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Electric vehicles: the next big investment opportunity?
GLOBAL warming has far-reaching and devastating consequences for the planet. Much of it is due to carbon dioxide emissions from cars. Most people acknowledge the threat, but think it will not affect them over their lifetimes.
Yet global warming cannot be ignored anymore. Its effect on our lives is real. Average global sea levels rose 17 cm over the last century, and the rate of change is increasing. Last year, we witnessed an extraordinary spate of natural catastrophes. Major hurricanes hit the US Gulf coast, the Caribbean and Mexico. Fires flamed across the US West Coast. These events are likely to increase in frequency and severity.
Governments around the world are strongly compelled to act. In late 2015, about 200 countries signed the Paris Climate Agreement, pledging to keep the increase in global average temperatures well below two deg C above pre-industrial levels. The European Union (EU) wrote laws to ensure it can meet its climate and energy targets by 2020. These targets include a 20 per cent reduction in greenhouse gas emissions; a 20 per cent improvement in energy efficiency and an agreement that 20 per cent of EU energy should come from renewables.
Global warming combined with regulatory action has a significant consequence for investors. With transportation accounting for a quarter of global greenhouse gas emissions, of which passenger cars and other light vehicles represent 17 per cent of total emissions, this is a natural place for affected parties to focus their attention. Electric vehicles (EVs) have been placed on the fast track to mass adoption.
In China, infamous for its smog-choked cities, the government has been aggressively supporting the EV market through subsidies and restrictions on petroleum-powered vehicles. Closer to home, the Singapore government has been a strong proponent of autonomous vehicles, and has amended rules to facilitate trials of autonomous vehicles (AV). Vehicle manufacturers globally are confronted with new requirements to meet various emission standards.
Meanwhile, the economics of EVs is becoming viable. The costs of reducing carbon dioxide emissions in combustion engines are rising, while the cost of EVs is falling due to economies of scale for battery producers.
Technological disruption, regulatory emission requirements and changing consumer preferences are likely to lead to a rapid decline of diesel cars, and a shift towards more environmentally-friendly EVs. A number of car manufacturers, components suppliers and analysts are all expecting that, as early as 2025, electric vehicles might comprise up to half of new car sales.
By 2030, 70 per cent of all cars might even be electric in some shape or form. EVs are expected to grow 28 per cent a year over the foreseeable future. In addition, there are new business models, such as autonomous driving and shared mobility, which are also expected to grow 32 per cent a year. Lastly, the EV charging infrastructure business is growing 16 per cent per year. Collectively, there might be a US$3 trillion market opportunity per annum that investors can tap into.
Companies that are best positioned to benefit from these trends are not just the EV manufacturers which are household names today. Component suppliers such as battery and lightweight material suppliers can benefit. Companies involved in building the infrastructure backbone to support the EV industry will also contribute to the mass adoption of the technology. These infrastructure companies are today developing smart-grid technologies, deploying charging stations or working on the connectivity required to operate the electronic cockpits of autonomous vehicles.
Then come the EV manufacturers themselves. BMW is expected to launch 25 new electric models by 2025. Tesla CEO Elon Musk noted in his August 2018 letter to shareholders that it has been a long journey, but the industry is on the verge of a breakthrough. The company took 15 years to execute its initial goal to make an affordable, long-range EV that can also be highly profitable. "In the second half of 2018, we expect, for the first time in our history, to become both sustainably profitable and cash-flow positive," he said.
When technology is on the brink of mass adoption, nobody might believe it yet. But when change happens, it happens incredibly quickly. It only took about 13 years in the early 1900s before horse carriages disappeared from New York's Fifth Avenue, replaced by cars.
With technological advancements, the switch to EVs and autonomous driving will happen in our lifetime. Perhaps it might even be drones that will transport us, but the path is clear, and irreversible.
EVs might yet be the biggest investment opportunity of this century and the best way to access it is to partner with professional fund managers with the expertise to identify most appealing opportunities across the whole value chain of EV production. This begins from "building the car", where beneficiaries extend from car manufacturers to component suppliers, to "driving the car", where a number of well-positioned companies in the areas of charging infrastructure, connectivity and autonomous driving would rapidly gain market share in their respective local and global markets. It is also important to get in early before valuations become too high and the investment opportunity set starts to shrink.
- The writer is vice-president and hedge fund specialist at Credit Suisse Private Banking Asia-Pacific