Investors are focused on an anticipated boom in electric cars. The true acceleration in demand is happening elsewhere.
Electric vehicles (EVs) have reached a clear inflection point. Product quality has improved and consumer availability is expanding rapidly. Perhaps most importantly, the cost of electric car ownership is finally approaching parity with traditional combustion engine cars.
The colourful stories within the industry have also helped generate interest: the spectacular and turbulent growth story of Elon Musk’s Tesla has certainly made headlines. However, shifting to a fully EV future will require more time and investment than most investors expect.
As investors in climate change trends, we look beyond the headlines. While the market remains focused on the use of electric cars, it is electric van and lorry use that is accelerating ahead of the curve.
Even if we take very aggressive forecasts for the transition of new car sales to EVs, the overall composition of the car fleet will take many decades - arguably too long - to shift. There are two key reasons for this.
The first is that not even a fraction of the battery factories required to power all of the world’s automobiles exist. The investment required to build the needed manufacturing capacity will be huge. The first “Gigafactory”, built by Tesla, cost an estimated $5 billion for a 50GWh factory. If we assumed future factories only cost 60% of this initial factory build, the cumulative industry spending needed to fully convert the automobile industry to EVs is over $400 billion.
Clearly, very large new markets will be created and destroyed in the transition. Investors may want to take note of the major markets that are developing in battery components such as electrodes, power electronics, and electric motors.
The second factor slowing electric car uptake is replacement speed: the average life of a car is over 15 years. It is even longer in emerging economies. Assuming that EVs represent 25% of all new global car sales in 2030, and 75% in 2040, EVs will only represent just over 11% of the overall fleet in 2030, still less than 45% in 2040 and only 77% in 2050 (which is when transport needs to be essentially zero-emission to meet the Paris goal). Most consumer car journeys would still be generating substantial greenhouse gas (GHG) emissions in 2040, and the only way to overcome that would be a forced early retirement of combustion engine vehicles.
Source: Schroders, April 2019
Commercial delivery and logistics vehicles, on the other hand, work much harder than consumer vehicles. This means that they generally have a shorter life (or at least have their powertrain replaced more frequently). Electric vehicles are also ideally suited to commercial use on short-haul delivery networks, as the vehicles return to the local depot once a day to be recharged.
The logistics industry is rapidly catching on to this as the headlines, below, highlight. Companies that rely on large delivery fleets are aggressively converting their vans and trucks to electric. This is partly a result of city authorities rapidly tightening emission regulations. London, this month, introduced the world’s toughest vehicle emissions standard in the centre of the city to help reduce toxic air pollution and protect public health.
But it’s also simply because electric is cheaper. Deutsche Post DHL have gone as far as committing to operating 70% of their own “first and last mile” services with clean delivery solutions by 2025. Given that some of its operating regions will lag behind, it means the company will need to be using almost 100% low emission vehicles in Germany by that date.
Source: Financial Times, Reuters, WebWire
Delivery firms are under pressure from their clients. For example, Amazon has recently announced plans to make 50% of all shipments carbon neutral by 2030 (when only around 10% of the existing consumer car fleet will have shifted to electric).
Amazon needs to give more detail around how it intends to achieve this, but it is clear that this pace of conversion away from combustion engine vehicles can and will happen fastest in the professional delivery and ecommerce industry. Perhaps Amazon, instead of offering free next day delivery for Prime members, could soon start incentivising free EV delivery, and charging for other delivery methods - stranger things have happened.
Investors should also consider the wider backdrop – companies that adapt to global challenges such as climate change, put themselves on a far better footing. Amazon is just one potential example.
Consumers and regulators may wake up to the significant contribution to greenhouse gas emissions made by consumer car journeys to and from their favourite shops. Perhaps then, traditional retailers and out-of-town shopping malls will face further regulatory costs and headwinds as they are asked to incorporate the true cost of their associated emissions against a cleaner, online, alternative. As climate change investors, we intend to remain one-step ahead.
This article is issued by Cazenove Capital which is part of the Schroders Group and a trading name of Schroder & Co. Limited, 1 London Wall Place, London EC2Y 5AU. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority.
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