Investing in the EV ecosystem

28 November 2023
Investing in EVs

Introduction

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One of the biggest changes in our lifetime is likely to be the shift from petroleum-powered engines to electric vehicles (EVs). According to research provider Bloomberg New Energy Finance (BNEF), 1.7 million EVs were sold worldwide in 2020, representing just 2.7% of new car sales. By 2030, however, BNEF predicts annual global EV sales will hit 26 million – and by 2040, over half of all vehicles sold will be electric.

Four major factors are driving this change.
1. Increasing choice: there are over 500 different EV models available in the market, everything from hatchbacks to big rigs.
2. Falling costs: even without buyer subsidies, BNEF expects EVs to reach price parity with most gas and diesel vehicle types by the middle of the decade and exceed it shortly thereafter. That lower cost is primarily down to the third factor below.
3. Improving battery technology: the power cells which provide EVs with propulsion are getting better all the time, rapidly alleviating previous concerns. Progress has been made in terms of driving range, charging time, safety, and durability.
4. Government policy: in recognition of their contribution to greenhouse gas emissions, large swaths of the planet are moving to ban sales of new internal combustion vehicles. To date, at least 13 countries and 31 cities or regions have announced plans to phase out sales of petroleum-powered cars and trucks – but that list is constantly growing.

Taking all these factors combined, there’s no stopping the megatrend towards EVs – and with such a great shift come significant investment opportunities. But instead of solely focusing on big-name EV manufacturers like Tesla and BYD, smart investors may find more interesting options (and potentially greater gains) on offer further up the supply chain, as well as in related industries.

An overview of the EV ecosystem

The most important part of an electric vehicle is its engine equivalent: the battery. Since virtually all EVs run on lithium batteries, their supply chain begins with lithium miners – as well as extractors and processors of the other key metals used in a lithium battery, such as cobalt and nickel.

Battery manufacturers need these metals in order to build the battery cells which stack together to make a battery pack. Those packs are a key input for EV manufacturers, who then build the rest of the vehicles and sell them, either to auto dealers or directly to consumers and businesses.

But the ecosystem doesn’t end there. More EVs on the road means there’ll have to be more charging stations, as well as the “fuel” to fill ‘em up. The sources of this electricity should, furthermore, be largely renewable: there’s no point in pushing EVs as a green future only to power them with “dirty” electricity ultimately generated by gas or even coal.

Speaking of which, there’s one underappreciated area which closes the loop of EVs’ lifecycle: battery recycling. More on that later – but let’s kick things off with a look at how those batteries get made in the first place.

Investing in battery suppliers and producers

Forget water or data: its huge importance to EVs means many think of lithium as the “new oil”. Road transportation is currently the biggest source of global oil demand, after all – and one German company, with predictable literalism, now lets investors buy barrels of the metal that’s supplanting oil at the heart of travel.

Lithium Investment Unit

A more conventional approach involves investing in shares of lithium miners and processors. Around 75% of global lithium production is controlled by just five firms: Albemarle, SQM, Ganfeng Lithium, Tianqi, and Livent. All of these companies are publicly traded, meaning you can easily buy their stock in a bid to profit from the surging demand for lithium.

That demand could surprise on the upside if “solid-state” batteries (more on which shortly) become commercially available faster than expected: these use proportionally more lithium than today’s dominant types. But demand could surprise on the downside if the cost and capacity of battery recycling improve faster than thought.

Cobalt and nickel are also widely used in lithium batteries. More familiar names such as Glencore, Vale, and BHP are the biggest suppliers of these metals – but between these mining giants and the lithium specialists, you may be better off with the latter lot. Not only do they offer more direct exposure to the EV megatrend, but they carry less ethical and environmental baggage (at least for now).

There’s also much more to creating battery-ready lithium than simply getting the metal out the ground. The chemical conversions required to transmute raw lithium into a manufacturing-grade substance are a boon for our lithium producers: the additional complexity they add to simply securing exclusive access to lithium deposits increases the industry’s barriers to entry.

The next step sees battery producers buy the lithium and other metals and use them to build the battery packs which power electric vehicles. The biggest battery companies include CATL, Panasonic, LG Chem, Samsung SDI, SK Innovation, and EV manufacturer BYD, which makes its own. (Tesla – which mainly uses Panasonic’s batteries – is reportedly considering a similar approach.)

There’s also a growing list of startups focusing on the development of next-generation “solid-state” battery tech – which aim to overcome many of the performance shortcomings today’s EVs still exhibit compared to their fossil-fuel counterparts. Besides promising to increase range by 80% and provide ultra-fast charging, solid-state batteries have longer lifespans, are non-combustible, and can withstand subzero temperatures.

Names to watch here include Ionic Materials, Sion Power, Solid Power, and QuantumScape. As of the time of writing, however, only QuantumScape’s shares are publicly listed – and with no company yet to nail large-scale production, this is a risky area. A safer and more efficient approach might be to gain exposure to a diversified basket of battery-focused stocks through an exchange-traded fund (ETF) such as Global X Lithium & Battery Tech ETF (ticker: LIT).

Don’t forget that both lithium producers and battery manufacturers are also benefiting from the broader shift towards renewable energy. Large-scale lithium battery storage systems are increasingly being used to help electricity grids cope with wind and solar power’s naturally fluctuating supply – setting excess aside for a rainy day.

Investing in EV automakers

Investing in companies that manufacture EVs is perhaps the most obvious way to profit from the EV theme, but success may not be as straightforward as you think.

We’ve already mentioned Tesla and BYD, two well-established players in the EV market (in BYD’s case mainly in its home country of China) facing ever-stiffer competition from hitherto traditional automakers like Volkswagen, Hyundai, BMW, and the Renault–Nissan–Mitsubishi Alliance.

While Tesla remains the biggest-selling EV brand – and continues to hog investors’ attention – the old-school auto behemoths’ impressive manufacturing capacity may soon see them producing EVs on a much larger scale.
Chinese upstarts such as NIO, Xpeng, and Li Auto are also nipping at Tesla’s heels. But while all of these companies have shares listed in the US, their prices don’t necessarily match their precocity.

There’s a huge premium on the stock prices of EV pure-players compared to traditional auto makers. Maybe investors are subscribing to the idea that incumbents never successfully transition to a transformative new technology, but that skepticism looks somewhat extreme next to the wild enthusiasm for as-yet unproven EV specialists.

All of this underlines one of the trickiest things about investing in EV automakers right now: it’s still very hard to forecast with any certainty who the eventual winners will be. A dominant market share is one thing – but generating sustainable profit is another, as Tesla has shown: if it weren’t for the company selling regulatory credits, it would still be unprofitable.

That’s why it’s essential to look at other ways to play the EV megatrend. And as well as looking at lithium and battery producers, you may also want to consider investing in companies that stand to benefit from more EVs actually getting out on the road – regardless of which automaker built them.

Investing in related industries

BNEF estimates that there’ll be around 116 million EVs driving around in 2030. But the impact of this will be felt way beyond those firms involved in their production.

For starters, all those EVs need to be charged. This calls for two main types of company: electric utilities to generate and distribute the power, and firms to build and operate EV charging stations. Interestingly, BNEF only expects EVs to increase global electricity demand by 5.2% by 2040. But as well as selling electricity, utilities make money from building infrastructure – and all those charging stations will need hooking up to the grid.

You can play this sub-theme by way of ETFs such as the US-focused Utilities Select Sector SPDR Fund (ticker: XLU) or its transatlantic cousin the iShares STOXX Europe 600 Utilities UCITS ETF (ticker: EXH9). In terms of individual utility stocks, seek out those operating in areas with increasing EV penetration and generating most of their electricity from renewable sources.

Prominent companies building and operating EV charging stations include Blink Charging, EVgo, Alfen, ChargePoint, and EVBox. All of these firms are either publicly traded or are, at the time of writing, currently on their way to becoming so via “reverse mergers” with special purpose acquisition companies (SPACs). Not all of them are profitable, however – so be sure to study their future trajectories carefully before investing.

It’s also worth thinking about what happens to EV batteries when they reach the end of their life. Safely disposing of the chemicals present is tough, and that all-important lithium is really too useful to go to waste – so battery recycling firms have sprung up looking to recover the metal and sell it back to producers. In fact, the global industry is expected to be worth as much as $18 billion by 2030.

There are a number of recycling startups worth having on your radar, namely Northvolt, Li-Cycle, Lithion, and Redwood Materials – this last one run by one of Tesla’s co-founders. As for stocks you can actually invest in right now, there’s China’s GEM and materials company Umicore, although neither are pure-play battery recycling companies.

It’d be remiss not to mention here one final way to profit from more EVs hitting the road. This involves shorting – or betting against – investments that are likely to suffer as a result, such as oil stocks or even oil itself. BNEF, after all, estimates that EVs will displace almost 18 million barrels per day of oil demand by 2040.

For reference, total oil demand in 2023 is expected to surpass 100 million barrels per day – so a one-fifth reduction could hurt the price of both the commodity and its producers. You might therefore conclude it’s a good idea to short either an exchange-traded product such as the United States Oil Fund (ticker: USO) or else a basket of stocks like the SPDR S&P Oil & Gas Exploration & Production ETF (ticker: XOP).

Conclusion

The drive towards EVs is one of the biggest trends of our time. But there’s a lot more to the phenomenon than just a handful of much-hyped manufacturers’ stocks.

To make the most of the opportunity afforded by this seismic shift, consider investing in baskets of shares from across the entire value chain instead of just one or two companies. By adding lithium producers, battery manufacturers, electric utilities, recyclers, and EV charging station operators to your portfolio, you should benefit regardless of which automaker comes out on top. And it’ll likely be considerably cheaper…

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