Hitting the Road: A Q&A on Electric Vehicle Adoption
Morningstar’s Seth Goldstein on what’s driving adoption worldwide and which companies stand to benefit.
The Intergovernmental Panel on Climate Change released a report in early October that calls for faster electric vehicle and hybrid adoption to help limit the effects of climate change. The report calls for emissions to be reduced 45% versus 2010 levels by 2030. This will be a key topic at the Katowice Climate Change Conference in December, where governments from around the world will review the Paris agreement. The outcome could lead to governments setting stricter regulations and investing further in electric vehicle charging infrastructure.
That would bolster the case laid out by analyst Seth Goldstein in Morningstar’s recent Electric Vehicle Observer. I spoke with Goldstein about the factors driving electric vehicle adoption rates around the globe, and the companies that stand to benefit from the trends. Our conversation took place on Oct. 3, and valuation data is as of that date. The discussion has been edited for length and clarity.
Laura Lallos: How does Morningstar’s forecast for global adoption rates of electric vehicles compare with the consensus view?
Seth Goldstein, CFA, is an equity analyst with Morningstar Research Services.
Seth Goldstein: We forecast a 2028 global adoption rate of 15%, which is roughly 4 percentage points above consensus estimates. We use a regional buildup, where we project China, the EU, and the U.S. separately. A lot of other projections I’ve seen use only a global forecast.
Lallos: You believe that electric vehicles will reach cost parity with internal combustion engines over the next decade. What technological advances are driving this?
Goldstein: Electric vehicle costs will decline primarily due to cheaper batteries. Battery costs will decline first because of the rise in gigafactories. Manufacturing economies of scale will greatly reduce the unit production costs for each battery. We expect nearly all batteries will be made in gigafactories by about the middle of the next decade. Second, new battery chemistries will contain much cheaper blends of raw materials. For example, by using more nickel and less cobalt, even if you keep everything else the same, battery costs will decline, as nickel is cheaper than cobalt. As these new battery chemistries take shape, raw materials costs will be an important part of that overall lower cost.
We’re expecting battery costs to go from about $225 per kilowatt-hour today to about $80 per kilowatt-hour by 2028, which should greatly reduce both the initial purchase cost of an electric vehicle and the replacement battery cost. When you count the lower variable operating costs from electricity versus gasoline, you’re going to have a cost of ownership from electric vehicles that’s going to be on par with traditional internal combustion engines.
Lallos: What companies on your coverage list stand to benefit from this trend?
Goldstein: One of the best ways to play the electric vehicle adoption trend is lithium producers. Lithium is going to be needed in all batteries, regardless of the specific battery chemistry, and is going to be needed in all electric vehicles, regardless of auto brand. We like Albemarle (ALB) and SQM (SQM), which are low-cost lithium producers that have a cost advantage and narrow moat ratings. We see them as the two best ways to invest in the electric vehicle adoption trend. We also like BorgWarner (BWA), as the company is well positioned across multiple auto powertrains, everything from the traditional internal combustion engines to hybrids and electric vehicles. Being able to meet the auto manufacturers’ needs, regardless of which powertrain they’re producing, will allow BorgWarner to grow faster than the auto industry over the next several years.
Lallos: Regulation is also a key variable here.
Goldstein: We see regulations as the medium-term driver that will continue to spur electric vehicle adoption over the next several years. There are two major components that we look at. There are the automaker regulations that may require automakers to produce electric vehicles. And there’s also consumer subsidies, which help to offset some of the cost disparity, as electric vehicles are currently more expensive than vehicles with internal combustion engines.
In regions where there’s strong regulation that requires automakers to produce electric vehicles, combined with consumer subsidies, adoption tends to rise. As China has the strongest regulations and some of the most generous subsidies, it’s no surprise right now that they’re leading the world in electric vehicle adoption.
The regulatory policies force automakers to make electric vehicles an increasingly higher proportion of total sales each year. Automakers are incentivized to spend R&D to produce longer ranges and shorter recharging times. On the consumer side, subsidies are larger for longer-range vehicles, which almost reduces all of the higher cost of an electric vehicle and the longer range helps to reduce range anxiety. Finally, China’s state-owned utility is investing heavily in charging infrastructure. This comprehensive approach will set electric vehicles up for long-term success in China.
Where the regulations and the subsidies are weaker, electric vehicle adoption is lower. That’s the case in the U.S. Outside of states with zero emission vehicle programs, such as California, electric vehicle adoption tends to be much lower.
Lallos: What is driving China to push the adoption of electric vehicles?
Goldstein: There are two major factors. The first is pollution within cities. Autos and transportation vehicles in general account for a major part of the pollution that makes some of China’s cities unbearable. It creates a lot of health problems for the people who live there. So, China is making a big environmental push to clean up their cities. One easy way to do that is to take vehicles that have diesel and gasoline emissions off the road and replace them with electric vehicles.
Second, China also sees electric vehicles as an emerging industry that will be here for decades to come. They see an opportunity to take the lead here and be able to match what the U.S. did for cars in the last century. China sees a great growth opportunity, where they can not only sell Chinese brands within China, but eventually start exporting those cars globally and compete with the traditional automakers in electric vehicle sales.
Lallos: Within the U.S., California generally drives trends because it sets stricter fuel efficiency standards by a waiver under the Clean Air Act. Now, the EPA has moved to end California’s power to set its own standards. How do you factor that into your analysis?
Goldstein: We look at what’s going to happen at both a state and a federal level. We expect the California waiver to be a long court battle. I wouldn’t expect an outcome for years to come, and before that time, there could be a new administration that does not want to pursue the litigation anymore. As a result, our base-case assumption is that California keeps the waiver.
But we also look at the national standards. We expect those to be rolled back from the stricter 2025 standards that were set in 2012 under the Obama administration, to be in line with the 2020 standards, as was recently proposed by the Trump administration. Given automaker need for regulatory certainty, a new administration may decide to leave the regulations in place once they are finalized. Another option would be to raise the fuel standards back to the original standards set in 2012; this would be the same fuel standards that California and 12 other states have in place. In an extreme change scenario, a new administration could roll out the ZEV regulations nationwide; however, we don’t see this as likely right now.
Lallos: Even if standards are rolled back, do automakers still have an incentive to continue pursuing improvements?
Goldstein: Automakers do have some economic incentive to continue to increase fuel efficiency and to possibly roll out some electrification—such as 48-volt mild hybrids, or strong hybrids such as the Toyota Prius— into a wide range of vehicles. To meet standards in places like Europe and China, they have to invest in and develop the technologies anyway. Where they can use the technologies in the U.S. and continue to recoup the cost of fuel efficiency through each additional vehicle sold, I think they will try to do so.
Now, there is a point where the U.S. consumer is going to say, “OK, my truck has increased from 10 miles a gallon to 20 miles a gallon, and I’m not willing to pay an extra $10,000 for additional technologies.” That will be a balance that the automakers will continue to try to push where they can.
Lallos: Could you talk about the whole product model framework that guides your outlook?
Goldstein: This framework shapes our long-term electric vehicle adoption forecast for a given region. The whole product model traditionally has been used for new technologies to determine what improvements are needed to meet the expectations of the majority of consumers.
You have people who think electric vehicles are cool or want one because it’s environmentally friendly. That’s an early market, where people are willing to accept an inferior product. They’re willing to deal with a shorter driving range, longer recharge times, and having to plan a road trip around finding charging infrastructure. These are things that could potentially limit a more practical consumer. The majority of consumers take a more practical approach to buying a car and will only purchase an electric vehicle once they are functionally comparable to an internal combustion engine.
We look at the extended range, cost parity with internal combustion engines, and decreasing recharge times. We also look at the amount of charging infrastructure in a given region. These factors will either continue to limit electric vehicle adoption by the mainstream consumer or, once they’re in place, facilitate greater adoption by consumers who initially said that an electric vehicle was not for them. They’ll become more likely to make the purchase.
Lallos: How close are we to the mainstream consumer feeling comfortable with a fully electric vehicle?
Goldstein: When I look at all the different components that need to be in place, three of them will come from new battery technologies: extended range, cost parity with internal combustion engines on a total cost of ownership basis, and shorter recharge times. Those I think will all happen globally within the next 10 years. You’re going to see recharge times fall from about 40 minutes now to 20 minutes. As we discussed earlier, internal combustion engines will be on par with the cost of electric vehicles. And we will see the extended range. Right now, an electric vehicle gets about 200 miles on average; I think that’s going to go up to about 300 miles with these new battery chemistries.
Our research indicates that charging infrastructure is the leading cause of range anxiety— and that’s a regional wild card. It will spur electric vehicle adoption in places like China and the EU. But we think it will still be an issue for much of the U.S. in places outside of California, New York, and the other zero emission vehicle states (Connecticut, Maine, Maryland, Massachusetts, New Jersey, Oregon, Rhode Island, and Vermont). In the middle parts of the country, where there’s not much EV charging infrastructure outside of major cities and federal highways, people will still be reluctant to purchase an electric vehicle.
Lallos: Do you anticipate other states accelerating efforts to catch up as the trend takes hold in Europe and on the East and West coasts here?
Goldstein: It is a trend that could accelerate if consumers start to demand it and they start to push elected officials to build more charging infrastructure—and if local utilities work with state regulators to put more charging infrastructure in their rate base. But in places like the middle parts of the U.S., where the regulation is just not there to give an initial push, I think it’s going to take a lot more consumer pull. Once consumers see that costs have come down, that electric vehicles function more like a conventional car, and that there is improved charging infrastructure, this could happen.
Places with stronger regulations are more open to either allowing utilities to build the infrastructure, like in California, or having a state-owned enterprise spend billions of dollars to build it themselves, as in China. That will help consumers get over that fear that they’re going to be driving down the highway on a road trip and run out of power before reaching a recharging station.
Lallos: As you mentioned, utilities stand to benefit from electric vehicle adoption. Which utilities are a way to play this trend now?
Goldstein: We like utilities where regulators are already pushing for electric vehicle adoption, mainly in places like California. Edison International (EIX) and Sempra Energy (SRE) have proposed multimillion- or multibillion-dollar plans to regulators for electric vehicle charging investments. When this electric vehicle charging infrastructure investment is added to the regulated rate base, then investors can look forward to regulated returns on that investment. It gives investors a lot more certainty that there will be a good return from this investment. Utilities without that sort of rate-based support would have to make the investment and just hope that the economics pay off from enough people using their chargers.
Lallos: What about the automakers themselves— who is best positioned in this area?
Goldstein: The two automakers that we like the most from an electric vehicle standpoint right now are General Motors (GM) and BMW (BMWYY). These are both undervalued relative to our fair value estimates. They’re both investing heavily in electric vehicle production and want to produce numerous models and electrified powertrains over the next several years that they plan to start rolling out in multiple models.
Lallos: Any final thoughts?
Goldstein: We haven’t touched much on Europe. While BMW is a global automaker, it sells a lot of its cars in Europe still—and while Europe won’t be as far along as China is in 10 years, Europe is making a strong regulatory push. Tightening vehicle emissions standards will essentially force automakers to produce more hybrids and electric vehicles each year.
By 2025, the automakers’ average vehicle will have the same emissions as a Toyota Prius hybrid, and by 2030, the standard will tighten to the equivalent of a plug-in hybrid. This means that for every larger nonelectrified vehicle that is sold, it must be offset by an increasingly greater number of electric vehicles and hybrids. Subsidies in the EU vary by country, but Germany, France, and the United Kingdom offer higher subsidies, and they make up roughly half of auto sales in Europe. And they’re backing that up by issuing government grants to build charging infrastructure. Europe, like China, is taking a comprehensive approach that will result in an above global average electric vehicle adoption rate.
 Goldstein, S., Hilgert, R., Whiston, D., et al. 2018. “Electric Vehicle Sales in China and Europe Will Leave U.S. in the Dust, Driving Above-Consensus Global Adoption Rates.” Morningstar Electric Vehicle Observer, September.
This article originally appeared in the December/January 2019 issue of Morningstar magazine. To learn more about Morningstar magazine, please visit our corporate website.
Laura Lallos does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.