Industry Voice: That Electric Feeling

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Industry Voice: That Electric Feeling

1       "Galvanised" - fast and furious advent of the EVs

Down with the combustion engine

"The board is set, the pieces are moving" Gandalf famously said in The Lord of the Rings, referring to the forces of good and evil coming out of balance and into a rapid motion. One could quite as well use the same phrase for the automotive industry today, and one of the pieces that have been stirring things up recently is EVs (Electric Vehicles).

A series of high profile announcements by the governments of France, UK and other countries has seen many of them set specific dates to ban the sales of new combustion engine cars.

Table 1 Announcements of intention to restrict new fossil-fuel car sales

Country

Announced

Commences

Japan

Jun 2015

2030*

Norway

Jun 2016

2025**

India

May 2017

2030

France

Jul 2017

2040

UK

Jul 2017

2040

China

Sep 2017

-

Sources: Press (BBC, Economist, Guardian, Independent), METI

* 50% of new car sales to be EV/PHV

** Announced, but not implemented

While it remains to be seen how practical the specific deadlines will prove to be, the consequences are already far-reaching. Along with the emergence of self-driving technology, they are causing a shake-up of the auto industry, which for many years was dominated by large car manufacturers, with subcontractors forming several tiers in their supply chains. New technologies are increasingly being provided by external specialists - barbarians are at the gates, and the established order is crumbling, creating interesting investment opportunities.

Chart 1 Structural Shift in the Automotive Industry

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Source: TMAM

Manufacturers go with the flow

The car manufacturers took notice of government announcements, and a number of players are promising to flood our streets with EVs and hybrid cars.

Table 2 Announcements by Car Manufacturers to Increase EV Production

Car Manufacturer

Year

EV Initiatives

Volvo

2019

electrify entire vehicle line-up

Jaguar Land Rover

2020

electrify entire vehicle line-up

Toyota and Mazda

2021

new $1.6bn U.S.-based plant for electric/hybrid vehicles

Daimler

2022

electrify "entire portfolio", 50 electric and hybrid models

Renault, Nissan, Mitsubishi

2022

12 all-electric models

GM

2023

20 all-electric vehicles

Ford

2023

13 all-electric models

VW Group

2030

electric and hybrid versions of 300 vehicles

Source: Press (Automotive News, Mashable UK)

The market growth potential is significant, and while the specific numbers projected differ, the general consensus is that the only way is up.

Chart 2 Forecasted Global EV Annual Shipments (mil cars)

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Source: Automobile Inspection & Registration Information Association

2         "Electrical undercurrent" - Japan's underrated contribution to EVs

EVs - show me what you are made of

Today, EV-related headlines are typically dominated by Tesla Inc., but one notable Japanese exception recently has been Nissan Leaf. While we find Nissan's investment case convincing in the long term, there are also more subtle ways to invest into the EV surge.

For instance, building new electric cars means many more batteries and electric motors need to be produced. There is a number of stocks, which are well positioned to benefit from the ensuing demand, Sumitomo Metal Mining (5713), Mitsubishi Chemical (4188), and Toray (3402) to name a few.

Sumitomo's case is a particularly strong one as they own the MCLE (Matte Chlorine Leach Electrowinning) technology of highly efficient electrolyte nickel and cobalt production. Both metals are crucial in high-capacity batteries. Mitsubishi Chemical is the world's biggest manufacturer of electrolyte solution for lithium-ion batteries and Toray produces a variety of materials used in electric motors and car electronics.

Efficiently electric

Another dimension of EV proliferation is the growing demand for electrically powered components. Their efficiency is a much bigger issue in electric cars than in their combustion engine counterparts, because every additional piece that consumes electricity means more battery drainage and shorter range.

One example of an industry incumbent succeeding in this environment is Denso (6902), a global auto parts supplier. This firm produces efficient electrical components such as air conditioning systems as one example, and is also a leader in ADAS (advanced driver assistance systems), leveraging on another major trend - the gradual shift to autonomous driving.

Nidec's (6594) business was focused on small precision motors for hard disk/DVD drives, but as its core business slowed down, it found a reincarnation in supplying the moving parts that help steer, adjust seats and cool the engines in cars.

Chart 3 Comparative YTD Stock Performance

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Source: Bloomberg

Our approach (Growth at Reasonable Price or ‘GARP') to stock selection has consistently been effective in identifying growth names, while also paying attention to valuations. With plenty of opportunities like those mentioned above, we feel confident about continuing to select interesting ideas for our clients.

Tokio Marine Asset Management (TMAM)

TMAM is a Japan/Asia equity specialist with over 30 years' market experience and approx. $57.2 bn AUM (as of September-end 2017).

Product info

Our flagship Japanese Equity GARP strategy, managed by our veteran PM Yoshihisa Nakagawa, is a diversified portfolio of growth stocks with a two-decade-long track record.

For more information about the issues raised in this article, please contact Business Development at Tokio Marine Asset Management (London) Ltd.

Email: [email protected]

Tel.: +44 (0)20 7280 8580

Website: www.tokiomarineam.co.uk

 

Disclaimer

This document is intended for informational purposes only and no claims can be made based on the content provided therein. It does not constitute an offer or an investment recommendation to purchase or sell investment funds/products or to execute any other types of transactions. It makes no guarantee for the accuracy, reliability, currency and completeness of the information provided herein. The content of this document is subject to change without notice. Tokio Marine Asset Management (London) Limited is authorised and regulated by the Financial Conduct Authority (FRN 487699) and accepts no liability for any damages whatsoever arising from action taken on the basis of the contents of this document. Any simulated performance data and/or past performance data is not a reliable indicator of future performance.

 

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