Nicolas Ziegelasch, head of equity research at Killik & Co, explains how investors can take advantage of the growing popularity of electric cars.
How is the car market changing?
We believe the change that will sweep through the global car market over the next 10 to 20 years will be one of the most transformative ever to hit any sector. It can be broken down into three phases, all with different timescales.
Firstly, we anticipate a significant growth in electric vehicle (EV) adoption by consumers (and also businesses). That will be followed by the introduction of robo-taxis. The last phase will be the roll-out of fully autonomous vehicles.
We think that the market is underestimating the size and speed of these changes and the profound impact they will have across multiple sectors in nearly every economy.
What are the forces driving these changes?
There are several, of which the most significant are increasing regulatory pressure to reduce emissions in both developed and emerging markets, greater consumer awareness of the personal and environmental benefits of eco-friendly mobility, and pure demand-creation from market leader, Tesla.
How important is Tesla?
Hugely. CEO Elon Musk has more or less single-handedly led the EV revolution by producing cars that are built to high quality standards and, equally importantly, are desirable to drive and use. In doing so, his firm has dragged the traditional auto makers kicking and screaming into the electric age.
However, Tesla may actually have been too successful in the short-term for its own longer-term good. Panicked by the sheer scale and speed of Tesla's expansion, global auto giants, such as Volkswagen and General Motors, have announced multi-billion dollar investment strategies designed to implement mass-scale electric vehicle production across a large range of models.
So while Tesla has stolen a march, the competitive landscape is likely to get much tougher. Identifying a clear winner will become commensurately more difficult.
What are your preferred ways to play this shift?
As a result of this growing competitive pressure, we think some of the best routes for investors won't come from the auto industry directly, but rather through other beneficiaries.
It is clear, for example, that a huge amount of copper will be used for vehicle electrification. This is needed not only to build the vehicles themselves, but also for the construction of the charging networks that will support them and the associated expansion of the electricity grid.
This underpins the investment case for commodities firm and copper mining specialist, Antofagasta. We also see the demand for batteries rising sharply, which should benefit firms that are bulk suppliers of materials such as nickel and cobalt.
Commodities producer and trader Glencore is heavily exposed to both, in addition to copper.
When will we see robo-taxis and automated vehicles?
These phases are a few years away yet. Nonetheless, we believe that robo-taxis, and ultimately fully autonomous vehicles, will one day be commonplace. The impact on carmakers is unclear at this stage.
On the one hand, there will potentially be a lower number of cars on the roads, but the flipside is that these cars will likely be driven much more frequently. This increased vehicle usage should spur demand for replacement tyres, a product that makes a significant contribution to both revenue and profit at Continental.
In addition, the firm has a strong presence in advanced driver assistance (ADAS) products, such as sensors, Radar and Lidar, all of which should benefit from the increased long-term demand for driverless vehicles.