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Investing in the rise of electric vehicles

The consumer appeal of electric vehicles has increased over the last 10 years, with manufacturers in a race to ramp up development and production of battery-powered cars. However, is the investment case for electric vehicles as “electric” as the cars themselves?

The global car industry is changing. Ten years ago, the only fully electric vehicle (EV) commercially available was the Tesla Roadster, followed by the Mitsubishi i-MiEV and the Nissan Leaf. Today, several automakers, including Audi, BMW and Jaguar, have at least one EV in their fleet. 

According to Bloomberg’s 2018 Electric Vehicle Outlook, the number of EV models will jump from 155 at the end of 2017 to 289 by 2022, as they become cheaper to make than traditional internal combustion engine (ICE) cars. This rapid increase in production is driven by the commitment from manufacturers to electrify their vehicles over the next 10 years (with Chinese manufacturers, like Chang’an, committing to sell only electric vehicles after 2025) to meet stricter emissions regulations. 

In terms of consumer demand, Bloomberg forecasts that EV sales will increase from a record of 1.1 million in 2017 to 11 million in 2025 and reach 30 million by 2030. However, in the meantime, EVs still make up a small size of the global car market, accounting for under 2% (in most regions) of total sales in 2018. 

So, what does this mean for investors looking for an opportunity in electric cars? 

Even with the somewhat optimistic assumption by the car industry that EVs will account for up to 50% of new car sales by 2040, it is not guaranteed that they will dominate the roads. This is particularly true when you consider that the consumer appeal for electric cars is based on their lower carbon emissions and lower running costs – something that hybrid cars (that are propelled by a petrol or diesel engine with an electric motor) also offer at a more attractive price. Traditional automakers are well placed to compete in this segment. 

The most significant disruption that EVs present is as a potential risk to the bottom line for traditional automakers for whom the transition to EVs cannibalises their core business: the “gas guzzling” petrol or diesel engines with massive profit margins. Daimler AG (the parent company of Mercedes-Benz) puts the current profit margin of EVs at roughly half that of conventional cars – until the industry can bring down the cost of production, EVs will continue to have a significant negative effect on profitability. 

The other risk that traditional automakers face is the competitive threat posed by companies like Tesla that have proven that you don’t have to be a large automaker with decades of research and development to gain traction among consumers. 

Investors should also consider the practical constraints that may impact the adoption rate of EVs. These include investment in the necessary recharging infrastructure, battery supply chains and factories, as well as power generation facilities that are needed to meet the anticipated increased demand in EVs. 

Allan Gray currently has exposure (both domestically and internationally, through our offshore partner, Orbis) to entities which generate revenue from the various stages of the production cycle for both ICE vehicles and EVs, which means that we are well positioned to benefit from both the advent of EVs and the defensiveness of traditional automakers. 

Some examples of our exposure to stocks which derive revenues from the ICE or “green” vehicle sector domestically and globally are platinum miners (platinum group metals are used for catalytic converters in vehicles powered by internal combustion engines and hybrid vehicles require platinum loadings), Sasol, copper producers and some vehicle manufacturers. 

The future for electric vehicles is uncertain 

It is quite possible that EVs are simply a better product than combustion vehicles, in the same way that digital cameras are just better than film. We believe there are select opportunities to benefit both from the shift to EVs without paying over the odds, and other opportunities where one can benefit from excessive negative sentiment towards traditional car manufacturers that the market believes will not manage the EV transition well.

Additional source: BloombergNEF Electric Vehicle Outlook 2018

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