Charging forward

The electric vehicle revolution and how we are investing

We forecast the electric vehicle (EV) market to grow at 30% per year until 2030 - but what does this mean for investors?

Semi-conductors, software, batteries and charging infrastructure are just a few parts of the EV ecosystem that offer substantial growth opportunities.

Scroll down to find out how we are taking advantage.

Change underway

It's rare that a well-established global market completely transforms in just a few years.

But it looks like that’s exactly what’s in store for the motoring industry, as electric vehicles (EV) become the norm and the internal combustion engine is rendered obsolete.

Our own forecasts show the EV market’s volumes are likely to grow more than 30% a year until 2030 on the back of tougher regulation and increasing consumer demand.

For long-term investors, the question is understanding the elements of the EV ecosystem that will generate the best growth opportunities.

And they may not be the most obvious.

Chart: total vehicle sales by engine type - forecast

Source: Martin Currie, May 2019

Think electric cars - think Tesla? It's probably the highest-profile electric vehicle brand, with its Model 3 the best-selling model in 2018.

Global Portfolio Trust Portfolio Manager discusses the electric vehicle market

Global Portfolio Trust Portfolio Manager discusses the electric vehicle market

Worryingly for Tesla, however, is that many other manufacturers have their own EV models. Manufacturers such as BAIC (a Chinese state-owned enterprise), Nissan, Toyota, Renault and BMW are definitely catching up.

What’s clear to us through our research, is that vehicle manufacture is definitely the most visible part of the value chain - but it is not such a rich mine of opportunity for investors.

There are two reasons for this:

  • The first is the potential exposure to consumer choice risk. With decisions on brands dependent on consumer tastes, (which can shift rapidly) making a prediction on whether the consumer will favour a certain brand such Tesla, Porsche or Renault is an unnecessary risk for investors to make.
  • Secondly, being right at the forefront of the consumer end market exposes investors to intense competition - which, as investors, we tend to want to avoid. 

In fact, looking at the increased R&D and capital expenditure intentions of car makers, there is a sizeable ramp-up in production capacity, highlighting a growing competitive pressure in this part of the value chain.

These increased competitive pressures might explain why Tesla recently announced a significant drop in its prices. 

A range of opportunities

But there are several routes in to the EV market that cover a gamut of products and services. The graphic below illustrates a selection of those opportunities and highlights the branches of the ecosystem.

That is exciting for long-term investors who can analyse and compare the relative growth characteristics of companies exposed to those markets.

What’s clear to us through our research, is that vehicle manufacture is definitely the most visible part of the value chain - but it is not such a rich mine of opportunity for investors.

We prefer to analyse the whole ecosystem of EV and find opportunities in attractively priced, high value links in the chain which enjoy higher pricing power.

Dutch firm ASML, for example, has an enviable position as the key supplier to the major semiconductor chip suppliers for these growing markets.

ASML makes precision lithography systems that pattern transistors and other components onto chips.

With a very strong market position and close relationships with customers, the company is critical in enabling innovation and development in the semiconductor industry, and therefore its pricing power is very strong.

Power controllers and driving systems

Another semiconductor-related firm, German firm Infineon, has a wide range of products for the automotive industry as its transitions towards EV and hybrid technology, as well as autonomous cars. These products range from power controllers to Advanced Driver-Assistance Systems (ADAS).

Infineon’s leading position in the autos segment is further cemented through the acquisition of chipmaker Cypress and is now benefiting from the increased use of semiconductors in cars.

While the average value of semiconductor products in vehicles is around US$360 this figure is expected to increase rapidly – as some estimates put the value of content in EV/hybrids at closer to US$1,000. (Source: Statista, IEA, May 2018)

When compared with the cost of a car, the benefit of increasing technological content in a car comes at a very small additional cost, making companies like Infineon attractive ways to invest in the industry’s strong growth potential.

Battery power - a lasting advantage

Another vital part of the value chain is batteries – the beating heart of the electrical vehicle, where we are analysing some potential opportunities.

Global material and recycling company Umicore has the patent to Cellcore®, which is an important brand name for NMC (lithium, nickel, manganese and cobalt), that forms the cathode of a lithium-ion rechargeable battery.

It is the material of choice for the entire EV industry, except Tesla.

Umicore’s key competitive advantage is its closed-loop approach, where it recycles battery materials – giving it a distinct competitive advantage over peers who don’t make use of ‘urban mining’ and are therefore more reliant on raw materials from less sustainable sources.

...the benefit of increasing technological content in a car comes at a very small additional cost, making companies like Infineon attractive ways to invest in the industry’s strong growth potential.

The benefits of our wider approach

The EV industry is a perfect example of the way we approach investing in companies available through Martin Currie Global Portfolio Trust.

We undertake fundamental analysis to build a clear understanding of the industry structures and key dynamics.

We have developed our fundamental analytical framework to help us build an accurate picture of where the most valuable aspects of the industry are.

We typically tend to favour parts of the value-chain that are less competitive, have better industry structure, higher barriers to entry and therefore more pricing power

We believe that by taking this broad and deep approach to analysing segments of the market across the entire value-chain, we are then able to deploy our clients’ capital on the very best ideas, to gain exposure to attractive long-term growth opportunities.

Risks and important information

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