Vehicle electrification:
a powerful thematic trend

by Jonathan Graas,
Buy-side Equity Analyst – US Industrials


Today, the automobile world is experiencing its greatest revolution since the Ford Model T was introduced about one hundred years ago. Electric vehicles are anything but new. As a matter of fact, the first prototype was apparently developed in the 19th century, not long before vehicles with combustion engines. However, the technological superiority of combustion engines has outshone the development of electric vehicles until this very day.

There are many advantages to electric vehicles: they have superior energy yield, they are simple to produce and do not require a lot of maintenance (fewer moving parts), their engine performs well, etc. In addition to these advantages, the main reason to opt for the electric transition is related to our health and the environment.

Vehicles with a combustion engine: a public health issue

It is well known that vehicles with a combustion engine emit gases such as CO2 or nitrogen oxide (NOx) which contribute to global warming. However, if we could just name one argument, it would be the emission of fine particulates by combustion engines. This alone justifies the transition towards electrification.

Regardless of whether we look at diesel or petrol engines, the exhaust fumes contain significant amounts of fine particulates (which are smaller than 2.5μm) which penetrate deep into the lungs and cause cardiovascular and respiratory conditions. In 2012, the World Health Organization (WHO) considered diesel and petrol as ‘carcinogenic’. Hence, the debate should not focus on ‘diesel or petrol’ as both are extremely hazardous.

Electric vehicles will be here sooner than we think!

Although there is little doubt that electric vehicles are on the rise, adoption rates remain very low (under 2% of total car sales). The high cost, short distance range and lack of public charging infrastructure can be blamed for this. However, there are many indications that the adoption rates of electric vehicles will skyrocket in the coming years, and will even surpass the most optimistic forecasts. In order to become convinced of this statement, we need to analyse the three main factors which are related to the current concerns: infrastructure, regulation and batteries.

The need for infrastructure is being overestimated

The lack of public charging stations is an argument which is often heard as a hindrance to the transition to electric vehicles. Is this really the paradox of the chicken and the egg? First of all, we should look into the various options for charging electric vehicles. Indeed, there are three types of chargers: ultra slow, slow and fast.

Ultra slow chargers are the ones which are used among retail clients, with limited electrical grid power (a couple of kilowatts). Mostly, charging is done during the night. An estimated 70-90% of charging needs can be addressed by charging the vehicles at home or at work. Hence, 10-30% of the charging is done with public charging stations. Slow chargers allow vehicles to be charged in a few hours (3-4). This type of charger is mostly found in public, often close to shops and parking lots. It will become very normal to charge a vehicle while going to the restaurant or the cinema. Finally, fast chargers allow one to recharge the car’s batteries in under 30 minutes. They require special infrastructure. The next generation of ultra fast chargers which is currently being developed will allow one to recharge car batteries in less than ten minutes. This type of fast charging should remain very marginal, and will only be used for long distances, like when going on holidays.

The need for public charging stations is being overestimated, as in most cases this will not be the option that is used. We should understand that charging electric vehicles is a completely different paradigm than filling up at the gas station. Moreover, several players are investing in this domain, like for instance the joint venture IONITY created by VW, Ford, BMW and Daimler. Oil companies, electricity suppliers and even technology companies have been investing in this market.

A nudge from regulation

Regulation in terms of CO2 emissions is becoming increasingly strict in Europe as well as on a global scale. This regulation encourages car manufacturers to come up with alternatives, such as hybrid or electric vehicles, so that the imposed CO2 limits are not being exceeded. More recently, several governments and municipalities have announced that they will simply ban vehicles with a combustion engine (by 2040 in France and the United Kingdom) or have set quotas on electric vehicles, as is the case with China.

Finally, the number of subsidies granted to the purchase of electric vehicles is booming. Norway is a very good example of this, as this country grants subsidies up to €15,000 per vehicle. South Korea, Denmark and China are also good examples in this regard. The objective is to stimulate shortterm demand by compensating the price gap between combustion engine vehicles and electric vehicles. As battery technology further develops, this gap will narrow quickly, and subsidies will be phased out gradually.

Batteries: towards a parity of electric/petrol by 2025

Batteries play an extremely important role, as up to 50% of the current cost of electric vehicles battery related. In addition to their high cost, batteries hamper range. We are still a long way from a 1,000 kilometre range, but is it really necessary to have this kind of range, if we charge our electric vehicles while we are at work or sleeping?

For a couple of years, battery prices have fallen consistently, but not enough to compete with cars with a combustion engine. We currently find ourselves at a turning point. Indeed, the rate of price reduction will pick up significantly, allowing for parity between electric/petrol cars by 2025. Battery technology is moving incredibly fast. Cathodes enriched by nickel are currently in production. They enable a significant increase in energy performance. The next evolutions, like solid-state batteries, are already being developed. These will allow for even more impressive performance.

Along with the technological progress, mass production has started in earnest. The Tesla Gigafactory in Nevada, which currently produces the largest quantity of batteries in the world, is often in the news. However, in reality, there are about a dozen Gigafactories, without even counting the many new projects. In this mass production scheme, China plays a very important role, with global production accounting for more than 60% from 2020 onwards. Battery production will be able to cover the bulk of the need in the coming years (sufficient to have a 10% penetration rate by 2020). In the short term, there may even be production overcapacity, which will put pressure on battery prices. However, there will be considerable challenges in the medium term, as battery demand will exceed supply.

What is the impact of vehicle electrification?

The electric revolution is profoundly changing the world of car manufacturers. Traditional manufacturers will go through a very challenging transition period, as electric vehicles are not especially profitable. The value chain is shifting from expertise on the combustion engine, which yields handsome profits for manufacturers, to batteries, embedded technology and electronics, which are not the core business of traditional
manufacturers. The winners of the future are probably to be found among the players or new manufacturers who have been able to embed these key elements.

How do we invest in electrical vehicles now?

The easiest way would be to invest in the company most well known for electrical vehicles, Tesla. However, for every theme we identify as interesting, we look at the entire value chain to find companies that are best placed to invest in this theme and provide the greatest investment opportunity. In the case of electrical vehicles we are investing in auto suppliers instead of directly investing in OEMs. One example is Infineon, the worldwide leader in automotive power semiconductors. We like Infineon because of high barriers to entry (due to very long testing periods with OEMs), long term contracts (the duration of a car model), and a great structural growth driver from electrical vehicles. That is, the number of power semiconductors used in an electrical vehicle can be up to five times higher than a traditional combustion engine vehicle. Another example is Aptiv, provider of components of that make up a vehicle’s electrical backbone such as connector and wiring. Here again the move to electrical vehicles plays in their benefit and moreover, Aptiv is also well positioned for autonomous vehicle technologies.


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