The Trends of Electric Vehicles and Their Industrial Chain

Electric Vehicles
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New energy vehicles continue to gain momentum in 2021 as they have entered an accelerated development stage. The sales of electric vehicles, including both battery electric and plug-in hybrids, increased by 160% year-on-year to approximately 2.6 million units for the first half of 2021, which account for 26% of the global automobile sales.

Under the combined effects of new eco-policies, high-quality supply chain, higher gas prices, demand side shifts, the sales of the new energy vehicles are expected to surpass 10 million worldwide in 2022. While companies engaged in the related businesses are currently facing abundant opportunities, they also have to deal with significant challenges from both technology and market sides.

As the forerunner manufacturer of electric vehicles, Tesla (NASDAQ: TSLA) has already taken more than 74% of the market share worldwide. The annual production capacity of Tesla Giga Shanghai is close to 700,000, while the annual production capacity of Tesla Fremont factory is close to 600,000. Tesla Giga Texas is expected to be put into operation in 2022 while Tesla Giga factory Berlin will start mass production by the end of this year.

Tesla achieved sales of 500,000 vehicles in 2020, and it delivered a total of approximately 630,000 vehicles for the first three quarters of 2021, of which approximately 240,000 vehicles were delivered in Q3 2021, an increase of 73% year-on-year.

Tesla’s gross profit margin of the automotive business is 30.5% higher than the industry average, and the company is expected to sell 850,000 to 900,000 vehicles in 2021. Tesla recently announced that it will switch to LFP batteries for all its standard-range cars. The scale effect of such a shift will increase the company’s profitability and benefit the entire supply chain.

The company’s income statement for Q3 2021 shows that its revenue reached a record high of $13.757 billion, achieving a consecutive quarterly growth. During the same period, the company’s net profit reached $1.618 billion, an increase of 41.7% compared to last quarter.

Now is a good time for electric car manufacturers to go public, especially for those companies that have already entered the delivery stage of their products. Rivian (NASDAQ: RIVN), a manufacturer of autonomous electric vehicles headquartered in Irvine, California, launched Nasdaq on November 10, 2021 with an offering price of $78 per share and the total offering size of $10.53 billion. The company’s main product line features passenger vehicles and commercial delivery vehicles that equip durable 180 KWh batteries and level 3 autonomy systems.

The company partnered with Amazon to co-design and manufacture Rivian EDV (Electric Delivery Van) in 2019, and the delivery of this model will begin at the end of this year. Since the release date of Tesla’s Cyber trucks was postponed to 2022, Rivian has preempted the market share in the field of electric trucks. According to Bloomberg, Rivian is post-valued at approximately 76.6 billion, naming it the largest IPO in 2021 and the sixth largest IPO in U.S. history.

In comparison, the post-IPO valuation of Tesla was less than 2 billion back in 2010 with the total offering size of $0.226 billion. Li Auto (NASDAQ: LI) and Xpeng (NYSE: XPEV) raised $1.1 billion and $1.5 billion respectively last year during their IPOs.

On the first day of listing, Rivian’s stock price increased by 50% to $119 and its market capitalization exceeded $100 billion, surpassing Ford Motor (NYSE: F) and Lucid Motors (NASDAQ: LCID). Rivian had a net loss of $994 million for the first half of 2021, compared with the net loss of $377 million in the same period last year. Due to the increased manufacturing costs related to model R1T, an electric pickup truck, the company’s net loss for the third quarter of this year may reach $1.28 billion.

President Biden in August announced that he planned to sign a new executive order to achieve the goal of 50 percent electric vehicles sales by 2030, containing battery electric vehicles, plug-in hybrid vehicles, and fuel cell vehicles. On November 5, 2021, the $1.2 trillion bipartisan infrastructure bill was passed by the House of Representatives, consisting of billions of dollars for electric vehicles and clean energy.

According to Barron’s, to achieve Biden’s goal, the United States will have to spend nearly $100 billion in the next nine years to manufacture sufficient amounts of electric vehicles and lithium batteries, and it will also have to establish and maintain the related supporting infrastructure. For the time being, there are around 2 million electric vehicles on the roads in the United States, but only 2% of the vehicles sold in 2020 were pure electric vehicles. Taking General Motors as an example, the company delivered 1.3 million vehicles in the United States in the first half of 2021, and only 20,300 were electric vehicles, accounting for 1.6%.

According to the statistics done by The International Energy Agency (IEA), the United States accounts for only 17% of the world’s 10.2 million electric vehicles, which is far behind China’s 44% and Europe’s 31%. From 2016 to 2020, the United States, Europe and China have compound annual growth rates for electric vehicles of 17%, 60%, and 36% respectively. The reason why the data of the United States lags behind other regions is because of the consumption habits, the generally higher insurance rates of electric vehicles, and the limitations of utility.

On the other hand, such results also reflect the unreleased potential of demand in the U.S. market. With the market reopening, as well as the Biden’s infrastructure plan, the industry scale for electric vehicle industry is expected to expand in 2022. In order to propel Biden’s infrastructure plan, U.S. Department of Transportation announced $182 million in grants for the deployment of zero-emission and low emission transit buses and their supporting facilities. In addition, many state agencies have also implemented their own grant plans.

For example, Washington State Department of Transportation plans to award approximately $8 million in grants for projects to be completed 2021 through 2023. Owners of new all-electric or plug-in hybrid vehicles purchased after 2021 also enjoy the preferential tax policies as they are eligible for a federal income tax credit of up to $7,500. In order to stimulate the domestic industrial chain, government-purchased electric vehicles are strictly required to use at least half of American-made auto parts.

The current electric vehicle market in the United States is majorly driven by policies rather than fundamentals, and this is because the market has not yet grown large enough to arrive full competition. When consumers evaluate electric vehicles, they compare electric vehicles with traditional fuel vehicles, and they mainly focus on the cost of purchasing vehicles, the cost of driving the vehicles, and the residual value of vehicles. In the medium and long term, the demand for electric vehicles will shifted from subsidy-driven to market-driven.

In Europe, the impact incurred by the decline of government subsidies is limited, and sales of electric vehicles are expected to reach 2.55 million units by 2022. Traditional European automakers such as Volkswagen, Mercedes-Benz Volvo continue to release their own high-quality electric models. The Chinese government has enacted a series of policies that are beneficial to its domestic electric vehicle market. China’s monthly sales have continued to increase each month after Q2 2021 as the pandemic has stabilized.

The market penetration rate of electric energy vehicles in China has exceeded 20% in September 2021, and the annual sales of 2021 are expected to reach 3.2 million, an increase of 133% year-on-year. Companies in the business of fast charging networks for electric vehicles are also worthy of attention. For instance, the stock price of EVgo Services (NASDAQ: EVGO) has risen by 98% in the most recent month.

The company previously announced that it would partner with General Motors to build more than 2,700 new fast chargers across the U.S. over the next five years to bolster the electric vehicle presence. In addition, it also announced that it would provide Uber drivers with an exclusive discount.

Usually, it takes a fast charger about 20 to 45 minutes to complete the charging work in order to meet the high turnover requirements of the charging station operators and drivers. The infrastructure bill passed by the US House of Representatives this November will provide $7.5 billion for the construction of car charging infrastructure. “We’re going to build out the first-ever national network of charging stations all across the country — over 500,000 of them. So, you’ll be able to go across the whole darn country, from East Coast to West Coast, just like you’d stop at a gas station now.” said President Biden.

The United States now has 150,000 traditional gas stations, but there are only less than 10,000 fast charging stations nationwide. Arcady Sosinov, the CEO of FreeWire Technology, mentioned that it requires at least $10 billion of investments to build 50,000 fast charging stations. Other notable companies in the business of fast charging networks include Volta (NYSE: VLTA), ChargePoint (NYSE: CHPT), and WallBox (NYSE: WBX).

In 2020, the total global lithium mining volume reached 400,000 tons, of which one-third of lithium was used for the production of car batteries, and they could power nearly 3 million electric vehicles. If the production capacity of electric vehicles in the United States would be increased to 8 million per year, and other countries would also increase their demand at the same pace, the global lithium mining volume would reach 5 million tons per year, which would be a 13-fold increase for the entire industry.

The Global X Lithium & Battery Tech (LIT) ETF invests in the full life cycle of lithium mining industry, and it also serves as the key indicator of the electric vehicle industry. With the strong trend of the global electric vehicle market, the index increased by more than 80% in the past one year. The prosperity of the lithium industry has been reflected in the stock prices of various companies, such as Lithium Americas (NYSE: LAC), Livent Corp (NYSE: LTHM) and Albemarle (NYSE:ALB).

Nevertheless, as the lithium mining industry is currently heading towards a state of “permanent shortage” as the strong demand for lithium cannot be satisfied by the supply side. In order to maintain the stable and low-cost lithium supply, many car manufacturers plan to make strategic investments. For example, General Motors partnered with Controlled Thermal Resources in July this year to establish several lithium mining related projects in Salton Sea, California.

According to the United States Geological Survey, this location is estimated to contain 15 million tons of lithium resources. At present, the United States still needs to import a large amount of raw materials and finished products in the short to medium term due to its limited domestic production capacity of lithium batteries, which is mainly set up by Japanese and Korean manufacturers. Those lithium battery manufacturers in China will also enjoy the high growth of the industry by virtue of their low manufacturing costs and mature industrial chain.

The electric vehicle industry has also been plagued by the issue of chip shortages for a period of time. Due to the imbalance between demand and supply and the impact of the epidemic, especially the severe epidemic in Southeast Asia, that accounts for 27% of the global semiconductor packaging and testing industry, the production capacity of automotive chips is unable to keep up with the rising demand. This issue has led to a massive reduction in production in the global automotive industry.

According to the data provided by Auto Forecast Solutions (AFS), as of August 29, the global auto production has been reduced by 6.89 million. At the same time, AFS predicts that global automobile production will be reduced by 8.107 million units in 2021. The CEO of BMW expects that the chip shortage will last for another 6 to 12 months. Semiconductor giants such as TSMC, Samsung, and UMC have collectively set off a wave of price increases ranging from 10% to 20%.

In the past few years, the number of chips required in traditional vehicles is about 500 to 600 per vehicle. Due to the trends of clean energy and autonomous driving technology, the number of chips in each vehicle has been increased to 1200 to 1700. The MCU (micro control unit) chips, which control brakes, air conditioning, instrumentation, security, door locks and other systems, have experienced the most serious deficiency issue in the market.

The fore mentioned three semiconductor companies recently announced that they will invest $137 billion to build new chip factories in the United States and European countries to expand their productivity.

Nevertheless, those new facilities won’t solve the issue in the short time. From the perspective of production capacity, it usually takes 2 years to build a chip factory and pass the AEC-Q100 certification. This round of chip shortages has also draw attention at the national level as many countries have realized the importance of owning an independent industrial chain, which will not be disturbed by the supply situation in other countries.

European Union will raise tens of billions of euros to promote the development of semiconductor-related technologies. The American Semiconductor Industry Association (SIA) also called on the congress to increase federal funding for the development of chips by $3.5 billion in the next five years.

Erli Wang

Research Analyst

 

 

 

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