EV, is it for me?

Background

The EV industry has surged because of breakthroughs in technology, manufacturing and design, led by highly innovative start-ups creating new consumer demand. These are traits we typically associate with the United States. Yet when we look at the major world markets and their share of global EV sales, the biggest markets are China at 55% and Europe at 24%, with the U.S. in a distant third place at 13%.¹

Matthew: Why are China and Europe so far ahead of the United States?

Krista: We believe electric vehicle (EV) adoption in China and Europe has been faster than in the U.S. because governments in those regions have stepped in to help address consumer concerns. One of the main concerns is the higher price of an EV, compared to a vehicle using an internal combustion engine (ICE). The Chinese government provided support for the industry as early as 2009, offering tax breaks, subsidies and procurement contracts to help EV manufacturers gain traction. It has also encouraged EV buying through purchase subsidies and relief for the consumer from vehicle purchase tax. There have been similar assistance programs for European consumers, though they vary from country to country. While there is government support for EV manufacturing and consumers in North America, those policies have not been in place for as long and do not amount to the same discounts offered elsewhere. 

Another major concern relates to EV charging infrastructure. Governments in China and Europe have provided support through funding, incentives and other policy changes — like standardized connectors for charging— to build out a more comprehensive network than the one currently available in North America. Range anxiety is another common concern. The lower population density in North America combined with the less advanced charging network may give some consumers pause when deciding on their next vehicle type.

Background

EVs are growing much faster than the traditional market, accounting for about 31% of new vehicle sales in China, 18% in Europe and 10% in North America. But this is still some way from mass consumer adoption.²

Matthew: What do you see as the biggest obstacles to mass consumer adoption? Where in the world are you seeing the best solutions?

Krista: We believe the top concerns for consumers when evaluating the possible purchase of an EV are cost, charging infrastructure and range anxiety.

While the case is often made that over the lifetime of a vehicle an EV is cheaper, the upfront cost of an EV continues to exceed that of a comparable ICE vehicle. EVs are more costly primarily because of their batteries. Original Equipment Manufacturers (OEMs) also need to invest more heavily in research and development and they are unable to realize the same economies of scale as traditional vehicles using an internal combustion engine. These factors lead to a higher price point, for which the consumer will bear the brunt. We have seen varying approaches to address this issue, with some governments providing financial support to OEMs to help lower manufacturing costs, while others offer aid to the consumer to help lower the purchase cost of the vehicle. 

The lack of EV charging infrastructure is being tackled in a number of ways. Again, there is the option for government participation through funding and subsidies, or OEMs can build out their own networks, or several OEMs can collaborate to develop a network.

Finally, range anxiety is closely tied to the lack of charging infrastructure. We do believe concerns related to range anxiety will ease as charging infrastructure becomes more widespread and as new battery technology is introduced, extending vehicle range.

Matthew: Many North American investors can probably think of a few names when it comes to EV investments. Looking more broadly at the EV industry structure, what are some of the ways to invest in the industry?

Krista: There are several ways in which equity investors can gain exposure to the EV industry. The most obvious is through companies that manufacture only EVs. Traditional OEMs also provide exposure, with investors able to weigh the various strategies each OEM is employing as it looks to play a role in the EV market.

Moving up the supply chain, several suppliers provide exposure to EVs. Again, investors can review each supplier’s strategy as it relates to EVs. Some suppliers manufacture propulsion-agnostic parts that will be on vehicles regardless of propulsion type. Other suppliers are more heavily weighted to ICE vehicles, while others are investing in broadening their capabilities to offer EV-specific components. Distinct from what we would consider traditional auto suppliers are the suppliers of other components, such as chips, and battery manufacturers, which also have varying degrees of EV industry exposure. 

Finally, further up the EV supply chain are those companies mining and processing the key metals in EV batteries: lithium, cobalt, nickel, manganese and graphite.

Matthew: Thanks, Krista, for your insights. This provides important context for the EV industry and how it's evolving. In closing, I'd like to connect this insight on EV to our recent insight on artificial intelligence (AI). They're both themes that have got a lot of attention from financial markets. Investors can consider whether they want to emphasize a theme in their investments, based on their objectives, time horizon and risk tolerance. For investors who want to emphasize a theme, there are a variety of ways of doing this, as Krista has shown here for EV. For investors who don't have a particular view on a theme, then it's reasonable to gain exposure through an index fund, reflecting whatever role the theme ends up playing in global stock markets.