Buckle up: The unstoppable road to electrification

Covid-19 lockdown has significantly slowed the sales of new vehicles globally with a gradual catch up just recently. This has reignited the attention to the inevitable shift from combustion to electric. Every manufacturer and supply chain company that wants to competitively race in the motor market needs to match their plans to this inevitable transition. We investigate the implications of this and what the growth of this sector could mean for investors.

New designs. Fuel-efficient engines. Luxurious variants. Advanced safety tools. For decades, global car manufacturers have challenged each other. None of their innovations, however, have had nearly the same dramatic impact than the introduction of battery-powered vehicles.

An increased public attention towards energy efficiency, together with falling battery costs, made this electric revolution more and more appealing for manufacturers worldwide –in 2019 alone 143 new electric vehicles were launched. Established carmakers are adapting their businesses to a future without fossil fuels. But is such a future as near as it looks?

Environmental policies and stricter emission standards are surely the first steps for governments to influence the market. Public incentives drive electric-vehicle sales, as proven by the prompt reaction of the demand to any adjustment – like the decline registered in China and the UK following the cut of subsidies. But fiscal manoeuvres can also play a role. Reducing taxes or announcing an imminent increase can both promote a surge in sales.

Different short-term priorities might take precedence though, and force governments to make difficult choices. Duty revenues from fuel and precious local oil outputs will inevitably fall as electric vehicle (EV) sales increase. Also, green incentives require funding in already demanding times of recovery. Policies, therefore, can vary from place to place, from time to time.

A shift in public attitudes doesn’t always imply a shift in demand, and electric-vehicle sales are still in low, single-figure percentages compared to ICE (Internal Combustion Engines). Whilst home charging points are relatively cheap and easy to install, charging points in cities and especially towns and villages are limited and not always universal. The public sentiment may be positive, but the perceived lack of infrastructure is often holding back purchases. How to balance the increasing supply and uncertain demand?

As emerging markets develop, they are contributing disproportionately to emissions, with China and India among the top three emitters globally. Their need to embrace the transition has never been so crucial. Also, the electric shift will gradually but dramatically reduce oil consumption, which may have already peaked (as predicted by BP). As many emerging economies, particularly in Asia, depend on imported oil, the transition could be more needed there than anywhere else.

All this motivated China to make electric vehicles one of its priorities since 2015, with an aggressive annual goal of 7million sales (around 20% of the total) by 2025. China’s ambitions have extended further, to securing raw materials and building a robust charging infrastructure. But China has always struggled to export vehicles to crowded markets such as the US and Europe. Will electric ones suffer the same fate? Although the industry was dominated for decades by the US, Europe and Japan, except for a few Korean challenger brands, the EV market might play by its own rules. No global economy has risen to the challenge as quickly as China, which last year accounted for more than 50% of the global sales and currently dominates the charging infrastructure market.

European sales, on the other hand, exceeded China’s in the first half of 2020, and are expected to grow even more rapidly due to upcoming public policies – just Germany’s global production share could soon boost from 18% to 27%. China and the US might be losing ground, registering constant or dropping sales while the European market increases.

In general, for global, well-known brands, the trend is to increase their footprint in target markets by localising the production of vehicles and components. They are also looking to tap the attractive market of the rising middle class in China and other emerging markets, whose demand seems destined to rival or exceed that of the US.

Another aspect has a dramatic impact on the electric vehicle sector: the balance between cost and efficiency of its core component, the battery. If nowadays it makes up 30% of a car’s total cost, this percentage is estimated to fall to 15% by 2030 (Bloomberg NEF). That will progressively help customers see electric vehicles as viable, even better alternatives from an overall price perspective. So, who is dominating this separate, but tightly connected market? Leveraging its already well-developed electronic supply chain, China has become a top global producer (73%) of lithium-ion batteries (LiB). But other emerging markets and their car manufacturers (now acting as global players) are developing technology and capability on par with western counterparts.

So, the inevitable conclusion that the industry has been facing and accepting for years – that the combustion engine as we know it will be soon be displayed in museums – is getting closer by the day. And, between mergers and acquisitions, new entrants dominating the agenda and industry giants struggling to evolve, it’s an unpredictable road that will test the suspension, steering and brakes on the most robust investment vehicle. But what is certain is that the road to Electrification is unstoppable. Environmental disasters abound has brought sharper focus to the need to stem the tide, and the energy transition is one part that will continue to gain in momentum, not only through necessity but through education and awareness.

At BNP Paribas Asset Management, We are committed to actively using our investments and influence to shape a better world. By 2025 we want to align all our investment portfolios with the goals of the Paris Agreement, which aims to keep global temperature rise this century well-below 2ºC above pre-industrial levels. We also want to help investors effect change today and have recently launched an environmentally themed investment strategy that target attractive financial returns while making a positive contribution to the environment.

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