The automotive sector in a period of turbulent change

Transport is rapidly evolving and although there are few investment opportunities amongst vehicle manufacturers, the shift in power train technology from internal combustion to electricity, combined with ever-increasing levels of automation, creates a wealth of opportunities for investment.

September was a terrible month for the car industry as a whole. In China, sales in September were down 11% year on year, dragging down the third quarter to -7%1. Meanwhile, in Europe, changes to the emission testing regime made as a consequence of ‘diesel-gate’, caused sales to fall 23% year on year in September2. The US was the only brighter spot for the industry with the Seasonally Adjusted Annual Rate (SAAR) flat month on month at 17m vehicles3. But here too concerns are mounting, not least because of the impact of recently introduced tariffs on the steel and aluminium used by the industry.

Shift to electric vehicles is now virtually inevitable and accelerating

A proportion of the current pain in the automotive sector results from the underlying cyclicality of the industry and of the economy as a whole. Underneath this, however, are signals of more profound changes, which are driven by regulation and technology.

China is now the undisputed leader in sales of electric vehicles with over half of all electric vehicle sales globally sold in the country4. In Europe, the decision by the European Council in early October to support a 35% cut in CO2 emissions by 2030 effectively mandates a car market that is at least 30-40% electric5.

The increase in oil prices has also come at an opportune time for electric cars. 2019 will see an acceleration in the pace of electric vehicle launches with roughly one a month being launched across all vehicle classes. Including plug-in hybrids alongside battery electric vehicles, the total number of models available will jump from 179 in 2018 to 216 in 2019,  of which 132 will be battery electric6. 

Bloomberg NEF has pointed out that it took approximately five years to sell the first million electric vehicles around the world. This milestone was reached at the end of 2015. The fourth million however, was achieved in just over six months during the third quarter of 2018. The fifth million is expected to arrive even faster – by March next year7.

Figure 1: Cumulative global sales of electric vehicles8

Of course, these numbers need to be put in perspective. Total numbers of EVs are still only 1-2% of the total. However, it is notable that of the growth in car sales delivered in the year to the end of June 2018 compared to the previous year, nearly half was in EVs9.

And autonomy coming next

So while the shift to electric vehicles is now a reality for auto executives, in some ways the even more profound shift to autonomous vehicles is also ramping up. There are plenty of models today that have ‘level 2 autonomous capabilities’ such as advanced cruise control and autopilot. Further progress won’t be immediate though. Commercially available level 4 autonomy, a car that you can essentially sleep in, is still a decade away according to most analysts.

Source: Pengana

1 Morgan Stanley analysis.

2 http://europe.autonews.com/article/20181005/ANE/181009765/w-european-car-sales-fall-23-on-wltp

3 RW Baird analysis.

4 https://qz.com/1303594/when-it-comes-to-making-electric-cars-theres-china-and-everyone-else/

5 Op Cit 1

6 Bloomberg NEF forecasts.

7 Ibid

8 Ibid

9 Ibid