The electrified automobile and its implications have captured the imagination of thematic investors, ranging from those interested primarily in automakers, to those interested in clean energy or autonomous driving technology.
By our estimates, the total global electric passenger vehicle fleet reached nearly 10 million vehicles at the end of 2020 with new sales in 2020 being about 2.8m vehicles, a growth of around 25% versus sales of 2.2m in 2019. This growth compares very favorably to overall global light vehicle sales of around 75m vehicles in 2020, down 16% on 2019 levels.
The recent growth trends for electric vehicles (EV) will continue through 2021 supported by clear commitments from governments towards the electrification of transportation. We expect new EV sales to be in excess of 4m vehicles in 2021, up over 50% versus 2020 sales and representing around 5% of global total light vehicle sales of 83m units (up 11% in 2020 levels). Looking longer term, we expect that predominantly all passenger vehicle sales will be EVs by 2040.
In such an environment the desire to pick “the winner” is something we often observe among new thematic investors in the space. Unfortunately, this instinct of seeking “the next Tesla” can lead investors down the wrong path and towards companies that are more marketing-oriented than those with proven operational excellence. A number of the “next Teslas,” US-based SPAC (Special Purpose Acquisition Company) companies, have lost as much as 70% year to date when their marketing efforts failed to match the reality on the ground.
In our case, rather than trying to identify “the next Tesla” in the EV space, we prefer to ask: “How can we invest in the enablers of the electrification of the auto?” These companies are ones that potentially supply both the current Tesla and many of “the next Teslas,” whether those come from legacy automakers or startups.
Below is one such idea of an “enabler” in the EV space that may lead investors to ask better questions than where they can hunt for the next unicorn EV company.
Lithium-Ion Batteries: Enabling the Electric Revolution
The energy transition will see energy demand being ‘electrified’ as it moves away from predominantly hydrocarbon fuels and gases towards the consumption of electricity directly. Our ‘electrification’ sector includes those companies involved in the key enablers of this transition: the lithium-ion battery and the electric vehicle. The battery industry is critical here in that it will serve EVs and also provide a stationary energy storage solution in electricity grids, allowing variable renewable energy (i.e. solar & wind) to play an expanding role in the global power stack.
The catalyst for greater lithium-ion battery use has been sharp falls in the cost of manufacturing. According to Bloomberg New Energy Finance (BNEF), battery costs are down 89% over the decade from 2010 to 2020 (an implied “learning rate” of around 18%) with the average cost being $137/kWh in 2020. Significant economies of scale from mass battery manufacturing have lowered costs and, as these continue, the average cost of producing a lithium-ion battery for an EV is likely to fall towards $100/kWh in the mid-2020s. Of note, BNEF reported the first instance of a sub $100/kWh battery pack being manufactured for an e-bus in 2020.
This would allow EVs to compete on price with internal combustion engine (ICE) vehicles without subsidies. We expect an acceleration in the uptake of new EVs, with around 20% of new passenger vehicles sales being electric in 2025, rising to around 50% in 2030. On this basis, there will be nearly 300m electric vehicles on the world’s roads by 2030.
We believe the demand for lithium-ion batteries in grid (stationary) storage is likely to grow very rapidly as the cost of delivering a “renewable + storage” power system improves. Higher levels of variable renewable power in many electricity grids are resulting in low intraday power prices and incentivizing developers to make new renewable power projects fully “dispatchable” (via the addition of storage) in order to supply electricity at different points in the day and benefit from higher power prices. In 2019 there was 173 GW of grid storage globally (representing approximately 2% of global power generation capacity) and around 90% of this was in the form of pumped hydro.
Last year lithium-ion batteries took more share of both the global auto and global grid (stationary) storage industries as investment and capacity of lithium-ion battery manufacturing continued to ramp.
The market for grid (stationary) lithium-ion battery storage also grew handsomely in 2020, with deployments expected to have reached around 10,000 MWh, up around 50% on the levels seen in 2018/2019. The reduction in manufacturing cost spurred demand for batteries for use in a variety of grid-attached ancillary services, and the falling cost of large-scale renewables-plus-storage means that grid operators and utilities started to see credible paths to replacing coal and gas generators, justified by economics during the year.
We expect sustained growth in lithium-ion battery manufacturing capacity in 2021 and beyond, taking large scale manufacturing capacity to more than 1,200 GWh in 2023 and then significantly higher by the end of the decade. These facilities are being built globally, with China likely to maintain its dominance, with its share of global capacity staying in the 65-70% range.
As an illustration of the scale of the potential growth and the volatility around long-term forecasting, Tesla recently indicated that its annual battery needs alone will reach 3,000 GWh by 2030 - from 44 GWh currently. While this target also includes batteries for storage and other applications, if it is achieved, it would imply an overall lithium-ion battery market of around 6,000 GWh (based on 50% market share). This implies a dramatic impact on the demand outlook for lithium-ion battery raw materials as shown in the scenario from Goldman Sachs below.
To help fulfill demand, we also expect to see increasing focus in the coming years on the recycling of lithium-ion battery raw materials. Current recycling rates are estimated to be very low (around 10%) because recycling old batteries is a complex and expensive task. In the coming years, we expect government funded and mandated support for the battery recycling industry to bring about growth and economies of scale and, with the evolution of a re-use market, lithium-ion battery recycling will become a mainstream activity thus alleviating pressure on raw material production.
Lithium-Ion Batteries: Investable Ideas
Understanding the importance of the lithium-ion battery space as an enabler to the entire EV market led us to invest in some of the most notable companies in the sector. Both turn out to be far from Silicon Valley and likely wouldn’t be on anyone’s list as the next Tesla. These South Korean conglomerates benefit from diversified business lines, proximity to China’s massive growth engine and desire for EVs, as well as positive trade relationships with the US. Importantly these companies are not thought of directly as “EV” companies, a fact that has managed to keep their valuations at attractive levels relative to pure play stocks in the space.
- LG Chem is a large Korean chemicals company that grown to become the largest lithium-ion battery manufacturer in the world, with its lithium-ion battery business likely to represent two thirds of company revenues by 2025. The company has made a significant number of long-term relationships with auto manufacturers and is likely to benefit from strong demand for its products. In the near term, we believe that the company could spin-off its battery operations into a separate listed company.
- Samsung SDI is a pure play lithium-ion battery manufacturer, currently in the top 10 in the world. Its business has evolved from the manufacturing of electronic materials and smaller lithium-ion batteries into the manufacturing of large-scale electric vehicle and electricity grid storage batteries. We believe that the company can deliver 30% per annum revenue growth in the coming years.
Thematic investors who focus on the underlying enablers of a theme may shield themselves from the boom or bust mentality of finding the next unicorn and instead have something more prosaic, but ultimately more valuable to their portfolios.
Will Riley and Jonathan Waghorn are portfolio managers of SmartETFs at Guinness Atkinson Asset Management.
As of 11/19/21, SULR held 2.90% in its portfolio of LG Chem and 3.44% of Samsung SDI.
As of 11/19/21, MOTO held 2.53% in its portfolio of LG Chem, 3.30% of Samsung SDI, and 5.51% of Tesla.
A unicorn is a private start-up company with a valuation over $1 billion considered to be rare event.
An enabler company provides a service, product or technology that supports emerging business trends of other companies.
The companies in which the SmartETFs Funds invest in may be subject to rapid changes in technology, intense competition, rapid obsolescence of products and services, loss of intellectual property protections, evolving industry standards and frequent new product productions and changes in business cycles and government regulations. These risks could adversely affect the value of companies in which the Funds invest.
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Guinness Atkinson Asset Management is the manager for the SmartETFs Funds.
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