Electric Car and Bus Markets
What is ESG?
ESG stands for “environment, social and governance”.
What is ESG Investing?
ESG investing entails researching and factoring in environmental, social, and governance issues, in addition to the usual financials, when evaluating potential stocks for portfolios. Research is increasingly showing that this investing method can reduce portfolio risk, generate competitive investment returns, and help investors feel good about the stocks they own.
There are any number of ways for investors and business leaders to explore the EV or ESG conversation right now. The push for sustainable options in every sector reaches well beyond the automotive industry. The next generation consumer and market intelligence ensures you will see those trends coming and be ready to adapt (or adopt) early.
Electric Vehicles Are The Future
Until recently, mass adoption of Electric Vehicle (EV) technology has been concentrated primarily in the small vehicle category, targeted at reducing the numbers of the highly polluting two- and three-wheelers ubiquitous in Asia’s cities. Through a system of subsidies to encourage mass adoption of these EVs, China has sought to improve air quality throughout its many bustling city-centres.
Policies encouraging adoption of more sustainable behaviours are beginning to shift from incentivising consumers to regulatory enforcement, although the economic impact of COVID-19 has resulted in countries temporarily prioritising economic recovery. Furthermore, pressure to conform to more socially responsible practices is becoming increasingly mainstream.
Whilst China has led adoption of EVs and battery technology in recent years, European consumers and manufacturers are now rapidly turning to EVs, catalysed by incentives seeking to boost economic activity. EVs are generally regarded as ‘green’ technology, however the supply of mineral ingredients for batteries is likely to give rise to new sustainability challenges.
Regulations to Replace Subsidies
Regulations put in place by the Chinese government have increasingly focused on encouraging consumers and manufacturers to switch away from polluting ICEs to cleaner EV technology. Since 2019, China’s vehicle manufacturers have been incentivised to produce and sell greater volumes of their EVs through a system of credits for each unit produced, reflecting factors such as type, energy consumption, weight and range. Manufacturers that do not achieve agreed sales targets must either purchase credits from competitors or face financial penalties.
This subsidy system – introduced in 2012 as part of a push to reduce air pollution in China’s cities – has successfully stimulated EV adoption in the country. However, whilst the system was scheduled to be phased out in 2020, the combined impact of weaker-than-expected EV sales in 2019 and the shock of COVID-19 has meant that the withdrawal of purchase tax exemptions has been deferred until 2022.
The European Union’s 2014 Directive required member states to set targets for public recharging infrastructure; in 2017 it established the Battery Alliance, aimed at fostering co-operation between member states, industry and the European Investment Bank. As the EU has developed its environmental and sustainability policies, a combination of strategic support and regulatory pressure has been developed; for example, in 2019 stakeholders were consulted on how to use regulations to rapidly foster a battery market that provides high quality, cost efficient and competitive products in a sustainable manner.
Battery technology limitations have until recently meant high uptake has been limited above all to smaller vehicles, with approximately 350 million two- and three-wheeled EVs in use worldwide, representing 25% of all vehicles in this category globally. Use of these light vehicles has been centred primarily in Chinese cities, although adoption is spreading to other highly-populated cities in India and ASEAN nations.
Electrification of urban bus fleets is also seen as an area of potential growth, as their short routes and driving cycles are compatible with contemporary battery limitations. Globally, there are around half a million electric buses in use, about half of which are in Chinese cities. Extra-urban buses and lorries, however, do not readily lend themselves to electrification due to long distances and charging infrastructure requirements – today’s battery technology simply do not possess the range to make uptake in this sector viable for now.
Electric car global sales in 2019 amounted to 2.1 million, taking the global stock of electric cars to 7.2 million; or 2.6% of global car sales and 1% of global car stocks. As China experienced weak demand continuing into 2020 because of the COVID-19 pandemic, sales in Europe increased significantly, up by 57% in the first half of 2020, even as the overall trend of vehicle sales volumes showed a significant dip (down 37%). This change was mainly in response to European countries introducing new economic recovery schemes targeting green technology, taking European sales volumes ahead of China for the first time.
Automakers are rapidly growing their product ranges while shifting away from plug-in hybrids (PHEVs). In 2019, 143 new EV models were launched, while a further 450 models are expected by 2030, mostly consisting of mid-sized and large vehicles. Although the number of manufacturers and models is rapidly expanding, Tesla retains quite remarkable leadership. In the first half of 2020, global sales of the Tesla Model 3 amounted to 142,000 vehicles while the second most popular EV, the Renault Zoe, achieved a reduced 38,000 unit sales.
McKinsey estimates that by 2030 EVs could account for 20% of global vehicle sales, whereas Deloitte anticipate significant regional variations, with China making up 48% of total sales, Europe 27% and US only 14%.
One of the factors effecting adoption rates is the oil price, as consumers are highly sensitive to costs relative to ICE vehicles. The International Energy Agency calculates an oil price of US$25 per barrel will increase the payback period by 1 – 2.5 years compared to oil price of US$60. Fuel tax policy is also an influence; in countries such as Germany with 60% fuel tax, there is greater incentive to switch away from internal combustion engines than in the US where tax is around 20%.
EV growth rates are expected to slow beyond 2030, as wealthy countries will have substantially adopted the technology as far as is practical. In poorer countries, adoption will be slower due to the significant capital requirements to construct charging infrastructure necessary to make day-to-day use feasible.
Rare earth miners and uranium producers have enjoyed the flood of new money going into electric vehicles and environmental, social, and governance investment themes as reported by Bloomberg. Lithium producers have traditionally benefited from the growth in the electric vehicle market and the broader green energy push that has raised demand for lithium-ion batteries. More recently, rare earth producers have also gained momentum amid the greater push toward electric vehicles, especially with the Biden administration targeting a zero-emission future more reliant on clean energy alternatives.
There is an accelerating adoption of electric vehicles and electrification trends in wind turbines. Rare earth metals are incorporated in new technologies, from lithium-ion batteries to electric vehicles, wind turbines, and missile guidance systems. There is also limited global supply as only a handful of producers globally produce the metals.
Uranium stocks are now gaining attention from ESG investors due to their low GHG footprint and quintessential role as a clean energy alternative, the set-up for incremental/new Uranium investments as opportune for greenhouse gas emissions.
Young Investors are attracted to the Electric Vehicle market
With new apps available making investing an attainable option for anyone, young investors are increasingly attracted to the electric vehicle market – and to the surrounding conversation. Capturing customer experiences analytics with social listening is critical, as their investment decisions mirror their buying habits. Next generation consumer and market intelligence is key. Millennials love electric vehicles.
Electric Vehicles Batteries
The demand for EV batteries is expected to soar as automakers increasingly comply with emission standards and boost their production of battery electric vehicles (BEVs), according to a new report from Moody’s Investor Service. Tightening regulations and growth of BEVs are also expected to spur improvements in battery capacity. The International Energy Agency projects global battery capacity for BEVs and plug-in hybrid vehicles will grow by 24% on a compounded annual basis between 2020 and 2030.
Top makers of EV batteries, including Contemporary Amperex Technology, LG Chem, Panasonic Corporation and SK Innovation are set to benefit from rising demand. These four account for more than half of global production. However, a sharp rise in production will pose operational risks and increase the challenge of keeping leverage ratios stable, according to the report. As battery makers invest in emerging technology, strong relationships with automakers will be critical for their credit quality.
Makers of EV batteries who maintain solid relationships with automakers that have a clear strategy to expand BEV sales will see their revenue and profit stay stable. Among the four rated battery makers, Amperex Technology’s margin will remain the highest and stay around low double-digits over next 12 to 18 months, thanks to high-capacity utilization and China’s EV subsidies. In comparison, other battery makers’ margins are single-digit or less, according to the report.
McKinsey estimate the cost of an EV to be made up primarily of the battery pack, accounting for a full 40%-50% of the price while the power train represents another 20%. Lithium-ion (Li-ion) batteries commonly used in EVs presently use cathodes (a negatively charged electrode that’s the source of electrons generating the electrical charge) made from three mineral mixtures, with nickel cobalt aluminium oxide (NCA), nickel manganese cobalt oxide (NMC) and lithium iron phosphate (LFP) being the most prominent.
NMC, however, is the most widely used type due to its energy density properties. Energy density, or the amount of energy held in the battery per unit weight, is highly prized in many EV markets and is largely defined by the nickel content of the battery; this will likely represent one of the ways in which performance will be improved over coming years. On the other hand, it is worth noting that not all batteries are manufactured to optimise energy density. Other considerations such as cost or size constraints may be more important so that usage specifications vary; small battery packs are most common in Asia, whilst in Europe and US batteries are larger.
In the years since 2010, battery costs have fallen from US$1,000 kWh to US$147 kWh. Bloomberg New Energy Finance expects these will fall to around US$100 in 2023/4 and US$61 by 2030. It has been reported that Tesla is now working with Chinese battery manufacturer CATL on LPF battery technology which could reduce costs below the US$100 per kWh mark, helping to achieve cost parity with ICEs.
Recycling regulations primarily focus on making battery manufacturers responsible for waste through the entire life-cycle until scrapped, referred to as Extended Producer Responsibility (EPR). Batteries are also recycled by converting used packs for lower specification EVs, or reconfigured as part of electrical storage facilities.
In China, companies are mainly focused on recycling materials in preference to repurposing used batteries, in response to regulations and shortages in supply of lithium, 85% of which is imported. In 2020 the EU brought forward new regulations intended to protect and improve the environment by minimising adverse impacts of batteries through prohibiting certain materials and requiring battery producers to take responsibility for end collection and recycling. In the US, waste regulation is primarily set at the state level, with certain states having introduced battery recycling and disposal laws, while others have applied EPR principles.
While EVs are effective in reducing harmful air pollutants, large scale use of minerals such as cobalt and nickel bring their own challenges. High quality nickel, one of the main components of modern batteries, is extracted from rock containing just 1% of usable material. Such high quantities of waste product are potentially a major environmental concern; with increased demand its expected production will shift from Canada and Australia to Indonesia, where mining firms will have to sustainably dispose of large volumes of waste to ensure Indonesia’s seas with their rich coral reefs and turtles are not endangered.
Regulation, Technology and Investments
Impressive statistics on the rollout of electric vehicles (EVs) are the result of regulation, technological improvements, and greater investment in EV supply chains. But accessible, efficient, and low-cost charging infrastructure remains a prerequisite for widespread EV adoption; deploying this infrastructure efficiently and achieving target return rates will be more complex than immediately apparent.
Highlighting the magnitude of the transformation required to manage climate change, there is a commitment to cut net carbon emissions to zero within the next few decades. Zero-carbon transport is just one of the requirements for achieving this goal. Immense changes to power generation, heating, agriculture, and manufacturing will also be required.
Biggest Tech Breakthrough in a Generation
The early investors in the new type of device that experts say could impact society as much as the discovery of electricity. Current technology will soon be outdated and replaced by new devices. In the process, it is expected to create 22 million jobs and generate $12.3 trillion in activity.
Charging points are a vital aspect of the overall shift towards the electrification of transport. Various forecasts put the number of EVs on UK roads at between two and six million by 2030. EV drivers will seek to have residential chargers installed in their homes wherever that is an option: around 57% of UK households currently park on a driveway or in a domestic garage. Technical guidance from the EU recommends one public charger per 10 electric vehicles. This means hundreds of thousands of public chargers will be needed to enable the expected deployment of EVs, an exponential rise from the current level of roughly 20,000.
Competition to install the charging points is already intensifying as early entrants seek to gain advantage and capture market share. Car makers increasingly see the provision of ancillary services as paving the way for vehicle sales growth. Energy companies are increasingly looking to diversify their fossil-fuel exposure too, while utilities see synergies with their traditional energy-supply businesses. Finally, independent specialists have emerged who are seeking to capture market share and provide solutions for corporate clients such as shopping malls, supermarkets, fleet operators, and large employers.
The residential charging market is attractive to EV installers due to its large size and growth prospects. It is becoming increasingly commoditised, though, with low barriers to entry enabling increased competition and pressuring margins. Achieving economies of scale will be the key challenge for developers in this market segment.
On the other hand, public charging networks – particularly rapid charging – feature higher barriers to entry and potentially more stable revenues in the future. Location is crucial for this: some places, such as motorway service stations, have a more stable base of captive users than others like carparks or retail and leisure locations. Low utilisation is the main challenge for these assets, as preliminary data suggest around 80-90% of charging is conducted at home. Rapid chargers are seldom used even in markets such as Norway, where the EV transition is well under way. Furthermore, fast public charging can require significant upfront investment, not least in power network upgrades.
The good news for investors is that EV adoption is intensifying and creating a large market for the build out of ancillary infrastructure. Clarity on user behaviour and competitive dynamics will develop over the next five to 10 years. In the meantime, investors in charging infrastructure will need the patience to develop an in-depth understanding of consumer behaviour, the interaction between location and utilisation, and a tolerance for risk.
Electric Bus and Public Transportation Market
The electric bus market size exceeded $28 billion in 2020 and is expected to grow at 11% compound annual growth rate (CAGR) between 2021 and 2027. The market is forecast to grow at an exponential rate due to the rapid increase in uptake of electric buses as a sustainable mode of transport according to a new report by Global Market Insights (GMI).
Electric buses are primarily operated by the integrated electric batteries. This also includes plug-in hybrid buses and fuel-cell electric buses. The report says stringent emission regulations and directives imposed by governments across the globe will propel the adoption of electric buses. In 2019, France announced its 100% zero-emission vehicle target for 2040. As a part of the Paris Climate agreement, the country passed a law to ban ICE vehicle sales by 2040.
Electric buses are 100% eco-friendly as they operate on electrically-powered engines. They do not release smoke or toxic gases into the environment as they operate on a clean energy obtained from battery packs. Several benefits of electric buses, such as low maintenance costs and reduced pollution by emissions, are augmenting their representation in the market.
The increasing focus of several countries, such as India, China, and Canada, on promoting electrification of public transport is providing lucrative growth opportunities, according to GMI. Initiatives undertaken by several governments to reduce the carbon footprint of public transportation are boosting the electric bus market size through 2027.
The electric bus industry alongside every other industry has been impacted by the prevailing situations of COVID-19. The manufacturing of electric buses has been affected and sales numbers also decreased because of mass quarantines and lockdown during the first two quarters of 2020. Industry players have faced challenges on account of shortage of capital and financial insecurities caused by the decline in revenues. However, the market is expected to witness steady growth subject to the revival of global economic conditions in 2021, supported by policy changes and government support.
SPAC Merger Became the Trendiest EV IPO Route of 2020
The demand for electric vehicles (EVs) is fueling on the back of climate change concerns, favourable government policies and superior technologies. Investors are intrigued by automakers that look for solutions to lower global carbon emissions for providing a cleaner energy future. With green vehicles striking the right chord with investors, it has been raining IPOs in the EV market during the past year. Seemingly, merger with special purpose acquisition companies (SPACs) turned out to be the most popular course of action for an EV IPO in 2020.
What is a SPAC?
SPACs, or blank-check companies, are shell vehicles that raise money to take a private company public via a reverse merger. Unlike traditional initial public offerings (IPOs), SPAC deals allow listing candidates to market financial projections to investors, a perk for earlier stage companies that have yet to prove their business model.
SPACs have changed the traditional IPO market. SPACs are flourishing in the EV market, helping startups to avoid the complexity and strenuous paperwork associated with the traditional IPO. Many EV companies chose to go public in 2020 via reverse mergers with SPACs, a faster, simpler and less demanding process than the conventional means of making a debut on the stock market.
Electric-vehicle companies, many of which are yet to launch commercial products, have taken advantage of that. Nikola Corp was the first high profile one to go public via a SPAC listing, followed by others including Lordstown Motors Corp, Fisker Inc and Canoo Inc. U.S. listings have dominated the SPAC boom, but Europe’s stock exchanges are now catching up. The IPOX SPAC Index tracks the performance of a broad group of blank-check companies.
The early stages of adoption by users of medium and large cars has commenced, with higher sales volumes shifting from China to Europe. At present, volumes of battery-powered EV sales are small as a proportion of global vehicle sales, although rapidly rising; Tesla retains leadership and dominates the mid- and large-sized EV market. Higher levels of adoption are expected in wealthier nations where the significant cost of recharging infrastructure can be financed.
Governments around the world are embracing EVs as a green technology that reduces harmful air pollutants and are putting regulations in place which make battery manufacturers responsible for their products throughout their entire lifecycle. As consumers become more aware of the environmental impact of their actions and governments face growing liabilities from air pollution, adaption in many countries is now regarded as a necessity rather than a lifestyle choice.
Additionally, merger with special purpose acquisition companies (SPACs) has good prospects to continue with the 2020 popularity course of action for an EV IPO.
With the election of President Biden, who has signalled his commitment to sustainability by rapidly moving to re-join the Paris Agreement and appointing John Kerry as the special envoy on climate change, there is now the prospect the US will join China and Europe in forcing further change.