Investment Commentary

photoMay 23, 2018

Trends: Auto­mo­bile Indus­try & the Elec­tric Vehi­cle Revolution

Stig Zarle, Senior Secu­ri­ties Analyst


This piece is the first in a series of occa­sional memos to inform our clients of trans­for­ma­tive, long-​term (sec­u­lar) themes that we exam­ine as part of our invest­ment process. A sec­u­lar theme typ­i­cally starts as a sub­tle change within a mar­ket that grad­u­ally gains momen­tum and plays out over an extended period of time, per­haps decades (think ecom­merce, mobile com­put­ing, and clean energy). We study these trends and the com­pa­nies that have spe­cific expo­sure to these themes for poten­tial invest­ment opportunities.

The growth of the global auto­mo­bile indus­try over the past cen­tury has been intrin­si­cally tied to the inter­nal com­bus­tion engine. Rapid advances in bat­tery tech­nol­ogy rep­re­sent a sea change for the indus­try that has fueled the accel­er­at­ing global roll­out of elec­tri­fied vehi­cles that will dis­place demand for con­ven­tional vehi­cles. The elec­tri­fi­ca­tion of vehi­cles, both pas­sen­ger and com­mer­cial, is a game changer that will dis­rupt the staid indus­try. Tra­di­tional man­u­fac­tur­ers, sup­pli­ers, and dis­trib­u­tors will be forced to con­front the new elec­tric car real­ity and the dif­fer­ent com­peti­tors, eco­nom­ics, and reg­u­la­tions that accom­pany it. If done right, this impor­tant shift can have a sig­nif­i­cant pos­i­tive effect on car­bon emissions.

The Growth Ahead

Elec­tric vehi­cles, which include 100% battery-​powered vehi­cles as well as plug-​in hybrids that rely on elec­tric power first before a com­bus­tion engine is engaged, have grown from nearly 50,000 sold glob­ally in 2011 to over 1 mil­lion last year. While that growth is impres­sive, they remain a tiny por­tion of total vehi­cles sold world­wide (roughly 1% in 2017). Gasoline-​powered vehi­cles, unsur­pris­ingly, remain kings of the road … for the time being. As with any sec­u­lar trend the run­way for elec­tric cars is quite long. Var­i­ous auto indus­try experts pre­dict that the num­ber of elec­tric vehi­cles sold across the globe will out­num­ber tra­di­tional vehi­cles around 2030 which, if true, implies a 50-​fold increase in the num­ber of battery-​powered cars/​trucks/​buses sold annually.

The Road to Mass Adoption

Mul­ti­ple fac­tors will help drive the mass adop­tion of battery-​powered autos over the com­ing years. Led by sig­nif­i­cant improve­ments in bat­tery design and com­po­si­tion, new gen­er­a­tion bat­ter­ies will allow these vehi­cles to cover greater dis­tances on fully charged bat­ter­ies and cost man­u­fac­tur­ers much less to pro­duce. As bat­tery prices fall, the cost of own­er­ship will become increas­ingly attrac­tive to buy­ers, espe­cially when com­pared to tra­di­tional gasoline-​powered offer­ings – afford­abil­ity is a crit­i­cal dri­ver to alter­na­tive vehi­cle own­er­ship. In addi­tion, increased reg­u­la­tory over­sight relat­ing to car­bon emis­sions and fuel econ­omy will con­tinue to present new chal­lenges (and costs) to tra­di­tional vehi­cle man­u­fac­tur­ers. Some fed­eral author­i­ties are going so far as to push for the elim­i­na­tion of fos­sil fuel–powered auto sales alto­gether; recently China, France, India, the Nether­lands, Nor­way, and the UK all com­mit­ted to take such action in the com­ing years. Per­haps the most impor­tant dri­ver of the rise of elec­tric cars, how­ever, is the role that tra­di­tional automak­ers are play­ing. Most of these automak­ers have embraced the elec­tri­fi­ca­tion oppor­tu­nity by intro­duc­ing new mod­els and/​or expand­ing their offer­ings beyond a lim­ited num­ber of mod­els like the Chevy Bolt, the Nis­san Leaf and the BMW i3. Con­sumer inter­est will cer­tainly rise as choices broaden; accord­ing to the Finan­cial Times, the num­ber of electric-​powered mod­els avail­able glob­ally will rise from 112 in 2017 to 184 this year. The road to mass adop­tion of elec­tric vehi­cles, how­ever, does face var­i­ous head­winds. Among these hur­dles are insuf­fi­cient bat­tery range, lim­ited charg­ing sta­tion infra­struc­ture, the extended time needed to com­plete a full charge, and any poten­tial elon­gated period of down­ward pres­sure on oil prices in the future.

Find­ing Invest­ment Opportunities

As we con­sider investable oppor­tu­ni­ties relat­ing to this sec­u­lar theme, our invest­ment process attempts to go beyond the obvi­ous. While there will be win­ners and losers among the tra­di­tional automak­ers as they expand into elec­tric offer­ings, new com­peti­tors, like Tesla, will con­tinue to carve out siz­able niches in the grow­ing mar­ket. But the elec­tric vehi­cle rev­o­lu­tion is a global phe­nom­e­non and stretches well beyond US bor­ders; China, for instance, is home to both the world’s largest elec­tric car mar­ket and a hand­ful of pio­neers in battery-​powered vehi­cle pro­duc­tion. The biggest oppor­tu­nity, how­ever, lies out­side of the car mak­ers them­selves and in the bur­geon­ing sup­ply chain for this nascent indus­try. Mak­ers of bat­ter­ies, spe­cial­ized tech­no­log­i­cal com­po­nents, power man­age­ment sys­tems, and wiring are among some of the play­ers that will ben­e­fit from the elec­tric vehi­cle wave. Out­side of direct sup­pli­ers there are com­pa­nies that pro­duce charg­ing infra­struc­ture and bat­tery recy­cling capa­bil­i­ties that will pro­vide crit­i­cally impor­tant ser­vices to the indus­try. We cur­rently have expo­sure to this impor­tant theme in dif­fer­ent ways, but con­tinue to mon­i­tor all of these aspects for addi­tional opportunities.

ESG Con­sid­er­a­tions and Elec­tric Vehicles

From an ESG per­spec­tive, we focus on both the promise and the poten­tial risks asso­ci­ated with elec­tri­fi­ca­tion. Com­pa­nies across this indus­try stand to ben­e­fit from and enable a world­wide tran­si­tion to low-​carbon energy alter­na­tives and sus­tain­able tran­sit. Var­i­ous com­pa­nies appear poised to cap­i­tal­ize on the ambi­tious near-​term goals for elec­tri­fi­ca­tion that may play out as gov­ern­ments around the world turn to these tech­nolo­gies to help imple­ment the Paris Cli­mate Accord. How­ever, the same com­pa­nies have faced social issues that will need to be mon­i­tored closely. These include the chal­lenge of pro­mot­ing worker safety and suit­able labor stan­dards in fac­to­ries and exten­sive sourc­ing net­works through­out the globe. More widely, bat­tery mak­ers, automak­ers, and elec­tric vehi­cle com­pa­nies alike are affected by a risky sup­ply chain for the basic mate­ri­als that enable advanced bat­ter­ies. Accord­ing to global risk con­sul­tant Verisk Maple­croft, “seven of the pri­mary raw mate­ri­als in lithium-​ion bat­ter­ies – cobalt, lithium, cop­per, man­ganese, nickel, graphite and baux­ite” are “high-​risk” for human rights and forced labor. Amnesty Inter­na­tional has flagged the cobalt sup­ply chain and called out var­i­ous com­pa­nies for not doing enough to ensure their sources do not fund con­flict and abuse in areas such as the Demo­c­ra­tic Repub­lic of Congo. To respond to man­u­fac­tur­ing issues, as well as the deep sup­ply chain, we look for com­pa­nies that have clear labor rights poli­cies, make rea­son­able efforts to report on worker safety, and take steps with peers to enable trace­abil­ity and respon­si­bil­ity in the sup­ply chain for essen­tial commodities.

As with any mega-​trend, patience is required. The adop­tion of elec­tric vehi­cles through­out the auto indus­try is no dif­fer­ent. We believe that the demand for alter­na­tive vehi­cles will con­tinue to grow apace. Tra­di­tional busi­ness mod­els will be pres­sured and new win­ners will emerge that we hope to include in client port­fo­lios. As we care­fully con­sider sec­u­lar trends and the social ram­i­fi­ca­tions as part of our invest­ment process, we will con­tinue to look closely at the elec­tric vehi­cle space for investable opportunities.

Mr. Zarle ana­lyzes the finan­cial state­ments and com­pet­i­tive posi­tion­ing of pub­lic com­pa­nies in his role as a secu­ri­ties ana­lyst at Zevin. As a mem­ber of the Invest­ment Com­mit­tee, he per­forms fun­da­men­tal equity research across mul­ti­ple global sec­tors to sup­port invest­ment deci­sions for client port­fo­lios. Pre­vi­ously he worked as an equity ana­lyst for Pyra­mis Global Advi­sors (a divi­sion of Fidelity Invest­ments) and Pio­neer Invest­ments. Stig holds an MBA from The Uni­ver­sity of Chicago’s Booth School of Busi­ness and a BA in Eco­nom­ics from Bates College.