Missed out on Tesla? Other ways to profit from this big theme

Tesla’s share-price surge has grabbed all the headlines, but there are other routes to riches. Tom Bailey offers some share ideas for playing the electric vehicle theme. 

One of most memorable financial moments of 2020 was Tesla’s (NASDAQ:TSLA) share-price surge. Defying his many critics, Elon Musk’s electric vehicle company saw its share price increase seven-fold, making him the richest man in the world.

Whether Tesla shares have further to go is a matter of debate. However, beyond Tesla, it has also been a good year for electric car markets in general. NIO (NYSE:NIO), a Chinese luxury electric vehicle manufacturer for example, is now seen as a challenger to Tesla. With its battery swapping technology, it offers an alternative to recharging, potentially providing a solution to the problem of electric car driving range and charging times.

Scottish Mortgage (LSE:SMT) owns a stake in NIO. Over the course of 2020, the car maker's share price increased by more than 900%. Another Chinese challenger is BYD (SEHK:1211), which makes both passenger and commercial vehicles and batteries. The company’s share price has increased nearly threefold over the past year.

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Tailwinds for electric cars

There are a lot of tailwinds for the electric vehicle (EV) theme, which is considered one of the big trends for the next decade.

First, the market is growing rapidly from a still-relatively small base. In 2019, electric cars accounted for less than 3% of new car sales in the US.

Adoption rates are also relatively low, but growing, in the UK. According to data from the Society of Motor Manufacturers and Traders, 6.6% of cars sold in the UK were electric vehicles in 2020, representing a 180% year-on-year rise and up from 1.6%. Meanwhile, in October 2020, Europe recorded more electric vehicles sold than diesel cars, for the first time in history. 

State support

Governments around the world are currently very supportive. As Nitesh Shah, director of research at WisdomTree, notes: “A number of large countries/regions including Japan, South Korea, China, the United States and the European Union have set their sights on carbon neutrality around the middle of this century.”

Encouraging people to buy electric cars rather than oil-fuelled ones will be a big part of this. In some countries, such as the UK and France, a target year for the ban of traditional, petrol-powered vehicles is now in place. In others, it has taken the form of subsidies. For example, in the US, companies receive a tax credit of up to $7,500 (£5,500) per car for the first 200,000 electric vehicles sold by a company.

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However, on top of this, many governments around the world are committing themselves to large infrastructure projects to make electric cars more practical and, therefore, attractive.

As Timothy Parton, co-manager of JP Morgan American trust (LSE:JAM), notes: “Tesla will also likely benefit from upcoming Green Infrastructure spending initiatives across the globe, including government initiatives to increase the provision of EV charging stations across US and UK markets. This infrastructure is essential if we are going to hit 25 million EV units globally by 2030.”

China races ahead

China, however, may be the most exciting part of the electric vehicle story, with the Chinese government highly supportive. In 2019, half of all electric cars sold globally were sold in China.

Domestically, the Chinese government hopes that electric vehicles will help reduce air pollution. The government also hopes that electric cars will give it more energy security, reducing its reliance on oil imports from the Middle East. 

Beyond the domestic market, China views electric vehicles as a strategic export industry. China is aware that it is a latecomer to car production and therefore will struggle to compete with the established brands of Europe, America and Japan. 

However, as Daniel Yergin notes in his book The New Map: Energy, Climate, and the Clash of Nations: “The electric car is a new game, and there are no big established EV players.” China hopes to establish itself as a player in this new market.

That would suggest that one of the best ways to play the electric car boom would be through Chinese companies such as NIO or BYD. The risk, however, is that Chinese companies will still struggle to compete with the established brands of Europe and America. Consumers are uniquely sensitive to branding when it comes to cars and many may decline to buy a Chinese-brand vehicle.

Stick with the old?

While Tesla and several Chinese companies have captured headlines, some argue that established car makers pivoting to electric vehicles are also worth considering. 

Anthony Ginsberg, co-founder of the HAN-GINs Tech Megatrend Equal Weight UCITS ETF (LSE:ITEK), notes that Volkswagen (XETRA:VOW) recently raised its electric car sales targets across Europe and is investing in additional automation at factories to build more electric vehicles.

Meanwhile, in November, General Motors (NYSE:GM) announced a further $7 billion in research and development for electric vehicle production and now claims it will have 30 electric vehicles on the market by 2025. Ginsberg says: “GM is clearly moving to a full-electric line-up.”

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Finally, BMW (XETRA:BMW)has announced that electric vehicles will be manufactured at all German plants by 2022. Ginsberg says: “These companies have the money to invest in their product. This is vital, as battery technology still has a way to go.”

These companies all have the advantage of being long-established brands, which consumers may gravitate to. They also have the sale distribution networks (in the form of relationships with car dealerships) as well as supply chains for manufacturing.  

However, not everyone is so enthusiastic about the prospects for these firms. Shah notes: “For the most part, their legacy internal combustion engine vehicles make up the bulk of sales and we believe that will be the case for the several years to come.”

Mike Fox, head of sustainable investments at Royal London Asset Management, does not think these companies offer good investment prospects. He says: “The traditional car manufacturers make more EVs combined than Tesla so they are certainly part of the EV roll-out. In our view, however, the fact that they have many legacy products makes them un-investable both in terms of returns and from a sustainability standpoint.”

Picks and shovels approach

Whether American start-ups, traditional companies or Chinese challengers will dominate the electric vehicle market is a hard call to make. It will largely depend on consumer behaviour, which can be very fickle and unpredictable. One potential way to avoid making the wrong choice is to invest in non-car companies that are still part of theme.

This is the preferred way of WisdomTree. As Shah notes: “WisdomTree’s approach to getting exposure to the battery value chain is to largely exclude the EV application and focus on more upstream parts of the value chain such as raw materials, manufacturing, and enabling technology such as charging infrastructure.”

Scottish Mortgage appears to also be going down this route, alongside owning Tesla and NIO. The investment trust recently invested in Chargepoint, one of the world’s largest electric vehicle-charging networks. This should benefit from expanding electric car infrastructure. The trust also invested in Swedish battery develop Northvolt. Both companies are unlisted. 

Zed Osmani, manager of Legg Mason IF Martin Currie European Unconstrained takes a similar view. He says: “The real value is more likely to be found further up the value chain, in niche sub-segments where competitive pressures are lesser, barriers to entry are higher, and therefore pricing power is stronger, leading to higher return profiles.”

He pointed to his funds’ invested in Infineon Technologies (XETRA:IFX), a German semiconductor company that sells parts used in electric cars. He also noted Dutch chipmakers ASML (EURONEXT:ASML) for the same reasons.

Fund research company FundCalibre picked out Legg Mason IF Martin Currie Unconstrained as one of three routes to accessing the EV theme. It also highlighted Scottish Mortgage and Ninety One Global Environment. The latter only invests in companies that are contributing to the decarbonisation of the world economy.

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