Electric Vehicles Are Merging into The Mainstream

Electric Vehicles are Grabbing Headlines and Market Share

There’s no denying the cool factor of electric cars. They seem to be everywhere these days. Maybe your neighbor owns one, and perhaps you want one, too. It’s hard to turn on the telecast for a major sporting event without seeing commercials from traditional automakers hawking their new battery electric vehicles (BEVs).

Regardless of the buzz around them, we think BEVs will ultimately displace conventional autos as the future of personal mobility. Their carbon emissions and operating costs are lower than traditional automobiles, and innovative technologies are improving their performance.

The market has taken notice. Though Tesla has been a high-profile beneficiary of investor interest in BEVs, the Texas-based carmaker is just one of the companies trying to bring electric vehicles to the masses. Legacy manufacturers that have been building cars for generations of drivers also are trying to claim shares of the growing EV market. Their suppliers are coming along for the ride.

As with all trends, the hype around electric vehicles creates both risks and opportunities for investors.

The Auto Industry is Shifting from “ICE” to Electric

Because internal combustion engine (ICE) autos are among the most significant sources of global carbon dioxide emissions, the auto industry is undergoing a historic transformation. Manufacturers and consumers are starting to turn away from this older technology and embrace the green movement.

As a result, EV sales appear set to accelerate. BloombergNEF estimates BEVs could grow from their current level of roughly 2% of the auto market to 30% by 2030. This would mark a striking shift in consumer buying and driving habits.

Tesla has the Early Lead

Tesla used its first-mover advantage to take the lead in this new market.¹ The company’s innovations defined the category and provided a barrier to competitors. This led to compelling growth. Despite this early success, the company remains a minor player in the overall automobile market, accounting for only 1% to 2% of all cars sold. See Figure 1.

Traditional Automakers are Expanding their Electric Vehicle Lineups

The market has somewhat overlooked traditional automakers amid the Tesla hype until recently. We think this is a mistake. For example, GM and The Volkswagen Group are profitable and have committed billions to build EV platforms. They’ve honed their ability to produce autos at scale over many decades, and their traditional auto lines have historically generated cash flows that may help support the transition to BEVs.

Volkswagen has introduced electric models in its popular Audi and Porsche lineups. Audi is the best-selling BEV in Europe, while the Porsche Taycan is among the top-selling EV sedans in the U.S.²

GM has electric offerings under its Cadillac, Hummer and Chevrolet lines. Toyota, Honda, BMW and Daimler also have ambitious plans for BEVs. Meanwhile, Ford has an electric version of its popular F-150 pickup truck.

EV Parts Suppliers are Along for the Ride

The shift to BEVs is creating opportunities for parts suppliers as well. Aptiv, for example, offers wiring solutions and autonomous driving and safety components. The company’s customers include GM, BMW and Volkswagen.

Japan-based Bridgestone was one of the first firms to produce lightweight EV-specific tires. The tires on BEVs tend to wear faster due to the higher torques and vehicle weights. This creates the opportunity to benefit from new car sales and from more frequent replacements.

TE Connectivity is another example. This Switzerland-based technology company designs and manufactures connectors and sensors for harsh environments where vehicle failure could be catastrophic. TE’s high-tech products cross BEV applications such as infotainment, safety and powertrain systems.

Investing in Themes Can Be Risky

Our approach to any investment – from companies that make high-tech products to businesses that distribute everyday consumer goods – is to make decisions on a stock-by-stock basis.

We come at it from a value perspective. We dig into the details to determine whether we think a stock is selling at an attractive price. We also evaluate whether a company meets our quality standards. These are pretty high hurdles.

Applying this thinking to individual automakers and suppliers sometimes identifies what we believe to be attractive opportunities. However, it’s important to note that we’re not investing in the theme. Rather, we’re making our decision based on our analysis of each company’s potential and the risks that come with it.