Investing in EVs

While overall car sales were curbed somewhat in 2022, the road appears to be getting smoother of late—particularly for electric vehicles (EVs). Indeed, global electric car sales sped up 60% last year to surpass 10 million for the first time ever, despite broader car sales headwinds as well as rising battery prices.¹ Most auto market analysts think EVs are on the fast track to accelerate in the years ahead.

Here's where the EV market stands, and what roadblocks EV investors could face.

EV sales speed up

EVs represented a growing percentage of total car sales last year in the world’s 3 largest auto markets—China (25%), the European Union (20%), and the US (10%).¹ However, they still accounted for a relatively small percentage of total car sales, leaving a lot of room for growth (see Passenger car sales chart).

Automakers are clearly anticipating that potential growth in EV share: There are now over 400 electric car models globally (notably, roughly 55% of these models were SUVs, a 40% increase from 2018).¹ Here’s a list of 2022's top-10 selling plug-in electric vehicle models worldwide:²

• Tesla Model Y
• BYD Song Plus
• Tesla Model 3
• Wuling Hong Guang MINI EV
• BYD Qin Plus
• BYD Han
• BYD Dolphin
• BYD Yuan Plus
• Volkswagen ID.4
• BYD Tang

The expectation that EV sales for these and other models may grow at an exponential pace in the coming years is due primarily to shifting consumer preferences, public and private investment in building out the electric vehicle ecosystem, and technological improvements, plus other factors. If this trend continues as expected, there remain big investing implications.

Federal support from governments around the globe in particular 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 have 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 roughly 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

In addition to the biggest automobile manufacturers in the world shifting into gear in the EV market—including SAIC Motor,BMW (), Honda (), General Motors (), Ford (, Toyota (), Hyundai (), Volkswagen (), and Porsche ()—there are more pure EV makers than ever before. These relatively newer companies have made significant inroads to capture EV market share—especially in China.

Here are the 10 largest automakers by market cap who produce only electric vehicles:²

• US-based Tesla ()
• China-based Li Auto ()
• US-based Rivian Automotive ()
• China-based Nio ()
• US-based Lucid Motors ()
• Sweden-based Polestar ()
• China-based XPeng ()
• China-based Leapmotor
• US-based Fisker ()
• US-based Proterra ()

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 under $700 billion, as of mid-February 2023. Rivian made big news in late 2021 immediately after its IPO valued the company at nearly $14 billion—despite at the time not having delivered a single car to customers yet.

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 have made significant strides ramping up their EV offering. As a result, consumers have more choices among EVs than ever before.

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, 2022 was a record year for EVs—and 2023 is expected to be even better.

With that said, there are reasons for investors to be cautious. Not only are supply chain issues continuing to cause some shortages and delays for automakers, relatively higher input prices remain a factor that threatens to curb margins over the near term. For instance, key battery components including lithium carbonate, graphite, and nickel have all increased in price relative to several years ago. Of course, improvements in battery technology have been helping bring prices down over time, partially offsetting the uptick in input prices. Nevertheless, new car prices have increased substantially over the past several years, potentially pricing out many buyers.

Another risk that remains is the EV market's reliance on government support. While many governments around the world are increasingly focusing on EV infrastructure, EV car sellers still depend to a great extent on tax credits and other 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.

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