Valerio Baselli: Hello and welcome to Morningstar. Electric vehicles are the future, but we are not there yet. To discuss what lies ahead of us within the electric mobility sector, as well as the investment opportunities, today I’m joined by Wendy Chen, investment manager disruptive growth at GAM Investments.
So, Wendy, the mass adoption of electric vehicles is slowly becoming a reality, and this is especially true in China. Can you describe the current state of the Chinese e-mobility industry?
Wendy Chen: Definitely. Thanks very much, Valerio, for the kind invitation and introduction. Well said that the rapid penetration of electric vehicle has been mind-blowing for even the most conservative mind. Not only have it been promoted by policymakers to reduce fuel dependence as well as to reduce emissions, also customers embrace the electric vehicle due to its lower fuel costs and as well as improved digital experience. And in this process, China has definitely emerged as a global leader, both in terms of manufacturing as well as consuming electric vehicles. In 2022, about 60% of global EVs sold were made in mainland China with more than 100% year-on-year growth. That actually is already after 10-times expansion of sales in China over the past five years. So, it all makes China the largest and fastest growing global EV market. The growth isn’t ending there yet, as we’re seeing, the EV penetration in China right now is only around 30%, but we’re expecting half of the new autos sold every year in China to be electric vehicles over the next five years.
Now, the bigger the pond, of course, you expect a greater quantity of fishes. China EV has been quite a fierce arena even for the local OEM with more than 94 brands being offered there, with 300 EV models sold in China right now with the price point varied from US$7,000 all the way towards US$100,000. And domestic carmakers this time are also stealing the show from international carmakers as we see over 80% of the EVs sold in China are local brands. Therefore, I will coin the China market right now as quite extending and exciting tracks of racing car with multiple world-class racers competing on it.
Baselli: Yeah, absolutely. And as you mentioned, Chinese companies are emerging as leaders in the EVs production also for the rest of the world, including Europe. And indeed, the European Commission recently launched an investigation into whether to impose punitive tariffs to protect the European producers against cheaper Chinese electric cars. What do you think will happen? And what will the consequences be in your view?
Chen: Yeah, definitely the Europe anti-subsidy problem came at quite a bad timing, of kind of like a bummer after the excitement we see with China electric vehicle presence at the Munich Auto Show earlier this month. However, my thinking is that such process is probably going to delay the adoption but not really preventing the adoption of the Chinese electric vehicles in Europe. At the end of the day, the EV adoption in Europe is still far from satisfactory against the current CO2 emission targets, while the Chinese made the vehicle is undoubtedly competitive compared to many of the global providers in terms of their product offering, variety, as well as well-established supply chain. So, I don’t think the decision so far is going to hinder the China EV export as we are seeing most of the increasing export growth this year will be coming from other key markets such as ASEAN. So, despite the concern and the headwind, for example, we’ve already seen the China auto export over the last month in August hitting a new record high at 370,000. So, I think even in the worst case of continued prop scenario from EU as we see in history, sometimes the joint venture as well as a factory transplantation work could be another way to keep the business going in Europe and kind of like a win-win situation for both parties.
Baselli: All right. And as you mentioned as well, sales of electric vehicles have exploded in recent years. But there still is a quite large number of consumers who have many doubts, at least in Europe, about the autonomy of batteries or even the amount of electricity that will be needed to serve the entire user base, not to mention some accident that we all saw on television or on social media involving battery explosions, for example. What do you think of that? And what is your general outlook concerning EVs global adoption?
Chen: Yeah, that’s a great question. And actually, in fact, with the rapid adoption of e-mobility, the battery technology has also advanced years to come. So, not only are we seeing in terms of the long duration, high reliable energy storage system as well as high density, we’re also seeing some cutting-edge battery technology being adopted in some of the new models that we’re seeing, such as the solid state battery and the sodium iron battery. And also, easier to adopt technology advancements, just like faster charging as well as higher energy density could help the battery tech go miles already. So, the biggest question is not about whether we have the good enough battery technology, it’s whether they’re cheap enough to be adopted in mass-produced EV models. So, I think the key right now is still the EV end demand, whether we’re still seeing sustainable EV demand going forward for battery tech adoption into the newly launched models.
And probably, entering into the second part of your question about the global penetration, I think that, for example, last year in 2022, we have only 14% of new auto sale globally that is electric vehicle. And that is compared to one-third of the EV penetration in China. So, I think in a best-case scenario where we have relatively free export and uninterruptive globalisation, probably we’re going to see over the next decade, around 50% EV penetration just in line with our estimate with the China EV penetration over the next five years. However, probably in a bear case, that’s if we’re seeing a more de-globalised scenario, then maybe we can only see about 25% to 30% of EV penetration in the end case.
Baselli: Very interesting. And finally, what is the best way for investors to take a position on the e-mobility electric vehicles trend in your view?
Chen: Yeah, definitely, that’s the key question also as an investor. So, one unique thing I think we witnessed during the EV era is that it’s relatively easy to entry compared to the ICE or the traditional car era. Hardware engine, which defined winner in the era of internal combustion engine, is no longer the deal breaker in the EV era. Therefore, with so many new entrants, winners have to be superior both in terms of their quality, as well as their, I would say, price competitiveness when it comes to multiple rounds of price reductions, as we’re starting from Tesla price cuts this year. Therefore, the winner has to be brainy or digitalising enough, as well as price competitive. So, when it comes to position in EV stock or EV company, we probably will put sustainable cash flow and profitability as a starting filter or kind of like a deal breaker to actually invest into this company or not. And second, they have to have adequate software advancement to ensure it’s still attractive in a time of rapid adoption of both car IoT as well as a high-level auto pilot. So, probably one way to coin them – they have to be brainy as well as affordable.
Baselli: Perfect. Thanks a lot to Wendy Chen. For Morningstar, I’m Valerio Baselli. Thanks for watching.
