Electric vehicles charge up

Here's how investors can ride the EV revolution.

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Key takeaways

  • There is more momentum behind the electric vehicle (EV) market than ever before.
  • Legacy automakers and newer entrants are ramping up EV production.
  • Who can best navigate the market's current headwinds and win on batteries longer term might help determine who emerges from the pack.

The EV revolution continues. Consider this: 130,000 electric cars were sold worldwide for all of 2012, according to the International Energy Agency (IEA). Fast forward 10 years and more than that number are now sold in 1 week, as global EV sales sped up to 6.6 million in 2021, more than triple that of 2019 (see EV market share growing rapidly chart). EVs now represent close to 9% of all car sales.

Even though EV sales still represent a relatively small percentage of the total car market, they are expected to grow at an exponential pace in the coming years, thanks to shifting consumer preferences, public and private investment in building out the electric vehicle ecosystem, technological improvements, and other factors. If this trend continues as expected, there may be big investing implications.

Government support, technological innovation

Momentum has been building for several years, driven in large part by increasing demand for EVs like Tesla's (TSLA) Model 3 (the top-selling EV worldwide in 2021) and Model Y, Wuling Motors' (WLMTF) Mini EV, Volkswagen's (VLKAF) ID.4, BYD's (BYDDY)  Qin Plus DM,  Ford's (F) Mustang Mach-E, General Motors' (GM) Bolt, and Nissan's (NSANF) Leaf.

Federal support from governments around the globe has helped propel the EV market. Tax credits for electric vehicle purchases, for instance, have been a major catalyst helping spur consumer demand. More recently, several governments in Asia, North America, and Europe—the largest markets for EVs—have recently passed major legislation targeting the EV ecosystem to help accelerate the transition from gas-powered cars to electric vehicles. For example, the US Infrastructure Investment and Jobs Act that passed in 2021 allocated $15 billion for electric vehicle infrastructure.

Advancements in battery technology have been another critical component of the EV revolution. As range capacity has increased over the years, due primarily to innovations in battery technology, so too has consumer's acceptance of electric vehicles. It was less than 20 years ago that electric vehicles were powered by lead-acid batteries with a roughly 55-mile max range capacity. Today's lithium-ion technology (which has been the main type of EV battery since the late 2000s) currently has a max capacity of nearly 10 times the old lead-acid battery for some EVs.

Looking past liquid electrolyte-based lithium-ion technology, some industry insiders—including Tesla cofounder Martin Eberhard—have expressed optimism for emerging technologies, such as solid-state batteries. Solid-state batteries replace the liquid electrolyte with a solid electrolyte, potentially resulting in lower costs and a lengthening of the battery life cycle.

The expanding EV universe

There are more pure EV makers than ever before. In addition to the biggest automobile manufacturers in the world that are working toward augmenting their EV lineup—including SAIC Motor, BMW (BMWYY), Honda (HMC), General Motors (GM), Ford (F), Daimler (DMLRY), Toyota (TM), Hyundai (HYMLF), Volkswagen (VLVLY), and Porsche (POAHY)—relatively new companies have made significant inroads to capture market share.

Here are the 10 largest automakers by market cap who produce only electric vehicles:*

  • Texas, US-based Tesla (TSLA)
  • California, US-based Rivian Automotive (RIVN)
  • California, US-based Lucid Motors (LCID)
  • Shanghai, China-based Nio (NIO)
  • Guangzhou, China-based XPeng (XPEV)
  • Beijing, China-based Li Auto (LI)
  • California, US-based Fisker (FSR)
  • Arizona, US-based Nikola (NKLA)
  • London, UK-based Arrival (ARVL)
  • California, US-based Proterra (PTRA)

The rise of these pure EV companies has been staggering. Tesla is already the largest publicly traded automaker in the world with a market cap of just under $900 billion, as of mid-February 2022. Rivian made big news in late 2021 immediately after its IPO valued the company at nearly $14 billion—despite not having delivered a single car to customers yet. And Lucid Motors is putting “range anxiety” naysayers to shame with its Air Dream model that boasts the best battery life in the market today. 

But it's not just the new entrants and startups with their potentially lofty valuations that have pushed the EV market into the next gear. All of the legacy automakers are ramping up plans to ride the electric trend wave. Some highlights:  

  • General Motors has announced it will phase out all gas engines by 2035, and is close to completing several battery plants in the US. EV principals at GM believe its efforts to build their own battery line, as Tesla already has, will provide a competitive advantage. 
  • Ford, which uses an external supplier for its batteries, is already seeing success with its Mustang Mach EV and has more than 200,000 reservations for its in-development F-150 Lightning truck, as of early 2022. 
  • Honda plans to offer 2 electric cars in the US by 2024 using batteries supplied by GM.
  • Porsche (POAHY) recently broke the cross-country charging record in the US when its Taycan sedan spent just 2.5 hours charging during a January 2022 trip from Los Angeles to New York City. 
  • Mercedes-Benz (DDAIF) recently rolled out its new EQS with a battery capacity of 350 miles.

And the list goes on. Needless to say, consumers are going to have a lot more choice among EVs in the near future.

Can any bumps in the road slow down EVs?

An impressive aspect for the EV market has been its resilience in the face of the global supply chain headwinds that have impacted car makers, as well as a range of other businesses. Cars contain thousands of components, and despite supply issues across a spectrum of these components, 2021 was a record year for EVs—and 2022 is expected to be even better.

If you are interested in exploring an electric vehicle-focused ETF, Fidelity offers the Fidelity Electric Vehicle and Future Transpo ETF (FDRV).

With that said, there are reasons for investors to be cautious. Not only are supply chain issues causing a variety of shortages and delays for automakers, rising input prices threaten to curb margins over the near term. For instance, key battery components including lithium carbonate, graphite, and nickel have all surged in price over the past several years. Of course, improvements in battery technology have been helping bring prices down over time, partially offsetting the recent uptick in input prices.

Another risk remains the EV market's reliance on government support. While many governments around the world are increasingly focusing on EV infrastructure, car sellers still depend to a great extent on EV tax credits and other business-friendly policies. Just as subsidies and other governmental support for oil and gas industries help support the traditional gas engine market, the EV market relies to a great extent on the public-private partnership.

Valuations are an additional concern. For example, some EV makers are valued in the billions despite not having delivered cars to customers yet. There are also entrenched EV companies that have valuations that some investors think do not match their underlying fundamentals.

Nevertheless, trends in the electric vehicle market appear to be stronger than ever.

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