Investors seeking pay dirt from the shift to electric and autonomous vehicles might be wise to ignore the big automakers and start looking under the hood.
Today, the new, shiny opportunity to build great wealth may not be in mining gold, but in an early stake in a truly disruptive technology – one that transforms how the world does business, consumes entertainment or travels. Moreover, while many investors look to the future for game-changing technologies, the next great disruptor may already be sitting in the garage.
For reasons ranging from falling battery prices to government regulations to concerns about climate change, global sales of electric vehicles (EVs) are revving up. From 2013 to 2017, EV sales rose by more than 500%, and we believe the trend is likely to intensify. It is estimated that the electric vehicle industry will see sales of EVs and plug-in hybrid vehicles climb from more than 1 million (or 1% of new car sales) in 2017 to the north of 10.6 million (or 11%) in 2025.1
Growing market share for EVs could present attractive opportunities for investors. And some of the best opportunities may exist upstream from the electric vehicle industry – in the suppliers that serve EV manufacturers and automakers.
"With many disruptive technologies, investors tend to fixate on the end products – like the smartphone or the car – overlooking the opportunities presented by the suppliers of the products' key components, like software or computer chips," says Chris Baggini, Global Head of Equity Strategy at the J.P. Morgan Private Bank.
Overlooking a product's business ecosystem can be costly for two reasons. "For one, it limits investors' opportunity set," Baggini explains, "and, two, it concentrates investment risk among just a few companies that manufacture the product." For these reasons, Baggini recommends investing in electric vehicles by expanding beyond the automakers to sectors likely to benefit from the wider adoption of EVs. These include:
Demand for lithium, the primary element in EV batteries, is expected to increase by 20% by 2025.2 Established players that have long-term pacts with regional governments and local communities to mine lithium at scale are poised to benefit. Ideally, miners also would have multi-year pricing contracts with customers to mitigate the impact of price fluctuations.
More powerful, efficient batteries are crucial to the wider adoption of EVs. As such, one strategy for investing in electric vehicles is to favor battery makers with demonstrated ability to both increase the energy density of their products and maintain a strong balance sheet. Working capital is essential to fund research and to withstand today's low operating margins, which have been pressured by oversupply and falling prices, the latter due to intense competition for market share.
Wide-scale adoption of EVs could be a boon to the semiconductor industry, making semiconductors another venue for investing in electric vehicles. EV powertrains and power systems feature hundreds of micro-controllers, microprocessors, and analog and digital signal processors. The estimated value of semiconductors in a typical EV is about $1,000, compared with about $330 in a gasoline-powered vehicle.3 This could grow significantly due to strong consumer demand for connectivity and infotainment features, as well as advanced driver-assistance systems, such as blind-spot monitoring.
While it is relatively easy to determine which sectors stand to benefit from growing sales of EVs, identifying the companies best positioned to maximize the opportunities is not. Challenges to investing in electric vehicles include properly evaluating battery technology or the quality of a semiconductor manufacturer’s research-and-development platform.
"EV technology is highly complex, and so is the EV supply chain," says Kojo Achiampong of the J.P. Morgan Private Bank Equity Strategy team. “Success in this space will depend on the ability to identify the winners and losers early enough.”
For ideas on how to incorporate these views in a way that is suitable for you, contact your J.P. Morgan representative.
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