It has been hard to miss recent headlines relating to the progress of electric vehicles (EVs) and the
phasing out of the internal combustion engine (ICE) that powers the majority of today’s cars.
In May, Daimler announced the funding of its first European battery plant for its future Mercedes
EVs. Last week, Volvo announced that all its new-model cars will have an electric drivetrain by 2019;
a mix of hybrids and pure EVs. Overnight, France announced that they will ban the sale of petrol and
diesel cars by 2040. These are just a handful of examples of recent headlines suggesting strong
momentum in the EV race.
What is not widely reported in the headlines – yet – is that most major car manufacturers have
made similar decision and are dedicating significant resources towards their own EV strategies.
Bringing cost competitive EVs to market to eventually phase out the ICEs is widely expected among
most market participants and analysts. The polarizing aspect is the timing of the EV roll-out and
potential implications for traditional businesses, such as petrol retailers, refiners, power generators,
lines companies, etc.
Whilst we do not pretend to have the answer, based on our research, we believe that technology is
moving faster than consensus expectations in bringing down battery manufacturing costs, which will
make EVs cost-compatible sooner than expected. This is in part a function of scale, know-how and
increased competition in the battery manufacturing industry. Regulation is likely to accelerate this
transition.
This is a topic we have been monitoring for a long time and it is a polarizing theme for investors. The
uncertain nature of the EV disruption makes it incredibly hard to decide on an appropriate terminal
value for the utilities or Z Energy.
A lot of our time is spent looking at how to best position portfolios to both protect against losses
should equity markets start pricing in the inevitable shift to EVs, but also how to potentially be part
of funding what could be a very long, secular growth industry. At this point in time, this has resulted
in little to no exposure to businesses with significant earnings generated from supplying ICEs, but
some exposure to battery materials suppliers.
Harbour will continue to monitor any further developments that could challenge or support our
base-case that the EV revolution is accelerating faster rather than slower.
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