Switching lanes: the electric vehicle market

Transport is integral to our everyday lives as it allows us to get to work, visit friends and explore new places. As a result, it presents an interesting sector full of attractive investment opportunities. In this article, I look at how the electric vehicle (EV) market is driving transition in the automotive industry, presenting a new source of growth as fossil fuel vehicles are phased out as we move towards a low-carbon economy.

Key geographical players currently dominate the EV market include German BMW and Volkswagen, US-based Tesla, BYD in China and Japanese Nissan. These companies are making progressive developments with Tesla launching earlier this year its Model Y, an electric seven passenger vehicle and more recently its Cybertruck. With global supply chains, these companies can efficiently tap into the global EV market. Nissan for example have pushed their Nissan Leaf into the Indonesia market last year, with the Philippines market in the pipeline for later this year.

Currently, due to regulatory pressures and an increase in demand for sustainability in society, the automotive industry is shifting away from existing diesel and petrol models to electric vehicles. 

EV MARKET 

Forecasts for the EV market indicate growth from 3 million units produced in 2019 to a staggering 27 million units in 2030. This highlights the global opportunity that the market possesses, driven by consumers and investors shifting towards a sustainable mind set with the demand for CO2 emitting fossil fuel cars suffering in turn.

Furthermore, fossil fuel vehicles demand is facing downward pressures from regulation with fossil fuel car production set to be banned in the near future. For example, bans are set to be implemented in Germany in 2030, United Kingdom by 2040 and as early as 2025 in Norway, which leads the progressive transition towards electric vehicles.

Government action by key European countries along with China and the United States have also focused on stimulating production through environmental policies such as financial incentives that encourage the uptake of electric vehicles.

Economically, these subsidies will artificially drive up production and consumption of EVs and hence increase volumes sold. Due to higher volume of units being sold, the average cost per unit will decrease making it more cost effective to produce electric vehicles due to economies of scale. A clear example of this can be seen in the Chinese market, with the government offering customers 110,000 Yuan of subsidies per unit, roughly £13,000, when purchasing EVs. This should hypothetically lead to more demand and hence spread fixed costs across more units sold.

The policy is in line with the country’s commitment to reducing fossil fuel vehicles, with the Chinese government aiming for electric vehicles to account for 10% of total conventional passenger cars in 2019, reaching 12% by 2020. Polices such as this highlight the global shift of the automotive industry, with EV sales already rising 62% from 2017 to 2018 in China alone.

CONSTRAINTS 

Accurately predicting how the EV market will develop is difficult due to several constraints that could hold back the speed of growth in the sector. It is clear that the industry has to transform towards electric and alternative fuel sources but it is hard to predict how successful the adoption of such vehicles will be. 

One of the largest barriers to growth for the EV market is the lack of charging infrastructure. Essentially, the issue of how long fuel will last is no different from that of petrol or diesel. However, in the case of electric vehicles the issue relates to finding charging points, along with the time to charge the car’s batteries.

It takes minutes to fill a fossil fuel car whereas to charge an EV it can take several hours. For example, from empty-to-full the Nissan Leaf takes between 4 to 8 hours. Not an ideal situation if you don’t have enough charge to get home. As such, reducing charging times is essential to the successful adoption of EV.

The other issue is the lack of refuelling infrastructure as mentioned. Even if charging times are reduced, if there are no convenient charging points on routes then barriers to growth remain. Currently, there are 632,000 charging points globally compared to 524,000 fossil fuel refuelling stations in Europe alone. As such, investment is required to improve charging infrastructure in order to sustain growth.

Both limitations are co-dependent and will stunt EV development until necessary investment can tackle these shortfalls. These are key issues for the target market and solutions are required in order to achieve optimal adoption of EVs.

OUTLOOK 

There are clearly limits facing the EV market, but with both demand from consumers and government policies the transition from fossil fuel vehicles is inevitable. As such, it presents interesting investment opportunities.

One company that is benefiting from this is AB Dynamics, which supplies safety-testing services to electric vehicles and autonomous cars. As production increases for EV as forecasts suggest, so too will demand for the firm’s services.

By looking for companies that have a strong business proposition and robust financials, these firms will be well placed to take advantage of the shift in the automotive industry.