Two years ago, we said that the electric vehicles (EV) trend was here to stay and that China would lead the charge.1 While both of these expectations were realized, the performance of electrical vehicles indices lagged broader markets.

We believe this is a temporary slowdown caused by factors likely to reverse course in 2020. Indeed, we see a re-acceleration of electric vehicle sales in 2020—led by Europe.

This re-acceleration could mean rising global battery shipments, especially to Europe. Possible beneficiaries from this 2020 growth may include Korean battery manufacturers, Chinese battery material makers (anode, cathode, and separator) and European power semiconductors. 

On the other hand, possible laggards may include lithium/cobalt producers, due to the oversupplied market (though nickel is in undersupply); and Chinese original equipment manufacturers (OEMs), due to the crowded competitive landscape of 487 companies registered to manufacture EVs in China.2

2019 EV slowdown reflected in its underperformance

Line chart compares index levels for Solactive Electric Vehicles and Future Mobility Index and the MSCI World Index from October 2017 through October 2019. Both follow a similar trajectory; they dip to their lowest in December 2018, but have since recovered to level they were at in August 2017.

European EV adoption rate is set to climb

Source: J.P. Morgan Asia Pacific Equity Research. As of 7/1/19.
Bar chart shows share of new electric or partially electric vehicle sales (%) in Europe from 2015 through 2019, and estimated from 2020 to 2025. The chart highlights that sales are expected to triple from 2019 to 2020; and by 2025, sales are expected to be over five times the 2019 level.

Here is the analysis that informs our view:

Sales of electric vehicles worldwide, and China’s share of the industry, have both increased in the past two years. Global EV sales rose from 1.08 million in 2017 to 2.64 million (forecast) in 2019. China’s portion of global EV sales went from 49% to 56%. China saw its EV industry account for 7% of total new vehicle sales in 2019, well ahead of forecasts, and double the number of charge points in two years.

Despite the sector’s outperformance early in 2019, investor sentiment on electric vehicles, and therefore returns, has soured since spring 2019. Three factors contributed:

  1. A tough cyclical backdrop—As trade tensions weighed on global PMIs, auto sales have trended lower globally. Few companies today offer a pure play on electric vehicles and most companies in the auto supply chain have exposure to internal combustion engine (ICE) vehicles. EV-exposed or not, it’s difficult for auto parts suppliers, battery manufacturers, commodity producers and semiconductor manufacturers to buck the trend of slower global growth.
  2. Subsidy cuts in China—Announced in April and implemented in June, China’s light vehicle and commercial EV subsidy cuts materially and adversely impacted EV sales. This September saw China’s electric vehicle sales decline by 34% year-over-year (y/y).3 Remaining subsides are expected to be fully eliminated in 2020.4
  3. Recent rollback of emissions standards in the United States—President Trump ordered the federal government to revoke a legal waiver that had allowed California to set more stringent vehicle tailpipe emissions standards. That means California must follow the weaker emissions guidelines set on a federal level. Similarly, the President is expected to roll back a stricter national tailpipe pollution standard based on that of California.5

China accounts for over half of global EV sales

Source: Bloomberg New Energy Finance, as of 5/15/2019
Bar chart shows sales of EV globally (in millions) from 2015 through 2019, comparing that of China to the United States. The chart highlights that China’s share of sales have continued to grow comparatively to the United States.

The same three factors that weighed on performance in 2019 could reverse course in 2020—creating an opportunity for a re-acceleration of EV sales.

  1. Improving macro backdrop and a pickup in auto sales—Supported by increasingly expansionary monetary policy (five developed market and 13 emerging market central banks have cut interest rates so far in 2019), and barring further escalation of trade tensions, overall global auto sales should rebound from about a 0.25% contraction in 2019 to around a 1.5% expansion in 2020. J.P. Morgan also expects that China’s EV sales will grow 35% y/y in 2020, after dipping to 23% y/y in 2019.
  2. Diminishing need for subsidies—While China cutting EV subsidies has slowed demand, the reason for the subsidy phaseouts is that many EV models are approaching price parity with ICE cars. Industry forecasts estimate that breakeven will be reached in 2022.
  3. Stricter emissions standards—While the United States relaxed emissions standards, the European Union is moving full steam ahead with them. New EU emissions standards and fines should accelerate EV adoption in Europe meaningfully in 2020. Europe is likely to see the highest growth rate in EVs in 2020 among regions, with the penetration rates for all EVs (including hybrids and plug-in hybrids) rising from 9% to 28% and battery EV sales rising 132% from 2019 to 2020.

Why would European EV sales grow so quickly? New rules regarding vehicle CO2 emissions scheduled to go into effect in 2020 will require the vast majority of cars to cut CO2 emissions from the current average of 120.5g per kilometer to 95g. By 2021, all vehicles must follow this standard or pay a fine.

For every new car that fails to meet the new standard, the OEM will be fined 95 euros per gram of CO2 emitted over the target.6 It’s estimated that there will be almost 35 billion euros in fines imposed across the industry by 2021, giving European automakers an incentive to step up EV production and sales. Indeed, European OEMs are planning to release 55 models of electric vehicles between 2019 and 2022.

On the demand side, many European cities are offering incentives for consumers to go electric when choosing their next car. European cities are also setting high bars for emissions that should spur EV adoption. Authorities in Paris and Amsterdam planning to ban all petrol and diesel-fueled vehicles by 2030.7

Notably, European politics are tilting toward electric vehicles as well. In the European Parliament, the Green Party made significant gains in the latest elections and in national elections, won 20%, 13% and 12% of the vote in Germany, France and the United Kingdom, respectively.8

Politics also may generate demand in the United States. Investing in clean energy would likely benefit if voters elect a Democrat as president in 2020. Nearly all the Democratic presidential candidates have suggested they would implement broad environmental policies that should, at least partially stiffen regulation on gasoline-powered cars.

Speak with your J.P. Morgan Advisor to further the conversation on potential investment opportunities.

 

Footnotes:

1 “China Leads Electric Vehicle Trend Acceleration,” J.P. Morgan, November 2017.

2 Trefor Moss, “China Has 487 Electric-Car Makers, and Local Governments Are Clamoring for More,” The Wall Street Journal, July 19, 2018.

3 “NEVs Declined Yearly,” China Association of Automobile Manufacturers, October 16, 2019.

4 “China Cuts Electric-Car Subsidies, Shares of Top EV Makers Drop,” Bloomberg, March 26, 2019.

5 “California Sues the Trump Administration in its Escalating War Over Auto Emissions,” the New York Times, September 20, 2019.

6 Chester Dawson and Oliver Sachgau, “Europe’s Tough Emissions Rules Come with $39 Billion Threat,” Bloomberg, June 26, 2019.

7 Brian Love, “Paris Plans to Banish All but Electric Cars by 2030,” Reuters, October 12, 2017.

8 The “Green Wave” and 4 other takeaways from the European parliamentary elections, Vox Media. May 28, 2019.