Published on March 13th, 2018 | by James Ayre0
Investors Positioning Themselves For EV Boom By Betting On Parts Suppliers, Not Auto Manufacturers
March 13th, 2018 by James Ayre
A large proportion of investors into the auto industry are now focusing on auto parts suppliers, rather than auto manufacturers themselves, owing to the perception that auto parts suppliers are slated to be the big winner as the shift to electric vehicles and self-driving tech accelerates, according to a recent analysis performed by Reuters.
These findings shouldn’t be too surprising to those here at CleanTechnica, as we’ve been predicting for years that most auto manufacturers are likely to see a substantial hit to their profits as the switchover to self-driving and electric vehicles occurs.
This is largely due to the fact that electric vehicles are much simpler than internal combustion engine (ICE) vehicles, battery packs comprise a large part of the parts (which most auto manufacturers have no competence in producing), and most self-driving tech will be coming from third-parties rather than being developed internally.
In particular, the investors interviewed by Reuters as part of its recent analysis pointed towards large part suppliers, such as Aptiv, Continental, and Valeo, when questioned about the firms attracting the most interest as of late.
“Those companies providing technology which supports an autonomous, connected, shared and electric transportation system are well positioned to experience heightened levels of profitable growth over the long term,” explained an associate fund manager at EdenTree Investment Management by the name of Thomas Fitzgerald. That firm holds large investments in Aptiv, Autoliv, Infineon, and other involved the new electric vehicle and self-driving systems sectors.
Reuters provides more: “It is also an acknowledgement that the big innovations are happening as much in the auto industry’s scattered supply base as in the design hubs of the big carmakers, also known as original equipment manufacturers (OEMs) … For carmakers, the shift to EVs carries huge costs and risks, with many slashing billions from their cost base to help offset the lower profitability of electric cars.”
“Even premium manufacturers with the highest profit margins are bracing for some pain. Daimler says it will face a significantly lower margin ‘in the beginning of the cycle.’ With governments stepping up efforts to reduce pollution, carmakers plan to plough at least $90 billion globally into EVs, according to a Reuters analysis.”
It should be realized, though, that a large portion of that figure is no doubt destined for China. The reality is that the government of China is doing far more than others to promote electric vehicles, which is unsurprisingly considering the air pollution problems in some parts of the country.
The head of global equities at Lyxor Asset Management, Fabrice Theveneau, commented: “We have strongly increased our exposure to this theme as we now believe that EVs are in a position to become competitive in less than 5 years.”
Continuing: “He expects parts makers to sell more products to OEMs, which he believes will be ‘net losers’ from the EV shift, losing market share to new competitors such as Tesla and facing heavy costs to transform their industrial base … Lyxor’s Theveneau instead favors tyremakers Continental, Pirelli and Michelin as he expects demand for premium tyres to pick up as the average EV will drive further than a conventional car.”
That’s an interesting point, with tire-wear likely being the bottleneck when it comes to the limited serving needs of electric vehicles, it would make sense to many people to use highly durable tires.
Notably, Lyxor, and many of the other investment firms that Reuters queried as well, has invested heavily in some mining firms associated with the supply of materials used in electric vehicle batteries, such as lithium and cobalt, etc..
Also notable is that Lyxor is expecting that Nissan, Renault, and Toyota will remain top auto manufacturers even after the shift to electric vehicles is well under way. I’m inclined to agree, as at this point it appears that the German and American firms are the most likely to see a large reduction in market-share over the coming decades.