Investing in Electric Autos: Focusing on Enablers, Not Unicorns

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.