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Electric vehicles coming of age

Electric vehicles coming of age

13-12-2018 | Insight

In the coming years, the global automotive industry will go through its most radical change as vehicle electrification and changing consumer preferences challenge existing business models.

  • Ruud van Suijdam
    Ruud
    van Suijdam
    Portfolio Manager
  • Thiemo  Lang
    Thiemo
    Lang
    Senior Portfolio Manager, RobecoSAM Smart Mobility Strategy & Smart Energy Strategy
Source: RobecoSAM, 2017: EV = Pure Electric Vehicle, PHEV = Plug-in Hybrid EV, HEV = Full Hybrid EV, MHEV = Mild Hybrid EV, ICE = Internal Combustion Engine

While it may be too early to say goodbye to the combustion engine, 2019 looks set to become a milestone in the mass adoption of electric vehicles. We have known for some time that this was going to happen, as it is a transition that will help move us close to fulfilling a number of the Sustainable Development Goals formulated by the UN back in 20151. However, the incentives required to get the ball rolling were only starting to emerge slowly. We now expect these to come thick and fast, offering interesting investment opportunities next year.

An example is the recent growing trend for governments to reveal their long-term ambitions for combatting air pollution and reducing CO2 emissions. Instrumental in achieving these targets is the introduction of stricter limits for vehicle emissions, an approach that is gaining momentum among governments worldwide. The EU, for instance, has set a CO2 reduction target of 27% by 2020. And environmental issues like ‘dieselgate’ have vastly increased awareness of a problem that desperately needs a solution. Electric vehicles are part of that solution. With new models expected to come off the production line this year and next, electric vehicles look set to become a real alternative to combustion-powered cars, providing an interesting investment opportunity into the bargain.

This article is part of our investment outlook 2019: ‘Turbulence ahead’.
This article is part of our investment outlook 2019: ‘Turbulence ahead’.
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Electric vehicles at an inflection point

Investing in electric vehicles is a good example of impact investing, as it benefits the environment and offers an interesting investment case. Although stringent emissions regulations will continue to spur changes in the automotive industry, ongoing production-cost declines will be critical in driving electric vehicle sales.

Several factors are contributing to falling costs. The price of batteries has already come down a lot and should continue to fall over the next three to four years. In addition, the costs of electrified powertrains – including the power electronics and motors – are expected to fall significantly as well. Future electric vehicles will be based on optimized, scalable platforms, allowing a significant reduction in development and assembly costs. Once optimized, they are expected to require around 25% less assembly time (less than 30 hours compared with 40 hours for traditional cars).

With the total cost of owning an electric car marginally below that of owning a ‘traditional’ one, the electric vehicle market is already shifting from a subsidy-driven to purely economics-driven market. This transition will result in the electric vehicle market reaching the critical inflection point for mass adoption. Car manufacturers are investing heavily in electrifying their fleets and the results will become evident next year as a wide range of electric vehicles hits the market.

It is not, therefore, just about car manufacturers expanding their range; we also expect investment opportunities to materialize across the entire spectrum of sectors and industries that make up the electric vehicle value chain. These include component and sub-system suppliers focusing on the crucial elements of electrification, companies focusing on sensors and data processing, and suppliers of smart electrical grids and charging infrastructures.

Growth expectations

In the coming years, the global automotive industry will go through its most radical change as vehicle electrification and changing consumer preferences challenge existing business models. Around 1.1 million plug-in hybrid electric vehicles (PHEVs) and pure electric vehicles (EVs) were sold worldwide in 2017, which represents year-on-year growth of over 50%. Electric vehicle sales in 2018 are expected to increase to 1.7 million units; in other words, nearly 2% of all new cars sold. We expect this trend to accelerate in the coming years, with 3 million pure electric vehicles and 2 million plug-in hybrid electric vehicles estimated to be sold in 2020.

Investors that have embraced impact investing need to have a long-term view. Typically, such investment themes are accompanied by above-average volatility, as the corresponding strategies tend to have a growth bias. For the first half of 2019, we expect growth-oriented themes to fare well. But if the economy cools as we approach 2020, most investors will favor defensive stocks, which could hurt short-term performance. However, given the irreversibility of the mobility trend and the increasing quality and scope of connectivity and mobility services, entirely new markets will develop, further increasing the breadth of investment opportunities in 2019.

1In particular: Sustainable Development Goal - Ensure access to affordable, reliable, sustainable and modern energy for all

Outlook 2019: Turbulence ahead
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