A disruptive technology is an innovation or invention that creates a new market and disrupts an existing market, often causing an enormous displacement of the already existing market. Examples of this include: the car and the horse-drawn carriages, Netflix and Blockbuster, email and the fax, Wikipedia and the encyclopaedia, oil and whale oil, cell phones and landlines.
Often the transformative effects of these technologies are not widely predicted, so market leaders suddenly find their previously profitable products suddenly redundant. A good example are the historic completely inaccurate forecasts by prominent telecommunication companies about the future demand of cell phones. In 1995, the largest telecommunications company in the world was AT&T. They hired the consultancy firm ‘McKinsey and Co’ to investigate and predict the market usage of cell phones in the U.S. in the year 2000. Mckinsey conducted an analysis of the market and ran their models and eventually determined that approximately 900,000 people in 2000 would use be using cell phones. Based on these low predictions AT&T decided the market was not worth a significant amount of investment.
Of course, McKinsey were wildly wrong. The actual number of cell phone users was nearer 110 million people by 2000. But as AT&T had not invested heavily in development in that market they missed trillions of dollars in potential opportunities. So, what happened and why were McKinsey so wrong?
Well, McKinsey made their predictions based on previous market growth and assumed a linear rate of market increase. They failed to anticipate the technology’s potential utility to make it preferable to the older technology. If they had anticipated this then they could have predicted that the majority of the population that were using landlines would seek to acquire cell phones; then their predictive models would have had a far higher degree of accuracy.
The lithium battery has the same potential to disrupt the conventional fossil fuel vehicle market. When electric vehicles have equal or better performance, have equal purchase cost, have an equal or better range before recharging, suffer fewer mechanical difficulties, or have a longer operating life than conventional vehicles, then the pervious market growth of the electric car market will no longer follow the historic trend. Should several of these electric vehicle benefits transpire then the electric car market will shift towards replacing conventional vehicles, not towards continuing its gradual growth. It could be that in 10 years’ time it would be economic lunacy to choose a petrol-powered car over the much cheaper and more powerful electric car; in which case there will likely be an insufficient number of lunatics to sustain the conventional car business and it will die.
The electric car’s efficiency is growing at a much faster rate than the increasing efficiency of conventional vehicles. Additionally, electric vehicles require fewer parts and will eventually become cheaper to manufacture than conventional vehicles – which will also mean much lower maintenance costs for electric vehicles. With these factors in mind it seems inevitable that electric vehicles will begin to supplant conventional vehicles, and lithium will become the white gold that displaces black gold - just as happened to whale oil.
Once this disruptive stage begins the price of lithium will increase according to the increase in demand, and a massive surge in demand can be expected to cause a similar surge in lithium’s value. At first glance this might indicate that the price of lithium batteries and their vehicles will also increase rapidly. However, lithium prices have little impact on costs as lithium makes up 3% or less of battery costs, meaning that even huge lithium price spikes would not significantly impact the cost of electric vehicles. Consequently, electric vehicle manufacturers are unlikely to shift away from lithium despite huge increases in the commodity’s spot price.
When considering the potential future of lithium, it cannot be disassociated from the electric vehicle market that seems poised to rapidly accelerate once a seemingly inevitable tipping point is reached. When that tipping point passes, and lithium’s value climbs quickly, even more potential lithium deposits will become economically viable and the margins for success will correspondingly increase. With this in mind we are looking to acquire more potentially lithium rich properties in the near future to take advantage of this potential before the technology becomes market disruptive and drives a huge increase in property prices and in the number of competing prospectors.
It can never be predicted when this tipping point will be reached but it is always better to act now than risk waiting, only for the opportunity to pass you by.