This summer, the Impax investment team collaborated with a group from Imperial College London to conduct deeper research into the rapidly accelerating electric vehicle (EV) market.
The key development in Impax’s recent thinking is with regard to the time it will take for a transition from fossil fuel-powered vehicles to EVs, and the role that hybrid cars will play in this.
Our view is that the electrification of vehicles is occurring more quickly than was expected by many observers. This is primarily due to an alignment of three key factors:
- The entry of the technology sector into the EV market, which is creating new competitive dynamics and a faster R&D cycle. Large technology companies are looking to leverage their expertise in data and software, while Chinese companies aim to leapfrog internal combustion engine (ICE) vehicles and move straight to EVs. Original Equipment Manufacturers (OEMs) fear losing market share in the medium/long term, and are therefore rolling out new models more aggressively.
- Government action to accelerate the EV market due to increased concern about air pollution and mistrust of traditional car manufacturers in the wake of the VW emissions scandal.
- Changing sentiment amongst consumers who are showing a willingness to buy EVs, with “early adopters” acting as evangelists for the market, demonstrating that concerns over charging and driving range are not insurmountable. In some segments, consumers have shown that they are willing to pay a premium for EVs.
Our research also reveals two areas we classify as ‘key unknowns’:
- Tax revenue replacement. Governments face a substantial loss of revenue from fuel taxes as EV take-up increases, and it is not clear how they will replace this revenue.
- Battery residual value. Today, owners can expect to recoup about 40%1 of their ICE vehicle’s value on the second-hand market, depending on the vehicle’s age. With EVs, this is currently about 30% after a three-year lease1. While the proportion of battery costs to a car’s selling price continues to shrink as batteries become cheaper, the battery will remain a significant cost of an EV. Future development of the market for used batteries is a key unknown in the future economics of EVs, and an important factor in the pace of adoption.
In our view, battery development will drive EV penetration, and so the most logical investment opportunities are in this area. However, many battery manufacturers face several issues that act as a drag on their profitability, including poor returns, overcapacity, and the risk of stranded assets. Currently there are too many players in a capital-intensive market.
Instead, we seek to invest in companies that are benefiting from growth in a proven technology. We avoid conceptual products not yet ready for the market. We believe there is more value to be found further down the value chain, for example, in transducers, which are used in the electronic systems outside the battery. They are used to handle a vehicle’s power management and in other energy efficiency applications, such as controlling the flow of power through the drivetrain. As the complexity of these and other systems in EVs increases, so does the need for semiconductors – another significant investment opportunity.
The uncertainty over the pace of EV charging infrastructure rollout may also bring investment opportunities.
Electrification versus automation
Rapidly falling costs of EVs could be a catalyst for widespread adoption of autonomous cars, although it would be technically possible for vehicular automation to exist in a fleet of ICE vehicles. Vehicular automation is a compelling idea. It has the potential to reduce accidents and it would also likely reduce vehicle production dramatically by increasing the utilisation rate of the overall fleet. The impact of autonomous driving is a topic which we will be exploring further, along with other insights that the research with Imperial College London yielded.