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Written by: Will Riley and Jonathan Waghorn | Guinness Atkinson Asset Management
The electrified automobile and its implications have captured the imagination of clients interested in thematic investing, ranging from those interested primarily in automakers, to those interested in clean energy or autonomous driving technology.
By our estimates, the total global electric passenger vehicle fleet reached nearly 10 million vehicles at the end of 2020 with new sales in 2020 being about 2.8m vehicles, a growth of around 25% versus sales of 2.2m in 2019. This growth compares very favorably to overall global light vehicle sales of around 75m vehicles in 2020, down 16% on 2019 levels.
The recent growth trends for electric vehicles (EV) will continue through 2021 supported by clear commitments from governments towards the electrification of transportation. We expect new EV sales to be in excess of 4m vehicles in 2021, up over 50% versus 2020 sales and representing around 5% of global total light vehicle sales of 83m units (up 11% in 2020 levels). Looking longer term, we expect that predominantly all passenger vehicle sales will be EVs by 2040.
In such an environment the desire to pick “the winner” is something we often observe among new thematic investors in the space. Unfortunately, this instinct of seeking “the next Tesla” can lead investors down the wrong path and towards companies that are more marketing-oriented than those with proven operational excellence. A number of the “next Teslas,” US-based SPAC (Special Purpose Acquisition Company) companies, have lost as much as 70% year to date when their marketing efforts failed to match the reality on the ground.
Rather than trying to identify “the next Tesla” in the EV space, a better question to ask is: “How can we invest in the enablers of the electrification of the auto?” These companies are ones that potentially supply both the current Tesla and many of “the next Teslas,” whether those come from legacy automakers or startups.
Below is one such example of an “enabler” in the EV space that may lead clients to ask better questions than where they can hunt for the next unicorn EV company.
Lithium-Ion Batteries: Enabling the Electric Revolution
The energy transition will see energy demand being “electrified” as it moves away from predominantly hydrocarbon fuels and gases towards the consumption of electricity directly. The “electrification” sector includes those companies involved in the key enablers of this transition: the lithium-ion battery and the electric vehicle. The battery industry is critical here in that it will serve EVs and also provide a stationary energy storage solution in electricity grids, allowing variable renewable energy (i.e. solar & wind) to play an expanding role in the global power stack.
The catalyst for greater lithium-ion battery use has been sharp falls in the cost of manufacturing. According to Bloomberg New Energy Finance (BNEF), battery costs are down 89% over the decade from 2010 to 2020, with the average cost being $137/kWh in 2020. Significant economies of scale from mass battery manufacturing have lowered costs and, as these continue, the average cost of producing a lithium-ion battery for an EV is likely to continue to fall.
This would allow EVs to compete on price with internal combustion engine (ICE) vehicles without subsidies. We expect an acceleration in the uptake of new EVs, with around 20% of new passenger vehicles sales being electric in 2025, rising to around 50% in 2030. On this basis, there will be nearly 300m electric vehicles on the world’s roads by 2030.
We believe the demand for lithium-ion batteries in grid (stationary) storage is likely to grow very rapidly as the cost of delivering a “renewable + storage” power system improves. Higher levels of variable renewable power in many electricity grids are resulting in low intraday power prices and incentivizing developers to make new renewable power projects fully “dispatchable” (via the addition of storage) in order to supply electricity at different points in the day and benefit from higher power prices.
Last year lithium-ion batteries took more share of both the global auto and global grid (stationary) storage industries as investment and capacity of lithium-ion battery manufacturing continued to ramp.
The market for grid (stationary) lithium-ion battery storage also grew handsomely in 2020, with deployments expected to rise around 50% from the levels seen in 2018/2019. The reduction in manufacturing cost spurred demand for batteries for use in a variety of grid-attached ancillary services, and the falling cost of large-scale “renewables-plus-storage” means that grid operators and utilities started to see credible paths to replacing coal and gas generators, justified by economics during the year.
We expect sustained growth in lithium-ion battery manufacturing capacity in 2021 and beyond, taking large scale manufacturing capacity to more than 1,200 GWh in 2023 and then significantly higher by the end of the decade. These facilities are being built globally, with China likely to maintain its dominance, with its share of global capacity staying in the 65-70% range.
As an illustration of the scale of the potential growth (and volatility) around long-term forecasting, Tesla recently indicated that its annual battery needs alone will reach 3,000 GWh by 2030 - from 44 GWh currently. While this target also includes batteries for storage and other applications, if it is achieved, it would imply an overall lithium-ion battery market of around 6,000 GWh (based on 50% market share). This implies a dramatic impact on the demand outlook for lithium-ion battery raw materials.
Many of the specific companies that manufacture and are otherwise involved in the production lithium-io batteries operate far from Silicon Valley. Two of the largest companies in the space are headquartered in South Korea, suggesting clients interested in thematic investing will be best served not only by focusing on enablers in the background but also taking a global approach.
Thematic investing clients who focus on the underlying enablers of a theme may shield themselves from the boom or bust mentality of finding the next unicorn and instead have something more prosaic, but ultimately more valuable to their portfolios.
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