Standard Life Investments

Through the Lens

Electric Vehicles - a seismic change in the car industry

  • How the electric vehicle revolution is going to shake-up the entire industry
  • This will create numerous opportunities across the corporate spectrum
  • Emerging market seen as big winners

The shift towards the age of the electric car promises a superior driving experience, a more cost efficient business model and a new set of winners. 

Offering enhanced performance and a better cost structure, electric cars will encourage a new wave of competition that will threaten the traditional car industry. This will likely catalyse a change in leadership. Traditional manufacturers, constrained by heavy fixed costs and meagre cashflow, will be able to migrate only slowly to electric vehicles.

While Tesla leads the field in electric car technology, the potential rewards extend further. Both new and traditional car manufacturers are now rapidly developing their own electric vehicles, hoping to be fast followers. The technology ushers in a new group of suppliers, with expertise in fields such as lightweight materials, electronics, software and battery technology.

Leaner, cleaner electric

Electric cars present a disruptive force that threatens the very survival of traditional car manufacturers. Conversely, it presents a rich opportunity for disruptive entrepreneurs to seize a slice of the trillion-dollar global car industry.

At the forefront of this change is Tesla Motors, which has pioneered electric car technology and overhauled the traditional industry business model – from design, parts procurement and assembly through to marketing, distribution and aftersales service. Many consider Tesla the exception rather than the rule but it has pioneered a product that offers a superb driving experience. This is encouraging new car manufacturers, particularly in China, to adopt a similar approach.

The electric vehicle offers additional space and, more importantly, performance is outstanding with acceleration in larger-battery cars rivalling most ‘supercars’. Particularly noticeable are the superior consumer entertainment and safety features that can be readily designed into this technology.

Range anxiety has deterred many potential buyers of electric cars, particularly given thin charging-station coverage and slow charging times. However, coverage is continually improving and larger batteries mitigate the problem by offering a range of up to 300 miles. This is estimated to cover 95% of journeys and 99% of city journeys. Considering also that cars are left idle for over 23 hours a day on average, there is ample time to recharge the battery.

Driving costs lower

The biggest obstacle to mass adoption is price, with the large battery packs the main culprit. However, like other technologies, electric car technology is continually advancing and becoming cheaper.

Following discussions with leading battery manufacturers, including LG Chem and Samsung SDI, we believe costs will continue to decline far more rapidly than the market predicts, catalysed by scale increases, energy-density improvements, advances in materials composition and process enhancements.

To give an idea of scale, at end-2016, the estimated battery pack cost was $300/kWh. Our analysis suggests by end-2017 it will be circa $200/kWh, and by end-2020 just circa $100 kWh – well below the consensus estimate of $200 by 2020.

Using a 60kWh battery, c250-300mile range, the cost to a car manufacturer falls from $18,000 to just $6,000.

This matters because today’s traditional engine costs around $5,000 and with more stringent fuel efficiency and emission standards is forecast to rise to around $6,000 by 2020. So, by 2020, we estimate the electric car will reach parity with a traditional-engine vehicle.

Beyond 2020, we believe the cost structure of electric vehicles will surpass traditional vehicles. As well as substantial fuel savings, repair and maintenance costs will be cheaper because there are 90% fewer mechanical moving parts, resulting in less wear and tear. This reduces the need for an extensive repair network. Additionally, the change towards internet-based consumer researching habits warrants a smaller sales footprint.

This significantly lowers distribution costs for pure electric vehicle manufacturers, but will prove difficult for incumbent carmakers to adopt.

Investing in change

Alongside electric vehicle manufacturers, companies in the new supply chain will be among the winners in this industry transformation. Chinese manufacturer Minth supplies structural and decorative auto parts. The company specialises in lightweight materials that are particularly suitable for electric vehicles where surplus weight impedes range and battery life.

Samsung SDI is distinguishing itself in battery development, which is being recognised through important new customer wins, including VW and BMW.

Another name to highlight is Australia-listed Syrah Resources. Syrah is the world’s only end-to-end supplier of high-grade coated spherical graphite, used in lithium-ion batteries. Crucially, the structure of this form of graphite improves energy density and substantially reduces battery cost. It is therefore of prime importance for electric vehicles, and will hasten the eventual affordability and adoption of the technology.