Electrification

The hot topic in investment markets this year has been artificial intelligence, so we thought we would check in on the state of electric vehicles (EVs), a part of the market where excitement has dimmed. Often it is when investors are looking elsewhere that attractive valuations can be found.

There is no denying that electric vehicle (EV) sales have experienced a momentary dip. Subsidies have been scaled down, internal combustion engine sales phase-out dates pushed back in the UK, and auto manufacturers (outside of China) are still grappling with bringing vehicles to market that are within the reach of a broader range of household incomes.

The upfront cost of an EV can be more expensive than cars with internal combustion engines (ICE), but the economics over their lifetime can be more attractive due to lower fuel and maintenance costs. Moreover, as EV production volumes increase and battery technology matures further, prices should come down, enticing more consumers to switch to EVs. The big pick-up in sales of second-hand Battery EVs in the UK (41,505 in Q1 2024 versus 6,564 three years earlier) shows a market that is beginning to mature and plenty of consumer demand at the right price point.¹

According to the BloombergNEF (BNEF) annual Electric Vehicle Outlook (EVO), EV sales projections have been reduced by 6.7 million through 2026.2 Even so, this is still a huge uplift from just a few years ago. The direction of travel is already clear. According to Bloomberg Green analysis on adoption rates globally, 31 nations have exceeded a critical threshold: the point at which Battery EVs constitute 5% or more of new car sales.3 Why is this important? Crossing this milestone indicates the beginning of widespread acceptance, a phase after which there tends to be a swift shift in technological preferences towards EVs, which is set to benefit automakers and their suppliers.

We can see in the table that EVs are already becoming firmly established and we expect the Battery EV proportion to increase, particularly as we move closer to regulatory deadlines.

EV market share of auto sales (year to date to June 2024)

Source: Bloomberg, China Automotive Tech and Research Center, ACEA, Argonne National Laboratory, BNP Paribas. BEV = Battery Electric Vehicle (runs off the battery), PHEV = Plug-in Hybrid Electric Vehicle (can be charged via a charging port like a BEV and perform short to middle distance trips off the battery alone, with a back-up combustion engine). HEV = Hybrid Electric Vehicle (uses regenerative charging from the brakes or driving to run on electric for very short distances but relies principally on the combustion engine).

While we have invested selectively in EV manufacturers, it tends to be a competitive space, so we have sought out investments in the supply chain where we believe better value can be located. Opportunities are opening up across the broader EV supply chain, including mining, automotive technology suppliers, battery manufacturers, semiconductors and system solutions providers.

Suppliers are also set to benefit from the increasing electrification of cars in general – combustion engine cars having more electric technology to make them more fuel efficient. Put simply, as electrification increases, so too does the demand on suppliers’ products.

Electrification as a theme has been at the heart our approach to sustainable investing for several years. It is also part of a broader investment theme that we call the digitalisation, electrification, and decarbonisation (DED) nexus. This theme is in action across all parts of the global economy since we need to electrify and digitise in order to decarbonise (reduce carbon emissions).

Footnote
¹Society of Motor Manufacturers and Traders, May 2024. 2BloombergNEF, Electric Vehicle Outlook 2024. 3Bloomberg, ‘Electric Cars Pass Mass Adoption Tipping Point in 31 Countries’, March 2024.