Investors get under the bonnet of the green car revolution

Luke Fletcher

The auto manufacturing industry is a familiar sector to most investors in the market, with the large car brands being household names.

But the sector is currently undergoing dramatic changes, driven by a combination of disruptive technologies and regulation on carbon emissions which has wider economic implications for the market.

In light of this, the latest report by CDP, called Driving Disruption, which analyses how the auto industry can move to a low carbon economy, has put the spotlight on how radical these shifts are, what the pace of change means for car companies, and implications for investing in the sector.

Interestingly, these changes do not relate just to the car companies but can impact other sectors, for example through the shift in demand from oil to electricity.

Let's take an example a sample of 16 leading car companies worth $790bn. These car makers are stepping on the accelerator as they shift to electric vehicles (EVs).

The EV market is projected to soar to $1trn by 2030 and 30 per cent of new car sales are expected to be zero emissions or plug-in hybrid. 

The cost of EVs is also being driven down by technological advances. Lithium-ion (Li-ion) battery packs continue to fall in cost and price parity with vehicles using internal combustion engines is expected from around 2022. 

Industry spending on research and development is also high compared to most sectors (5 per cent of sales) with car makers focusing increasingly on electric and self-driving vehicle technologies.

Since 2015, more than $80bn has been invested in companies developing autonomous and shared vehicles.

So what does this mean for advisers seeking to talk to clients about such long-term trends?

For many advisers, the changes underway in the car industry are a signal of things to come in other major sectors. The Paris Agreement’s aim to keep global warming below 2°C is heating up the pace of the low carbon transition and restructuring the wider global economy. 

The utilities sector is a good example. Just six years ago, more than 40 per cent of the UK’s electricity was produced by burning coal - today, that figure is just 7 per cent. Last year, wind power in Britain accounted for 15 per cent of the nation’s energy, a huge jump from 10 per cent in 2016. 

This transition is driven by rapidly falling costs – the global levelised cost of electricity (LCOE) of solar PV declined by 70 per cent from 2010 to 2016. 

This shift to a cleaner electricity supply is all the more crucial when considering the additional demand expected from higher adoption of EVs.

A study in the EU on different penetration rates of electric vehicles finds that a high adoption rate could see EVs reach levels of 4-5 per cent of total electricity demand in several European countries by 2030.