Electric vehicles: Running out of power or just a bump in the road?

Global autos: a view from Singapore, Ming Da Zhuang

Despite recent investor pessimism, the move toward electrification in the auto industry is not likely to slow down. In our view, the auto sector is developing into two distinct regions—China, now the world’s largest market, and global ex-China—progressing at different speeds.

China remains on track to exceed 70% EV adoption by 2030, having already achieved 40% EV penetration in April 2024. EV sales, including both fully battery-powered vehicles and hybrids, rose 18% in the first quarter of 2024 compared with the same period in 2023.³ This has been largely consumer driven as the Chinese market benefits from a wide range of affordable products. So, in our view, the story of slowing EV demand is not applicable to the Chinese market.

The pessimistic narrative is more prevalent in Europe and the United States. Teething issues with the technology, concerns about subsidies receding in places, inflation, and higher prices due to original equipment manufacturers (OEMs) using higher specification batteries, have all contributed to a gloomier picture of faltering global ex-China EV demand. Germany’s decision in late 2023 to end its EV subsidy program, which had paid out 10 billion euros between 2016 and 2024, has been an important driver of the recent slowdown.

Nonetheless, there remains a strong regulatory push in Europe and the United States, which negates some of the bearishness on EVs in these regions. Several countries have targets in place for partial or complete bans on sales of new ICE vehicles—the United States, Japan, the United Kingdom and South Korea are among those countries targeting 2035 for the cessation of sales—while subsidies still exist. The regulatory landscape is such that OEMs will need to comply with tightening emission regulations in the United States and Europe and will thus be compelled to sell more EVs, thereby driving battery electric vehicle (BEV) adoption and penetration higher.

Additionally, innovations to reduce battery costs may be instrumental in improving the affordability of EVs. One of the reasons why EVs have been expensive relative to ICE vehicles is due to the cost of EV batteries, which contributes significantly to the overall vehicle price. Although battery costs have been declining, they are still a major expense. However, as many of the leading auto companies pursue plans to release newer, cost-effective models, we expect battery costs to fall. This should have a major bearing on the viability and affordability of EVs generally.

Global battery manufacturers: a view from Singapore, Clara Lee

The current weakness in demand for EV’s is cyclical and is the juncture where EV economics is tested as subsidies wind down. To enable EV’s to achieve cost parity with ICE vehicles, increasing the energy density of batteries and optimizing the manufacturing process is important, and this is where batteries make great partners for OEMs.

In our view, certain Korean battery makers have developed competitive advantages in battery chemistry and form factor flexibility, large scale manufacturing and supply chain integration, which are necessary for OEMs to structurally reduce the cost of EVs and make them affordable for the consumer. This process requires collaboration with a battery maker as optimization needs to occur from cell components all the way to the chassis. Manufacturing on a large scale with profitable yields is the additional hurdle many fail to surmount. 

In this space, we tend to favor tier 1 suppliers to major OEMs globally that possess large battery patent portfolios and have deep supply chain relationships up to the mine gate, which enables OEMs to meet trade regulations. Some OEMs aim to produce a significant share of batteries in-house over the next 5-10 years. However, developing battery cell and component technology is not easy, and scaling up in-house production is no easy feat, a key hurdle being failing to achieve the dry electrode method vs wet electrodes used by the industry.

Materials for the transition (lithium): a view from the United Kingdom, Craig Cameron

Many raw materials companies are critical to the energy transition. To reach net zero, we will need significant growth in the supply of metals such as copper, lithium, aluminum and nickel. Lithium is a key driver of the decarbonization of the transportation industry, with the metal forming a major component of all EV batteries, regardless of cathode chemistry. More than 90% of lithium demand now comes from the battery industry,⁴ and EVs remain the main source of demand growth going forward.

High EV-battery inventory levels and weakening expectations around EV sales led to share-price weakness through 2023, creating what we believe is a compelling long-term value opportunity in the lithium sector.

During 2023, spot pricing for lithium carbonate at 99.5% concentration (lithium carbonate equivalent or LCE) fell from more than US$75/kg to less than US$14/kg, with the price remaining in the range of around US$14-US$15/kg since then.⁵ While we acknowledge that lithium prices could continue to be volatile in the near term, we believe the market is now pricing in the current low lithium price into perpetuity, a scenario where we see meaningful shortages in supply as EV demand grows.

Today significant quantities of lithium can be extracted at low cost from brines in the “lithium triangle” of Chile, Argentina and Bolivia, or from a suite of relatively new technologies known as direct lithium extraction (DLE). However, marginal sources of supply are still coming from non-integrated hard rock mining of a product known as spodumene. This precursor to lithium hydroxide and lithium carbonate is used in EV batteries after it is sold to conversion facilities to produce these lithium products. We see spodumene as a significant source of incremental supply as the EV market grows. Our estimates suggest that prices are currently 30% too low to incentivize new supply of spodumene, and this discount is larger if alternative mined rocks are needed, such as lepidolite. Indeed, even the world’s largest spodumene project, the Greenbushes mine in Australia, is planning to lower production in response to weak pricing. Yet, in our opinion, supply growth remains crucial in a market that is still expected to see demand grow at 10%+ through the rest of the decade.⁶ Notably we expect demand from China and Europe, where regulation and subsidies remain supportive, to drive this growth.

As EV demand growth continues and high levels of inventories unwind, we expect lithium prices to rebound at least to incentive pricing. We also see a meaningful chance of medium-term price spikes, similar to 2022’s, on the back of ongoing price volatility. In such an environment we expect lithium equities to do well against lowered expectations.

Materials for the transition (aluminum): a view from Canada, Tina Sadler

Transportation is the largest end market for global aluminum, accounting for roughly 30% of total demand.⁷ The drive toward lighter vehicle construction has prompted increased demand for aluminum, with the silvery-white metal already replacing steel to some degree in traditional ICE vehicles. The light-weighting process can reduce transport emissions materially, on the simple concept that a lighter vehicle requires less power and thus less fuel. 

BEVs are generally 10%-15% heavier than their ICE counterparts, due to the weight of the battery pack and additional strengthening of the main structure to absorb increased crash loads. Thus, the light-weighting need is enhanced in the move to EVs. Bernstein Research estimates that EVs use 250 kg of aluminum on average compared to 172 kg in ICEs, with the increase driven by the need to offset the weight of large batteries and battery enclosures. Aluminum’s role in the light-weighting of the vehicle can also drive cost savings resulting from the ability to downsize the battery pack and drive-train components, while maintaining vehicle range.

In the face of increased regulations, there is enhanced focus on the CO2 footprint of a vehicle, not just during the use phase, but also from a total-cycle assessment perspective. As part of this, both regulators and vehicle OEMs have sharpened their focus on the CO2 footprint of raw materials used in the production process of the vehicle. The simple fact is that the average kilogram of aluminum produced globally today has a higher carbon footprint compared to the average kilogram of steel. However, given that aluminum is three times lighter, the comparison becomes less relevant as the weight savings compensate for the bulk of the difference.

The case for low-carbon aluminum is even more compelling as a superior alternative raw material for BEVs, as it allows for an emission reduction in both the production and use phases of the vehicle. This advantage starts at the first step of production, with automative research firm fka reporting an average estimated CO2 savings of around 15% vs. steel through the use of low-carbon aluminum where practically possible in the production process. 

Power semiconductors: a view from the United States, Peter Nori

Near-term market concerns regarding semiconductors relate to elevated inventories, weakness in EV sales, China softness and the ongoing correction in automotive and industrial end markets. Semiconductors stocks have underperformed for much of the period since mid-2023 on cycle concerns.

One leading manufacturer of the semiconductors used in automotive applications that we believe could stand to benefit from the ongoing green transition has 55%+ of revenues from power semis. Global EV penetration reached 13% in 2023, led by China at 25.6% and Europe at 18.1%⁸, while industry experts forecast EV/hybrid penetration rates to approach 50% by 2027⁹ due to tougher emissions standards, subsidies and regulatory moves to ban ICE vehicles. The semiconductor content in EV and hybrid vehicles is similar and shifts in demand should be neutral, in our opinion.

We believe our thesis rests on the company’s positioning in semiconductors and sensors used to reduce power consumption and improve efficiency and safety in automobiles, industrial applications, solar and wind farms, and consumer devices. It is one of the leaders in fragmented markets, selling to customers under long duration contracts averaging seven years in autos and five years in industrial applications. Switching costs are high, particularly in automotive, due to lengthy qualification times, mission critical applications, software lock-in with MCU and low cost of chips relative to the price of the finished product.