By 2030, EVs will be 30% of total autos sold globally, up from 3% in 2020. By 2025, EVs will become cheaper for entry-level cars and reach performance parity with internal combustion engines (ICEs). By 2030, EVs and hybrids will be two of every three autos sold globally, thanks to sufficient charging infrastructure being built throughout China, Europe, and the U.S.
Morningstar analysts see opportunities throughout the value chain – battery manufacturers, specialty chemicals, battery component producers, lithium producers, Auto OEMs (original equipment manufacturers) and parts suppliers, semiconductors, utilities, and oil and gas.
Lewis Jackson and Valerio Baselli compiled this list based on the research of Morningstar analysts.
Here are some handy acronyms:
- EV: Electric Vehicles
- BEV: Battery Electric Vehicles
- HEV: Hybrid Electric Vehicles
- PHEV: Plug-in Hybrid Electric Vehicles
BMW Group: In 2020, BMW had 14 electrified models available to consumers, which accounted for 8% of its sales. BMW's narrow moat rating comes from its strong brand names and intellectual property. The firm expects fully electric models to annually average 50% growth through 2025, by which time it plans to have 25 electrified models, of which, 12 will be EVs and 13 plug-in hybrids. By 2030, BMW targets at least 50% of its global sales volume to be EVs.
General Motors: In 2021, GM announced its ambition to sell only zero emission vehicles by 2035. GM does not have a moat as facing strong competition, it is nearly impossible for one firm to gain a sustainable advantage. GM plans to invest $35 billion on EV and AV development from 2020 to 2025, by which time it intends to launch 30 EVs and have 1 million annual EV sales. It also has its proprietary Ultium battery technology that it is selling to other firms such as Honda.
Ford: Ford has finally accelerated its EV plans and the Mustang Mach-E looks like a real competitor to a Tesla Model Y. The 2022 launch of the F-150 Lightning, an EV version of Ford's most profitable vehicle platform, shows Ford is serious about EVs. Ford does not have a moat. In May, the firm announced it will spend over $30 billion on electric vehicles through 2025, which we expect to be for both passenger vehicles and commercial vans.
Volkswagen: Approximately 3% of VW's 2020 worldwide sales volumes were BEVs. Volkswagen does not have an economic moat. Moatiness from its premium and ultraluxury brands like Porsche, Bentley, Lamborghini, and Bugatti, is offset by mass-market Volkswagen, Skoda, and SEAT brands, plus the even more capital-intensive commercial truck business. During the next five years, Volkswagen is spending €46 billion to electrify its product portfolio. In 2025, the company expects BEVs to be 20% of total volume, growing to 55% to 60% by the early 2030’s.
BorgWarner: BorgWarner makes motors, gearboxes, inverters, converters, battery management systems, on-board chargers, and software for EVs. The company also combines components and software into a complete integrated drive module. BorgWarner’s narrow-moat rating comes from a continuous flow of intellectual property and the switching cost. In 2030, BorgWarner targets around 45% of its revenue from EVs, up from around 3% in 2021. We expect revenue to average 2 to 4 percentage points of growth in excess of global light vehicle production as EV penetration outpaces declines in ICE.
Continental: Through Vitesco, due to be spun off in September 2021, Continental's EV product portfolio includes motors, gearboxes, inverters, converters, battery management systems, on-board chargers, thermal management systems, and software. The company also combines components and software into a complete high voltage axle drive module. Vitesco targets more than €2 billion in revenue from electrification technologies in the mid-term, which we estimate to be 2025, up from €406 million in 2020. The firm has more than €13 billion in electrification technologies order backlog. We expect revenue to average 2 to 4 percentage points of growth in excess of global light vehicle production as EV-related growth outpaces declines in ICE.
STMicroelectronics: STMicro is a key EV supplier. The company sells silicon-carbide (SiC)-based power semiconductors to Tesla for Model 3 EV Inverters. ST is investing heavily in SiC and gallium-nitride (GaN)-based semis aimed at EVs. ST's narrow-moat rating stems from decades of chip design expertise, as well as high customer switching costs because of costly re-designs. ST is well exposed to rising chip content per car, which we estimate should rise roughly 5% faster than global light vehicle sales, thanks to content gains per vehicle, including EVs.
Johnson Matthey: Johnson Matthey is a new entrant in the field of high energy cathode materials for EV batteries with its flagship product, eLNO (enhanced lithium nickel oxide). We expect Johnson Matthey's first eLNO plant to be completed in 2022. Johnson Matthey has a narrow moat based on intangible assets and switching costs in its emissions catalysts, process catalysts, and precious metal services businesses. The company plans to rapidly expand eLNO capacity in Europe in the coming years. The first plant has a capacity of 10,000 metric tons per year. However, engineering on a second plant with a 30,000 metric ton capacity has already commenced.
Panasonic: Panasonic is one of the largest EV battery makers globally, with battery manufacturing sites around the world to supply automakers. We estimate Panasonic's battery production capacity will grow six to eight times and the company will be able to achieve a cost advantage against competitors. However, batteries are still too small a contribution versus the larger consumer electronics business to qualify the whole company for a moat. Panasonic is investing heavily in the expansion of its battery capacity through the buildout of giga factories, or manufacturing plants, that can produce an annual capacity of 1GWh of batteries.
Glencore: Glencore is exposed to EV's through material copper, cobalt, and nickel production and earnings. We think the company’s commodities trading and marketing operations would likely be worthy of a narrow moat on their own, based on cost advantage. However, Glencore’s mining assets on average are not moat worthy. Glencore has been relatively disciplined with capital allocation, and the growth outlook for the major EV exposed metals is generally flat. Cobalt is the exception and is set grow about 40% by 2022 from 2020 levels as production cuts initiated in August 2019 are reversed.
Sociedad Quimica y Minera: SQM's largest business is lithium production. Lithium will benefit from increased EV adoption as greater lithium demand will result in higher prices and profits. Our narrow moat rating stems from SQM's cost-advantaged lithium, iodine, and specialty fertiliser production. SQM operates the lowest-cost brine-based lithium resource globally. SQM is investing in expanding its lithium capacity over three times over the next decade, largely through low-cost brownfield capacity expansions. We view these investments as value-accretive given our favourable EV outlook.
ExxonMobil: Oil is primarily used to make fuels, including gasoline, which EVs do not require. Natural gas demand could rise, as it's used to generate electricity, but EVs will curtail crude demand. But vehicles have 10-15 years lifespans, so the transition will be slow. Meanwhile, producing wells will decline over time and more must be drilled. Firms at the low end of the cost curve can still thrive. ExxonMobil is our top pick within the sector (along with Schlumberger). We maintain our narrow moat rating, although we view Exxon’s competitive position as weakened.
DuPont de Nemours: DuPont sells specialty polymers, materials to produce battery separators, and electronic materials to automakers and auto suppliers throughout the EV supply chain. The company generates roughly 50% more revenue per EV or hybrid versus ICEs. DuPont invests around 4% of sales in R&D every year, which Morningstar view as sufficient to continue developing new premium products. As EV adoption grows, DuPont should benefit from selling a greater proportion of premium products into the EV supply chain.
Edison International: Edison's Southern California electric utility is embarking on the largest EV charging network expansion in the US right now. The investment in the charging network and the distribution infrastructure to support the new chargers will total about US$1 billion. Edison plans to spend $16 billion during the next three years on distribution and transmission upgrades in California, representing 7% annual growth in its asset base. As EV penetration grows, Morningstar expects investment in EV-related infrastructure and energy storage to make up a larger share of its growth investment.
Tesla: Tesla is the market leader with the best technology. We think Tesla could prove to be one of the best pure-play BEV investments if its competitors are unable to catch up to its technology. Tesla: Bumpy road to mass-market volume
