RedBlue Newsletter: 06Oct22

RedBlue Newsletter: 06Oct22

A concise yet comprehensive picture into all things mobility

Podcast: The Expert Series

Episode 4: Horace Dediu

This episode we speak with Horace Dediu, the co-founder of Micromobility Industries and one of the earliest and most influential voices in the world of micromobility. A longtime Apple analyst, his insights into the adoption curve of products like the iPhone informed how he began to look at consumer interest in e-bikes and, later, e-scooters. Looking at the state of micromobility today we touch on flash points, like the near-collapse of one-time leaders like Bird and Lime. “What went wrong,” quickly morphs into “what is still likely to go right,” and Horace takes a generally positive long-term view of the role that micromobility will play in cities around the world. Hosts Olaf and Prescott take issue with Horace’s general upbeat attitude, concerned that without a bit more passion in the fight, the necessary infrastructure changes aren’t likely to be adopted. Be sure not to miss this one - and let us know where you fall in the debate!

You can listen on Spotify & Apple as well

Your thoughts?

Can we do more to accelerate micromobility in the US? Our podcast with Horace this week got feisty on this point. What do you think? Click through to vote on our poll!

🐏 Fleetification drives electrification

Why should subsidies be directed primarily to fleets rather than private car owners? You just need to look at one company to understand: Hertz.

In recent months, Hertz has signed deals to buy 100,000 Teslas (a large portion of which will be delivered this year), 65,000 Polestars and 175,000 GM EVs (over the next five years). That’s a total of 340,000 EVs. Bought by one company.

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To put that into perspective, in the first half of 2022, about 413,000 EVs were sold in the US (about 6% of US vehicles sold). Now Hertz isn’t buying all of these vehicles right now, but it is locking in this demand for carmakers allowing them to scale manufacturing capacity with confidence. Furthermore, for carmakers these vehicles are much simpler to sell and deliver - they don’t need their dealerships to invest to transitioning to EV sales, a challenge that GM (link) and Ford (link) are dealing with right now.

Not only is Hertz a massive portion of the overall EV market, but it is also working to build out charging infrastructure - the company just closed an agreement with BP to build out a national network of charging across the US (link).

Why is Hertz all in on electric? The simple reason is that they have made a business decision about the economics of operating EVs. Rental vehicles are used significantly more than privately owned vehicles and since they cost less to operate, they pay for themselves. You can see me talking about this more here:

Unsurprisingly, Hertz isn’t the only fleet aggressively purchasing EVs - EV subscription company Autonomy just ordered 23,000 EVs (link), and rental company Sixt just announced it would purchase 100,000 BYD EVs (link). Meanwhile, Amazon has ordered 100,000 delivery vans from Rivian and “thousands” Ram ProMasters from Stellantis. UPS has ordered 10,000 electric vans from Arrival.

Fleet vehicles are the best type of cars to electrify - they do more miles more efficiently. These companies offer a service and therefore also have an interest in helping build out the required infrastructure for mass adoption of EVs. Beyond this, rental cars are a great way to shift consumer habits: you’re test driving an EV when you rent one.

So why should Hertz and other fleets get subsidies if they are already electrifying rapidly? The answer is simple: we have a finite amount of dollars and we should be using them to pull the most effective lever to reduce vehicle emissions. Every dollar that goes to private car ownership is going into “battery sponges” (see here for our explainer) - vehicles that are over-engineered and underutilized. In contrast, every dollar going into fleet vehicles has much greater leverage in how quickly it shifts miles over to electric for all the reasons outlined above. Companies like Hertz that show they can bring EVs online quickly should be given additional support to bring about an even bolder and more rapid transformation. Everything else will follow.

🌃 The shriveling frontier of America

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America is running out of land for housing (link).

Land now accounts for 47% of U.S. home values, estimates Mr. Davis. That is up from 38% in 2012 and less than 20% in the early 1960s. The rising value of land is responsible for almost all of the surge in home values in recent decades, he said.

It seems preposterous: How could a country so rich in space have so little available for people to live on?

The answer lies at the intersection of a few compounding factors

  • Rules about where & what you can build (zoning + density): A key reason the available pool of land has shrunk is that land needs to be zoned for development. The frontier of America has been closed down through bureaucratic categorization. Beyond this, what can be built in these zones has meant that often only low density housing such as single family homes are permitted. The consequence of reducing space to build and the density of what is built on it is that land markets can’t respond to growth in demand other than through price increases.
  • The capacity of cities to handle growth (transportation): America is built around cars. But cars have limited throughput (link). As you increase the density of an urban space, you also increase the demands on thoroughfare, and roads quickly max out causing congestion. It’s very hard to correct for this retroactively: Once an urban environment is built, it becomes very challenging add higher throughput modes. Landowners will fight against giving up their property to create the right of way needed. But because it can’t be built, they will also fight against denser housing or new developments, since this imposes a greater burden on roadways.

This combination of regulation and car dependency has created bonsais out American cities, stunted in their growth and absurdly overpriced. This phenomena is most pronounced in coastal cities like San Francisco and LA, but it is becoming more widespread.

Bonsais and NIMBYs both follow a very narrow definition of what is beautiful; enforcing this standard broadly stunts growth
Bonsais and NIMBYs both follow a very narrow definition of what is beautiful; enforcing this standard broadly stunts growth

The dynamic is pernicious and creates a feedback loop that increasingly restricts supply and drives up costs. Since adjacent construction lowers the value of your land, and preventing construction drives up the value by restricting supply, every new homeowner is baptized into the NIMBY model through simple self-interest. Fortunately, self-interest can be translated into more palatable claims about aesthetics. Regulations with initially innocuous intentions have been weaponized against development (link). And because so much of our world and wealth is tied to our home, these forces are incredibly powerful. It turns out even people who write manifestos declaring America must build more and remove obstacles to doing so (link) fight local battles against construction when it directly affects them (link).

Price increases become self-reinforcing: As restrictions for new homeowners grow and prices climb, those in the landowners club have less desire to sell, and instead wait for their asset to appreciate further while more ardently resisting change.

The consequences of this simple mechanism are cascading, and are a key driver of America’s inequality crisis. At its most extreme, homelessness, which is a devastating epidemic in cities like San Francisco and LA, can’t be understood without understanding that restricted supply, rising costs and the resulting inability to afford a home is literally the reason that people become home-less. But the problems span the whole of society and create a massive line between the haves and the have-nots - those that can ride the tide of rising prices and those who get drowned by it. It affects young people disproportionately and threatens a long term failure mode for a society. It seems likely that this problem will only because more entrenched with time.

We care about this problem broadly, but also specifically since transportation policy and land use policy are intimately connected. The macro-picture is important to understand numerous local fights that are being fought across America. And though there are localized responses to these issues, there’s no overarching plan to address it, even though there needs to be.

📉 Fedex vs UPS earnings

Fedex’s operating income fell by 69% in Q3. It could be a sign of weakness amongst consumers, but Fedex has been much less successful than UPS under the disciplined leadership of Carol Tomé in reigning in costs. You can see the relative performances of there stocks in this chart:

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