(Oct 30): The best-performing sector in the global stock markets over the last two months has been neither internet technology nor oil. Rather, it is one that had been a laggard for years: automobile manufacturers. As investors chased up shares in fledgling electric carmaker Tesla, giants such as General Motors, Toyota Motor and Ford Motor saw their own fortunes decline.

Since mid-August, however, there has been a sea change in sentiment as investors have circled back to legacy carmakers in the realisation that they could actually take a significant chunk of the electric vehicle (EV) market. Shares in GM, which overtook Tesla as the most valuable car company last month, are up 34% over the past two months.

Not since Henry Ford introduced the moving Model T assembly line more than 100 years ago has the automotive industry seen such a fundamental transformation, says Sam Korus, a New York-based analyst for ARK Investment, which manages a range of tech funds. Increasing fascination with electrification, connected cars and autonomous driving has refocused attention on the global passenger car industry. “We are moving from car ownership to a new ‘Transportation as a service’ paradigm, where we will be able to rent autonomous, electric cars whenever we need them,” says Beijia Ma, a strategist for Bank of America Merrill Lynch in London.

Electric, connected, autonomous
“Three major trends have been driving the global auto sector: the emergence of new energy, or electric, vehicles; the move towards autonomous driving or driverless cars; and car sharing,” says Christopher Richter, regional auto analyst for CLSA in Tokyo. “These trends are inter-related.” On their own, the viability of each one of them looks challenging but, together, they make business sense. “In crowded areas or big cities around the world, car sharing makes sense. Do I really want to live in Tokyo, New York or Singapore and own a car? Maybe not. It’s probably easier for me to get on my cellphone and summon Uber.”

Although ride hailing has been around for a few years, Uber, Didi and Grab still have a challenging path to profitability, Richter notes. “But once you start layering in the possibility that, over the next decade, we will have truly self-driving cars, then you can imagine fleets of cars roaming cities. So, you get better utilisation of cars and you are able to bring down costs because, right now, the driver is a big part of the total cost.”

For now, the trend that is getting the most traction is EVs. “The reason GM and Toyota dominated the car business for so long was that tech players until recently didn’t want to touch the internal combustion engines with a barge pole,” Richter tells The Edge Singapore. “It was too complicated, required too much know-how and too much capital, and returns on the capital deployed were low.” EVs, on the other hand, are relatively easy. They need far fewer moving parts. Tesla says its new battery powertrain will use just 18 parts compared with a gasoline-powered, similar-sized sedan that might need hundreds. Moreover, you can buy batteries made by someone else, and electric motors are a mature technology.

EVs also last much longer than petrol- or diesel-based cars. For one thing, battery-based systems experience less wear and tear than the hardware-intensive internal combustion engine-based cars that we drive today. Tesla owners report battery degradation of no more than 7% after logging 250,000 miles (402,336km). Moreover, many aspects of battery powertrain systems can be upgraded or repaired remotely through over-the-air software updates instead of going to a service station. “Batteries will outlast electric cars,” says Korus. A 10-year-old battery from a Tesla Model S could command US$13,000 ($17,716), or several times more than an entire used internal-combustion engine vehicle sold originally at a similar price point, he says.

Your first ride in an electric car will probably be an Uber or a Grab. “Because of its inherent economics, ride hailing is likely to be the first major user of autonomous or semi-autonomous electric vehicles,” says Brent Thill, internet analyst at Jefferies in San Francisco. A recent study that compared a Tesla car being used as an Uber in California with several other sedans found that operating costs of electric ride sharing over a year were up to a third cheaper, owing particularly to maintenance-related savings.

EVs as cheap as petrol-based cars
So, what will drive the EV boom? The key is the price and performance of lithium-ion batteries. A recent US Department of Energy study showed EV battery costs declining 73% from US$930 per kWh at end-2009 to US$250 early last year. Since then, prices have fallen another 40%. “We are on track to get to the point within the next five to seven years when there is price parity between electric cars and gasoline cars and the point where EVs are cheaper than cars that run on internal combustion engines,” Richter says.

He cites GM’s pure electric model, the Chevy Bolt, which has the longest range for any EV — 238 miles. “It has a 60kWh battery and GM says that works out to US$145 per kWh cost,” he notes. In comparison, the cost of the battery in Tesla’s Model 3 is currently about US$190 per kWh, which is expected to drop to US$163 per kWh by early next year. The magical tipping point, at the battery pack level, is US$100 per kWh, the level that Tesla CEO Elon Musk expects costs to drop to by 2020. For now, customers are comfortable with a 240-mile range for a fully charged car without getting range anxiety. Indeed, Tesla is expected to start selling a higher-end version of its Model S next year, with a range of up to 335 miles on a single battery charge.

At current prices, GM is paying US$6,500 to US$7,000 for the battery pack and Tesla around US$10,000. “Put this in the context of the internal combustion engine — the engine, transmission, cooling system, fuel system and the exhaust system — add it all together and it comes to about a third of the total cost of a vehicle,” notes Richter. Whether it is a US$30,000 family sedan — the average cost of a new car in the US — or US$35,000 for the basic Tesla Model 3, total manufacturing costs are now fairly similar for battery powertrains and internal combustion engine models. On top of that, you have fewer parts, lower maintenance cost, plus electricity is cheaper than gasoline. Moreover, the cost of making petrol-based cars is rising as manufacturers are forced to comply with stricter efficiency and emission regulations. Indeed, Bank of America Merrill Lynch forecasts that the total cost of ownership of an EV will reach close to parity with the cost of owning a gasoline-based vehi cle by end-2018 in markets such as Germany and by end-2019 in the US.

The switch to electric, connected and autonomous cars is also driven by the needs of new large car markets such as China, India and Brazil. Policymakers are waking up to the realisation that they can deal with the issues of severe pollution in large cities — such as China’s Shanghai and Beijing or Delhi in India — without forcing citizens into more expensive options by embracing and prioritising electric cars. Little wonder, then, that automakers such as Volvo and Volkswagen see the writing on the wall and have said they will move to all-electric or mostly electric vehicles over the next five years.

“Right now, the EV market is about true believers — people who want to do something about the environment and make a statement,” says Richter. Most consumers will not jump in until EVs become much cheaper than cars that use petrol or diesel.

Even if prices were similar, why would they buy an EV if they had to worry about things such as charging stations or figure out how long the car can drive when it is fully charged?

Government subsidies and tax credits are a big part of why EVs have done well so far, notes Richter. Jefferies’ Thill tells The Edge Singapore that EVs will continue to need some tax credit or subsidies for the next few years. “It will take five to 10 years before EVs have the cost advantage where they can stand on their own four wheels,” he says.

Big winners: Cobalt and lithium
So, where should investors look for winners and losers in the EV race? Ultimately, the biggest winners will not be carmakers such as Tesla or China’s BYD Co or even battery makers such as Japan’s Panasonic, Tesla’s joint-venture partner in the battery Gigafactory or South Korea’s Samsung SDI and LG Chem, but makers of the components inside a battery as well as those exposed to raw materials for the batteries such as lithium and cobalt. Prices of lithium, which has been dubbed “the new oil”, have more than tripled from US$6,000 a tonne in late 2015 to more than US$20,000 a tonne today.

But the lithium story may not have legs. Lithium is among the most plentiful elements in the earth’s crust. So, while there have been shortages as demand has soared — and they are likely to persist for a while — supply issues will gradually be ironed out as new capacity comes onstream over the next few years, says ARK’s Korus.

Chilean mining firm Sociedad Química y Minera de Chile and US miner Albemarle are two top lithium players. SQM stock is up 113% this year and Albemarle is up 61%. Another way to play lithium is through the Global X Lithium & Battery Tech exchange-traded fund, which is up 52% over the past year.

Cobalt is probably the hottest metal around. “Right now, cobalt seems to be a tougher nut to crack because there is less of it under the earth,” says Richter. Cobalt prices have nearly tripled since January last year. Switzerland-based, Hong Kong-listed diversified mining giant Glencore is a big cobalt player with 30% of global production. Its main competitor is Hong Kong-listed China Molybdenum Luoyang Co. There are several “pure plays”, such as Toronto-listed eCobalt Solutions, whose stock is up 1,003% since late February last year. Singa pore-based billionaire Robert Friedland is seeking to list his Australian cobalt firm Clean TeQ Holdings through a secondary offering on the Toronto bourse. Clean TeQ shares are up 187% over the past year and 889% since Friedland acquired control 18 months ago. As a genuine shortage of cobalt is looming, battery makers are switching to lithium-ion nickel-manganese-cobalt batteries, which use more nickel, but less cobalt and manganese.

China in the driver’s seat
Another big winner is China, the world’s biggest market for cars, which is clearly seen in the driver’s seat in the race to be the leader in EVs. The sudden change in the economics of EVs has given the Chinese a clear advantage to forge ahead of other car manufacturing peers — the US, Japan and Germany. “This fragrant soup that is brewing in China with the world’s largest market, a lot of pollution and government support could create an interesting broth when it is fully cooked,” says Richter, who recalls that Japanese automakers were bit players on the global stage until the 1974 oil shock, when the world needed small, fuel-efficient cars. Bank of America Merrill Lynch in a recent report forecasts that more than two million pure-electric vehicles will ship in 2020. That figure is 2% of total new passenger car sales, and will rise to 12% of all new cars sold by 2025; 41 million, or 34%, by 2030; and 107 million, or 90%, by 2050. UBS forecasts global EV sales to reach 14.3 million units, or 13.7% of total sales, in 2025, with China EV sales reaching 4.8 million, or 15.5%, of all vehicle sales that year.

ARK’s Korus, who expects EV sales to reach 17 million units by 2022, believes equity analysts, automakers and, indeed, consumers are grossly underestimating just how far EV technology has come and just how fast electric car volumes are likely to be ramped up as battery costs collapse and regulators start to penalise internal-combustion engine cars with higher compliance costs. “Demand for EVs is most likely to exceed expectations by more than an order of magnitude,” he says. The real beneficiaries will be companies that have design expertise and the capacity to meet the demand — such as financially challenged Tesla — as well as battery makers, miners with access to resources such as lithium and cobalt and, of course, consumers. It promises to be a wild ride. “Few people alive today witnessed the transition from horse and buggy,” he says. “But we all will have front-row seats for the electric car revolution that is unfolding. So, we just need to hold on and buckle up!”

Assif Shameen is a technology writer based in North America

This article appeared in Issue 803 (Oct 30) of The Edge Singapore.
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