Timestamp: [00:00:55]
In the opening segment of the podcast, host Nick Mazing introduces Xavier Smith, Director of Research for Industrials and Energy at AlphaSense. Smith shares his background, including his experience in hedge funds and long-only firms in New York and London. He also discusses his role at AlphaSense.
The EV Market: Challenges and Future Prospects
Timestamp: [00:07:30]
The conversation shifts to the electric vehicle (EV) market, discussing the reasons behind the recent drop in EV penetration in the US. Xavier highlights the impact of high-interest rates and production issues faced by legacy Original Equipment Manufacturers (OEMs) as key factors. He also mentions the normalization of used EV pricing after the COVID-19 pandemic.
“There are a couple of issues going on in the EV market in particular, and then the auto market more broadly. First of all, interest rates are high, as we’ve discussed earlier, and that’s having an effect, a negative effect on the entire auto market.”
Offshore Solar: The Next Big Thing in Energy Transition
Timestamp: [00:19:33]
Xavier expresses his excitement about the development of offshore solar. He discusses a joint venture project in Asia that’s pioneering this technology, highlighting the potential ease of permitting and the challenges of dealing with corrosive conditions.
“I think the most exciting thing I’ve read recently is the development of offshore solar. And this is interesting ’cause if you think of other methods of energy production, they all have an offshore version. We all know about offshore drilling for oil and gas. We all know about offshore wind for wind turbines, but offshore solar is an interesting development.”
The Political Divide in the US Energy Transition
Timestamp: [00:21:08]
The conversation turns to the political aspects of the energy transition in the US. Smith predicts a divide between blue and red states in their approach to renewable energy and fossil fuels based on political rhetoric and contributions.
“I have to answer that question in two ways. I think in rhetoric, blue states will like to tout how they are converting over to renewable energy. I think red states would probably prefer to support the fossil fuel industry given the political contributions that they make.”
Full Transcript
[00:00:00] Nick Mazing: Hello and welcome. You’ll listen to Signals by AlphaSense, and I’m your host, Nick Mazing. Today we welcome Xavier Smith, director of Research Energy and Industrials, extreme AlphaSense Expert Insights Solution. If you’re not familiar with it, the solution covers a wide range of expert insights services, including an extensive.
[00:00:23] Expert interview transcript library. Integrate with all of the other document sets that one would need, like broker research, filings, transcripts, news, and so on. Inside of the AlphaSense platform, alongside co services, monthly sector, newsletters, webinars, and more. Today we’re going to cover trends, industrials, such as EV adoption, energy transition, EV charging.
[00:00:46] Along with how interest rates are influencing the construction cycle, Xavier welcome and can you tell us a little bit more about yourself and about your work?
[00:00:55] Xavier Smith: Hello everyone. I’m Xavier Smith. Uh, Nick, thanks for having me. Everyone else. Thanks for giving me your time today. Uh, so I joined AlphaSense a couple of months ago. I am director of research for Industrials and Energy. I. At AlphaSense and, uh, basically I’m just in charge of content generation at the firm.
[00:01:16] Uh, so, uh, trying to create lots of in interesting and engaging content for our clients. Uh, before I was at AlphaSense, I spent a lot of time on the buy side at numerous hedge funds and long only, uh, firms, uh, both in New York and, and London. Uh, so thanks for having me today.
[00:01:35] Nick Mazing: So let’s start with kind of the big picture questions. What are the most exciting developments in industrial, which is a very broad area currently.
[00:01:47] Xavier Smith: Yeah, sure. You know, Nick, I, I tend to look at energy and industrials through the lens of two different categories. Uh, one category is the traditional. Side of industrials, which is what most people think of when they think of industrials. So, uh, more the traditional industries of manufacturing, aerospace and defense materials, uh, sectors like that.
[00:02:11] Uh, and then the other category of industrials is the new and more emerging side of industrials. These sectors are more tech adjacent. So this includes EVs, energy storage, renewable energy, uh, these types of sectors. Uh, if you were to look at what’s going on in both of these spaces, uh, I guess both side, both the emerging tech adjacent side of industrials and the traditional side of industrials have some interesting trends that are going on right now.
[00:02:40] Uh, in the tech adjacent side, uh, you’ve got EV adoption, uh, which is increasing year by year. In the US we’re currently at, around 7% of new car sales are, uh, EVs, uh, that lags Europe, which is around 15%. And that lags China, which is even higher. I think they’re over 20% or 30%, uh, something like that. Um, so you know, that is one of the categories that is attracting a lot of attention, uh, and a lot of investor focus.
[00:03:10] Uh, if you look within the EV space, uh, that also breaks out into two categories. So you’ve got the, the new firms, the upstarts, the pure plays. So these are firms like Tesla, uh, Rivian, lucid, Lordstown, uh, and then you’ve got the Legacy OEMs, which are playing a bit of a catch up here. Uh, so these are your Volkswagens, your Forge, your Mercedes.
[00:03:34] Uh, and so basically, uh, the news flow is will the legacy OEMs. Be able to catch up, uh, with what Tesla has done in the space. And then also will some of the upstarts, uh, like Rivian and Lucid, uh, Lordstown has gone bankrupt so they don’t count. Uh, but will they also be able to, to match what, what, what Tesla’s done?
[00:03:55] Um, so, you know, that’s scaring a lot of attention. Uh, the other thing that’s going on in the, uh, tech adjacent side of industrials is just clean energy. It’s just, you know, the, the adoption of renewable, uh, energy and, and it’s interesting, uh, I’ve been covering industrials since about 2000 and back during that timeframe, the, the 2000, 2005 timeframe.
[00:04:23] Industrials required government subsidies in order to make sense or in order to, to pencil as a project that any utility or any household would, would take out. Uh, but now these days, because they’ve gotten so efficient and their productivity gains have been so great, uh, these, these technologies no longer require.
[00:04:44] Government subsidies in order to, to pencil out and, and be effective. Um, however, we still do have government subsidies in, in the space. And so, uh, it’s just, uh, investors are, are just watching, uh, how fast, uh, the, the takeup is for, uh, renewable energy. Uh, one fact, uh, that I think is really interesting is that this is the first year ever.
[00:05:08] Where investments and clean energy will outpace investments in fossil fuels. Uh, the investments are for $1.7 trillion in investments in renewable energy, uh, for 2023. And then that’s almost double, uh, the CapEx number of 1 trillion. For fossil fuel CapEx in 2023. So this has never happened before. Uh, so this is garnering, uh, a lot of interest.
[00:05:36] Uh, and then if you look at just the, the, the growth rates, uh, you know, clean energy spending is expected to grow 24% in 2023. Uh, and that’s greater than the, the 15% growth that we’re seeing, uh, in fossil fuels. If I were to switch over to, uh, old industrials, I would say the, the fact that is most interesting, uh, to followers and participants in the space right now is just the interest rate cycle and what that’s doing to construction.
[00:06:08] And it’s very interesting because right now we’re seeing a bifurcated market. On the residential side, you’re actually seeing, despite the fact that interest rates, uh, are at 7% for most new mortgages today, home builders are doing pretty well. Uh, and, and that’s just due to the fact that it’s pretty hard to, to buy an existing house, uh, because, uh, most.
[00:06:32] Residents don’t wanna move, uh, ’cause they have a cheap mortgage. Uh, so the, the new home builders are actually doing well despite the fact that interest rates are really high. Then you contrast that over to the commercial side and you see a lot of plight going on in the commercial real estate sector, especially with, uh, uh, what you’re seeing with office space.
[00:06:51] Uh, so it’s a bit of a bifurcated market and, and people are watching that space as well.
[00:06:54] Nick Mazing: Mm-hmm. So let’s start digging into these, uh, areas a little bit more in detail. Let’s talk about EVs first. So, Why do you think EV penetration in the US fell in Q2 to around 7.5% versus 8% earlier in the year? And it looks like used EV pricing is dropping by about 30% in June. Uh, the result headlines about, uh, price cuts from the, uh, OEMs for new EVs.
[00:07:26] Do you think customers are losing the excitement about the technology?
[00:07:30] Xavier Smith: Right. Uh, that, that’s a, a great question. I, I think there are a couple of, uh, issues going on in the EV market in particular, and then the auto market more broadly. Uh, first of all, uh, interest rates are high, you know, as we’ve discussed earlier, and that’s having an, an effect, a negative effect on the entire auto market.
[00:07:53] Uh, so it’s not just EVs, it’s all cars. All cars are becoming less expensive to consumers. Uh, so, so that’s an issue. Uh, the other factor is that a lot of the OEMs, especially the, the legacy OEMs, Having problems with sourcing battery components, they’re having source, they’re having issues with ramping up their battery production capacity.
[00:08:18] And so the availability of getting an EV has actually been quite difficult. Uh, if you were to look maybe six months ago, If you were to go on Ford’s website and you wanted to order yourself a, a brand new Mach e uh, it was a pretty difficult process. You, you would go on, uh, it would tell you that they’re not taking new orders until, uh, six months from now, 12 months from now.
[00:08:43] This is the same issue. If you went on Cadillac’s website, you tried to order yourself, uh, their new luxury. Ev, the S u V called the Lyric. Uh, they closed orders, uh, for, for new customers for this, uh, a couple of days after launching it. And so there were lots of fits and starts, uh, from, from the consumer side in terms of if you actually wanted to order an ev it was actually difficult to complete that process.
[00:09:07] Uh, now, uh, the legacy OEMs have, have finally, Gotten their acts together somewhat, and you can actually go on these websites and, and start to place orders for cars. Uh, so I think there’s, it’s been an issue of, uh, availability production scale in terms of legacy OEMs. Uh, these cars cost more just because of where, uh, interest rates are.
[00:09:31] And then the, the, the fact of, uh, ev pricing falling 30% or so. Uh, you know, I would say that that’s just a return to normal. Uh, the pricing of used cars got pretty crazy during covid. Uh, you probably remember, uh, just how hard it was to get a new car or used car. Uh, back during those days, used car prices went crazy.
[00:09:52] Uh, Firms like Carvana, uh, benefited extensively from that. And then now we’re just kind of, uh, fading back to a, a normal, uh, car pricing cycle. So,
[00:10:02] Nick Mazing: Mm. So. Uh, staying with EVs and when we look forward, so how long do you think the US EV penetration will take to match Europe’s of around 50%? Or China’s, which you mentioned just mentioned, is, is even higher.
[00:10:19] Xavier Smith: Yeah, sure. You, you know, it’s, uh, I, if I had to throw a date on that, I would say probably around 20, 25 or so. And where I get that number from is that is the time, uh, when most analysts think that EV pricing, uh, will match the pricing of an internal combustion engine car, uh, spec. For spec. Like for like, uh, right now I.
[00:10:48] EVs still carry a price premium, uh, to their I C E counterparts. Uh, but as battery, uh, technology improves, as OEMs ramp their production, uh, pricing will fall on EVs. And then by the time we get to 2025, uh, most analysts are expecting that EVs will, will match IC vehicles in terms of their, their price versus quality.
[00:11:13] Um, and then I think once you see that, you’ll start to see. Much faster adoption in the US for EVs, uh, versus what you’re seeing today. Uh, and so then I think we’ll be at a point where, uh, the US numbers will start to look more like, uh, Europe’s 15% numbers or, or China’s numbers, which, which are even higher.
[00:11:33] Of course, that’s a moving target. Europe. Europe is, uh, You know, their, their adoption is, will be higher then as well. Uh, but, but I think 2020 and 2025 will, will be the, uh, the, the magic year there. There’s also the issue of availability. Uh, you know, as I spoke of before, uh, lots of the OEMs have had lots of difficulties in terms of ramping their production of EVs.
[00:11:56] So if you as a consumer went to your local dealership, you tried to order one of these things, it was really hard to get. Uh, by the time we get out into 24 and 25, these issues should be largely resolved. If we look at, uh, Rivian, for example, uh, Rivian is the US uh, truck and SUV Ev maker. Last year they were plagued with production disappointment, uh, scaling disappointment at their factories.
[00:12:27] This year, they’re finally impressing investors and impressing onlookers with where their production is. I think you’ll start to see this rollout across the industry, uh, and that increased production means increased availability means lower pricing, and, and that, that that’s good for consumers. The other thing that’s interesting, uh, is that, uh, you, you’ll, most of the EV makers are on there.
[00:12:51] Shall we say version 1.0 of their, of their ev. Most of these cars are very expensive. Our Vivian’s pickup truck is $70,000. Their SUV is $80,000. It’s called the R Run. When we get out to 2025, they will be on their, let’s call it 2.0 vehicle, which will be a lot cheaper. Uh, so this will be like how Tesla started out with their model S, their Model X.
[00:13:16] These were 80 to a hundred thousand dollars cars. When they launched their Model three and Model Y, that’s when they got the mass adoption and that’s when their units went over a million. When Rivian launches there, R2, which would be a 50 to $60,000 s u V and truck, I think then you’ll start to see mass adoption and you’ll start to see those numbers take off
[00:13:39] Nick Mazing: So last question on EVs obviously. Consumer range anxiety has been a problem, at least historically with the adoption. And, uh, do you think that EV charging is still an impediment? Because we’ve seen a lot of headlines recently from large manufacturers adopting the Tesla starting Tesla charging standard, which will hopefully help with the network effects there.
[00:14:09] Xavier Smith: Sure. Uh, I think one of the most exciting things occurring in EV charging, I. Are the funds that come from Biden’s Infrastructure Plan and come from the Inflation Reduction Act. The I r A, those programs committed $7.5 billion to EV charging. So over the next few years, we will see a large ramp out ra uh, ramp up in terms of EV charging stations.
[00:14:38] Uh, so this will relieve. Uh, customer’s fears of range anxiety, and where do I charge my, my new ev? Uh, historically, uh, the, the, the biggest, uh, besides Tesla, uh, the biggest firm in terms of ev charging has been electrify America. Uh, they have had a lot of disappointments in terms of reliability of their, of their network, although these things are improving.
[00:15:06] So again, as we go out into 20 24, 20 25, uh, the build out of the network will be much more progressed than than where it is. And then we should see an improvement in ev charging quality as well, uh, from players like, like Electrify America. Uh, the Tesla news is interesting. Because Tesla has the most reliable charging network and the fact that it’s opening up to all cars, uh, lots of OEMs are, are adopting the Tesla standard.
[00:15:35] Uh, that includes Ford, it includes gm, uh, it includes Rivian, uh, and other OEMs. This just means that there, there are more charging options for customers. Uh, and so again, that, that should, that should be good for, for EV adoption. The, the final thing I’ll say on this topic is just that the range of an EV is also increasing.
[00:15:56] Uh, a couple years ago, the, the average EV had a range of 200 miles, 250 miles, that should be more like 300, 3 50 miles over the next year to 24 months. So this means that you just, a customer doesn’t need to charge as much. Uh, so that, so that should help adoption as well.
[00:16:16] Nick Mazing: So let’s switch gears. Pun intended for from EV still energy transition. What is exciting in 2023 on the energy transition front?
[00:16:28] Xavier Smith: I think the most exciting factor in energy transition is batteries, uh, or energy storage. One of the criticisms of renewable energy, uh, has been that it’s intermittent. So if you look at wind energy, the wind is not blowing all the time. So how do you get power, wind? It’s not windy. Uh, and then on the solar side it’s, you know, the sun’s only shining for half of the day.
[00:16:55] So what do you do for the other half of the day? Energy storage and industrialized batteries are, are changing the game here. Because it allows a utility or a household to shift their power usage. So when the wind is blowing, the battery’s charging. When the wind isn’t blowing, the battery can discharge and supply a factory or a household, um, or a commercial business.
[00:17:20] Uh, so this is, this is, this is pretty exciting. It, it, it’s changing the game. Uh, if you look at. Industry estimates, uh, batteries were about, it’s a $50 billion business back in 2020. It’s $160 billion today. Uh, so it’s tripled over the last three years. Uh, so that, that, I think that’s the most exciting thing, uh, in, in energy trans transition, uh, right now.
[00:17:47] The other thing that’s interesting, uh, and I have to go back to the I R A, uh, there are production subsidies for battery production within the United States. Uh, and the subsidies are so extensive, uh, that it has changed the calculus of where battery companies. Where auto OEMs are placing their battery factories.
[00:18:13] Historically, the leaders of battery production have all been in Asia. It’s firms like Panasonic, it’s LG Chem, uh, it’s Samsung, uh, but with the advent. Of the I R A, it means that producing batteries in the United States becomes actually more cost effective than doing so in Asia. There, there’s some reports that say that with all these subsidies, it’s actually 15% cheaper.
[00:18:43] To do industrial scale battery manufacturing in the US versus Asia. So this has changed the, the whole calculus of, uh, of manufacturing in this country. And so, so that’s pretty interesting. Uh, Europe noticed this, uh, and they came up with their own policies. To get more battery production within Europe. Uh, so it doesn’t all flow out of Asia and, and into the, to the US there’s a program called C R M A, there’s a program called N Z I A and all these things are subsidizing battery capacity, uh, in, in Europe.
[00:19:16] So I, I’d say that’s, that’s the most exciting thing right uh, energy transition.
[00:19:21] Nick Mazing: Mm-hmm. So, uh, beyond. Storage, dropping in cost and and driving adoption of renewable sources. Is there anything else in the r&d pipeline that gets you excited?
[00:19:33] Xavier Smith: Sure. I think the most exciting thing I’ve read recently is the development of offshore solar. Uh, and this is interesting ’cause if you think of other methods of energy production, they all have an offshore version. We all know about offshore drilling for oil and gas. Uh, we all know about offshore wind for wind turbines, but offshore solar is, is an interesting development.
[00:20:01] Uh, right now there’s a. Uh, a, a project, uh, in Asia, it’s a, a JV between a, a Chinese power developer and a Norwegian power developer. And, uh, they’re doing 11 gigawatts, uh, off the coast, uh, in Asia. And, uh, it looks pretty compelling. It’s, it’s an interesting development. One of the issues with solar is getting the permits.
[00:20:29] Uh, for, for these large land plots that are required for a solar farm. And, uh, the, the thought is, is that if this moves offshore, the permitting will be lots of, lot, lot easier, uh, than, than it is right now. Uh, one of the issues with, with offshore solar is the fact that it’s quite corrosive, uh, dealing with, uh, the salt water and the salt air.
[00:20:52] Uh, but, but it’s, it, it’s interesting. So I’d say watch this space.
[00:20:56] Nick Mazing: So what about politics and energy transition? So do you think that in the US we’re going to see a, uh, kind of. Of blue state, the red state divide in the energy transition space.
[00:21:08] Xavier Smith: Yeah, I, I think that, that, that’s really interesting and, and I, I have to answer that question in two ways. I, I think in rhetoric, I. Yes. Uh, I, I think that Blue States will, uh, like to tout how they are converting over to renewable energy. Uh, I think red states would, would probably prefer to, to support the, the fossil fuel industry, uh, given the political contributions that, that they make.
[00:21:33] Uh, but if you look at the underlying trends, I think both red states and blue states are, are going towards renewables. Uh, One reason is just cost. Uh, we talked earlier about how back in the early two thousands renewable energy required subsidies to be competitive with fossil fuels. That’s no longer the case.
[00:21:54] Uh, if, if you look now in terms of build and install cost, Per kilowatt. Uh, if you look at solar energy, it’s about $1,300 per kilowatt. If you look at wind, it’s about $1,700 per kilowatt. If you look at coal, it’s $4,000 per kilowatt. So solar and wind are much less expensive than using coal. And I think whether you’re a red state or you’re a blue state, you just look at the numbers and, and you think it is just more effective, uh, to, to, to go this way.
[00:22:28] Uh, it’s funny if you look at Texas, uh, which which is. You know, a, a red state, they have, have a Republican governor right now. Uh, they had 10 gigawatts of power that were, that was offline due to the, the recent, um, uh, uh, Heat issues that they’re having there. And this is due to failures at coal plants, failure of nuclear plants, uh, but solar energy and wind energy was picking up the slack.
[00:22:58] Uh, and, and it was making things, uh, better for, for, for residents there. Uh, solar is booming in Texas. It’s going to be the second largest solar market in the us. Uh, it’s projected to outpace California by around 2030 or so. Uh, so, so that, that, that’s really interesting. Um, and then in Florida, uh, we’re, we’re seeing, uh, similar issues.
[00:23:22] Uh, the big utilities there are planning to phase out their, their cold generation by 2028 or so. Uh, and there’s a big move to, to have that. Replaced with renewables. Uh, so yeah, I, I think the adoption in red space will, will be big as well.
[00:23:39] Nick Mazing: So shifting gears again
[00:23:41] Xavier Smith: More, more gears, more gear shifting.
[00:23:44] Nick Mazing: from the new economy and discussing more conventional industrials like construction, building materials and so on. So at the beginning of the year, The expectations were low because rates were increasing what we’re seeing in construction and building materials.
[00:24:00] Xavier Smith: Yeah, sure. Uh, it looks like, uh, residential construction in terms of new homes built. Exceeds expectations. Uh, it, it, it, it continues to exceed expectations even though interest rates are, are quite high. Uh, it looks like, uh, prospective buyer traffic. There, there are various es that, that track these numbers.
[00:24:26] Uh, We’re at the highest numbers we’ve seen in, in 2023. Uh, so, so that’s pretty bullish in terms of, uh, what happens next for, for home builders, um, in terms of pricing incentives that, uh, home builders are having to use to attract buyers. It used to be around 25%, uh, of, of, of, uh, Deals were required incentives and that that fell to 22% in July.
[00:24:54] Uh, so, so that’s also, uh, pre pretty exciting for home builders. And so that, that, that looks pretty strong there continues to be a cloud over the, the commercial sector, especially office. Uh, so that’s where everyone’s watching to see what happens next.
[00:25:09] Nick Mazing: Xavier, thank you for joining us today.
[00:25:12] Xavier Smith: Thanks, Nick.
[00:25:13] Nick Mazing: Today we spoke with Xavier Smith, director of Research Energy and Industrials at AlphaSense Expert Insight Solution. We covered EVs. We covered energy transition, energy storage, as well as construction and interest rates. This was another episode of Signals by AlphaSense.
[00:25:31] My name is Nick Mazing, and you can find us on all the major platforms. Thank you for listening.
