Replacing internal combustion engines with electric vehicles is vital if the world is to hit emissions reduction targets. The transition to battery-powered electric cars has dominated the headlines in recent years, but attractive sustainable transport investment opportunities can also be found among the battery makers, semiconductor manufacturers, charging station operators, component suppliers – and many others besides – that are helping to make the electric vehicle revolution possible.
Look for opportunities beyond cars
Electric cars are already a familiar sight on our roads, and much of the global car industry is now moving towards full electrification over the coming decade. However, while reducing the greenhouse gas emissions from the world’s 1.2 billion passenger cars1 is a priority, the emissions produced by the transportation of goods also needs to be addressed. In the European Union (EU), heavy duty and light duty trucks represent 38.1% of road transportation emissions.
Transport emissions in the EU
For investors, the development of electric-powered trucks represents a vital next step on the road to net zero. Pressure for change is coming from the bottom up, as truck customers look to use transportation as a way to meet their own emissions reduction targets. A supermarket chain, for example, may find that as much as 30% of its total CO2 emissions come from transportation of goods.
The truck makers that are leading the transition to electric vehicles may provide some of the most attractive opportunities. Volvo, for example, expects its entire fleet to be fossil free by 2040, with over 35% of its truck sales electrified by 2030. Volvo has also established a joint venture with Daimler Truck to develop hydrogen fuel cell technology, which could be a gamechanger in the battle to develop electric vehicles with the power to move heavy goods over long distances.
By going electric, these early movers may benefit from increased revenues generated from customer servicing, via the sale of longer service contracts, and the provision of battery management and battery charging facilities. With revenues from customer servicing also carrying higher margins and providing greater resilience through economic cycles, electrification is expected to help push service-related revenues to 50% of total revenues for Volvo and Daimler Truck by 2030.
Battery demand is surging, but so are prices
Further along the supply chain, battery makers will play a particularly crucial role in the electric vehicle transition. While several companies have begun investing to increase production capacity to meet an expected 90-fold increase in demand for batteries in the next three decades2 , investing in the development of better battery technology is just as important, as car makers look to address consumer concerns over the range and charging speeds of electric cars.
A good example is Chinese lithium-ion battery maker CATL, which is the number one electric vehicle battery supplier in China by output, production scale and technology with 49% market share in 2020. The company, which develops innovative battery technologies and battery management systems, counts almost all of China’s major carmakers as customers, and has started to build footprints in Europe through its contract wins with BMW and Daimler.
CATL battery shipments
However, battery makers face headwinds from commodity prices, given raw materials make up 50% of the cost of batteries. As a result, the sourcing and pricing of key battery components, such as lithium, nickel cobalt and manganese, will be key for the competitiveness of battery makers. Also, given batteries account for some 40% of the cost of electric vehicles, it is likely that battery prices could dictate the future rate of adoption of electric vehicles themselves.
Semiconductors are a vital component
Another key component of electric vehicles is semiconductors. The semiconductor content in cars has been increasing rapidly over the last 20 years, and is set to rise further as electric vehicles require double the semiconductor content compared to conventional cars, rising to four times the amount for fully driverless electric cars. The semiconductor industry is therefore set to benefit from a sharp rise in demand as the world moves to electric.
Semiconductor content per vehicle (USD)
More recently the semiconductor sector has been hit by supply constraints. Many semiconductor companies lowered their capital expenditure (capex) plans significantly when the Covid pandemic began in early 2020, just as global demand for semiconductors began to increase, driven by demand for PCs and laptops from people home working and home schooling during lockdowns. The result was a redirection of semiconductor capacity and manufacturing tools to these growing demand segments.
From the third quarter of 2020, demand from automotive companies also started recover, in part due to the easing of Covid restrictions and in part due to the structural growth in semiconductor content per vehicle. However, semiconductor suppliers were not able to ramp up capex quickly due to shortages in tool supply. Thanks to a significant increase in capex in 2021 and 2022, the demand/supply situation is expected to normalise towards the end of 2022 and into 2023.
One of the companies that looks well positioned to capitalise on demand from carmakers is Infineon, a German semiconductor manufacturer that is focused on the faster growing semiconductor segments, with around 80% exposure to cars and industrials3. The company is a secular winner, and we expect it to sustain high single-digit revenue growth over the long term.
Infineon automotive revenue trends versus the industry based on gartner data
It’s not just the makers of electric vehicle components that are in line to benefit from the green mobility revolution. Once electric vehicle penetration reaches around 20%-25%, electricity grids will need to be upgraded to withstand the increased demand for power. Investors may find opportunities in the companies that can help to build the infrastructure to enhance power line capacity.
French cable and fibre optic company Nexans is just one of the companies that could benefit from electricity infrastructure upgrades. The company, which makes high voltage cables, as well as providing solutions to help reduce the risk of power distribution disruptions, is already seeing rising demand for its power cables and associated technologies as electrification takes hold.
Invest in the electric vehicle transition
Companies supporting the electric vehicle transition will be expected to benefit from the estimated $275 trillion4 in capital that will be directed towards sustainable technologies in the next 30 years. The key for investors is to seek out those companies that can make the biggest contributions in the journey to net zero, while also delivering attractive long-term returns.
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