While many have eagerly followed Tesla’s progress in the electric vehicle (EV) market for years now—and if you haven’t, check out TSLA’s stock, which has increased 10x over the past 5 years—governments and industry alike are piling into the space.
- European countries like the Netherlands and Norway have targets to ban petrol/diesel cars by 2025.
- France and Britain joined the push into EV in July of this year by announcing they will ban sales of petrol cars by 2040.
- Most recently, China joined the group, with details likely to surface after its important 19thNational Congress meeting in October.
China is also considering opening up its borders and letting foreign EV carmakers establish wholly-owned ventures. This would be a dramatic shift in policy, as today, foreign auto manufacturers are required to set up joint ventures with local companies. Auto manufacturers themselves are hopping on board: Volvo announced that all model introductions starting in 2019 will either be hybrids or EV. BMW announced it will roll out a slate of electrified and fully-electric vehicles.
It’s no wonder stocks of BYD, Geely, and Brilliance China, who are poised to benefit from the shift into EVs, are up 50%-300% this year.
To be sure, the entire auto industry will be going through tectonic shifts, not just for auto manufacturers but suppliers worldwide. In fact, autos are one of the most complex mass-produced products, with roughly 30,000 parts, compared to PCs and smartphones which have about 1,500-2,000 parts. While EVs use 1/3 fewer parts (estimated 20,000 parts), the complexity and nature of advanced materials required (e.g., battery technologies) make it an equally daunting task to shift the entire industry towards EV production.
Companies affected by the paradigm shift run the gamut. Original Equipment Manufacturers (OEMs) include Tesla (obviously), the traditional automakers like Toyota, Daimler, VW, GM, Ford, Nissan, Honda, BMW, and the Chinese automakers BYD, Geely, and Brilliance China. On the one hand, engine and transmission makers are likely to face meaningful headwinds, as EV engines require less than half the parts of conventional engines. Companies that make engine-related parts include NGK, Hyundai Wia, Tenneco, and transmission companies include Aisin Sekki and Schaeffler.
On the other hand, companies exposed to the production of EV batteries have arguably the most exciting part of the value chain—and frankly one that requires the most innovation going forward. Here, the supply chain ranges from materials and components (cobalt, cathode, anode, lithium; companies like Umicore, Toray, Nippon Carbon, Hitachi) to the battery cell itself (companies like LG Chem, Samsung, Panasonic).
So, who will be the ultimate winners and losers?
While first movers might gain a slight advantage, the international investors at R Squared (former team at Julius Baer/Artio Global) don’t think they will necessarily be the biggest winners. Innovation will lead the way, but it is important to know that many new technologies will fail to gain critical mass and low (enough) unit costs. A nimble, fast-follower strategy might be the most appropriate strategy. And to profit from the trend, we believe it will be equally important for investors to also be nimble, attentive to fast-moving changes, and opportunistic.
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As international equity investors, the team at R Squared Capital Management (former team at Julius Baer / Artio Global) utilizes fundamental and macro analysis in our quest to correctly identify structural tailwinds and headwinds at the geographic, sector and company levels.
FROM THE DESK OF LUIS AHN
Luis Ahn is a Partner and Analyst at R Squared Capital Management.
Prior to joining R Squared, Luis was a Senior Analyst at Bloom Tree Partners.
Luis received an MBA from The Wharton School and Bachelor of Science in Quantitative Economics and Computer Science from Tufts University.
To view the firm biographies of RSQ, click here.