How do investors make money out of what is the biggest disruptive industry, electric vehicles (EVs)?
According to Ashwin Sanketh, Nikko Asset Management’s senior equity analyst, they should start with the vehicle makers. “Besides Tesla, which has captured the popular imagination and is a pure EV maker, all of the major automakers have dipped their toes into the EV market by introducing at least one model,” he says.
Volkswagen, for example, most recently upped the ante by pledging to launch 30 pure EVs by 2025 and target 2 million to 3 million in annual sales, amounting to 25% of the company’s total. But Sanketh says it is the Chinese automakers, who are gearing up to meet their government’s target of 5 million EVs on the road by 2020, that will easily surpass their global peers in terms of units sold.
On the flip side, Sanketh says incumbent car makers are likely to lose market share little by little at the beginning, potentially followed by precipitous declines later. He says Asian companies account for nearly 60% of the market capitalisation of automakers globally, followed by Europe and the US. “This is where fortunes can be made or lost.”
Also keep an eye on battery manufacturers, as they are the logical next beneficiary since batteries account for a third of the cost of an EV.
“EV battery specifications are not yet standardised and there are over 80 different lithium-ion battery configurations in production currently, with differing performance metrics such as energy density, power density and battery life as well as costs,” says Sanketh.
All the major EV battery manufacturers are Asian, with Japanese businesses such as Panasonic leading the way in terms of technology and Korean (Samsung SDI, LG Chemical) and Chinese companies making up the remainder, he says. Chinese companies will account for the bulk of new capacity, with only Tesla’s Gigafactory a notable exception.
Lithium is a key ingredient of the EV battery. Last year around 45% of global lithium supply came from China. The business is fairly concentrated: two of the top five producers are Chinese (Sichuan Tianqi and Ganfeng), accounting for just under 25% of the global market.
Suppliers of graphite, which is used in batteries, are another possibility but Sanketh says this is hardly fertile ground for investors at present.