European car manufacturers catch up with electric cars. The analysis a edited by Ben Kelly, Senior Global Research Analyst, Ann Steele, Portfolio Manager and Dan Ison, Portfolio Manager at Columbia Threadneedle Investments
Humans are constantly underestimating the speed of technological change. Despite our ability to consume technology at an ever faster pace over decades, we never really appreciate it, which is why disruptive technologies are often underestimated and overlooked. The story abounds with examples (Figure 1), and in hindsight it is too easy to laugh at erroneous predictions. But we live in a time when social and environmental risks to the global economy have never been higher, which is likely the prelude to unprecedented technological advances.
The problem is that if we fail to anticipate the rapid introduction of some of these technologies, the environmental and economic consequences could become significant. However, the change also offers significant investment opportunities. One of these concerns the automotive sector, in particular electric vehicles (EVs). Electric cars are among the key points in the long-awaited “Net Zero Strategy” presented by the British government in October for the COP26 conference in Glasgow, held in early November. The government has promised to require carmakers to sell an unspecified percentage of electric cars from 2024 onwards, as well as promising an investment of £ 620 million to build a charging infrastructure and £ 350 million to dynamize the supply chain. Under pressure from political authorities, car manufacturers sell a large number of electric cars.
It is no exaggeration to say that the industry is at a turning point, perhaps as significant as the shift from wagon and horse to internal combustion engine more than 100 years ago. To give an idea of the speed of change, electric cars are expected to represent 12% of the 18.6 million cars sold in 2022, compared to only 3% of the 21.2 million vehicles sold in 2019. This figure should increase further: by I 2025 it is estimated that electric cars will account for 25% of 20.8 million of expected car sales and more than a third (35%) by 2030. Globally, the picture is the same, although North America is lagging behind Europe and China. The range of available electric cars has already increased enormously in recent years; the main producers invest heavily without compromising their profit margins.
When choosing the car manufacturers that will dominate tomorrow’s electric car market, the sharp difference between those with credible medium- and long-term strategies for developing environmental technologies such as Daimler and Volkswagen, and those that do not, is astounding. For example, MSCI recently raised the Environmental, Social and Management (ESG) ratings for both of these companies. Traditional automakers are rapidly catching up with Tesla, the industry’s leading revolutionary, and are rapidly launching new models at a time when margins are at record highs. Although it sold far more electric passenger cars globally in 2019 than any other automaker (368,000 against China’s BYD’s 226,000 and Renault-Nissan’s 183,000), Tesla is losing market share and revenue in key European markets. For example, the European EV battery market grew 106% in 2020, while Tesla sales fell 11%.. That said, the Tesla Model 3 was the best-selling electric vehicle in Europe in the first four months of 2021. As a company, however, it had a significantly lower market share than traditional multi-model car manufacturers.
During the same period, Volkswagen dominated Europe in terms of market share by 21.6% for its VW, Audi, Seat and Porsche brands, while Tesla came in seventh with 5.3%.. The next generation of electric cars from traditional car manufacturers, planned to launch from 2024-2025, will be better designed than the current one and will have a better range. At that point, they will become more valid competitors. As they develop new products, automakers are also resetting their manufacturing processes to make them more sustainable. Daimler, which will be renamed the Mercedes-Benz Group in early 2022, is ahead of its competitors by 2039 as a net-zero emissions target, slightly ahead of most companies. In fact, most companies that build new production facilities supply them with renewable energy. However, the expected expansion may be hampered by bottlenecks. One of these ESG issues concerns the purchase of cobalt from the Congo for battery components. Major European carmakers say they only use ethically sourced materials for their batteries, but that could lead to a tightening of the supply of these strategic metals. Lack of investment in charging infrastructure is another persistent problem.
Overall, however, we are seeing a strong recovery between European manufacturers and Tesla. None of these are pure companies in the electric car segment, but the Tesla stock valuation premium largely reflects this fact. Tesla delivered 499,550 cars in 2020, which corresponds to a market value of 962,000 euros per. vehicle. Volkswagen, on the other hand, delivered 9.3 million cars, corresponding to a market value of € 14,100 per car. vehicle. As European carmakers with clear strategies increase their share of electric car sales, the value gap between them and Tesla must narrow.
Given the steadily accelerating pace of technological progress and the growing awareness of the impact of climate change on decisions at all levels of the global economy (from governments to businesses and individuals), this sector remains crucial. for us investors.
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