ValueWalk

Horseman Likes The Electric Car Market… A Lot

Amid news that California is considering a bill to ban gas-powered cars by 2040, the future for electric cars – and the commodities that drive them – appear to be in the midst of a historic bull market. Despite the fact that electric cars currently account for just 0.2% globally, that is set to change, says Horseman Capital Management’s Stephen Roberts. The electric car market will be booming even more.

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Electric car market: Despite moves by the US, the Paris Agreement and global demand for energy efficiency and reduction in greenhouse gases is a trend that appears unstoppable

Autos are responsible for 23% of global energy related greenhouse gas emissions, according to the International Energy Agency (IEA). With the Paris Agreement having set an objective to limit the increase the average temperature to below 2 degrees Celsius, there is a global movement to go green. This is leading the incentives to encourage adoption of electric vehicles, benefiting investments in the sector.

Norway is the leader in encouraging its citizens to adopt electric vehicles. Such green vehicles currently have a 29% market share. Drivers are encouraged with benefits such as a waiver of fees for toll roads and ferries as well as the cars being exempt from a sales tax.

The Netherlands is in second place in electric car market share, clocking in at 6.4%, quickly followed by Sweden at 3.4%. China, France, and the United Kingdom all have electric car market shares near 1.5%, but it is China that appears to have the most significant opportunity.

On a gross basis, China accounts for 40% of worldwide sales – double that of the US.

While the US has begun to pull back incentives, China, faced with growing air quality issues, with tax incentives ranging from CNY 35,000 ($5,000) to CNY 60,000 ($8,500) for purchasing an electric vehicle. But perhaps the most pronounced benefit might be the limited availability of license plates. The restrictions in China put a crimp on automotive sales, but not if you are purchasing an electric car, with the license plate restrictions either mostly or totally eliminated.

The electric car market is just getting started

While government incentives are important to motivating electric car usage, it is also incumbent on the manufacturers to make the product more attractive.

One key, according to Roberts, is lowering the cost of the battery pack, which is currently holding auto manufacturers back from a full court press into profitability.

“There is no question in our minds that the early mass producers of electric cars will become profitable more quickly as the price of manufacturing a battery pack is the biggest stumbling block,” he wrote. While battery pack prices have dropped by 80% to nearly $227 per kWh, they still have a long way to go. In order to be competitive with less expensive internal combustible engines, they will need to fall to near $100 per kWh.

In part this drop in prices is like a chicken and egg scenario. For production to achieve more mass adoption, prices need to drop. In order for prices to drop, production needs to increase. Roberts notes that when production increased from 25,000 to 100,000 units, battery pack production costs fell by 13%. Manufacturers who produce more than 200,000 cars per year are expected to be able to produce the battery packs for near $200 kWh or less.

“This is part of the economy of scale that made Tesla so keen to build its Gigafactory in Nevada (the biggest building in the world) and start producing car batteries as well as stationary storage batteries,” Roberts wrote. “With more help from governments across the world and as sales ramp up, production costs will fall making it a profitable industry. There are some very clear ways to monetize the adoption of the electric car,” with early industry adopters and commodity producers providing investors a clear edge.