April 10, 2017 was a landmark day for the world’s motor industry because it saw e-car pioneer Tesla pull ahead of GM and Ford to become America’s most valuable automaker for the first time with a market value of $51 billion.
It was a sign of the times. The era of the internal combustion engine is slowly but surely drawing to a close. Even in diesel-obsessed Germany, VW’s emissions cheating scandal has convinced the last doubters that there’s no alternative to zero-emission engines in future.
Electric power and self-driving technology will be the biggest leap in automotive technology since the invention of the motor car. The International Energy Agency predicts that the number of electric cars on the roads will rise 100-fold to 100 million by 2030.
These days, everyone’s eyes are on Tesla. Investors are gambling on its success, and they’re being generous, maybe too generous. In the first quarter alone, Tesla lost $622 million and delivered just over 25,000 cars. VW delivered hundred times as many cars in the same period, just under 2.5 million. But despite that, VW’s market capitalization at €73 billion is only 50 percent bigger than Tesla’s. Evidently, investors see VW as history and Tesla as the future.
But for many, the gamble is getting too risky. According to Bloomberg, only 38 percent of equity analysts have buy recommendations for Tesla right now. That’s partly because the established auto giants are hard at work developing attractive electric and hybrid vehicles for the mass market.
“Internationally, Renault is seen as the leader in electric cars while Toyota is leading on hybrid vehicles,” said Frank Schwope, auto analyst at German bank NordLB.
Analysts said that so far, BMW is ahead of the pack in Germany with its range of electric models: the i3 electric city car and the i8 hybrid sports model. BMW plans to roll out the iNext from 2021, an electric, self-driving, fully connected vehicle. The group last year delivered more than 62,000 electric cars and aims to crack the 100,000 level in 2017.
Suppliers that only offer parts for combustion engines and lead batteries are exposed to major risks. Blackrock, study on electric cars
But only 37 percent of analysts have buy ratings for BMW. Given the upheaval the sector is facing, many investors are taking a wait-and-see approach.
The industry faces a dilemma when it comes to electric cars. “If the sales figures disappoint, the companies lose money. But if they wait for demand to pick up they risk being left behind by the competition,” said Blackrock, the world’s largest fund management firm, in a study.
Analysts insist that Daimler and VW shouldn’t be written off because both are capable of rapidly increasing their output of electric cars.
Daimler is launching the EQ brand to forge into electric cars and plans to sell its first EQ model by the end of the decade. It aims to mass-produce 10 new electric models by 2025.
VW announced this month that it will assemble the electric model ID, due to go on sale from 2020, at its plant in Zwickau in eastern Germany. It plans to sell one million electric cars per year by 2025 and wants to invest €9 billion, or $9.9 billion to develop alternative drive systems in the coming five years.
But who’s going to come out on top? That question also applies to car parts manufacturers. “Suppliers that only offer parts for combustion engines and lead batteries are exposed to major risks,” wrote Blackrock.
Some are likely to be bought by technology firms seeking access to automakers. That’s already happening. “I like the look of Mobileye, an Israeli specialist for driver assistance systems which is now being taken over by Intel,” said Mr. Schwope at NordLB.
Costs will have to fall by 40 percent to achieve global sales of 5 million electric cars by 2021.
The successful suppliers will be the ones that that can deliver complete innovative systems and technologies. But it’s hard to single out individual companies because so many are focusing on different products.
Michael Punzet, an analyst at DZ Bank, praised Hella, which makes lighting and electronic auto components. He said it was well-placed to profit strongly from electric mobility and autonomous driving.
Investors are also getting interested in power companies and providers of infrastructure such as charging points for electric cars. Cyber security firms that protect connected cars from hackers are also expected to do well.
Henning Gebhardt, head of asset management at Berenberg Bank, singled out German semiconductor group Infineon and Texas Instruments as providing “important components in the supply chain.”
Suppliers of raw materials for components such as batteries also provide huge investment opportunities. Virtually every electric car uses lithium-ion batteries these days and they account for 30 to 50 percent of a car’s material costs, Blackrock estimated.
According to analysts at Berenberg, costs will have to fall by 40 percent to achieve global sales of 5 million electric cars by 2021. But the opposite is happening because the price of lithium has increased sharply in recent years on expectations of a surge in demand.
“We think that companies that control the cheapest lithium salt water reserves in Latin America will be the winners in the long term,” Berenberg said in a study. They include the chemical companies Albemarke of the US and SQM of Chile.
Cobalt, which is also used in electric car batteries, is equally enjoying a boom, with the price having doubled over the last year. It’s going to be hard to increase the supply because more than half of it comes from conflict-ravaged Congo. China Molybdenum recently invested in mines there and is among the world’s biggest producers. It is also expected that the share of nickel content in batteries will rise, as the metal increases their range. Norilsk Nickel, Vale and Sumitomo Metal Mining are important players here, said Berenberg,
The race is still wide open. It’s unclear who the future winners among automakers, suppliers or batteries and raw materials providers will be. Tesla is an example of the share price potential of electric mobility. But the risks shouldn’t be underestimated.
Susanne Schier heads the private investment team at Handelsblatt's Frankfurt finance desk. Matthias Streit is a correspodent for Handelsblatt. To contact the author: [email protected], [email protected]