Electric Vehicles: Rolling Forward

International stocks

Electric Vehicles: Rolling Forward

The electric vehicle (EV) market continues to expand, and with it, opportunities for investors – not only in auto manufacturing, but also in the parts, materials and adjacent industries.

  • As we predicted in 2016, consensus expectations for EV sales have been too low: we suspect EV sales forecasts will continue to be revised upward.
  • As batteries become cheaper and more powerful and demand rises, deployment of electric city buses, delivery vans and utility vehicles should also continue to grow.
  • In the coming years, much of the value in EVs will be in software, battery components and semiconductors, technologies dominated by companies outside of the traditional auto supply chain.  

Writing in 2016, we argued that EV sales had the potential to grow much faster than many assumed, given key advantages an EV powertrain offers compared to the internal combustion engine (ICE) drivetrain: it can deliver better performance due to the instant torque of the electric motor, it is cheaper to charge due to higher energy efficiency and, with fewer moving mechanical parts, it has much lower maintenance costs.

We also argued that as battery costs continued to decline, manufacturers would be able to offer competitive EVs in a growing number of market segments. Given the speed of improvement in lithium-ion battery technology, we argued consensus expectations for EV sales were too low.

As we predicted, sales have grown faster than expected and the outlook for EV production has become more optimistic. As shown in the chart below, between 2015 and 2017, EV sales expanded at a consolidated annual growth rate of over 50% globally, moving from a total of 445,000 in 2015 to nearly 1.1 million in 2017. The International Energy Agency (IEA) now predicts that the global EV stock will reach 130 million vehicles in 2030, up significantly from its 58 million “base case” forecast published in 2017. We suspect these forecasts will continue to be revised upward in the future.

Electric city buses, delivery vans and utility vehicles have also witnessed strong growth and should continue to grow as batteries become cheaper and more powerful and demand rises. Strong EV growth in all these areas should also lead to opportunities in several new areas — in parts, materials and adjacent industries, for example — as the rate of disruption and innovation increases.

Electric Vehicle Sales by Region

Source: Bloomberg New Energy Finance. Includes highway-capable passenger vehicles only. Excludes low-speed EVs, buses and other commercial vehicles.

Electrification of Buses and Trucks Will Likely Accelerate

More and more buses on the road are electric. There were approximately 386,000 electric buses in use globally in 2017, up from only 146,000 in 2015, according to Bloomberg New Energy Finance (BNEF). Nearly all of these are in China: in the last three years, the growth in e-buses globally was mostly driven by environmental concerns and large Chinese subsidies. In cities such as Shenzhen, Beijing and Tianjin, subsidies brought the purchase price of battery electric (BEV) buses within the range of conventional buses. By the end of 2017, Shenzhen had completely transformed its urban fleet of 16,359 buses to all-electric models and is now targeting its taxi fleet. In addition, the Chinese fleet of BEV and plug-in hybrid electric (PHEV) buses accounted for almost all 386,000 units in use globally.

As battery costs continue to decline, the purchase of an e-bus will become an economically justifiable decision, even without subsidies. E-buses have much lower operating costs and are already cheaper on a total cost of ownership basis than conventional buses in some regions. According to the IEA, e-buses traveling 40,000 km to 50,000 km per year are already cost competitive in regions with high diesel taxation like Europe as long as battery prices are below $260 per kilowatt hour (kWh). To alleviate the higher up-front purchase price of e-buses, new business models are also evolving, including battery leasing, joint procurement and bus sharing.

We expect adoption of e-buses to accelerate as economic benefits become more evident in various regions. Several cities, especially in China and Europe, have already announced ambitious electrification plans for their municipal fleets. In October 2017, 12 cities signed the C40 Fossil-Fuel-Free Streets Declaration, pledging to procure only zero-emission buses from 2025 onward. Oslo plans to transition to an all-renewable fleet in 2025–2030.

The electric powertrain is also expected to be adopted across various commercial truck platforms, something not in mainstream forecasts two years ago. This is significant because trucks are large consumers of diesel fuel due to their high weight and mileage driven. So far, most of the plug-in electric models introduced are light- and medium-freight trucks that operate in urban and suburban contexts. Currently the largest market for e-trucks is China, where companies like Chinese vehicle manufacturer BYD offer electric utility trucks for municipalities. In Europe, StreetScooter, owned by DHL, manufactures electric vans that have been delivered for the German post office.

As total costs of ownership decrease, a growing number of electric heavy-duty truck models have also been developed for pilot projects. Tesla has announced its Semi model and Daimler has announced series production of its heavy-duty truck as of 2021. According to Tesla, due to lower electricity costs and fewer systems to maintain, its Semi will provide $200,000 in annual fuel savings and a two-year payback period.  

E-Truck Model Development is Expanding

Source: ClearBridge Investments, company announcements.  

Battery Costs Falling Rapidly

The falling cost of rechargeable batteries is a key premise for our view that EVs will be increasingly disruptive to traditional ICE platforms. As batteries get cheaper, auto makers can offer cheaper and better EVs.

The weighted average price of lithium-ion battery packs saw a 24% year-over-year decline in 2017 to $209/kWh, according to a recent BNEF survey of 50 companies across the value chain. Battery costs have improved by around 80% since 2010. BNEF observed that these price reductions are largely a result of an increase in battery manufacturing capacity and the economies of scale that come with it. Battery costs will continue to improve, mostly due to changes in the number and scale of battery factories, size of batteries installed in cars and improving battery chemistry. 

 Battery Affordability Keeps Improving

 

Source: Bloomberg New Energy Finance.

As costs come down, EV battery production capacity is rising quickly. Total commissioned EV lithium-ion battery production capacity was 131 gigawatt hours (GWh) in the first quarter of 2018, a 46% increase from 90 GWh a year earlier. If all the lithium-ion battery capacity announced and under construction is built, global manufacturing capacity will increase to 406 GWh by the end of 2021. As industry players commission larger manufacturing plants, economies of scale remain an important driver of lithium-ion battery price reductions.

While Tesla does not provide its current cost of batteries, it has said publicly that it expects its battery pack costs to decline to around $100/kWh by 2020. We expect Tesla to be significantly ahead on unit battery costs versus other car manufacturers, as Tesla benefits from large economies of scale at its Gigafactory in Nevada, from its large battery size per car (lowering the battery pack costs per kWh) and from its relatively high car manufacturing volumes, especially with the recently launched Model 3.

EV Demand Shifting from Regulatory Push to Demand Pull

Many original obstacles to EV adoption, such as cost, range and charging infrastructure are gradually being overcome. Many original equipment manufacturers (OEMs) are moving away from compliance EV cars to embrace the technology and are offering fast and attractive long-range cars. Historically, there has been a perception that EVs are of lower quality than their ICE counterparts. This may have been true as electric powertrains were often forced into chassis designed to house combustion engines. However, a new generation of modular vehicle platforms, designed from the ground up as EVs, should address these concerns. Volkswagen, for example, is working on a new EV platform called MEB. This platform has been specifically developed to make the manufacture of EVs more efficient and therefore less expensive. Its design starts with a flat-shaped battery and allows for a flat floor and a roomier-than-normal cabin. Volkswagen intends to leverage this platform over several different EV models to improve the economies of production.

The premium end of the market will soon see several new attractive EV models. After Tesla’s S and X models captured significant premium segment market share, competitors responded by announcing many attractive electric models. These include cars such as the Porsche Taycan, Audi e-tron, Mercedes EQC and Jaguar I-PACE, which is already available in Europe. These new premium cars promise good driving ranges, fast charging capabilities and attractive specifications, such as good handling and quick acceleration.

Early indications are that Tesla’s Model 3 will be a major commercial success. In the U.S., with sales of 14,000 units in July 2018, according to preliminary data, the Model 3 outsold its top four category competitors combined (BMW 3, Mercedes S, Audi A4 and Lexus IS). Initial Model 3 reviews tout superior handling, acceleration and quietness unmatched by the ICE platforms at similar prices. Interestingly, customer surveys regarding EV purchase intentions are generally positive and most new electric models have long waiting times as demand has outstripped OEM projections. Automakers have made significant commitments to electrification in the past year, with announcements ranging from setting specific EV sales targets over the coming decade to developing new vehicle architectures and ramping up spending in R&D and equipment.

EVs Are Becoming a Primary Focus of Automakers

Source: Bloomberg New Energy Finance.

The growth in public charging infrastructure has been impressive over the last two years. There are also many initiatives underway to grow the networks further. Tesla has its Supercharger network, and IONITY, owned by a consortium of Western OEMs, has plans for 400 fast charging stations in Europe. Meanwhile, companies such as ChargePoint and EVgo already operate public and private charge points. Electrify America has committed $2 billion to develop a fast charging network in the U.S. While currently EVs are charged mostly at home or at certain destinations, ultimately strong public charging infrastructure along highways will be critical to wide EV adoption.

Electrification Continues to Create New Growth Opportunities

Electrification will affect many industries and companies. Electrically powered components have fewer moving parts, are easier to build and in some cases last longer. Items like engine parts, oil filters, intercoolers, turbos and other ICE-related products may face declining growth rates in the future, depending on EV adoption curves. Electric powertrain components are joined by advanced power management systems that heavily depend on software and semiconductors. Right now, a lot of value of each vehicle is in parts that might simply disappear from cars in the future. In the coming years, much of the value in vehicles will be in software, batteries and semiconductors — technologies dominated by companies outside of the traditional automotive supply chain.

The shift to fully electric cars presents a good opportunity for the semiconductor industry. Research estimates the semiconductor content in the Tesla Model 3 to be above $1,500 compared to the roughly $400 in an average ICE car. Much of this is in powertrain semiconductor modules, such as the inverter module and battery monitoring boards. Model 3 powertrain semiconductor content is estimated to be worth around $600, or about six times more than in an average car. The key suppliers of powertrain semiconductors in Europe are STMicroelectronics and Infineon.

The whole supply chain for rechargeable batteries will have to scale up massively. We are already witnessing large expansion projects shaping up. In the lithium market, all key players reported growth in demand from EVs and announced massive capacity expansions. According to Volkswagen and Albemarle, a lead producer of lithium for EV batteries, annual sales of 3 million EVs will require some 140 million tons of lithium carbonate equivalent, more than double the current demand for lithium from the consumer electronics industry. Albemarle expects the lithium market to almost quadruple by 2025. Its Chilean peer Sociedad Quimica y Minera (SQM) announced plans to increase lithium carbonate capacity fourfold to 180 million tons by 2021.

Leaders in cathode materials, a key component of the rechargeable battery, also expect substantial growth in demand. Umicore, from Belgium, expects the rechargeable battery market to increase more than tenfold to 650 GWh from 2015 to 2025. This positive outlook, based on the manufacturing pipelines of EV and e-bus manufacturers, drives Umicore’s plan to quadruple its manufacturing capacity for battery cathode materials.

EVs will also offer new opportunities for companies that did not have material exposure to the car drivetrain previously. Nidec from Japan, for example, is leveraging its expertise in electric motors to capitalize on the growth of electric traction motors. Nidec announced plans to build several factories to manufacture electric traction motors for cars and buses and targets at least $1 billion in revenue by 2025 from these products. While many OEMs will manufacture electric traction motors in-house, Nidec estimates that around half of electric motors manufacturing volume will be outsourced to specialized companies like itself.

Conclusion
  • We see new growth opportunities created by increasing EV adoption. As batteries become cheaper and more powerful, adoption should only increase, and EV powertrains should become more feasible in a variety of EV vehicle types.
  • We are also seeing opportunities resulting from the shift in value in vehicles from traditional auto parts to software and semiconductors, technologies traditionally outside the automotive supply chain.
  • This shift looks poised to continue as a new generation of modular vehicle platforms, designed from the ground up as EVs, generates increased demand.
Top

Important Information

 

All investments involve risk, including possible loss of principal.

The value of investments and the income from them can go down as well as up and investors may not get back the amounts originally invested, and can be affected by changes in interest rates, in exchange rates, general market conditions, political, social and economic developments and other variable factors. Investment involves risks including but not limited to, possible delays in payments and loss of income or capital. Neither Legg Mason nor any of its affiliates guarantees any rate of return or the return of capital invested. 

Equity securities are subject to price fluctuation and possible loss of principal. Fixed-income securities involve interest rate, credit, inflation and reinvestment risks; and possible loss of principal. As interest rates rise, the value of fixed income securities falls.

International investments are subject to special risks including currency fluctuations, social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets.

Commodities and currencies contain heightened risk that include market, political, regulatory, and natural conditions and may not be suitable for all investors.

Past performance is no guarantee of future results.  Please note that an investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges.

The opinions and views expressed herein are not intended to be relied upon as a prediction or forecast of actual future events or performance, guarantee of future results, recommendations or advice.  Statements made in this material are not intended as buy or sell recommendations of any securities. Forward-looking statements are subject to uncertainties that could cause actual developments and results to differ materially from the expectations expressed. This information has been prepared from sources believed reliable but the accuracy and completeness of the information cannot be guaranteed. Information and opinions expressed by either Legg Mason or its affiliates are current as at the date indicated, are subject to change without notice, and do not take into account the particular investment objectives, financial situation or needs of individual investors.

The information in this material is confidential and proprietary and may not be used other than by the intended user. Neither Legg Mason or its affiliates or any of their officer or employee of Legg Mason accepts any liability whatsoever for any loss arising from any use of this material or its contents. This material may not be reproduced, distributed or published without prior written permission from Legg Mason. Distribution of this material may be restricted in certain jurisdictions. Any persons coming into possession of this material should seek advice for details of, and observe such restrictions (if any).

This material may have been prepared by an advisor or entity affiliated with an entity mentioned below through common control and ownership by Legg Mason, Inc.  Unless otherwise noted the “$” (dollar sign) represents U.S. Dollars.

This material is only for distribution in those countries and to those recipients listed.

All investors and eligible counterparties in Europe, the UK, Switzerland:

In Europe (excluding UK and Switzerland), this financial promotion is issued by Legg Mason Investments (Ireland) Limited, registered office 6th Floor, Building Three, Number One Ballsbridge, 126 Pembroke Road, Ballsbridge, Dublin 4, D04 EP27. Registered in Ireland, Company No. 271887. Authorised and regulated by the Central Bank of Ireland.

All Qualified Investors in Switzerland:
In Switzerland, this financial promotion is issued by Legg Mason Investments (Switzerland) GmbH, authorised by the Swiss Financial Market Supervisory Authority FINMA.  Investors in Switzerland: The representative in Switzerland is FIRST INDEPENDENT FUND SERVICES LTD., Klausstrasse 33, 8008 Zurich, Switzerland and the paying agent in Switzerland is NPB Neue Privat Bank AG, Limmatquai 1, 8024 Zurich, Switzerland. Copies of the Articles of Association, the Prospectus, the Key Investor Information documents and the annual and semi-annual reports of the Company may be obtained free of charge from the representative in Switzerland.

All investors in the UK:
In the UK this financial promotion is issued by Legg Mason Investments (Europe) Limited, registered office 201 Bishopsgate, London EC2M 3AB. Registered in England and Wales, Company No. 1732037. Authorized and regulated by the Financial Conduct Authority. Client Services +44 (0)207 070 7444

All Investors in Hong Kong and Singapore:

This material is provided by Legg Mason Asset Management Hong Kong Limited in Hong Kong and Legg Mason Asset Management Singapore Pte. Limited (Registration Number (UEN): 200007942R) in Singapore.

This material has not been reviewed by any regulatory authority in Hong Kong or Singapore.

All Investors in the People’s Republic of China ("PRC"):

This material is provided by Legg Mason Asset Management Hong Kong Limited to intended recipients in the PRC.  The content of this document is only for Press or the PRC investors investing in the QDII Product offered by PRC’s commercial bank in accordance with the regulation of China Banking Regulatory Commission.  Investors should read the offering document prior to any subscription.  Please seek advice from PRC’s commercial banks and/or other professional advisors, if necessary. Please note that Legg Mason and its affiliates are the Managers of the offshore funds invested by QDII Products only.  Legg Mason and its affiliates are not authorized by any regulatory authority to conduct business or investment activities in China.

This material has not been reviewed by any regulatory authority in the PRC.

Distributors and existing investors in Korea and Distributors in Taiwan:

This material is provided by Legg Mason Asset Management Hong Kong Limited to eligible recipients in Korea and by Legg Mason Investments (Taiwan) Limited (Registration Number: (98) Jin Guan Tou Gu Xin Zi Di 001; Address: Suite E, 55F, Taipei 101 Tower, 7, Xin Yi Road, Section 5, Taipei 110, Taiwan, R.O.C.; Tel: (886) 2-8722 1666) in Taiwan. Legg Mason Investments (Taiwan) Limited operates and manages its business independently.

This material has not been reviewed by any regulatory authority in Korea or Taiwan.

All Investors in the Americas:

This material is provided by Legg Mason Investor Services LLC, a U.S. registered Broker-Dealer, which includes Legg Mason Americas International. Legg Mason Investor Services, LLC, Member FINRA/SIPC, and all entities mentioned are subsidiaries of Legg Mason, Inc.

All Investors in Australia:

This material is issued by Legg Mason Asset Management Australia Limited (ABN 76 004 835 839, AFSL 204827) (“Legg Mason”). The contents are proprietary and confidential and intended solely for the use of Legg Mason and the clients or prospective clients to whom it has been delivered. It is not to be reproduced or distributed to any other person except to the client’s professional advisers.