5 min read 17 Jan 20
Summary: Watching Hollywood films from the 1980s that depicted the future, nearly all seemed to show people driving in electric cars. Here we are today in the year 2020, and sceptism still remains as to when and if electric cars will actually become the dominant form of ground transportation.
With the 2015 Paris Climate Conference focusing minds on a strategy to reduce CO2 emissions, it has highlighted that our behaviour with regards to transportation needs to change in order for CO2 targets to be met. We need to see a move away from ICE (the Internal Combustion Engine) towards carbon-free modes of transport, from both a CO2 emissions perspective, and also to improve local air quality.
There still remain concerns around BEVs (Battery Electric Vehicles):
The Volkswagen Group (VW) was engulfed in the emission scandal in 2015 when the US Environmental Protection Agency issued a notice of violation of the Clean Air Act after establishing that the company had misled regulators with regards to the emissions from its vehicles.
From that moment on, VW has led existing car manufacturers in developing alternatives to ICE vehicles. In a recent statement, the company announced it would increase spending by a further 36%, to a staggering €60 billion, over five years for BEVs (globally, only Amazon and Alphabet/Google now spend more on R&D than the VW Group do). Having looked at fuel cell technology as an alternative to BEVs (where the car runs on hydrogen rather than petrol), VW has decided that the future is BEVs and is backing this single technology.
Fuel cells are still being explored by other car manufacturers such as Toyota, but even Toyota is accelerating its BEV strategy, and recently acquired a 51% joint venture stake in Panasonic’s battery business. Fuel cells are still likely to have an application in long-haul vehicles, that require a much greater range capacity.
While plug-in hybrids (ICE + rechargeable battery) have also been put forward as an option, recent studies in Europe found that the vast majority of drivers were not recharging the battery. So, in essence, they were creating more pollution – as most are heavier vehicles that burn more fuel when the engine is running.
Cost still remains a big issue for consumers looking to switch from an ICE car to a BEV. While the costs are coming down, there is still a material difference. This will continue to require government pressure and support, both in helping to bring down the cost of BEVs, and ensuring the full environmental costs are priced into ICE cars. Don’t be surprised to see cities across Europe ban diesel cars entirely within the next few years. The UK, France and China have all announced plans to end the sale of new ICE vehicles by 2040, and some cities are already considering bringing that deadline forward.
The ownership structure of cars is also open to change. The average car is parked for more than 90% of the time and, in large cities, nearly 50% of moving cars are looking for a parking space. With General Motors taking a stake in US ride-sharing company Lyft, and Daimler and BMW taking a stake in the French ride-hailing app Kapten, the large car manufacturers are keeping their options open for the best way to service future mobility.
New BEVs coming onto the market can travel 100 miles on a 25-minute standard charge. While this may be problematic for longer commuters, the recharge times continue to fall. Also, the average car owner in London only travels around 105 miles per week ; very much suited to the BEVs on the market today. There remains a lack of infrastructure in terms of charging stations, but there are movements in the market. Royal Dutch Shell, BP, and Total have all recently purchased car battery recharging companies, they clearly see the industry shifting to BEVs and want to ensure they remain relevant.
Which also brings us to the question of why (publicly) some car companies still remain pessimistic on BEVs. In truth, they are not! However, by publicly stating the hurdles involved in adopting the technologies, they wish to advance their case to receive government support in helping to build out the required infrastructure.
The last leg in the infrastructure story is capacity in the grid for BEVs. Even with a significant push into BEVs (the forecast penetration of BEVs as a percentage of new car sales globally is set to steadily rise to ca 80% by 2045), they are not likely to constitute much more than a third of the operating fleet on the roads by then. So this should allow sufficient time for the grid to build out its capacity to handle the increase in demand.
There are concerns that, with the additional metals required for BEVs – such as copper, cobalt, nickel and lithium, the environmental effects of this additional production are not being considered. To address these issues, VW is preparing its entire supply chain to be carbon neutral. In order to supply into VW’s BEV electric platform, suppliers will have to independently verify that the products were produced with net zero emissions. VW is also ensuring its own BEV facilities are carbon neutral.
With the supply chain including mining companies, the world’s largest miner, BHP, has already begun transitioning its mines to operate on renewable energy alone. This includes the Escondida mine in Chile, the world’s largest copper producer, which is expected to be fully operating on renewable energy by 2025.
This then leaves the issue of how the grid is powered. Here, governments need to continue their push in replacing carbon-based fuels (such as coal and gas) with renewables (like wind and solar) in powering electricity for BEVs to recharge.
The quantum of investment required for these new technologies is very large. This is the reason we have begun to see consolidation in the market. For example, Peugeot and Citroen owner, Groupe PSA, has merged with Fiat Chrysler, and Ford (although not investing as heavily in BEV power trains) has announced it will buy three platforms from the VW Group. Elsewhere, having been fierce rivals in the past, Daimler and BMW have partnered together with Kapten, and plan to have commonality across their BEV fleets.
Expect to see more consolidation and partnerships in the industry. This transition will be a substantial structural headwind for suppliers who only serve the ICE power train. Delphi Technologies, for instance, has announced the closure of nine R&D centres and currently trades on a P/E multiple of 5x. It should, however, be a boon for those companies that invested early in the BEV supply chain. A good example is Cypress Semiconductor, a leading supplier of memory processors to BEV platforms, which has attracted a bid from Infineon Technologies at a near 50% premium.
While there are still some hurdles, the Hollywood vision of a future with electric cars looks closer to becoming a reality.
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