Recharging the auto market: Electric vehicles offer opportunities in Asia

The evolution from traditional gasoline-powered vehicles to electric vehicles (EVs) was a gradual process until technological developments and a focus on renewable energy caused a resurgence in EVs in recent years. In 2018, global EV sales increased 64% versus 2017, with the number of vehicles sold exceeding 2 million for the first time, according to the sales database, EV-volumes. We believe the EV growth story is inevitable, with EV sales expected to increase from approximately 2% of global market share in 2016, to 22% by 2030 (source: CB Insights Research, March 2019). Yet, while the growth rate is strong, the market is still heavily dominated by traditional internal combustion engines. So, the question is, how will this change occur?

We believe the answer, and the investment opportunity, may be in Asia, particularly in South Korea and China. China dominates EV growth, having sold more electric cars in 2018 than all other countries combined. This is a result of close to a decade of government support such as tax incentives, subsidies for car manufacturers and consumers, the world’s largest rollout of charging stations, and restrictions on the sale and use of traditional combustion engine vehicles. In 2018, there were 1.2 million electric vehicles sold in China, representing 56% of total global sales and an increase of 78% compared to the prior year. As highlighted in the chart below, recent rapid sales growth is catapulting China into the world’s largest share of total EVs in circulation.

EVs in circulation: China’s growing share

Graph of China's growing share

Source: International Energy Agency (IEA), 2018.

Outside China, EV growth is dominated by Europe and the United States, which collectively made up 37% of all EV sales in 2018 (source: EV-volumes). It is worth noting that Norway, even though it doesn’t rank highly due to its smaller market size, has fast-tracked EV take-up — an astonishing 39% of all car sales in the country were EVs in 2017, the highest EV market penetration of any country (source: IEA).

Behind the EV growth: Competition and climate change

While the automaker Tesla has been a pioneer in the EV space, a number of competitors are prioritizing EV development and quickly catching up. EV adoption by the world’s largest auto manufacturers will drive more competition, product choice, innovation, infrastructure rollout, and overall industry growth. While production costs and economies of scale have previously limited innovation, a strong push by governments to reduce greenhouse emissions, such as through the Paris Agreement on climate change, even as consumer demand has been increasing, has made EV a key focus for these global players. The end result could be the inevitable phaseout of the internal combustion engine in many markets. A 2018 report by the Center for Climate Protection, for example, suggested that countries such as China, India, and Britain will cease all internal combustion vehicle sales by 2040, 2030, and 2040, respectively (source:

EV production costs are also falling rapidly. Bloomberg New Energy Finance has projected that EV costs will be less expensive than internal combustion engine vehicles by 2024, even without government subsidies. Such a downtrend in EV prices is not driven solely by economies of scale, but also by a cut in battery-sourcing costs, thanks to cell makers’ per-unit energy density gains. While this dynamic will lower the cost of electric vehicles, we think stricter environmental regulations are likely to drive traditional combustion engine vehicle costs higher, due to the addition of components aimed at improving fuel efficiency and reducing emissions.

What’s influencing consumers

Along with the significant forces compelling automakers to increasingly adopt EV technology, a number of key trends are also influencing more consumers to seriously consider the purchase of an EV. Not only are the number of EVs on the road growing, but the user experience is also improving. This includes an expanded infrastructure of charging stations in many markets (as seen in the chart below), improved EV driving ranges, and lower maintenance costs. These trends help provide a favorable climate for further EV market penetration.

EV charging stations globally

Graph of EV charging stations globally

Sources: Organisation for Economic Co-operation and Development (OECD)/IEA, Macquarie Capital (USA) Inc., October 2018.

Despite these trends and other tailwinds supporting the growth of EVs, there remains much room for improvement. Short driving ranges, long charging times, and affordability issues have hindered growth. However, these barriers are progressing at a fast pace (source: Range extension is enabled by increases in per-vehicle battery capacity, and these improvements are being made without adding to the cost or weight of passenger vehicles, thanks to economies of scale and improving battery energy density. The charts below show the rapid rate at which battery density is improving and costs are falling, as well as the significant improvements in EV driving range, more than doubling between 2010 and 2018.

Average range of EVs in the US

Graph of average range of EVs in the US

Source:, 2018.

Battery cost and installed capacity

Graph of battery cost and installed capacity

Source: IEA, 2018.

Affordability has improved from the falling costs of batteries, a main factor in EV costs. This dynamic will likely help lead to EVs becoming less expensive than comparable combustion vehicles in a relatively short time frame. Most market research firms estimate this price parity to be achieved around the mid-2020s.

The Asian EV opportunity

Just as technology has disrupted the traditional cell phone and personal computer (PC) markets, we believe an auto industry transformation may be just around the corner. Unprecedented demand and investment suggest to us that the EV supply chain and broader industry, from raw-material producers to battery manufacturers and automakers, will experience significant changes in the near term. This change is likely to continue to provide opportunities for investors to benefit from this strong EV growth story, which is underpinned by sustainable structural growth.

We believe the EV opportunity, particularly for Asia, is strongest in the battery segment with China, South Korea, and Japan leading the technology and production in this space. We expect that demand growth and industry consolidation will continue to drive growth in these Asian battery companies, with increasing scale enabling stronger bargaining power with automakers, and higher margins going forward.

While we see a bright future for EV battery companies, it must be noted that up until now these businesses have largely been unprofitable as low levels of demand and aggressive pricing to win orders have created an environment of low scale and thin margins. However, we see this dynamic changing with some companies reaching breakeven as soon as 2020.

More strength in bargaining power

Shifts such as in EV batteries has been created by strong EV demand, which in turn creates better bargaining power for the top players. This is brought on by increasing demand being met by a limited supply, which tips the supply demand dynamics in favor of producers. An example of this strengthening bargaining power is the recent transition to cost pass-through contracts that help protect margins, as opposed to past practices of higher input costs being absorbed by producers.

Korean opportunities

Within Asia, we especially see EV battery opportunities in South Korea. Technology leadership, reliability, and strong relationships with global automakers have positioned South Korean companies to take more market share. As observed in the chart below, growth in South Korean capacity is expected to be stronger than the overall market, which positions these companies well to meet increasing EV demand.

Global EV battery capacity

Graph of global EV battery capacity

Source: Macquarie Research, February 2019.

The road to EV opportunities may go through Asia

EVs are creating, in our view, an important growth story globally, with demand and investment sparking change that could eventually overtake traditional internal combustion engines. In a number of ways — from battery production in South Korea, to the growing EV market share in China — Asia seems to us to be particularly poised as a road to EV investment opportunity.


Investing involves risk, including the possible loss of principal.

The views expressed represent the investment team’s assessment of the market environment as of June 2019, and should not be considered a recommendation to buy, hold, or sell any security, and should not be relied on as research or investment advice. Views are subject to change without notice.

Past performance does not guarantee future results.

Diversification may not protect against market risk.

International investments entail risks including fluctuation in currency values, differences in accounting principles, or economic or political instability in other nations. Investing in emerging markets can be riskier than investing in established foreign markets due to increased volatility and lower trading volume.

All charts are for illustrative purposes only. Charts have been prepared by Macquarie unless otherwise noted.

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