Electric cars will become the norm sooner than expected. But when exactly this happens will depend on battery costs. And, in our view, battery manufacturers are not necessarily the most attractive investment opportunity.
The rate at which electric cars enter the market will depend largely on how fast battery costs fall. Prices have fallen rapidly, from USD 1 000 per kilowatt hour in 2010 to USD 209 last year. And, according to Bloomberg, if they continue falling at this rate, it will be cheaper by 2020 to buy a car with an electric engine than with a combustion engine.
The break-through for electric cars can come earlier than previously expected. Large technology companies are embracing the car market, while governments are encouraging people to switch to electric vehicles, and consumers themselves are now keener to buy battery-powered cars and are willing to pay a bit more for them. It would not be a surprise if, by 2030, 30%-40% of vehicles on the road are partly or fully electric. The Volkswagen diesel scandal was a real turning point, as a key moment in the history of transport. Not only has it had a major impact on Volkswagen itself, but also on governments and consumers.
Focus on critical component and technology suppliers
However, there are also uncertainties surrounding electric cars. How, for example, are governments going to react to the prospect of lower excise duties? And what about consumers and the fact that battery costs mean that electric cars have a lower second-hand value than normal cars? Will the infrastructure needed for charging all the new electric cars be in place on time?
Although electric cars’ break-through will depend very much on how battery costs develop, the best opportunities for investors are not in battery manufacturers, in our view. Battery manufacturing is a capital-intensive sector with too many players, modest returns on investments, overcapacity and the risk of stranded assets. By contrast, there are more opportunities for investing in businesses that supply critical components and technology contributing to the rapid growth in electric cars, including manufacturers of the electronics needed to regulate electric cars’ power or make them energy-efficient. Electric cars, in turn, are becoming more complex, and that also makes semi-conductor manufacturers a more attractive investment.
China is key
According to the International Energy Agency, the market for hybrid and electric cars grew at an annual 54% in 2017. However, while there are now some three million electric (or partly electric) cars on the roads, this is still a fraction of the total number of vehicles in the world, estimated by Navigant Research to be in excess of one billion. Of the one million electric cars sold last year around the world, half were bought in China, currently the largest market for electric cars.
China is the key country for electric cars. There are various reasons for Beijing to encourage them. Chinese car manufacturers have not managed to be successful outside of China. The government sees electric cars as a way of changing that. At the same time, Beijing sees a role for electric cars in helping to reduce urban pollution.
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