How to pick the winners and losers in EV race?

Equity investment analyst believes both startups and incumbents have a chance of success over the long term

How to pick the winners and losers in EV race?

We’ve all heard about the electric car era that’s set to take over. Well, significant evidence suggests that time has arrived, certainly from an investment perspective.

General Motors announced in January 2021 that it will stop manufacturing gas-powered cars by 2035, while Volkswagen, Europe’s largest automaker, disclosed plans to invest US$86 billion to develop electric vehicles, digital factories and self-driving cars over the next five years.

Last year, as anyone following the news will know, Tesla’s shares soared from US$100 billion to US$800 billion, making it more valuable than the nine largest traditional automakers combined. Elon Musk’s’ trend-setting firm, which sold just under 500,000 cars last year, expects sales growth of 50% a year.

Kaitlyn Murphy, equity investment analyst at Capital Group, said: “New developments will potentially make EVs cost competitive, not only with new gas-burning cars but with the entire fleet of cars on the road, including used cars.

“That’s about 270 or 280 million vehicles in the U.S. If you take a long-term view, that suggests there could be much stronger growth than the market expects.”

While China and Europe have been particularly aggressive in providing subsidies and setting tight restrictions on fossil fuel emissions, there are reasons to believe the U.S. and other markets could catch up faster than expected.

Crucially, EVs are approaching a tipping point where they will become cheaper to buy than traditional cars even without government subsidies. And for the consumer, it’s not just a lower sticker price that will make EVs more compelling.

“You're thinking about what an EV can be from a total cost of ownership versus the internal combustion engine,” Murphy added. “For example, typical battery-powered cars will have far lower maintenance and running costs than cars that burn fossil fuels.”

Another important innovation that will not only drive cost considerations, but also transform the total customer experience is the introduction of software-defined EVs. The software can receive over-the-air updates to improve functionality and safety while also providing entertainment.

For investors, the trick will be to identify winners and losers. Those companies quick to embrace structural change and rapidly adapt have a better chance of success over the long term, whether they are auto industry titans or startups.

Murphy said: “There’s a widely held assumption that, with change this disruptive and with startups already competing for market share, it will be hard for incumbents to survive. Incumbent automakers must contend with writing off old manufacturing facilities, managing relationships with suppliers and shrinking profit margins.

“However, they also have vast resources and global manufacturing capabilities. Startups don’t have the associated cost burdens but could struggle to ramp up manufacturing.”

But don’t count the incumbents out just yet, she added. Look at GM, where CEO Mary Bara is disrupting the company from within. In addition to going all-electric by 2035, GM has been investing heavily in Cruise, its self-driving unit.

“This is not an opportunity of the moment, but for incumbents and startups alike it has the potential to become a powerful software and intellectual property business model that has compelling economics to the consumer and to society in terms of safety,” Buchbinder said.