In a growth-challenged world, decarbonisation remains a powerful structural growth trend. COVID-19 has created opportunities and challenges for investors aiming to tap into it.
Jul 29, 2021
Consumers appear increasingly ready to make the electric switch, not least due to advances that have addressed many of the turn-offs associated with earlier EVs. The electric cars of today are streets ahead of their forerunners of just a few years ago, and the market now offers more affordable models, longer ranges, faster charging speeds and better support infrastructure.
Automakers evidently believe the future of car travel is electric. New EV-players are entering the auto sector and incumbents know they need to electrify to survive. Cadillac, Volvo and Bentley are among the marques planning to go all-electric by 2030, with Jaguar aiming to do so by 2025.
So do politicians, many of whom are under pressure to implement credible net-zero strategies. Governments that are considering or have taken action to prohibit sales of some or all new internal combustion engine (ICE) vehicles include Norway (2025), the UK (2030), India (2030), Ireland (2030), Israel (2030), Canada (2035), China (to be determined) and France (2040), among others, as well as a number of US states.
Excitingly for investors, the transition to electrified transport is only just beginning – suggesting the big profits to be made from the e-transport revolution lie in the future. EV sales may have rocketed, but EVs’ share of total car sales was still under 5% last year. In all, there are just 11 million or so EVs on the road, nowhere near enough to meaningfully cut greenhouse gas emissions from transport.
Based on the International Energy Agency’s ‘stated policies’ scenario – i.e., reflecting all existing national climate-related policies, policy ambitions and targets – the number of EVs globally needs to reach 145 million by 2030 for governments to deliver on their current climate promises. If we are to actually achieve the Paris climate goals, there need to be half as many EVs again – about 225 million.
That adds up to a lot of car sales. The challenge for investors is figuring out who will make them, and whether they can remain profitable while doing so. Because at this point, we think it is still very difficult to determine which manufacturers will ultimately dominate the EV market.
So how can investors capture the opportunity? Instead of buying into automakers, an alternative route to getting exposure to the future of transport is to turn towards the auto sector's supply chains and related industries.
EVs look a lot like ICE cars on the outside, but they require different technologies and even, to some extent, raw materials. The projected development of the EV market implies very significant growth potential for the companies that produce and supply them. Areas to consider here include semiconductors, lasers and sensor technology, mobility software, battery production and heating/cooling systems.
By allocating to market-leading businesses that provide these and other components and services to a number of the major EV manufacturers, investors may be able to capture the rise in electric-car adoption regardless of which automaker ends up topping the EV sales rankings.
Another possible benefit of investing in EVs via supply chains is that companies within these areas typically get less attention than carmakers. Consequently, their growth potential is more likely to be underappreciated, and hence not properly reflected in their share prices. In contrast, the shares of some of the early manufacturers of EVs – some of which are rarely out of the headlines – have already priced in heady increases in sales and profitability, though they have also been very volatile at times.
A final reason for getting exposure to the electric-transport revolution indirectly via supply chains is that transitioning ICE production to EVs is expensive and fraught with uncertainty. As electrified transport becomes mainstream, EV makers are also likely to face pricing pressures as they battle for market share, putting further potential strain on balance sheets. EV suppliers may be better placed to remain profitable and deliver sustainable returns.
In short, although there will eventually be some big winners among carmakers as the global transport system goes green, the route to electrification is far from clear for most of them and littered with potential potholes.
Investors may therefore want to consider taking the road less travelled, by investing in companies in related sectors. That may give them a better chance of capitalising on perhaps one of the biggest economic revolutions of the 21st century, while making a positive contribution to driving forward global decarbonisation.