Electric vehicle markets are currently experiencing exponential growth, with sales surpassing 10 million vehicles in 2022. EVs accounted for 14% of all new car sales, up from around 9% in 2021 and less than 5% in 2020.
Governments around the world are implementing regulations and incentives to increase the uptake of electric vehicles. Underpinned by a favourable regulatory backdrop, global EV sales are expected to reach 40 million or 40% of all cars sold by 2030.
In this newsletter, we look at how government policies are shaping future demand for EVs, how EVs differ from internal combustion engine (ICE) vehicles and where we believe the investment opportunities are.
Climate change is causing structural shifts in the global economy, requiring many sectors to innovate to remain relevant or compliant in the future. One sector experiencing rapid change is the automotive market. Governments around the world have implemented regulations that mandate a certain percentage of all automotive sales to be electric vehicles (EVs). This, coupled with changing consumer preferences, has compelled vehicle manufacturers to fundamentally alter their product profile.
The most common government regulations that are being used to promote EVs is the Zero-emission vehicle (ZEV) mandates: ZEV mandates require automakers to sell a certain percentage of ZEVs each year.
Global zero-emission vehicle mandates timeline:
Electric vehicle markets are currently experiencing exponential growth, with sales surpassing 10 million vehicles in 2022. EVs accounted for 14% of all new car sales, up from around 9% in 2021 and less than 5% in 2020. Three markets dominate global sales, with China leading the way by representing approximately 60% of global electric car sales. China currently has over half of the electric cars on the road globally and has already exceeded its 2025 target for new energy vehicle sales.
In Europe, the second largest market, electric car sales increased by over 15% in 2022 – more than one in every five cars sold was electric. The United States, the third largest market, saw a 55% increase in electric car sales in 2022, reaching a sales share of 8%.
Consumers now have a wide range of options when it comes to electric cars. In 2022, there were 500 different electric car models available, which is more than double the number of options in 2018. Morningstar estimates that EVs will make up 40% of global auto sales or 40 million units by 2030. While EVs still have a higher upfront cost compared to most automobile categories, decreasing battery costs are expected to lead to cost parity in terms of total cost of ownership over the next few years for most vehicles.
Electric vehicle sales projection to 2030:
Consumer concerns regarding functionality are rapidly diminishing. EVs have reached a comparable range to internal combustion engines and charging times have decreased. The expansion of charging infrastructure on highways and in cities worldwide is expected to drive increased EV sales, even without subsidies.
Internal combustion versus electric vehicles:
EVs have significantly fewer parts compared to internal combustion engine (ICE) vehicles. A typical ICE vehicle has over 1000 moving parts, while an EV has around 200. This is because EVs have a simpler powertrain consisting of a battery, motor, and controller. An ICE powertrain comprises the engine, driveshaft, differential, fuel system, air intake system, exhaust, and cooling systems.
Some parts, such as brakes, steering, and suspension, are common to both EVs and ICE vehicles. However, even when considering these common parts, EVs still have significantly fewer overall parts than ICE vehicles.
The reduced number of parts in EVs provides several advantages. Firstly, it increases their reliability and reduces the need for maintenance. Secondly, it makes EVs lighter, enhancing their performance and efficiency relative to their ICE counterparts.
Electric Vehicle Batteries:
The battery is the most important component in an electric vehicle, underpinning not only performance but the overall cost of the vehicle as well.
A lithium-ion EV battery consists of packaging and mounting structures, an electronic and electrical control system, and battery cells. Each cell contains two electrodes (a cathode and an anode), an electrolyte (a chemical solution that allows electricity to flow between the electrodes), and a separator (physical barrier between the cathode and electrode).
Lithium-ion battery composition:
A key characteristic of the battery is its energy density – a measure of energy stored per unit of volume (expressed in watt-hours per kilogram). The higher a battery’s energy density, the more energy it can store, and in the case of electric vehicles, the greater the range on a single charge. The cathode is critical to determining a battery’s energy density because its capacity determines the battery’s overall energy storage capacity.
They key differences between the chemistry compositions relate to energy density, weight, and cost. Generally speaking, energy density gains have an inverse relationship to cost. Over the past decade, battery technologies have continuously improved. For example, cell energy density has risen from around 120 Wh/kg a decade ago to around 270 Wh/kg today.
With the jump in EV production volumes in 2022, underpinning the sharp rise in critical mineral prices, the average battery price per kilowatt hour (kWh) rose as manufacturing scale benefits were offset by higher mineral cathode costs. The share of cathode material costs rose to nearly 40% of the total cost of the average lithium-ion battery cost in 2022, indicating the sensitivity of battery costs to changes in the prices of critical minerals.
Average pack price of lithium-ion batteries and share of cathode material cost:
Having pioneered the development and scale production of internal combustion engine vehicles in the 20th Century, the US and Europe are in an unfamiliar position in respect of EV supply chains. China dominates at every stage of the EV battery supply chain downstream of mining.
Given the rising tensions between western countries and China, governments have grown concerned about their reliance on China to achieve EV penetration targets. Onshoring or “friend-shoring” has become a key policy priority, particularly following Russia’s invasion of Ukraine. In response, the US and Europe are establishing support measures to shift production of key EV battery components closer to home.
The US Inflation Reduction Act (IRA) is seeking, using consumer vehicle subsidies, to stimulate domestic EV production and ensure components are manufactured onshore or by countries that it holds free trade agreements with (aka “friendly” countries).
Led by government targets and policies, the geographical diversity of EV battery supply chains is expected to improve over the next decade. However, China’s early lead is likely to sustain their manufacturing dominance across most stages of the battery supply chain.
Investment Opportunities:
We believe it is easier to find high-quality companies in industries that enjoy attractive economics. However, there are also high-quality companies in apparently unattractive industries. Auto manufacturing has historically exhibited poor economics, with most businesses unable to earn a return above their cost of capital – through the cycle.
Certain subsectors within the auto manufacturing supply chain have, however, proven to be better investments than others, and we believe the same will apply throughout the decade long EV transition. Of the eight sub-sectors listed in the graphic above, we have identified three which we believe offer the most attractive investment opportunities – components, semiconductors, and critical minerals.
Automotive Components
To facilitate the transition from ICE to EVs, vehicle manufacturers are having to incur significant costs. The largest cost component is typically the conversion of existing production lines to produce EVs. This may involve installing new equipment, retraining workers, and developing new manufacturing processes.
Several of the world’s largest automakers have already announced significant investments to convert their manufacturing facilities. For instance, Volkswagen has pledged to invest €52 billion in EVs and batteries by 2025, GM $35 billion by 2025, Ford $50 billion by 2026, and BMW €30 billion by 2025.
We believe auto suppliers are a better way to take advantage of the EV transition relative to the vehicle manufacturers. Companies are simply replacing ICE vehicles with EVs, resulting in limited (if any) incremental revenue or profit from the transition.
Content per vehicle is expected to be 2.9x higher than an ICE equivalent:
The value of content per vehicle in an EV is estimated to reach ~2.9x the equivalent ICE vehicle. Although the number of components for an EV is lower, the value of the components is significantly higher. This is because EV components are typically more sophisticated and differentiated than their counterparts in ICE vehicles. Specialised parts are typically involved in electric drive systems, including electric motors, power electronics, and inverters. For example, the content of one high-voltage silicon carbide inverter in an EV is close to the overall content opportunity per vehicle in an ICE.
With the opportunity to grow the value of the content sold to EV manufacturers, auto component suppliers are expected to generate incremental revenue from the same number of vehicles produced. Although they too will be replacing ICE-related volumes in the near-term, we believe the longer-term benefit is compelling.
Semiconductors:
Modern vehicles are more reliant on chips than ever before. According to Bloomberg, the average vehicle contains 1 400 semiconductors that control everything from airbags and safety mechanics to the electrical systems and powertrain.
Today, chips control virtually every system in a vehicle, from the air conditioning and tyre pressure monitoring system to the airbags. As the automotive industry continues to embrace electrification and automation, the volume of chip content-per-vehicle is only expected to grow.
The rapid adoption of hybrid and electric vehicles and the increasing semiconductor content per EV will boost the demand for automotive chips. According to S&P Global, the value of semiconductors averaged $500 per vehicle in 2020 but is forecast to reach $1 400 per vehicle by 2028.
EVs require more chip content than ICE vehicles for several reasons, including:
- Power electronics – EVs use a variety of power electronics devices to control the flow of electricity from the battery to the electric motor, and to convert the electricity from AC to DC and back again.
- Battery management system (BMS) – a complex system that monitors and manages the battery pack, ensuring that it operates safely and efficiently. It requires a number of sensors and microcontrollers to perform this task.
- Advanced driver assistance systems (ADAS) – many EVs come with ADAS features such as automatic emergency braking, lane departure warning, and adaptive cruise control. These features rely on a variety of sensors and cameras, as well as powerful processors to analyse the data and make decisions.
- Infotainment systems – EVs typically have more advanced infotainment systems than ICE vehicles, with features such as larger touchscreens, voice control, and internet connectivity.
Industry demand for increasingly complex infotainment, advanced safety, and vehicle autonomy systems will continue to increase the volume of semiconductors in vehicles. We see the benefit accruing to not only the companies included above, but to broader semiconductor manufacturing volumes, which will be a tailwind to chip foundries (e.g. TSMC & Samsung) and chip manufacturing equipment manufacturers (e.g. ASML).
Critical minerals:
The expected surge in sales of electric and plug-in hybrid vehicles over the remainder of the decade, requires huge volumes of critical minerals. The minerals designated as critical to the transition to EVs are lithium, nickel, cobalt, manganese, and graphite.
Last year, about 60% of lithium, 30% of cobalt and 10% of nickel demand was for EV batteries. This is up dramatically from five years ago, when the share of demand from EVs for lithium, cobalt, and nickel, was 15%, 10% and 2%, respectively.
Over the last five years, demand for lithium has tripled, while nickel and cobalt demand have increased by 40% and 70%, respectively. The surge in demand for these critical minerals has spurred a jump in investment for both exploration and new mine development.
Among battery critical minerals, we see the greatest investment potential in lithium. Lithium is the only critical mineral that is used across all cathode chemistries, providing a demand outlook that aligns most directly with underlying EV production volume forecasts.
Lithium Demand Estimates:
Morningstar estimates that lithium demand will triple from the 2022 level of 800 000 tonnes to reach over 2.5 million tonnes by 2030 based on a 40% EV adoption rate.
Historically, lithium demand was dominated by industrial uses. As EV sales and demand for lithium batteries in consumer electronics and energy storage systems have grown, industrial uses now make up just 16% of total lithium demand and is forecast to decline to 5% in 2030. EVs are expected to contribute more than two-thirds of demand by 2030.
Lithium is produced from two very different sources– brine and hard rock. The largest brine resource is currently located in the Salar de Atacama in Chile, with other large brine resources in the Andes Mountains, where Chile, Argentina and Bolivia meet – dubbed the “Lithium Triangle.” Brine (35-50x saltier than seawater) is pumped from underground ancient salt lakes into evaporation ponds. Over a period of between 9 and 18 months, the water evaporates, leaving lithium salt. From there, the lithium salt is sent to a processing plant, where it is processed into either lithium carbonate or lithium chloride.
Evaporation ponds in the Salar de Atacama:
Lithium from hard rock is extracted using conventional mining techniques. Mined ore is refined and processed into lithium concentrate, which is then processed into lithium carbonate, lithium hydroxide or lithium chloride. The main lithium-bearing sources are spodumene and lepidolite deposits. Spodumene deposits typically contain two to three times the amount of lithium compared to lepidolite. As a result, most of the lithium produced from hard rock comes from spodumene assets in Australia. Unlike the large brine resources in Chile, where lithium salts are processed into end-product lithium carbonate/oxide on-site, spodumene concentrate has historically been exported to China for processing.
With strong demand estimates underpinned by the expected growth in sales of EV, demand for lithium is anticipated to reach or exceed current projections. However, we see supply as the potentially limiting factor in reaching the unconstrained demand estimates. Recent greenfield (new resources) lithium projects have taken between eight and 16 years to bring on-stream. On average, production from new lithium projects is delayed by an average of two-and-a-half years from originally announced timelines, excluding production ramp-ups. Delays have been driven by factors such as delays in permitting/approvals, lithium price cycles (impacting financing) and technical challenges during commissioning and production ramp-up.
Greenfield developments carry significant execution risk in achieving project timelines, ramp up and production targets. More than half of the modelled 2030 supply estimate of 1.7 million tonnes is due to come from greenfield developments.
We expect prices to remain well-ahead of the marginal cost of supply over the remainder of the decade, presenting attractive opportunities to invest in low-cost producers that will also benefit from rising production profiles.