Electric dreams
Author: Martin Grosskopf
April 11, 2019
Will investors get a jolt from EVs this year?
It was a period of frenzied innovation and some considered the invention nothing more than organized lightning in a box. But the push to find new ways to move the newly-urbanized masses inspired rapid advances in electric vehicles.
Ford’s Model T ultimately won out.
And while it’s taken more than a century, some of the traditional automakers appear to be betting like never before that the electric future is arriving sooner than many think. Consider, for example, that the world’s largest auto company boosted its production plans for the electric vehicle (EV) last month, saying it will produce 22 million electric cars over the next decade, up from earlier plans to build 15 million cars. Meanwhile, that same week, one of the Big Three announced a $300-million (U.S.) investment to produce a new EV in line with its goal to sell one million units annually by 2026.
It’s little wonder. In its “Battery Electric Vehicles” report, industry watchers like Deloitte are forecasting a 950% increase to 21 million units in global sales of EV units by 2030, up from about two million in 2018. Yet, other prognosticators are far less jubilant in their outlook. In other words, predicting the future market penetration of EVs at this juncture appears to be more of an art than a science.
Still, there’s little question that the global auto industry is undergoing a dramatic transformation. And where there’s change, there’s opportunity. The quandary for many with an interest in marrying their interest in addressing climate change with shareholder returns is in discerning where best to invest their cash. In other words, which of these massive capital investments will ultimately prove profitable? Is it wise to throw money at those companies currently boosting production, or to wait until other big players join in, juicing their production and EV fleets?
With so many disparate views of the near-future, as well as notions as to which players will ultimately prove successful, investors would do well to follow the supply chain.
Global growth of the EV market
China currently buys more than half of the world’s new electric cars, according to the International Energy Agency’s (IEA) “Global Electric Vehicles Outlook” for 2018. Meanwhile, Norway boasts the deepest market penetration, while Sweden, Germany and Japan have also been posting strong growth rates. While the most recent figures show that the United States sold the second largest number of EVs in the world after China, it’s still a very small fraction of the overall auto U.S. market, the IEA report said.
Pure plays have undoubtedly proven that people would buy EVs if they were designed well enough. Regulation provided the window of opportunity. Indeed, much of the growth around the world has been driven by government policy initiatives designed to meet social and environmental sustainability goals, as well as through financial incentives. Just last month, for example, Canada’s federal government introduced new subsidies for electric vehicles in its most recent budget as part of its commitment to adopt a zero-emission vehicle strategy.
Meanwhile, the failure of diesel-based vehicles to address climate change initiatives has also played a role in the growth of the EV market. In fact, diesel emissions have proven even more harmful to human health than traditional vehicles, and automakers have responded by shifting production out of diesel and into both EVs and hybrid vehicles.
Certainly, there’s a valuation argument to be made as we look to the auto sector in 2019, assuming we avoid a recession in the near-term. Auto stocks were pummeled throughout much of 2018, driven lower by a confluence of factors—including trade tensions between the United States and China and in Europe, and higher interest rates, which hurt consumer financing and added to an overall dampening of demand for vehicles in North America.
While traditional automakers are ramping up EV production, investors would be wise to weigh how spending billions over the next five years to boost production will impact their massive legacy businesses. Is there currently enough demand for EVs to justify the investment? Not to mention how the raft of new players in countries like China—which are racing ahead, pumping out new EVs at breakneck speed–will impact the global marketplace. Combustion engines will likely still be the largest fleet for decades to come and shouldn’t be discounted, despite the acceleration in demand for EVs.
Follow the supply chain
Investors would be wise to kick the tires of the conventional technologies that assist in reducing emissions from combustion engines, but also in EV exposed companies further down the supply chain. Many of the future opportunities are likely to be found in the supply chain companies that produce batteries or their inputs such as cathodes, separators or lithium. I believe that tremendous opportunity also exists in myriad of technologies that manage the flow of power from the battery to the electric propulsion motors. EVs are an important stepping stone to fully-autonomous vehicles, which will ultimately transform the transportation industry.
In an era of such meaningful change, many of the traditional automakers are already forging alliances with new suppliers, while creating a wealth of new opportunities for investors.
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Written by
Martin Grosskopf, MBA, MES
Vice-President and Portfolio Manager
AGF Investments Inc.
