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How to profit from the electric car revolution

Written by: Zehrid Osmani
Car manufacturers may be the obvious way to play the electric vehicle growth story, but they're not necessarily the best route, according to one fund manager.

It’s rare that a well-established global market completely transforms in just a few years.

But it looks like that’s exactly what’s in store for the motoring industry, as electric vehicles (EVs) become more the norm and the internal combustion engine is rendered obsolete.

Our forecasts show the EV market’s volumes are likely to grow more than 30% a year until 2030 on the back of tougher regulation and increasing demand.

For long-term investors, the question is understanding the elements of the EV ecosystem that will generate the best growth opportunities.

And they may not be the most obvious.

Think electric cars – think Tesla?

It’s probably the highest-profile electric vehicle brand. However, many other manufacturers have their own EV models. BAIC, Nissan, Toyota, Renault and BMW are all catching up.

Vehicle manufacture is the most visible part of the value-chain – but it is not such a rich mine of investing opportunity.

There are two main reasons:

  1. Potential exposure to consumer-choice risk. Predicting whether the consumer will favour a manufacturer is a risk for investors.
  2. Being at the forefront of the consumer-end exposes investors to intense competition.

In fact, looking at the increased R&D and capital expenditure intentions of manufacturers, there is a ramp-up in production capacity, highlighting the growing competition in this part of the chain.

These pressures might explain why Tesla recently announced a significant price drop.

A range of less obvious opportunities

There are several routes into the EV market that cover a gamut of products and services. These present exciting opportunities for long-term investors.

We prefer to analyse the whole ecosystem of EV, finding opportunities in attractively priced, high value links in the chain with higher pricing power.

Dutch firm ASML, for example, has an enviable position as the key supplier to the major semiconductor chip suppliers for these growing markets.

The company is critical in enabling innovation and development in its field, and therefore has strong pricing-power.

Another semiconductor-related firm, Infineon, has a variety of products for an industry in transition towards EV, hybrid and autonomous technology.

Infineon’s leading position is boosted through the acquisition of chipmaker Cypress and now benefits from the increased use of semiconductors.

Compared with the price of a car, the benefit of increasing technological content in a vehicle comes at a small additional cost, making companies like Infineon attractive ways to invest.

Global material and recycling company Umicore has the patent to Cellcore, an important brand name for NMC (lithium, nickel, manganese and cobalt), that forms the cathode of a lithium-ion rechargeable battery – the material of choice for the entire EV industry, except Tesla.

Umicore’s advantage is its closed-loop approach – it recycles. This gives it a distinct advantage over peers who don’t utilise ‘urban mining’ and are reliant on materials from less sustainable sources.

The benefits of our wider approach

The EV industry is a perfect example of the way we approach investing in companies available through our Global Portfolio Trust.

We have developed our analytical framework to indicate where the most valuable aspects of the industry are.

We tend to favour parts of the value-chain that are less competitive, have better industry structure, higher barriers to entry and therefore more pricing power.

We believe that by taking this broad and deep approach to analysing segments of the market across the entire ecosystem, we can then invest in the companies that give us the best exposure to the growth opportunity.

Zehrid Osmani is portfolio manager of the Martin Currie Global Portfolio Trust

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