Since the car was invented in 1886, it has become a central pillar of economic growth. However, this journey did not happen overnight.
One of the world’s most successful investors, Warren Buffett, has pointed out that for investors back in 1903 the potential of the motor car may have been clear, but those early investors would likely have lost money. That’s because out of the 2,000 or so companies that entered the US automobile industry in the following decades, only three now remain.
This analogy is particularly relevant for investors considering the electric vehicle (EV) sector. On the one hand, the transition to electric cars is an obvious trend as it is pivotal to the success of net zero ambitions; on the other hand, identifying those companies today that will survive and prosper for the next ten to 20 years will be challenging.
Unlike in 1903, the auto industry is no longer new, and areas of competitive strength and scale that are more likely to translate into EV success can be identified. Yet, new technologies, particularly battery technology and its related supply chains, can be both disruptive and hard to predict and highlights the importance of active and deep fundamental research.
Growth of the electric car market
Investors often look to past historical industrial innovations to gain insights into the likely impact, pace of growth and market penetration of new technologies. The evolution of the internal combustion engine (ICE) can provide a useful framework for how the electric vehicle market might play out. This is relevant not only for the sales of cars and the prospects for manufacturers, but also to understanding how related industries, infrastructure and supply chains may be impacted which should lead to better investment decisions.
Electric cars were first developed around the same time as their ICE counterparts, but it wasn’t until the mid-1990s that the first purpose-built modern electric car was mass-produced. Take up has been slow but is accelerating. In 2021, close to 10% of global car sales were electric, which was four times higher than the previous year. And momentum has continued into this year, with 2 million being sold in the first quarter, up 75% from the same period in 2021.
This exponential growth can be attributed to multiple factors – government stimulus measures, a jump in the number of electric car models, and record diesel and gasoline prices. Consumer preference is another major driver behind this growth – car buyers are increasingly recognising the benefits of adopting a greener lifestyle and transportation is a relatively easy starting point.
Amid such high uptake, it would be easy to assume the sector is nearing its growth peak, but in reality it has barely scratched the surface. More than half of current sales were in China, with Europe and the US largely making up the rest – meaning several regions (notably emerging markets) are lagging. And for net zero to be achieved by 2050, electric vehicles will need to represent 60% of vehicles sold globally by 2030, but current forecasts suggest this will only be around 30% at that time.
It’s not about the number of wheels
It’s easy to think that the electrification of vehicles is all about cars. However, in order for true decarbonisation to take place all of our transport infrastructure will need to be transformed. Progress on the electrification of other transport segments is taking place, albeit more quietly.
BloombergNEF’s seventh annual Long-Term Electric Vehicle Outlook found that there are over 1.3 million commercial electric vehicles, including buses, delivery vans and trucks, and there are over 280 million electric mopeds, scooters, motorcycles and three-wheelers on the road globally. Again, China is a market leader with 685,000 electric buses on the road and 195 million electric two-wheelers, but 17% of light commercial vehicles sales in South Korea were electric in 2021 and almost 40% of India’s three-wheeler fleet is already electric.
Meanwhile in Europe, the popularity of electric bikes is exploding and accounted for over 12 billion euros worth of sales last year as evolutions in battery technology extended the range e-bikes can travel and digitisation blends the physical experience of riding a bike with the digital experience of using a smart phone. As well as domestic use, e-bikes are being used commercially for urban delivery services, while shared mobility schemes are helping plug the gap between cars and public transport.
Source: BloombergNEF, Electric Vehicle Outlook 2022. Accessed 2022.
Greater charging infrastructure required
One element slowing down the rollout of electric vehicles is the supporting charging infrastructure. Many car buyers are put off switching to electric vehicles because of so-called range anxiety – the fear of not being able to find a charging point in time to replenish a draining battery.
In 2021, there were around 376,000 publicly available EV chargers in Europe. This sounds a lot, but the number is expected to grow to an estimated 1.3 million public charging stations by 2025 and then reach 2.9 million by 2030. And there is significant regional variation, not just in terms of the number of charging points but the type of charging available – slow versus fast charging. The fastest electric vehicle chargers currently have a maximum output of 400kW, which means a vehicle could potentially be fully charged in about 15 minutes.
In order for the full potential of transport electrification to be realised – which would include fleets for ride-hailing, car hire and the delivery of goods – greater emphasis needs to be placed on how the charging infrastructure is rolled out. As well as individual chargers at home, at supermarkets and shopping centres, and petrol station forecourts, larger scale charging hubs would be capable of charging hundreds of vehicles at once. These would not only be efficient for users but would also help control the supply of electricity needed to power these vehicles.
And digitisation is set to play a vital role here too. Smart or ‘intelligent’ charging will help optimise energy consumption, while vehicle-to-grid technology will enable the electricity stored in vehicle batteries to be transferred back to the grid.
The greatest challenge to the mass roll-out of electric vehicles is the supply of batteries and their rare mineral and metal components.
Supply is already proving to be a greater constraint on adoption than demand in many countries – with some electric car models having a year+ waiting time for delivery. In fact, for the first time in a decade, the price of an electric car battery is set to rise in 2022.
The root of the problem lies in a limited supply of raw battery materials – such as lithium, cobalt and nickel – but also a lack of preparedness by many nations worldwide. China is the world’s most dominant player in refining strategic minerals, refining 73% of the world’s cobalt, 68% of its nickel, 59% of its lithium. This contrasts to Europe which processes around 20% of cobalt, but little else, and the US which has an even smaller stake.
Growing concerns over China’s dominance of the battery supply chain has prompted governments and businesses to act. While well-known car manufacturers are seeking to take more control of supply sourcing, some governments are using policy to rectify this situation.
The recent US Inflation Reduction Act may have been touted as a major step forward in climate change initiatives, but its tax credits for electric vehicles require a certain percentage of raw materials to be sourced domestically, or from free trade partners or through recycling. Significantly, this doesn’t include China. As well as triggering accusations from the EU that such policies are discriminatory and breach WTO rules, it has also raised criticism that few vehicles will actually qualify for the subsidies.
Looking beyond the obvious
An age of electric vehicles is dawning. While consumers, business and government acceptance of fuels demand, work still needs to be done for the transition to truly succeed. History has shown that evolution does not always happen in the obvious places. Vehicle manufacturers are collectively embracing the disruption of this necessary change, but associated industries are creating headwinds that may hinder rapid progress.
At BNP Paribas Asset Management, our Environmental Strategies Group recognises that simply identifying an individual trend, however transformative, is no guarantee of investment success. Rather, a wider understanding of the enormity of the challenges and opportunities being faced is required. Finding effective, thematic businesses takes research and an open mind, and requires the conviction to invest with an unconstrained approach, targeting the best ideas across a range of interconnected sectors.
We are convinced that an active approach is key to identifying the companies that will outperform.