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We expect EV sales in China and the EU will accelerate, driving above-consensus global adoption rates.
By Seth Goldstein | 19/10/18

The Intergovernmental Panel on Climate Change released a report earlier this month that calls for faster electric vehicle (EV) and hybrid adoption as part of the actions needed to limit the effects of climate change. The report calls for emissions to be reduced by 45% versus 2010 levels by 2030. The report will be a key topic at the Katowice Climate Change Conference in December, where governments from around the world will review the Paris agreement. We think the report’s conclusions could lead to governments setting stricter regulations and investing in EV charging infrastructure, which would result in increased EV adoption.

About the Author
Seth Goldstein, CFA, is an equity analyst for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. He covers agriculture, chemicals, copper, and lithium companies in the basic-materials sector. Goldstein is also the Chair of Morningstar’s Electric Vehicle Committee. Prior to assuming his current role in 2017, Goldstein was an associate equity analyst covering the basic-materials sector. Before joining Morningstar, Goldstein was a senior financial analyst for Oasis Financial, a financial analyst for Berkshire Hathaway Energy, and a field operations supervisor for the U.S. Census Bureau. Goldstein holds a bachelor’s degree in journalism from Ohio University and a master’s degree in business administration, with a concentration in finance, from the University of Iowa. He also holds the Chartered Financial Analyst® designation.

Over the next decade, battery electric vehicles will reach cost parity with internal combustion engines (ICEs). Additionally, battery innovations will increase driving range and shorten charging times so electric vehicles will no longer be inferior to ICEs. Charging infrastructure, which dictates range capabilities, will be the regional wild card that will either spur or limit EV adoption.

Over the medium term, we expect regulation will be the driving force behind EV adoption. Over the past couple of years, regulations have evolved from being predominantly based on fuel efficiency standards to including EV mandates. Regions with EV-specific regulations and incentives will provide a stronger push to EV adoption.

China will continue to make the strongest regulatory push to increase EV adoption. The regulations are already having the desired effect, as China currently sells the majority of electric vehicles globally. Tightening fuel standards in the European Union will push automakers to electrification over the next decade, while fragmented U.S. policies that vary between states and the federal government will have a mixed impact.

The strongest regulatory push will come from governments that specifically address electric vehicles and give automakers a benefit for producing electric vehicles with better range. Further, regulations that either provide benefits for EV drivers or restrict ICE drivers will enhance the regulatory push on the consumer side.

Auto suppliers that are positioned to help original-equipment manufacturers meet regulations across multiple powertrains are more likely to increase market share as regulations encourage sales of electric vehicles, hybrids and ICE technologies. EV requirements should create minimum annual increases in lithium demand.

Over the long term, we view EV adoption through the whole product model framework. The whole product model is a marketing framework that we employ along with the technology adoption curve. In his book Crossing the Chasm, Geoffrey Moore argues that there is a chasm in the technology adoption curve because the customers in the early market think about purchasing a new technology differently than customers in the mainstream market. To bridge the gap between these customer segments, the new technology must become a whole product that is functionally comparable to the old technology. For electric vehicles, this means the total cost of ownership, driving range, refueling (charging) time and charging infrastructure must improve in order to appeal to the mainstream market.

We expect EV penetration will follow the trajectory of similar innovations that have reached cost parity with prior technologies. We point to wind power generation, compact fluorescent light bulbs and the first automobiles as a representative group of comparable innovations that reached cost parity. These innovations share similar characteristics with electric vehicles: function held constant, higher purchase (fixed) cost and lower operating (variable) cost, government support and other considerations.

We forecast electric vehicles will account for 15% of all new passenger vehicle sales globally by 2028. However, EV penetration rates will vary widely by region. China and the EU will outpace the global EV penetration rate at 25% and 20%, respectively, while the United States will lag the global rate at 12.5%.

Hybrid electric vehicles will account for 21% of all new passenger vehicle sales globally by 2028 in our forecast, making electrified vehicles 36% of total sales. Similar to electric vehicles, HEV penetration rates will vary widely by region. The EU will outpace the global HEV penetration rate at 25%, while the U.S. and China will lag the 21% global rate at 20% and 15%, respectively.

Increased EV and hybrid adoption will continue to increase lithium demand and benefit auto suppliers who are positioned to sells parts across multiple powertrains. EV adoption also helps utilities primarily by offering infrastructure growth and, to a lesser extent, increased electricity demand, helping to offset stagnant U.S. demand growth.

Our top picks to invest in growing EV adoption include  Albemarle (ALB),  BMW (BMWYY),  BorgWarner (BWA),  Edison International (EIX),  General Motors (GM), and  SQM (SQM).

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