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A variety of secular trends are spurring innovation and disruption in the global economy and creating what we believe are attractive thematic investment opportunities. In this series of articles, we take a close look at some of these trends, the breadth of the opportunity set and the related risks.
Here, we focus on what we believe is the most significant period of disruption in the transportation sector in more than 100 years. Among our key conclusions:
The move to electric vehicles and the growth in vehicle technology will change how we get from point A to point B, but there is much more to this story, which will play out for years to come. EVs will help to reduce greenhouse gas emissions. Globally, transportation is the third-largest contributor of global emissions at 21%, with road vehicles accounting for 77% of those transportation-related emissions (Figure 1).
Given their lower energy density requirements compared to shipping, aviation and rail, road vehicles are the first segment to be electrified with current technologies. Light-duty vehicles and buses, which have more predictable routes (compared with medium-duty/heavy-duty commercial vehicles), are likely to benefit from the establishment of charging stations, as well as government subsidies and public transport electrification targets. As technology evolves, the expectation is that other transportation sectors will, in time, begin to adopt electrification more broadly.
The other important facet of the story is the heavy use of new technologies in both EVs and other vehicles, including ADAS and increased connectivity, which should deliver greater value to the user. This higher content value within a vehicle necessitates supply-chain investments (e.g., semiconductors and batteries) and opens new addressable markets — not unlike what we saw with the development of the smartphone ecosystem. We think it is this ecosystem that potentially provides the most attractive investment opportunities. With these changes, legacy OEMs (original equipment manufacturers) will see greater competition from new entrants.
An interesting aspect of this development is that it is facilitating a shake-up in market share. For the past decade, Chinese OEMs have struggled to gain foothold both globally and within their domestic market. However, the transition to electrification is empowering Chinese OEMs, which have steadily developed capabilities, built strong and deep supply chains and are now leaders, taking over the local EV market. With a compelling and affordable EV proposition, we see a long runway for growth for Chinese OEMs.
We expect this transportation revolution to continue accelerating, with the aid of four main catalysts:
Policy — As a growing number of countries commit to net-zero emissions, many are establishing aggressive targets for EVs. The European Union (EU) is aiming to have 30 million zero-emission cars on the road by 2030 versus 1.4 million in 2020. The US has set a goal of pushing EVs to 50% of new car sales by 2030, with the recently enacted Inflation Reduction Act providing strong incentives. And China set a “new energy vehicle” (NEV) target of 20% of new car sales by 2025 versus 6% in 2020 — although we would note that penetration is already estimated to be significantly higher than that, running at close to 30%. Some countries, including Canada, France and the UK among others, have also set dates for the ban of new ICE passenger vehicles sales, generally between 2030 and 2040.
Performance — A growing number of consumers recognise that EVs, with their lower centre of gravity and faster acceleration, simply perform better than ICE vehicles. Consumers will also value improvements in technological performance, such as larger displays that offer better connectivity, navigation features and entertainment. As technologies mature, regulatory requirements to increase safety could help boost the adoption of ADAS — such as automatic emergency braking, which has been included in safety assessment programs for new cars in Japan and Europe since 2014. These technologies will impact ICE vehicles, not just EVs.
Pricing — Over time, drivers of ICE vehicles will face higher costs driven by tighter emission standards, while EV drivers will see costs decline with growing scale and technological advancements — and this is before taking any government subsidies into account. While there will be variations by country, EVs are generally expected to approach cost parity with ICE vehicles by 2025 and even earlier in some markets. This metric has limitations, however, and we think a more valuable tool for comparing the two vehicle types is the total cost of ownership (TCO). This incorporates the price of the vehicle but also the cost of maintenance, fuel and other factors. On the basis of TCO, EVs have parity already at higher price points. This also means that residual values should be stronger for EVs than for their ICE vehicle peers.
A commonly cited factor related to EV adoption — and cost — is driving range, which has been steadily rising over time. According to the International Energy Agency, the weighted average range for a new electric car was about 350 km in 2021, up from 200 km in 2015.1 Much of this improvement is attributable to advances in battery technology, which have also driven down the upfront costs of batteries. Since 2010, we have seen dramatic declines in battery costs, which (despite a slight estimated increase in 2022 due to higher raw material costs) appear to be on track to hit US$100 per kilowatt hour in the next few years — the level at which battery EVs are generally considered competitive with ICE vehicles (Figure 2).
As battery demand increases — for vehicles but also other uses — companies supplying the underlying components should benefit. One example is battery separators, which are critical for battery safety. Among the leaders in this space is a Chinese company that has been able to add supply ahead of rising demand and grow market share.
Example is for illustrative purposes only and not intended as an investment recommendation.
Products — Improvements in product choice should help drive consumer adoption. Carmakers are focused on phasing out the production of ICE vehicles and introducing a host of new EV models. Between 2018 and 2021, the number of EV models more than doubled to over 450 globally (Figure 3), and the market continues to expand at a rapid rate.
We think the rising market penetration of electric vehicles and new vehicle technologies presents growth opportunities for a wide range of industries and companies:
Power — Companies throughout the battery supply chain, from mining companies to battery OEMs
ADAS and autonomous technology — Manufacturers of semiconductors, sensors, software and hardware that enable safer and, in time, autonomous driving
Connectivity — Companies providing the semiconductors, software and hardware required for the human/machine interface in EVs (smart “cockpits,” display units, etc.)
Electrification — Key components that are critical to EV production like the motor supply chain (coil winding equipment, ball bearings, motor manufacturers)
As indicated by the second and third categories above, EVs use significantly more semiconductor content than a typical ICE vehicle — often three times as much by some estimates. As autonomous driving becomes mainstream, we think we could see as much as 10 times the incremental semiconductor content as current levels.
The rise of the EV is accelerating the move from analog to digital. This trend is evident in the advanced digital panels in front of drivers (clusters) and in new digital infotainment features. A US-based company with meaningful market share in cockpit electronics is tapping into this opportunity via touchscreens and haptic controllers, but also in the required software, cybersecurity and connectivity technology.
Example is for illustrative purposes only and not intended as an investment recommendation.
As with any investment theme, there are risks to our outlook, including, for example, the possibility that battery costs remain too high (e.g., if the supply of raw materials is inadequate) or that governments don’t invest sufficiently in charging technology, inhibiting EV adoption. There are also ESG-related risks to bear in mind, including limited planning for battery disposal and recycling (the “E”), workforce reduction as combustion engines are phased out in favour of less labour-intensive EVs (the “S”) and the risk of data breaches affecting vehicle connectivity and automated functions (the “G”).
But we believe that over time, the rise of electric vehicles and in the technology packaged into vehicles of all types will continue to transform the transportation sector and create attractive investment opportunities, particularly among suppliers of the underlying technologies who are not reliant on a single brand or car model being successful but can benefit from the broader trends in consumer and commercial adoption.
1Source: International Energy Agency, Global EV Outlook 2022
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