Roger Garrett, November 2022
The automotive industry has been in transformation for over a decade, with electric vehicles (EV’s) growing from 17,000 vehicles in 2010 to over 16.5m vehicles in 2021, a compound growth rate of 89% and in an overall industry that typically grows less than 1% per annum.
The global shift towards decarbonisation allied with significant improvements in battery efficiency and improving sticker prices when compared with combustion engines, should ensure the growth in EV’s is the ‘only growth game in town’ in the automotive industry over the next decade.
The auto industry and its various suppliers are at the start of a major transition to EV’s. The initial surge is driven by both government policy around decarbonisation that promotes and subsidises EV’s helped by a buying cohort (millennials) with a preference for green technology.
The demand will be sustained by technology improvements that reduce battery price, increase range and improve the driver experience. The move to autonomous driving, together with regulation that discriminates against internal combustion engine (ICE) cars, will ultimately sustain the demand for EV’s.
The key themes that will sustain the EV revolution are:
Governmental support for decarbonisation. Many governments have set targets, some enshrined in law to achieve net-zero carbon emission targets, some by 2030. Even the two largest carbon emitters, the US and China, have commitments to carbon neutrality by 2050. Policy is being implemented to help the process with both incentives (tax rebates, subsidies and other incentives, government purchasing schemes) and disincentives (green taxes and tighter regulations) being used to help achieve these goals. Furthermore, the narrative is shifting from a focus on encouraging EV adoption to one that looks to ban the sales of ICE cars. Norway leads the way, looking to ban sales of new petrol-powered cars in 2025.
Manufacturer pivot to EV’s is impressive. The auto industry is embracing the EV opportunity with 18 of the top 20 largest auto companies (accounting for over 90% of all vehicle registrations in 2021) announcing intentions to increase available models. Some auto companies have already invested heavily to reconfigure product lines to just the manufacture of EV’s and many well-known car manufacturers talk about a time when they will only manufacture EV’s. For instance, Volvo will only sell electric cars from 2030, Ford will only sell electric cars in Europe by 2030.
Private sector preference for zero emission commercial vehicles will similarly underpin demand. Many enterprises have announced intentions to use only zero emission commercial vehicles for their transportation needs. Total cost of ownership will decline. Currently sticker prices for EV’s are higher than ICE vehicles, even with subsidies and rebates. However, a large part of this is due to the high cost of EV batteries which adds approximately US$10,000 to the cost. Ongoing investment into technology and performance should ensure that the overall trend is for an improving relative cost of ownership.
Technology improvements will improve the user experience. New models, improving battery performance and charging infrastructure (that removes the fear factor of completing a journey), better integration of infotainment and other technologies will continue to improve the value proposition of owning an EV and support demand.
User demand for clean technology. The trend or preference for technologies that cause less harm to the environment continues, especially with younger consumers. This should remain a strong source of demand for EV’s. Autonomous vehicles. The autonomous vehicle market is still in its infancy but eventually has the potential to significantly increase demand. Satisfying the appropriate authorities over safety standards as well as scaling and expanding the business, will take time but the long-term potential is large.
In conclusion, the automotive industry is undergoing a major transformation that should sustain growth in the EV value chain over decades. Government incentives and disincentives as well as new technologies and new models, when combined with changing consumer preferences, creates a strong platform for growth in EV’s for many years.
The securities we follow are likely to benefit from rising demand for EV’s over time. For more information on these opportunities, please visit the Craigs portal or contact your investment advisor.