As electric vehicles (EVs) become more and more prevalent, we wonder about the future of the automotive industry. Electric vehicles still represent only a tiny portion of the 1.3 billion automobiles in the world, but the total number of EVs is getting larger every day. Over the next five years, electric vehicles could transform from a niche market to a material segment of the global automobile market.
In 2019, over two million EVs were sold globally, representing only 2.5% of total worldwide car sales.
By 2025, this number is projected to increase six-fold. In other words, one out of every eight cars sold five years from now could be an electric vehicle compared to one out of 40 today.
There are still impediments to the wider adoption of electric vehicles, but these are gradually being mitigated. One such concern is cost. Electric vehicles require battery packs, which are more expensive than internal combustion engines. As a result, the upfront cost of an electric vehicle is a lot higher than a comparable non-electric vehicle. This could change within the next few years, though, as battery costs are steadily declining.
As shown in Exhibit 1, battery prices are 87% lower now than in 2010 according to BloombergNEF. The downward price trend for batteries is expected to continue due to economies of scale in manufacturing and ongoing improvements in technology. Within the next few years, electric vehicle battery packs are expected to reach cost parity with their internal combustion engine equivalents. Reaching this crossover point will be a historic achievement for the electric vehicle industry and will likely lead to increased adoption of electric vehicles.
Another impediment to electric vehicle sales is range anxiety – the fear that vehicles will run out of power before reaching their destination. As battery costs decline and technology improves, we could see manufacturers develop new batteries to provide increased driving range. More charging stations would also help alleviate range anxiety. According to BloombergNEF, the number of public charging outlets in the world has increased at a compound annual growth rate of more than 40% over the last seven years. Total outlets are projected to reach 1.2 million units in 2020 compared to less than 0.1 million in 2012. The number of charging stations will likely continue to grow as the global electric vehicle market expands.
Lack of choice is another commonly cited concern for consumers when considering an electric vehicle. Tesla Inc. is currently the most recognizable electric vehicle manufacturer. At present, Tesla’s Model 3 accounts for approximately one out of every eight EVs sold in the world. However, the market landscape could dramatically change in the next few years. According to AlixPartners, an American consulting firm, global car manufacturers will collectively spend US$225 billion on electric vehicle development over the next three years. Already, nearly 40 new models have been announced by various manufacturers, and more are likely on the way. Many of these new models are sport utility vehicles, which are gaining market share.
While we continue to see a long runway for non-electric vehicles and associated oil demand, the next five years will be a fascinating period for the electric vehicle industry as EV adoption continues to gain momentum. Given the significant growth potential, we are very interested in attractive investment opportunities related to the electric vehicle sector. One particular area that has caught our attention is the lithium industry.
Lithium Could Drive the Way to Attractive Investment Returns
Electric vehicle batteries use lithium-ion technology. Originally invented in the 1970s, lithium-ion batteries did not become commercially available until 1991. Many industry experts expect these batteries to be the standard for the foreseeable future due to heavy investment in their manufacturing, falling costs and widespread customer acceptance. Billions of dollars have already been spent on lithium-ion factories, and more are on the way. Global manufacturing capacity for lithium-ion batteries has increased by almost three-fold over the last five years and is expected to triple again within the next five years. As the cost steadily decreases and performance improves, the market for these batteries should continue to grow. Under these circumstances, competitors offering alternative battery technologies will likely face significant difficulties convincing potential customers to take a chance on an unfamiliar technology.
With the rapid growth in the electric vehicle market and no foreseeable alternatives to the lithium-ion battery, we are relatively bullish on lithium’s future prospects. Driven by rising EV sales, demand for lithium is expected to grow at a rapid pace over the next five years and beyond. Reflecting our positive long-term outlook for lithium, we recently added Albemarle Corporation, a specialty chemicals company, to the Odlum Brown Model Portfolio*.
Albemarle is the largest producer of lithium in the world. In addition, the company is one of the lowest cost producers of lithium carbonate and lithium hydroxide, which form the basis for rechargeable batteries. To keep up with growing demand, Albemarle expects to increase its lithium production capacity by almost 300% within the next couple of years. Even if lithium prices remain relatively stable, Albemarle’s lithium business should continue to grow over time due to rising sales volumes. Notwithstanding its strong fundamentals, we believe Albemarle’s current valuation does not fully reflect its long-term growth potential.
In our view, many of the impediments to electric vehicle adoption are being mitigated, setting the stage for expansion of the EV sector. We believe Albemarle is well positioned to capitalize on the associated growth in lithium demand.
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*The Odlum Brown Model Portfolio is an all-equity portfolio that was established by the Odlum Brown Equity Research Department on December 15, 1994, with a hypothetical investment of $250,000. It showcases how we believe individual security recommendations may be used within the context of a client portfolio. The Model also provides a basis with which to measure the quality of our advice and the effectiveness of our disciplined investment strategy. Trades are made using the closing price on the day a change is announced. Performance figures do not include any allowance for fees. Past performance is not indicative of future performance.
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