Opportunities abound as automakers go green
With gas guzzlers still dominating the roadways, it may seem all the hype about electric vehicles (EVs) is a bit overblown. But real progress is happening, and the pace should only increase.
In Europe and China, which together account for more than half of the world’s passenger vehicle production, vehicle electrification is getting a major boost from tightening fuel standards. By 2021, European automakers must cut average carbon dioxide emissions by 27% or face hefty fines, and electric vehicles provide the most direct path to compliance. To address issues of pollution and energy security, China has been pushing for more hybrid and electric vehicles as part of its “Five-Year Plan for Strategic Industries (2016-2020),” with sales of clean energy vehicles growing 50% annually as a result. Longer term, China’s technology roadmap calls for 30%+ annualized growth in EV production in the first half of next decade, which would make one of every seven new cars on Chinese roads electric or hybrid by 2025.
To be sure, global auto manufacturers face a bumpy road maintaining profitability as they formulate and execute their EV strategies, so investors seeking to profit from EV development may want to look under the hood, where the fastest growth is occurring. While the market for electric vehicles expands, so does the amount of electronic content per vehicle. The use of semiconductors and other electronic components—the building blocks for all electronics—has been steadily growing as automakers keep digitizing the vehicle interior to improve passenger safety and comfort. Simple radio consoles are now elegant touchscreens with GPS navigation and backup cameras. Fuel and speed gauges are now digitally displayed with exacting precision. And controls for virtually the entire driving experience have been duplicated on the steering wheel to minimize driver distraction. As a result, the average modern car has nearly $400 worth of semiconductor content. EVs and hybrids, which electrify the core mechanical functions of the vehicle, carry nearly double that amount. As automakers incorporate more advanced safety and autonomous technologies such as lane departure warnings and automatic braking, the number of computerized “building blocks” grows higher still.
From a cyclical standpoint, global trade headwinds and recent softness in auto sales have depressed valuations for many “auto-tech” stocks. But these are temporary issues, and the secular trend of growth in content per vehicle, coupled with the growth in production of EVs and advanced technology vehicles, should be a driving force for years to come. These long-term tailwinds provide great opportunities for investors to “plug in” to robust demand for semis and electronic components, while helping to promote a cleaner, healthier environment.