Wednesday, July 23, 2014


A new, futuristic-looking car has appeared on London’s streets. It is the Vauxhall Ampera, called the Chevrolet Volt in the U.S.; an electric-powered family saloon, which uses an onboard 1.4 litre petrol engine to recharge its batteries. The result is a usable car – 0-60 in ten seconds and around a 300 mile range – which achieves over a 100 miles per gallon.

Cramming a hatchback-sized engine, an electric generator, batteries, and an electric motor into one car may sound like the opposite of efficiency; but doing so reveals two key truths about cars and energy. First, electricity is a more efficient medium than petrol for managing power around a car. It can be harvested when braking and dispenses with the need for heavy gearboxes designed for internal combustion cars. Second, getting electricity to cars presents challenges; hence General Motors taking the decision to generate it on board.

The Ampera is a clever piece of systems integration. It also says a great deal about where the personal transport sector stands in 2014 – so much so that it is easy to imagine it as a museum piece of the future. Its design has a fully-electric power train for efficiency but recognises petrol as the most economical and portable underlying energy source. So is the Ampera ‘just another hybrid?’ The answer is no. In our automotive museum of the future, the preceding exhibit would be the Toyota Prius, first released in Europe in 2001. The Prius – which became a runaway success and is still a top seller for Toyota – is essentially a petrol car which uses a battery as a range extender around town. The Ampera is the opposite, which is a big difference; and it won 8/10 from the UK’s demanding Top Gear magazine, which is a bigger one.

Pure-play electric cars – those without range extenders – are also appearing. These include the Nissan Leaf with its quoted 80-mile range and the BMW i3 with a similar range, although it also comes in a range-extended model. Of these, the i3 is a bigger piece of news. It is a root and branch electric car, drawing on a BMW development programme that stretches back the electric Mini E of 2009. The i3 is built for lightness with a carbon-fibre body, and is tipped for success by the UK motoring press.

In the UK, sales of these cars are supported by a buyer subsidy of £5,000. This forms part of a broader systems of supports, including free recharging points in urban centres, which recently received a further £500 million commitment from central government. Although this should further boost the steady growth in this market, such vehicles still represent a small (but growing) proportion of overall sales for established carmakers. In the UK, 1,200 grant-eligible vehicles were registered in March 2014 ; while in the U.S., the equivalent figure was just under 5,000 . Consumer constraints include ‘range anxiety’ (hence the introduction of extenders), lack of charging infrastructure (although some retailers like Ikea have seen an opportunity to offer this as a perk to visiting customers) and, ultimately, cost. The Ampera and i3 are both around £30,000, which could easily get you a fast, frugal German sports saloon. And yet some markets are proving to be front-runners in the adoption of electric cars – in Norway, for example, around a fifth of new vehicles registered are electric.

So how ought investors to get exposure to this fast-moving theme? Automotive majors are not an option, given the small proportion of their business made up of electric vehicles and the narrowing profitability many face on their traditional lines (not surprising, given that the value chain of car manufacturing and distribution has hardly changed since Henry Ford). The one large, pure-play electric car manufacturer is Tesla. The company is selling over a thousand units of the Model S in the U.S. every month, which has received extremely positive reviews in the petrol-loving U.S. motoring press. Investor demand is currently outstripping the supply of the company’s shares, resulting in an eye-popping $30 billion valuation by Wall Street – or 135 times expected earnings this year. Yet this market capitalisation represents a broader vote of the confidence in the future growth of the market, especially given that Tesla is now set to produce batteries for other manufacturers. Tesla’s founder Elon Musk is living proof that one visionary entrepreneur can transform a market – he is nothing short of a modern-day Thomas Edison.

As far as batteries go, fears over raw materials constraints – of lithium, for example – appear to have eased. New supply has come on stream and more plentiful alternatives are emerging, while institutes such as MIT regularly post new research updates. And yet, as is often the case with scale and cost reduction challenges, China is likely to hold the key. Don’t forget that it has been China’s vast investment in solar photovoltaic manufacturing that has given the world competitive, ever cheaper solar power. Seeing their inability to overtake the West and Japan on internal combustion, Chinese companies are investing heavily in battery technologies. This should provide a boon to the market. In 2009, we made a private-equity investment predicated on future price reductions in batteries, which has since been proved correct. The team backed electric-outboard motor manufacturer Torqeedo, which has now benefited from such reductions to increase the power output of its largest unit tenfold to 80 HP – now the most powerful outboard electric boat engine on the market. And yet, as with any emerging sector, there is risk. Better Place, a well-backed Israeli start-up with the breakthrough idea of a network of ‘battery stations’ at which drivers could have one leased battery switched in a matter of seconds for a fully recharged replacement, went spectacularly bust last year.

For those looking for thematic growth coupled with lower risk, a better mindset may be to replace the words ‘electric cars’ with the less catchy ‘vehicle efficiency sector’. Driven by both increasing fuel-efficiency regulations (the EU’s latest standard calls for companies to reduce emissions to 95g/km across the EU car fleet by 2021); and by the demands of consumers suffering from high fuel prices, car makers are competing intensely on miles per gallon. Even in the U.S, where fuel is cheaper than in Europe, over a third of motorists list fuel efficiency as a top factor in choosing a car. The result is a great stimulus to automotive supply-chain companies focusing on delivering this outcome for large carmakers. ‘Stop-Start’ technology, which saves fuels and cuts down on urban pollution while paying for its upfront cost in a year, is now widespread. And there are multitude of more complex solutions, such as thermal management, ‘lightweighting’, and engine cooling. Our listed equities team has recently added U.S.-based Borg Warner, which clocked up sales of $7.4 billion in this market in 2013.

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