It’s good to be green
First there is the environmental angle. EVs are greener than current mass-market vehicle options, and as countries continue to implement their Paris Climate Accord commitments, we believe the question of carbon dioxide (CO2) will become ever more important. Similarly, an increased regulatory focus on nitrous oxide emissions and fine particulate matter seems unlikely to abate in the wake of the Volkswagen scandal.
The European Commission (EC) has laid out plans not only to tighten emissions testing for automakers, but also to ensure far higher penalties for companies that fail to make the grade. As of 2019, levies will take the form of a €95 fine per CO2 g/km above the limit for each vehicle produced if the average fleet emission breaches targets. For one German automaker, with 3.65 million units sold in Europe in 2016, even just being three grams above the EC’s emissions target would translate into a €1bn fine.
Low battery – please charge
If EV disruption is going to happen, we suggest it is likely to need a lot more charging stations and standardized access points to help address ‘range anxiety’ – fears of limits on battery life.Indeed, it appears automakers and regulators are putting in place the infrastructure to prepare the ground for an EV future. In Europe, a consortium of German carmakers has agreed to build a network of fast charging stations along the country’s highways.
Crucially, we think, companies across the globe have also cooperated on the standardization of charging system plugs, meaning a one-size-fits-all approach for motorists needing to charge their cars.
We also see electric vehicles as offering numerous benefits over petrol or diesel engine cars. For one thing, they have fewer moving parts, which makes them far more reliable and cheaper to maintain. They are also potentially safer and, as anyone who has test driven one of the latest models can testify, they can offer a fun driving experience, in some cases with 100% of torque (rotational force) available at 0rpm.
As the infographic shows, all this activity is beginning to translate into sales, with a year-on-year increase of 45% in EV sales between 2015 and 2016. However, despite this momentum, we would sound a note of caution: government subsidies may still remain necessary.
Here too there are signs of progress. Germany, for example, has established €1.2bn of EV incentives, which include a 10-year exemption from vehicle tax, as well as tax breaks to employers for setting up battery chargers for employees at the workplace. China’s 13th Five-Year Plan has a target of five million EVs on the road by 2020, and Norway has committed to a target of zero new fossil-fuel cars sold after 2025.
The investment case
With rising sales, new models and supercharged investment, in our view it’s not a question of if, but when, EVs overtake their fossil-fuel counterparts – but how should investors respond? Certain companies might generate great headlines around EVs, but headlines do not necessarily create investment returns. We also expect it to be tough for original equipment manufacturers (OEMs) to differentiate themselves in the EV world. It is therefore difficult to bet on one particular name, as the space is likely to be overcrowded and market shares very volatile.
Currently, we see better opportunities ‘upstream’ and ‘midstream’ in the basic materials and technology providers the OEMs will need to create the EV revolution. These include semiconductor manufacturers, battery manufacturers and the companies which produce the lithium needed for EV batteries.
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