Investors Bet on Component Makers in Electric Vehicles Shift

As carmakers ramp up spending on self-driving and electric vehicles (EVs), many investors are betting their component suppliers will be the first winners from the technology shifts.

Asked how they are positioning for the changes, investors interviewed by Reuters more often mentioned suppliers like Aptiv, Valeo, and Continental than the big car brands building them such as Volkswagen, Daimler, and Peugeot.

That partly reflects a long-term shift toward more complex vehicles where components makers are contributing an ever-larger proportion of a car’s total value. It is also an acknowledgment that the big innovations are happening as much in the auto industry’s scattered supply base as in the design hubs of the big carmakers, also known as original equipment manufacturers (OEMs).

“The structural growth opportunities and visibility in the suppliers are higher than for the OEMs where more uncertainties exist, debt is higher and margins/returns typically lower,” said Marcus Morris-Eyton, European equities portfolio manager at Allianz GI. Those companies providing technology that supports an autonomous, connected, shared and electric transportation system are well-positioned to experience heightened levels of profitable growth over the long term. For carmakers, the shift to EVs carries huge costs and risks, with many slashing billions from their cost base to help offset the lower profitability of electric cars. Even premium manufacturers with the highest profit margins are bracing for some pain. Daimler says it will face a significantly lower margin “in the beginning of the cycle”.

With governments stepping up efforts to reduce pollution, carmakers plan to plough at least $90 billion globally into EVs. Much of this has been driven by strict quotas that China, the world’s largest auto market, has set for new-energy vehicles (NEVs) and which are coming into force in 2019.

Like any transformative new technology, electric vehicles create a variety of potent economic development challenges and opportunities. While the electric vehicle market is still at a relatively early stage of development, it is poised to reshape industries and communities the world over. This section provides a quick overview of the potential benefits of electric vehicles so that economic developers can better assess what the evolution of this market will mean to their specific local communities.

Early adopters of electric vehicles face significant constraints in where they can live and work. Before charging infrastructure becomes widespread, communities that can offer adequate charging locations and PEV purchase incentives will have an advantage in attracting and retaining workers who want to make the switch to electrified transportation. Critically, from an economic development perspective, there is good reason to expect that early adopters of electric vehicles will also be highly talented workers.

From the outside, the electric vehicle looks like a gasoline-powered vehicle with the exception that the electric vehicle does not have a tailpipe. Internally, it is quite a different story. According to CALSTART, the advanced transportation consortium in California, 70% of an electric vehicle‘s component parts may be different from a gasoline-powered vehicle. The electric vehicle has several unique components that serve the same function as the more common components in a gasoline-powered vehicle. 

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