Directions on the road to electric cars

What’s around the corner for electric cars, their production and adoption by motorists? Norbert Ruecker, head of commodities research at Julius Baer, offers some advice


Formula E is provoking a lot of questions among fans. First they ask: “When will electric cars take over from petrol and diesel?”

When you see these cars whizz around the track, it’s natural to get excited. The performance of the vehicles is indeed remarkable. And when you look at the car industry, and see the rise of Tesla and the focus on electric power at the major brands, it’s clear something big is happening.

As head of commodity research at Julius Baer, I am often asked about the future of electric vehicles. How fast will demand rise? And what will this do to the oil industry?

People also want to know which companies in the field they should invest in. Here are my thoughts on these questions.

The initial point to make is it’s not possible to make precise forecasts in the long term; neither for GDP growth, the oil price or the success of any technology. The longer the time frame, the less certain the forecast.

Economist Philip Tetlock has done some excellent work showing why this is the case. Economies are chaotic, like the weather. A single small change can influence the entire system. So we need to shift our focus away from precise forecasts to unveiling the mesh of forces that shape the economy. Then we can envisage scenarios likely to arise in the future.

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The best way to evaluate scenarios in the global economy is to look at megatrends. These are fundamental changes taking place on a large scale. These fundamental changes tend to culminate over time triggering the structural transformation of industries and businesses, unleashing “disruptive” forces, to use one of today’s buzzwords.

The energy market is undergoing profound change these days. Energy use is increasing as the world population grows and especially as Asia is growing at a rapid pace. But there is no scarcity. New energy sources have emerged as result of the past decades’ high prices and investments in innovation and technology.

Solar and wind become an evermore cost-competitive alternative to the old-fashioned power plants. The shale revolution has turned the oil and gas business upside down, first in North America and then globally. The supply abundance dismisses earlier peak oil fears and suggests low prices for longer. Meanwhile, hybrid cars have become a common sight.

Digitalisation is changing consumer behaviour. Uber, Zipcar and other apps are changing the way we access mobility and think about car ownership. Climate change and air pollution are top political priorities, and today’s energy use a key culprit.

Governments push for action and produce a constant flow of environmentalregulation, demanding change from the energy business. Last but not least, social values are changing. Consumers increasingly seek sustainability and value the concept of a sharing economy, which differentiates using from owning.

Big cities are likely to take centre stage in an electric mobility revolution in the making

With these megatrends in mind, it is possible to analyse the prospects of an individual technology such as the electric car. Take the environment. Policymakers in cities are responding to pollution by imposing environmental regulations. For example, London has an ultra-low emission zone, which even the top management of the global car manufacturers had to take notice of.

More generally, regulations demanding better fuel efficiency are enough to offset the increased buying and driving of cars. In Europe and United States, oil demand probably peaked between 2004 and 2005. Moreover, the world’s urban centres increasingly have constraints on infrastructure. They lack space and public money simply to expand the road and rail networks to mitigate traffic congestion.

Take technology. Electric cars are still a niche today but, despite the fall in oil prices, the sector continues to grow robustly. With growth come economies of scale and lower costs, accelerated by the continued development of the technology. The high-cost disadvantage of electric cars slowly erodes.

Big cities are likely to take centre stage in an electric mobility revolution in the making. In big cities, the aim to combat air pollution, the need to use infrastructure efficiently, the support from advances in automated driving, and the large crowd of open-minded consumers willing to use apps and share cars instead of owning possibly creates a breeding ground for a new type of on-demand, electric mobility.

The latest announcements by the some of the car-sharing companies in fact point in this direction. Interestingly, North America, Europe and China seem equally ready in the starting blocks.

Where could we be wrong? For example, if car-sharing fails to become socially acceptable, this will reduce adoption of on-demand electric mobility. Or, if governments lose interest in environmental issues, we will also see slower adoption of electric vehicles.

Investors obviously want to know how to get exposure to the story of electric mobility. First, we have to identify the key areas adding value. In electric cars the battery technology, the drive system and charging infrastructure are the stand-out areas.

Second, we can look for companies operating in these areas with a competitive advantage based on a superior product, healthy financials, and prudent and responsible corporate culture. These are the companies you should focus on.

The third step is to manage risks. The best way is to diversify. Spread your holdings. Don’t put all your eggs in one basket.

This scenario-led approach allows an investor to think about a subject like electric cars in a meaningful way. A more simplistic approach won’t work. For example, lithium demand for batteries is set to triple by 2020. A good investment? Well, you’d need to study the companies in the market and political issues in South America, and gauge the entry barriers into lithium mining to make a decision.

It turns out to be very complex. But it is the only way to come up with valuable answers to some very important questions.

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