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Electric vehicles are in demand and thats a problem for investors


Published: 23 May 2022

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Demand for EV’s is vastly outstripping supply, leading to lost revenue and dipping share prices for manufacturers, writes Laura Miller for the ICAEW Financial Services Faculty.
Demand for electric vehicles (EVs) is, in some major quarters, outstripping supply. Volkswagen has said its electric cars have ‘sold out’ for 2022, amid a doubling of demand in Europe.  

VW Group CEO Herbert Diess told the Financial Times the company's brands, which include Volkswagen, Porsche, Škoda and Audi, had a backlog of 300,000 orders for EVs in western Europe alone. This is a problem for electric car buyers, and investors. 

All of the major car manufacturers have bold EV ambitions. In the latest (February 2022) Automotive Observer from fund management and research house Morningstar, moves by General Motors, the world’s largest automaker, into battery electric vehicles (BEVs) are described as “aggressive”.   

In June 2021, GM raised its projected combined BEV and autonomous vehicle spending for 2020-25 to $35 billion, a 30% increase from its November 2020 announcement, and a 75% increase from GM's initial spending target announced before the pandemic. All of GM’s rivals have similar plans, according to the Morningstar research, which also predicts two out of every three cars sold globally by 2030 will be EVs.  

Chip shortages 

Yet “auto suppliers' profitability and returns will likely be negatively affected in the first half of 2022,” the Morningstar note points out. The cause? Shortages in the processing chips EVs rely on.  

The research warns: “Automakers randomly and repeatedly turning production on and off from the chip crunch will cause dramatic swings up suppliers' short-term cost curve, as resource planning becomes nearly impossible."  

It is optimistic a more favourable operating environment will materialise in the second half of this year, “as the production cadence stabilises, albeit still at lower than pre-pandemic levels”. If so, better automaker profits will likely follow, as demand, constrained production, and so tight inventory support "a solid pricing environment".  

Yet even as global chip supply ramps up, the auto sector is competing for higher chip demand everywhere from consumer goods to healthcare and the technology sector. Constrained EV supply supporting higher prices is one thing, zero supply is quite another.  

Supply and demand 


Investors and shareholders in the major vehicle manufacturers can hold on tight and hope for the better second half of the year predicted. They have, thus far, been wrongfooted by misplaced market predictions, however. Seth Goldstein, equity and credit strategist at Morningstar, says: “If we take market consensus as a gauge of the transition from internal combustion engines (ICE) to EV powertrains, then the market has generally underestimated the speed of EV adoption since 2016, when we began forecasting EV adoption".  

Goldstein cautions investors will have to look at each car company individually and evaluate their plans to transition their vehicle sales towards EVs and hybrids over time. He says: “Investors need to evaluate which major automakers will be able to benefit from the transition to generate incremental profit growth.” 

Breaking down the key players, Toby Clothier, head of the global, thematic and strategy team at Mirabaud Equity Research, agrees each manufacturer’s case is nuanced. For example, he points out, less well known than the VW Group’s supply issues is the fact it was the number one seller of European EVs in both 2020 and 2021, selling more than double as many EVs as Tesla.  

In 2022, the landscape has changed once again. Clothier says: “Kia-Hyundai is pushing ahead extremely aggressively and battling for the top slot in Europe with VW Group. The key to their success, and to the success of Stellantis, who are in third position, is to have many models." Not only have all of them launched five to 10 models in the last two years, they also have the same again coming in the next couple of years. 

Market targets 

In his view, market shares will remain fairly stable, with some new players also entering the fray. But, Clothier says, the nature of the industry (in terms of economies of scale) means “anyone not producing at least 200,000 to 250,000 units a year in due course is unlikely to make it and will likely end up going bankrupt or being bought”.  

The only “new” contender likely to retain significant share is Tesla. Tesla’s market share, according to Mirabaud figures, is around 10-12% in Europe and China, and closer to 75% in the US, but falling gradually as others enter the US market.  

The US market is currently very small, Clothier points out, so Tesla’s blended share is around 15% globally. The other 85%+ seems likely to be divided amongst the existing players. At the luxury end, the likes of Mercedes, Audi and Lucid. At the cheaper end there are 100 plus Chinese manufacturers.   

Clothier says: “Many of the large OEMs  (original equipment manufacturers) have indicated they will at some point separate or spin off their EV businesses." Notably Ford, but others, like Volvo, have gone further and promised 100% EV production within a certain timeframe.  

EV limitations 

Mirabaud’s in-house research is of the view the EV industry is unlikely ever to get to 80-100% of global production, for three reasons.  

Firstly, 100% EVs would mean huge risk to life from power cuts. Secondly, there is probably not enough lithium mined in the world every year to support 80 to 100 million cars. Thirdly, in some countries and regions, Mongolia for example, the supply of electricity is non-existent in many areas so ICEs will prevail in all likelihood forever.  

Clothier adds: “This could also be said for large swathes of India, Africa, South America, which it is easy to forget when living in a large city in a developed market.” Still, most of the OEMs plan to have anywhere from 30% to 100% of their fleet being electric by 2030.  

If chip and other supply shortages are short-term issues,  medium and longer term problems are infrastructure for charging and the supply of electricity. Clothier says: “Neither are currently in a position to deal with this level of consumer adoption so numerous regulatory changes need to be made in the next five years if indeed this degree of switching is to take place.”  

Konrad Sippel, head of research at Solactive, index provider for the Electric Vehicle Charging Infrastructure UCITS ETF, says on charging infrastructure, it would be beneficial for the adoption of EVs overall if a consistent charging speeds and connectors could be agreed cross industry. “We currently see a vast variety of different charging capacities being built up with many models not (yet) able to utilise the fastest 300KW chargers, while there are also still new charge points with slower and not future proof charging speeds of less than 50KW being built.” 

Adoption rates 

Plenty of data point out EV adoption will have to grow to 60% plus by 2040 in order to meet various carbon net zero goals. Sippel says reaching those numbers is “not unrealistic” as the end of ICE based car sales start kicking in in most countries around 2030 to 2035.  

But, he adds, current investors may well be thrown by adoption numbers that will “very likely not grow linearly from 4-5% today to 60% in 2040”. He predicts: “We are much more likely to see a gradual increase of EV sales until the end of ICE sales really kick in and then likely an exponential growth in the decade from 2030 to 2040. This shape of the adoption curve is creating scepticism amongst some investors as they expect faster growth already today.” 

Investors in environmental, social and good governance funds that in turn invest in EVs face other risks than supply constraints. As Sippel (and Clothier) says: “The principal ESG risks with EVs revolve around lithium and cobalt and the mining of them. There is no obvious way round this at this stage other than for investors to monitor the mines from which these materials come.”   

David Harrison is lead fund manager of the Rathbone Greenbank Global Sustainability Fund. As an ESG investor he welcomes the “significant” pivot of the last 18 months from many global auto OEMs towards long term electrification. But he admits while this is clearly positive from a sustainability point of view, it also throws up “a whole range of issues and potential speed bumps for investors”.  

In addition to the pressure points already raised, there are known unknowns it’s hard for investors to plan for. A number of new manufacturers may emerge in the next five years, not incumbered by significant legacy costs and invested capital in ICE manufacturing, for example. Harrison says: “We do not know how much of the intrinsic value in the opportunity will be captured by these players, but it is something to consider”.  

Also, “very importantly”, ESG investors need to decide where in the electrification ecosystem they want to be positioned. Harrison says: “Historically the vehicle manufacturers have generated relatively low profit margins over an economic cycle – will this change as we move to electrification?  Or is it better to be exposed to the critical infrastructure and technology that the manufactures rely on?” 

Known unknowns 

Harrison admits there are certain important questions for which he doesn't, nor likely other experienced fund managers, have answers: “How much of the invested capital in each auto business will move away from ICE and how quickly? For which brands? Is there an element of greenwash at play?”  

Equally from a geographic point of view, Harrison is looking at whether an automobile company is maintaining ICE capacity in certain territories, as will be likely for emerging markets.  

“From an investment point of view, while the shift to electrification is powerful from a sustainability standpoint, who will retain the economic benefit in the long run?  How much will new entrants capture and what will the industry look like? We don’t know the answers yet, but it is something to keep a close eye on." Global EV penetration is still below 10%, so there is a long way to go. Harrison adds for investors and shareholders "there will invariably be volatility, positive and negative".