Regulation as the catalyst for investment
In the U.S., EVs are starting to grow in popularity as highlighted in a recent analysis by our Auto Research Analysts about global Electric Vehicle (EVs) adoption, but it’s notable that the EV revolution is happening faster in other countries. In December, Norway became the first country in the world where EV sales outstripped all others, with EVs accounting for two-thirds of new auto sales in the last few months.
What factors drive this change? As the CEO of EVgo, Cathy Zoi, highlighted at our recent Dealbook session, industry transformation is ideally driven by a trifecta of consumer demand, regulation and visionary leadership.
So far, regulation has been the key driver of EV adoption. Looking at Norway, the government offers a wide range of EV incentives and exemptions. In a country where luxury taxes can add up to $20,000 to the cost of a new vehicle, they’re a powerful incentive.
Back in the U.S., the incoming Biden administration has pledged $400 billion in public investment in clean energy, including battery technologies and EVs. Last month, the leading auto lobby group called for broad slate of government support to help overcome hurdles to consumer EV adoption.
The hope is that this becomes a virtuous circle, where consumers increasingly step-up demand which is satisfied by a broader range of EV models at different price points.
A challenge for leaders: the big rethink
It will take a huge amount of investment from automakers to make this transition. For incumbents, these investments are often existential decisions.
Many automakers have done this through tapping the sustainable finance market. Last October saw green bond issuance break through $1 trillion mark allowing automakers to tap debt markets at a lower cost to power their EV transition.
So far, investors have been largely supportive of these moves. However, automakers will soon have to demonstrate how the EV transition will increase profitability and thus justify higher valuation multiples.
As we’ve seen with many sectors from tech and media to banking, this could necessitate a rethink of their business models and a shift from thinking of a car as a “unit” to a “car-as-a platform”.
For the auto sector, such a shift to a more software-driven platform model, with its cycles of updates, upgrades and new features, can unlock a larger addressable market of recurring revenue that is also less cyclical. Such software updates would also require significantly less investment than manufacturing infrastructure upgrades.
As with platform models in other sectors, automakers will be able leverage the data that arises. This in turn unlocks greater customer connectivity and post-sales opportunities. McKinsey estimates such data-driven services could unlock an additional $1.5tn in revenues for automakers.
The ESG big picture
Looking at just the “E” of ESG, there is a debate on what emissions to target. To date, the industry has largely been focused on targeting tailpipe emissions. However, there is a near-term opportunity to reduce emissions from material production, and a growing expectation that automakers should ultimately target reducing their total Scope 3 emissions, which would cover over 95% of automobile emissions.
This opens up the wider issue of supply chain. While automakers might set their sights on the carbon-zero car, they can’t stake their ESG credentials on a supply chain that’s not sustainable.
For example, the “white gold rush” to meet lithium demand for batteries brings ecological concerns over the impact of large-scale mining. And Elon Musk’s pledge to remove cobalt from the next generation of Tesla batteries highlights that 60% of global cobalt supply comes from the Democratic Republic of Congo, where a large number of unregulated mines are beset with concerns of child labor.
In addition, we can’t overlook the “S” in ESG. To date, EVs typically require less labor to manufacture. Investors might wonder: how will the transition differentially impact companies with unionized workforces?
The organizations best positioned for success in the energy transition won’t just overcome the hurdles of legacy technology, but also the perils of legacy thinking.
