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    Global macro research: the impact of electrical vehicles on investments

    Global macro research: the impact of electrical vehicles on investments

    May 15, 2020 Global macro

    With demand for electric vehicles continuing to soar, we consider what impact this could have on investors’ portfolios. While the impact on some areas, like engine-part suppliers, may be self-explanatory, others are less straightforward.

    Specifically, we examine how the rising demand for electric vehicles may impact investments in the automobile sector, the energy sector and country exposures.

    The demand for electrical vehicles through 2040 is set to soar

    • Sales of global electric vehicle (EV) uptake has grown an average of over 60% per year from 2013 to 2018, to about 5 million light-duty electric vehicles on roads around the world1.
    • EV demand is forecast to rise substantially over the coming decades, with most meaningful increases in demand beginning around the mid-2020s as technology, consumer taste, and government regulation gradually converge to hasten the adoption of greener technology. EVs are expected rise to about 10% of auto sales by 2025, 25% by 2030, and 50% by 2038, with Europe and China expected to be the leading adopters2.

    Figure 1: Global electric vehicles and public charging points continue to surge higher2

    Global electric vehicles and public charging points continue to surge higher 

    1. Identifying the winners and losers within the automobile sector

    • Engine-related part suppliers are likely to face contraction owing to EVs possessing fewer moving parts. Analysis of moving and wearing parts showed that the highly lucrative spare parts business could shrink by ~60% in the endgame of a 100%-EV world, although this is still decades away.3
    • Lower servicing activity has the potential to dampen sales for after-market manufacturers of parts such as fluids and filters, labor demand for mechanics, and poses a headwind for the dealerships, which generate significant revenue from this activity.
    • We expect battery providers and electronic firms could benefit from increased demand. Some Asian companies, which currently dominate the market for EV batteries, are expanding their production capacity in Europe, China and the US in a fight to win lucrative contracts from global automakers.
    • Legislation is needed to incentivize manufacturers due to prohibitively high costs associated with EVs. Less stringent emission regulation in the United States will likely cause a slower adoption of EVs and so negative impacts from any shift in production mix will be felt later than in the EU and China.

    2. Considering the implications for the energy sector

    • In the near term, increased electricity demand should largely be met by existing power supply. However, over the long term, the extra demand will put upward pressure on prices and require increases in capacity and transmission.
    • Renewable energy sources stand to benefit. Electricity demand peaks may rise more sharply in the evening when car charging will be most popular. One offset is that certain renewable energy forms, namely wind, actually produce more energy at night, which could help to meet these peak demand times.
    • Utility companies are heavily investing in battery technology to store surplus energy during the day and meet peak demand at night with American firms announcing over USD$5 billion in battery investments since 2018. This tailwind is likely to benefit lithium (a key component used in batteries) and battery suppliers.

    3. Evaluating the impact on country exposures

    • Manufacturers in Eastern EU countries (due to high labor adoption) and South Korea (due to high exposure to final assembly and parts) are likely to suffer the most.
    • Countries with large production shares combined with large surpluses likely face the most macroeconomic risk. Therefore, with over 60% of global auto production concentrated in China, the US, Japan, Germany and India, these countries are likely to suffer too, albeit to a lesser extent.
    • Raw material-supplying countries stand to benefit from increasing battery demand. Lithium producers in South America (namely Chile and Argentina). Australia and China are the likely winners. China, the US, Australia, and Brazil will also benefit from the greater demand for cobalt, graphite, nickel, and aluminium

    Figure 2: Which geographies could be negatively impacted by the shift to EVs?

    Which geographies could be negatively impacted by the shift to EVs?

    Source: Insight. As at April 2020.

     

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