IDRV - The Race Is On For EVs

2023-11-04 01:40:00 ET

Summary

• Electric vehicles, or EVs, have been hailed as the future of transportation. They promise cleaner air, reduced dependence on fossil fuels, and a seismic shift in how we commute.
• But as we navigate this high-speed journey towards an electric future, there are certainly some speed bumps ahead, whether it's concerns about range anxiety, the availability of charging infrastructure, or simply the price tag of EVs.
• Charlie Lilford, Portfolio Manager for BlackRock's Fundamental Equities business, joins host Oscar Pulido to talk about the rate of adoption of electric vehicles across the world, and where he sees the most exciting investment opportunities.

Transcript

Oscar Pulido: Welcome to The Bid, where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm your host, Oscar Pulido.

Electric vehicles, or EVs, have been hailed as the future of transportation. They promise cleaner air, reduced dependence on fossil fuels, and a seismic shift in how we commute.

Charlie Lilford: When I work in the office, I take my bicycle which is obviously lowering my carbon footprint significantly when I travel. Yes, we can buy electric cars and we can utilize that in an EV, but when we think about our mobility and our transportation around our daily lives, it becomes much more significant.

Oscar Pulido: But as we navigate this high-speed journey towards an electric future, there are certainly some speed bumps ahead, whether it's concerns about range anxiety, the availability of charging infrastructure, or simply the price tag of EVs.

Charlie Lilford: These cars are much cheaper, in some cases even cheaper than a lot of combustion vehicle cars today. And so the next question is then, what is the challenge today?

Oscar Pulido: Here to dive into the fast lane of EVs is Charlie Lilford, Portfolio Manager for BlackRock's Fundamental Equities business. Charlie talks with hundreds of companies across the electric vehicle and renewable energy supply chains every year. Today, he joins us to talk about the rate of adoption of electric vehicles across the world. and where he sees the most exciting investment opportunities.

Oscar Pulido: Charlie, welcome to The Bid.

Charlie Lilford: Thanks, Oscar. It's a real pleasure to be here today.

Oscar Pulido: Maybe we can start by talking about what is driving this shift towards electric vehicles. We hear a lot about the transition to a low-carbon economy, so I think these two things are related.

Charlie Lilford: Yeah, they definitely are related. I think what's really exciting right now is the fact that electric vehicles are truly accelerating. This is becoming a mass market opportunity, we're seeing more and more of these EVs proliferating in our cities, in our economies, and we've really taken a totally new step change in terms of the future of electrification and electric vehicles.

As these cars become much cheaper, much more affordable to the consumer, we will see more and more of these cars being owned and purchased in all segments of the population. Historically, people thought of electric vehicles as something that's quite exclusive, whereas now it's really democratized.

We often see Government regulations and subsidies has having been very supportive to get that initial take-up of electric vehicles and that's certainly been the case in a number of markets such as in Europe and China for instance where EV penetration rates are now in excess of 20 percent in new car sales.

But that was really just the first step and now what we're seeing is this more broad and holistic adoption of EVs which I think is very exciting for the net zero transition and what it means for just our ability to reduce our impact on emissions in our cities. But also, this advancement in technology and mass market opportunity for electric vehicles.

Oscar Pulido: And you talk about the net zero transition and the reduction of, carbon output, the lower reliance on fossil fuels, this is something we hear a lot about. What is the contribution that this transition to EVs is making to that transition? Because certainly there's a lot of other things that are contributing to that transition, but what's the EV contribution to that?

Charlie Lilford: There's certainly a lot of other things that contribute to this and that there has also been an evolution what it means to be able to emissions more generally. And so, it is clear that this is something which is holistic and will need to be done in variety of industries and sectors.

But transportation accounts for approximately 25 percent of global CO2 emissions today. And then road transportation, passenger vehicles and freight, that's about two-thirds of that amount. It's a huge component of emissions, and yet it's hugely addressable in the sense that we can actually create change over the coming decades very effectively just from moving from mechanical to electrical transportation.

Passenger vehicles typically see that car owners own their cars for 12 years or in some cases more than that that's clearly an area where we will see electrification expanding and evolving and increasing penetration rates of electric vehicles over time.

But commercial vehicles are typically used for six to eight years on average the turnover rate of those vehicles is much higher compound that with the fact that many of these companies have net zero targets. They're trying to also reduce their costs and clearly electric vehicles do reduce your operating costs. It suggests that we will potentially see much higher acceleration and adoption of electrified vehicles in these segments than what we've seen to date. And that all comes down to the fact that it's becoming much more affordable, it's being driven by cost incentives and operating costs, and these adoption rates could accelerate.

Oscar Pulido: So, it's not the only way in which the world can transition to lower carbon, but it is a major contributor is what you're saying.

Charlie Lilford: Exactly, Oscar. But as I said before, the fact that we are seeing these vehicles becoming cheaper every year, they're democratizing into our economy so that opportunity is no longer something that we are forced to do. It's something that we will naturally choose, it's cheaper for us, it's a better solution and actually it has a much, more sustainable outcome.

Oscar Pulido: So, let's talk about the consumer, and I have to admit I'm actually one of those consumers in recent years of having purchased an electric vehicle, but what are the barriers to more mainstream adoption of electric vehicles? is it still price? You mentioned government subsidies before played a role early on, but is price the biggest barrier or are there other factors at play? Are people concerned about the range of the vehicle, maybe you can talk a little bit more about that.

Charlie Lilford: Historically it had been about price, this is changing, and this is actually changing very quickly. Now that we're seeing not just one or two car manufacturers in the world producing electric vehicles, we're seeing many more. For instance, this year alone, there are over a hundred new designs that are being launched in Europe, close to 50 in the United States, China is even more, about 150 new designs.

So, the opportunity for us as consumers to purchase electric vehicles is expanding. And so, we are spoilt with choice, and we will be even more spoilt with choice in three, five, 10 years’ time, because these manufacturers are producing electric vehicles at scale at affordable prices. That affordability question and the price point is becoming relatively mute in the future. These cars are much cheaper in some cases even cheaper than a lot of combustion vehicle cars today. And so, the next question is, then, what is the challenge today?

There's still challenge around charging, and I think people's anxiety around range. Can I get to my destination without having to stop and charge? To some degree that's people getting used to using electric cars and being familiar with how they would utilize them day to day.

It's clearly also a factor of building more charging infrastructure. And we're seeing a lot of that being built out. So longer-distance charging. A lot of work being done with automotive manufacturers to work together to find solutions so that they solve the problem for the consumer.

And then also the fact that ironically, we've overbuilt the batteries in the cars. The average US driver drives 40 miles in a given day. And if you think about the efficiency of battery in a pack, we are effectively looking at a car that is overbuilt by a factor of four or five times in terms of battery capacity. So, there are ways that we can evolve the cars to be best suited to the use cases of the end consumer.

Oscar Pulido: And it's interesting you mentioned all the new models, new companies coming out with electric vehicles, and I've had this experience of walking on the street and seeing a car and not recognizing the manufacturer of the model, and more often than not, it does appear to be an electric vehicle. So that resonated with me as you said that.

Before there were electric vehicles, we had something called hybrid vehicles, and they still exist, but there was this sort of steppingstone where people used hybrid cars before they went fully electric, and now people making that jump to just go more fully electric. So, what is that role of the hybrid vehicle these days then?

Charlie Lilford: Well, I think the hybrid still has a place. Particularly for those making that are using the car more frequently, want to have the opportunity to use electric, but also that range anxiety means that they want to fill their car with gas when they need it.

That being said, the progress and the advancements that are being made in EVs, pure EVs, battery electric EVs, is so significant. Really the core of the matter is hybrid is just a transition story as we move to a full electric marketplace. With the advancements in technology around electric vehicles there is the opportunity to see more and more of these EVs coming to the market. If you think about some of those step changes in technologies, the chance to have higher-voltage electric batteries being able to charge faster. I mean, that’s the key right? As a consumer, you don't want to waste too much time charging your car. If you're out and about you want to be able to charge it quickly.

That's one of the key changes that we see underway, and a lot of these car companies and a lot of the manufacturers are focusing on that. How do they produce batteries that have much higher energy density that can enable us to charge our cars faster?

Then car manufacturers asking the next question, where do we find greater efficiency? Where do we improve the technology? And then it comes down to the aerodynamics. It comes down to the rolling resistance. So how much resistance is applied from using your tires or the inertia? All of these incremental improvements mean that we can find ways to be far more efficient with the electricity that we're using in our cars and enable further adoption of electric vehicles.

Oscar Pulido: Everything you've mentioned certainly highlights that there's progress for the consumer, there's more choice, and there's progress being made in terms of transitioning to lower carbon emission. For you, as somebody who comes to work and is investing in stocks and companies, it sounds like the automobile ecosystem has changed dramatically over the last couple of years. So, what does that mean in terms of investment opportunities?

Charlie Lilford: This is such a great question, Oscar, because you're getting a collision of effectively the legacy environment with this new onset of what it means to be in an environment with electrification and electric vehicles.

And so, when you take a step back and you think about the automotive sector or the transportation sector, we've seen these companies historically engineering change. The fact is that this is the first time in over a hundred years that we've actually seen a totally new powertrain technology. We're moving from a mechanical to an electrical world. And what that means for me and our team as investors is that you see new companies coming into the space, new technologies emerging. There's a lot of change, and that as an active stock picker really represents a huge opportunity for us.

We see companies that are legacy, or companies that are incumbent, that are able to change, that will evolve, that will survive, that will succeed. That being said, some other companies that are legacies will not be able to do that. And I think that's where it gets truly exciting, this change that's underway, the emergence of new players, the emergence of new technologies, creates true opportunities for us at BlackRock as active stock pickers.

Oscar Pulido: And so, what's that one innovation that you see coming to electric vehicles that could be a game-changer in terms of performance and price, and how far away is that innovation from being in mass production?

Charlie Lilford: We get this question quite often. We’re certainly looking for these game-changing technologies. So, if it's advancements in battery technology, to get very technical, some of the anode technologies that we're seeing, where these companies are progressing on that front. Even just the advancements in the chemistries for the batteries, and furthermore, when you think about longer term, a lot of people talk about solid-state batteries. There is evidence that this could be very exciting and a game-changer in its own right.

When I say solid-state battery, what that means is there is a different technology that we can see being able to be used in cars, which is, much safer, but also has much greater performance. If we were to get into this achieving solid-state status, it does unlock a lot of the issues around charging times.

But I often reflect on what is the key game-changer. And the key game-changer for me here is efficiency. The ability for the manufacturers, for the supply chain, for the providers of technology to find much, much more efficient solutions to the problem.

When you think about it, how does a car company scale? How does a car company manufacture millions of vehicles very cost-effectively so that it is cheaper for you and I when we want to buy our next car. How do manufacturers of batteries get into a position where they can produce batteries at an affordable level so that those batteries are much cheaper when going into the electric vehicles?

And so, there are a lot of really interesting game-changing technologies out there, but it comes down to efficiency and the entire ecosystem to become more and more efficient, to improve day in, day out, year on year, to bring a product which is going to be far more cost-effective, far more affordable for everybody, not just a premium product.

Oscar Pulido: That's interesting because we live in a world where we want something, and we want it right away. We expect it on our doorstep. And what you're saying is there's great technology already in these vehicles. So certainly, there could be improvements. There always is, but it's just these companies getting to a point where if a lot of people actually want these vehicles right away that they can do it in an efficient and scalable manner.

Charlie Lilford: Yeah, exactly. Like you said, it's really about providing something to the consumer they want, that solves some of their problems. People want to have a car that's easy to use, cheap to run, comfortable, safe, reliable. All of these factors come into play in this sector, and I think electric vehicles do solve a lot of those issues.

Oscar Pulido: You mentioned before that one of the anxieties that potential buyers have is the range of the vehicle and where am I going to charge it. Is that the biggest obstacle right now for electric vehicles, or is there something else that is precluding this industry from growing faster?

Charlie Lilford: That is the case. We've seen that costs are coming down. In fact, costs will come down even more dramatically when we think about buying our next car. Really the key factor right now is, can I charge my vehicle? And I think this is also very interesting when you think about it, and I often use this quite flippantly, but it’s incredibly true. Electrification is all around us. If you think about electrification and the access to electricity, in many cases it's more accessible to us as urban dwellers than combustion fuels are.

So, if you think about where do we source our electricity to charge our cars, it's in our apartment buildings, our homes, in our offices, on our streets, and so the fact that electrification is permeating all around us is one of the key constraints which we believe is there but in fact isn't, and so it's really about changing some of the behaviors.

And very similarly to when you think about when you go home and charge your mobile phone, you charge it overnight. And then I wake up in the morning and I go to work with my phone fully charged.

When you think about electric vehicles, the best solution is to charge it slowly overnight, take eight hours, let your car charge. It's a behavioral factor that will evolve and emerge over time as people become more accustomed to using these new technologies and become accustomed to how they can optimize those technologies.

Oscar Pulido: So, imagine you wake up 10 years from now and it's the year 2033, is the adoption of electric vehicles now mainstream? Have we gotten to that point where that's what you own?

Charlie Lilford: So, ask this another way, in 2033 when you're looking for your next car to buy, will you be buying an internal combustion car? That's the key here. There are obviously some very optimistic scenarios around this, many people think that internal combustion cars will disappear overnight. The reality is they won't. Internal combustion cars will be with us for many years to come. And that's a factor of, we as drivers of these cars own these cars typically for 12 years. So that turnover rate is relatively slow, but nonetheless, what we're seeing is a dramatic increase in escalation in EV adoption.

And you just have to look at what's happened over the last few years. This year, we should have EV penetration rates close to 20% on a global basis, forget about certain markets where we see dramatic penetration rates, but if you reflect on that a few years prior, this was barely at 3 or 4%.

So, we've seen a 5X development in this just over the last four or five years. And when you think out to 2030, given the costs that we're seeing coming down, and given the nature of the design releases that we're seeing coming out of the manufacturers, there's nothing to suggest that we will not see significantly higher penetration rates in electric vehicles by 2030.

Oscar Pulido: So, Charlie, I have to ask, I mentioned at the beginning that I became an electric vehicle driver myself in the last couple of years, but do you practice what you preach? Do you drive an electric vehicle?

Charlie Lilford: I do, but I think it's even broader than just that. What's really interesting is that it's becoming a question of electrification in our lives. Yes, we can buy electric cars and we can utilize that in an EV, but when we think about our mobility and our transportation around our daily lives, it becomes much more significant.

When I go to London to work in the office, I take my bicycle. I use mass transportation, which is obviously lowering my carbon footprint significantly when I travel. So, it becomes far more holistic. EVs are just one piece of that puzzle in terms of, how we can address our own impact and what it means in terms of our own impact on net zero, but also how we travel more efficiently in cities. And so how can we be much more sustainable in our daily lives?

Oscar Pulido: So, I feel really charged after this discussion. I was trying to think of a witty pun to match many of the ones that you had as you were describing this space. But, Charlie, thanks for your insights on electric vehicles and what's to come ahead. And thank you for joining us on The Bid.

Charlie Lilford: Thanks, Oscar. we will see more and more electric vehicles in the future, and it's just going to be such an exciting next couple of years.

Oscar Pulido: Thank you for listening to this episode of The Bid.

Sources: IEA, July 2023; S&P Global Mobility, May 2023; US Department of Transportation, data for 2022; BlackRock Fundamental Equity analysis, with data from China Passenger Car Association, Oct. 2022; BlackRock Fundamental Equity analysis, with data from IEA, April 2023

This post originally appeared on BlackRock.

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.

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