Asia's mobility transformation is driving a new future

THE United Nations warned in a recent climate report that global warming is dangerously close to spiralling out of control and the window to avert the worst-case impacts is closing fast. The report calls on everyone - from governments to individuals - to come together now to address this dire threat.

Spurred on by the pandemic, investors are helping to lead the charge. The sustainable investing industry is booming, and we expect investors to become even more environmentally conscious as green markets evolve and mature. One segment that we see particular opportunity is Asia's mobility industry.

As home to the world's largest auto market (China), and some of the most competitive auto makers (in Japan, South Korea), as well as the most expansive supply chain of parts, chips, and raw materials (across South-east and North Asia), the region is uniquely positioned to capture pole position in the new electric vehicle (EV) market as the world forges ahead into the future of electrification.

THE PERFECT STORM FOR GLOBAL LEADERSHIP

Today, much of the global supply chain for EV manufacturing already runs through Asia, with mature companies and startups alike producing upstream raw materials and making batteries, electric motors, and power chargers among other key components.

Besides being a manufacturing powerhouse of integral parts and a leader in supportive government policies that aim to facilitate consumer adoption and charging station infrastructure, the region is also fast becoming a hotbed for innovation from batteries to autonomous-driving software, and a home to globally established auto brands and futuristic upstarts to boot.

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And as demand increasingly shifts towards autonomous driving hardware - fuelling the uptake for semiconductors, cameras, and sensors - the value chain should remain squarely centered in Asia. Meanwhile, software for self-driving, in-car entertainment, over-the-air connectivity, and more look set to offer new revenue streams.

Beyond 2025, we see the market coalescing around autonomous driving. The potential emergence of shared self-driving vehicles like robo-taxis and buses in Asia will likely be transformative for the EV industry.

Early-movers with dominant EV market shares, production expertise and software integration skills are poised to gain critical advantages.

HOW BIG IS THE ASIA MOBILITY OPPORTUNITY?

Asia's EV industry is set to swell on the back of a vibrant supply backdrop, hearty vehicle demand and a race among governments to reduce emissions.

We estimate that domestic EV sales in the four biggest auto markets in Asia - China, Japan, India, and Indonesia - will grow by a compound annual growth rate (CAGR) of 36 per cent to 20 million units by 2030 from about two million today.

China accounts for the vast majority of the group's forecast EV sales, with projected demand of nearly 18 million EVs in 2030, versus 1.8 million today. But the other markets should also see explosive growth.

Between 2021 to 2024, we expect Indonesia and India to witness a 97 per cent and 59 per cent CAGR respectively, although both started at a very low base in 2020, and Japan to experience a 45 per cent CAGR.

What's more, this story is not just about booming domestic EV sales. Asia's supply chain caters to the entire world, and the battery market in particular will likely remain another lucrative segment for Asia's original equipment manufacturers in the years to come.

ASIA'S BATTERY ADVANTAGE

Today, China has a highly competitive and comprehensive EV supply chain which spans nearly every component in an EV - from upstream raw materials, to midstream battery and downstream charging equipment and battery recycling initiatives.

In batteries (and related materials), which constitute around 60 per cent of EV component costs, China clearly dominates. By 2030, we expect the global EV battery market to shoot up to US$356 billion from US$17 billion in 2020, and Chinese suppliers to hold a 60 per cent market share.

Thanks to heavy capacity expansion and increasing synergies along the supply chain, these leading incumbents look set to further drive down costs and potentially even gain share in overseas markets.

In other component categories like e-motors and auto semiconductors, the country has less of a commanding position partly because Chinese suppliers are traditionally less dominant in segments like engines and transmissions.

Still, they have made progress in the latest technologies and look set to grow their market shares in critical areas, including electric control, inverters and high voltage power relays in powertrains, and power semiconductors.

Elsewhere in Asia, the upcoming EV revolution is also likely to be a boon for Indonesia, which sits on the world's largest nickel reserves and produces cobalt as a by-product. The country is expected to produce some 450,000 tons of nickel and 50,000 tons of cobalt over the coming few years, much of it dedicated to battery production.

A UNIQUE THEME POISED FOR GROWTH

While China's tech industries are getting battered by regulatory headwinds, mobility is one area that benefits from policy rather than suffers from it. To be sure, competition is stiff and the profitability trajectory for the start-ups will likely take years to materialise. As well, technological bumps and supply chain challenges remain obstacles to overcome.

Still, we are optimistic that the auto industry is in the midst of a once-in-a-century transformation that could yield attractive returns for investors.

We recommend holding a diversified mix of Asia's EV leaders across the key segments (including auto brands, battery making, and software) and incorporating positions in moonshot technologies with disruptive potential.

Only time will tell which companies will win the EV race. What is clear, though, is that Asia is poised to drive the industry in the years ahead.

• Min Lan Tan is head, chief investment office, APAC, UBS Global Wealth Management