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Equity Perspectives

While advanced battery technology and electric vehicle systems are helping to transform the global automotive industry, escalating trade tensions threaten to complicate supply chains.

 

In Brief:

  • With auto manufacturers around the world ramping up plans for electric vehicles (EVs), auto customers will have significantly more choice of EVs as cumulative models are expected to rise, from 116 in 2016 to 246 in 2020.
  • While other power-storage technologies are available, the lithium ion battery currently powering today’s EVs is likely to be the dominant technology for the next five to 10 years.
  • Increased adoption of EVs will hinge on lower battery costs, increased range (energy density), and tighter safety.  While investors wait for such innovation to become standardized, however, they may prefer to invest in companies that make the wiring and electronics for such vehicles.  
  • Some analysts expect EV battery prices to drop, from $10,000 to $4,000, and the average range to increase, from around 124 miles to 274 miles.
  • Chinese automakers, and one U.S. automaker, have set the most aggressive EV production targets for 2020, followed by two German manufacturers.

 

No matter what happens to gasoline prices and fuel-efficiency standards—U.S. regulators may propose relaxing them this spring—automakers around the world will continue to push development of electric vehicles (EVs), even though current models are unprofitable and proposed U.S. tariffs on imported steel and aluminum could raise costs.

Take, for example, the Chevy Bolt, General Motors’ fully electric vehicle. Even before the proposed tariffs were announced, GM lost an estimated $10,000 on each vehicle sold. But GM isn’t about to stop producing electric cars.  Like a number of manufacturers around the world, it can continue to subsidize EV development with profits from its popular pickup trucks and luxury cars.  And the potential for growth in China is enormous, given aggressive targets for state-owned automakers.

Of course, there is considerable debate about how “green” EVs are, considering the fossil fuels that are required to generate electricity. In addition, half of the world’s cobalt (a key ingredient in batteries) comes from the Republic of Congo, where a regional war complicates extraction for Chinese interests who don’t appear to have qualms about miners’ alleged reliance on child labor. But with more than one billion cars worldwide continuing to spew out emissions that most scientists believe are contributors to climate change, some countries are moving to phase out gas and diesel vehicles and provide subsidies for EV ownership.

According to the International Energy Agency, the number of EVs in use worldwide jumped, to two million in 2016 (the latest period for which data are available; see Chart 1).

 

Chart. 1.  Global Sales of Electric Cars Have Risen Steadily
Evolution of the global electric car stock by major markets, 2010–16

Source: IEA analysis based on EV industry submissions by country, complemented by European Alternative Fuels Observatory (2017a), IHS Polk (2016), Marklines (2017), European Automobile Manufacturers Association (ACEA, 2017a, 2017b), and the European Economic Area (2017).

Note: The electric car stock shown here is primarily estimated on the basis of cumulative sales since 2005.  When available, stock numbers from official national statistics have been used.  BEV = battery electric vehicles.  PHEV = plug-in hybrid electric vehicles.
The information shown is for illustrative purposes only. Statements concerning financial market trends are based on current market conditions, which will fluctuate. There is no guarantee that markets will perform in a similar manner under similar conditions in the future.

 

With almost every major auto maker producing (or planning) EV models (see Table 1), growth estimates vary widely (see Chart 2).

 

Table 1.  Chinese Manufacturers Have Set Aggressive EV Targets for 2020
Announced long-term EV strategies by original equipment manufacturers (OEMs), by region


Source: Company reports and Bernstein Research analysis.

 

Chart 2: Global EV Penetration by Region Is Expected to Pick Up in 2025 and 2030


Source: IHS and BofA Merrill Lynch Global Research estimates. The historical data shown in the chart above are for illustrative purposes only. Forecasts and projections are based on current market conditions and are subject to change without notice. Projections should not be considered a guarantee.

 

Our research suggests that EV penetration of the global auto market could reach around 5% of annual sales by the 2020–23 time frame and, according to one recent report, customers will have significantly more choice of EVs, with cumulative models available rising from 116 in 2016 to 246 in 2020 (see Chart 3).   

 

Chart 3: Customers Will Have Significantly More Choice of EVs by 2020
Cumulative models expected to rise, from 116 in 2016 to 246 in 2020


Source: Bloomberg New Energy Finance 2016-19 and BofA Merrill Lynch Global Research estimates.  The historical data shown in the chart above are for illustrative purposes only. Forecasts and projections are based on current market conditions and are subject to change without notice. Projections should not be considered a guarantee.
Note: BEV = battery electric vehicles.  PHEV = plug-in hybrid electric vehicles.

 

Meanwhile, as battery prices decline, driving ranges increase, economies of scale improve, and infrastructure expands to accommodate EVs, more consumers are expected to switch from gas- or diesel-powered vehicles to EVs—not only because they’re emission-free but also because they will be more economical (see Chart 4).

 

Chart 4. Lower Battery Prices and Higher Range Will Be Key Drivers of EV Adoption
EV battery costs and EV drive range, 2015–30E


Source: IHS and BofA Merrill Lynch Global Research estimates. The historical data shown in the chart above are for illustrative purposes only. Forecasts and projections are based on current market conditions and are subject to change without notice. Projections should not be considered a guarantee.

 

China Charging Up
How’s this for prescience: In September 2008, when the  global financial crisis was beginning to hit harder, MidAmerican Energy (which is controlled by Warren Buffett’s holding company, Berkshire Hathaway) purchased a stake in an upstart Chinese battery and EV manufacturer called BYD. As of March 1, 2018, shares of BYD have increased by more than 2,100%, eclipsing Tesla, the U.S.-based pure play in the EV market. 

Fast forward to the present, and China has embarked on an ambitious program to dominate futuristic technologies like electric vehicles, robotics, and artificial intelligence.  Of the one million EVs sold worldwide in 2017, half were sold in China, and the government is pushing for seven million by 2025, given mounting concerns about pollution and climate change.

“Any harm we inflict on nature will eventually return to haunt us… This is a reality we have to face,” said China’s premier, Xi Jinping, at the congress of the Chinese Communist Party last October (the congress is held every five years).  Toward that end, Xi said China must “develop a new model of modernization with humans developing in harmony with nature.”

With China contending with some of the worst air pollution in the world, part of the nation’s modernization includes a requirement that zero-emission vehicles comprise 10% of new car sales as soon as 2019 and 12% by 2020, which is more aggressive than any other major country.1

All of which helps explain the number of joint ventures (JVs) that have been formed in the last year with leading automakers such as Daimler, Toyota, the Renault-Nissan alliance, GM, BMW, Volkswagen, and Ford.

One of the more notable JVs involved Li Shufu, the billionaire chairman of China's other leading EV maker, Geely Automobile Holdings, which has taken a 10% stake in Germany’s Daimler.  Geely already owns Volvo, which plans to shift to hybrid and electric vehicles by 2021, and some observers are now raising questions about the future of BYD’s current partnership with Daimler.

Playing the Parts Landscape
Meanwhile, it remains to be seen how all this competitive posturing and innovation plays out. We believe the best way to play this mega-trend is through top global parts suppliers that are poised to benefit from the gradual progression of EV and hybrid production around the world.  While original equipment manufacturers (OEMs) strive to manage their cost structure on EVs, the companies that make power modules, wiring devices, and battery packs are likely to see steadily increasing demand as electric/hybrid propulsion improves.

One such company is pioneering the electrification of internal combustion powertrains through the addition of hybrid technology, which will allow for further engine downsizing by providing more power for intelligent driving. In 2016, the company introduced its mild hybrid vehicle solution, which maximizes the use of 48-volt electrification to minimize the demand on the engine, thereby improving engine performance while lowering CO2 (carbon dioxide) emissions by more than 10%.

How quickly battery technology improves is another matter, especially when it comes to the costs of underlying raw materials.  A recent report by Bernstein Research, for example, suggests that battery-pack costs are falling far faster than most recent projections, and will reach the $100/kWh (kilowatt hours) by 2021—a critical inflection point that may signal a significant economic crossover with internal combustion engine cars far sooner than most expect. 

At any rate, successive generations of lithium-ion batteries are likely to be the go-to power sources until evolving science makes high-nickel content, less expensive metals, and cheaper materials more economical to use.

The bottom line is that every OEM is going to have an electric vehicle in its product lineup—it’s not a differentiator; it’s a necessity.  But not every content supplier is positioned to benefit the same way.  Well-managed, well-diversified parts manufacturers that can leverage innovation on a global scale should be in the driver’s seat, as critical charging infrastructure expands to meet rising EV demand.


–Steve Govoni, Senior Financial Writer, contributed to this report

 

1 Fred Lambert, “Nissan’s Chinese Joint-Venture Increases EV Investment to Launch ‘More Than 20 Models’ in the Next Two Years,” Elektrek.com, February 5, 2018.

The information provided is not directed at any investor or category of investors and is provided solely as general information about Lord Abbett’s products and services and to otherwise provide general investment education.  None of the information provided should be regarded as a suggestion to engage in or refrain from any investment-related course of action as neither Lord Abbett nor its affiliates are undertaking to provide impartial investment advice, act as an impartial adviser, or give advice in a fiduciary capacity.   If you are an individual retirement investor, contact your financial advisor or other fiduciary about whether any given investment idea, strategy, product or service may be appropriate for your circumstances.

This material is provided for general and educational purposes only. It is not intended as an offer or solicitation for the purchase or sale of any financial instrument, or any Lord Abbett product or strategy. References to specific asset classes and financial markets are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations or investment advice. The examples provided are hypothetical, are for illustrative purposes only, and are not indicative of any particular investor situation.

This commentary may contain assumptions that are “forward-looking statements,” which are based on certain assumptions of future events. Actual events are difficult to predict and may differ from those assumed. There can be no assurance that forward-looking statements will materialize or that actual returns or results will not be materially different from those described here.

Statements concerning financial market trends are based on current market conditions, which will fluctuate. All investments involve risk, including possible loss of principal. No investing strategy can overcome all market volatility or guarantee future results.

The opinions provided in this posting contains the current opinions of the author are as of the date of publication, are subject to change based on subsequent developments, and may not reflect the views of the firm as a whole. This commentary is not intended to be relied upon as a forecast, research, or investment advice regarding a particular investment or the markets in general. Nor is it intended to predict or depict performance of any investment. This commentary is prepared based on information Lord Abbett deems reliable; however, Lord Abbett does not warrant the accuracy and completeness of the information. Consult a financial advisor on the strategy best for you.

Not FDIC-Insured. May lose value. Not guaranteed by any bank. Copyright © 2018 Lord, Abbett & Co. LLC. All rights reserved.  

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