» 95% of the world’s transport energy still comes from fossil fuels, emitting CO2 into the atmosphere and contributing towards global warming.1
» And greenhouse gas emissions are not the only story – there could be as many as 5 million deaths globally from air pollution, and unclean forms of transportation play a part in that too.2
Without a focus on sustainable mobility, these problems will get worse. Despite birth rates starting to decline, the UN expects the world’s population to ratchet up by almost 2 billion people over the next 30 years, hitting 9.7 billion in 2050.3 To put this in context, it wasn’t until 1930 that the global population of humans hit 2 billion. A population increase that took over a hundred thousand years from the appearance of the first modern humans is now expected to be replicated in 30 years…we are living in an age of accelerated change. Meanwhile, the world is becoming wealthier and more urbanised (the UN expects 68% of people to live in cities by 2050, up from 55% in 2018).4
A more numerous, more affluent global population will demand even more mobility. The UN estimates that the global car fleet could triple by 2050.5 So how do we make sure that this degree of mobility is sustainable?
One part of the answer is the electrification of vehicles. Transportation is responsible for 24% of direct CO2 emissions from fuel combustion6. Running on electricity, EVs swerve this problem.
Covid-19 and the subsequent lockdowns have acted as an accelerant to many structural trends; the electrification of the auto industry is certainly one of these. We appear to have reached a tipping point:
» Whilst global new car sales dropped by 30% in 2020, EV sales boomed.
» In Europe, EV volumes jumped 45% year on year.
Even within the year itself, the electrification process accelerated, with EVs hitting a 16% share of new sales in November, something that would have utterly unthinkable even a couple of years ago.7
Regulation is a major part of this, as governments compete to introduce ever more aspirational phaseout plans for fossil fuel vehicles (known as ICE vehicles – those with internal combustion engines). Countries with proposed bans on ICE vehicles include China, Japan, the UK, South Korea, Iceland, Denmark, Sweden, Norway, Slovenia, Germany, France, the Netherlands, Spain, Portugal and Canada. In November last year, Boris Johnson announced that the UK would pull forwards its ban on new petrol and diesel cars by a full decade, to 2030. Japan, a bastion of the global auto industry, is now rumoured to now be targeting 2035 for a phase out of new ICE vehicles, an ambitious timeframe that has raised the ire of several automotive titans in the country.
This favourable regulatory backdrop is coupled with the remarkable engineering and chemistry work around battery technology that has seen battery cost per kilowatt hour drop by around 90% over the decade.8 Elsewhere, charging infrastructures are being rapidly built out, ranges on a single charge are dramatically increasing, and subsidies for electric cars are being rolled out. In summary, we are now in a position where within a few years it will probably be both cheaper and cleaner to drive an electric car.
Searching for the sustainable investment opportunities
Tesla’s now legendary 2020 run may be the most eye-catching manifestation of EV enthusiasm, but there are other, perhaps subtler, ways of investing into the space.
Murata is a Japanese maker of electronic components, and the world leader in the manufacture of multi-layer ceramic capacitors (MLCCs) components, which are essential to storing electric charge and controlling current flow in a circuit. Within the automotive space, Murata has a 65% global market share of MLCCs, a dominant position underpinned by the fact that its components are highly reliable and durable and can operate under the sorts of high heat and stress that occur in a vehicle. Murata stress tests its MLCCs at 200°C – more stringent conditions than any of its competitors.
The electronics in an electric vehicle are far more sophisticated than in an ICE vehicle, and the number of MLCCs per vehicle is correspondingly higher. Just within the powertrain itself, it’s estimated that an electric vehicle has 3000 MLCCs, versus closer to 600 in a basic ICE vehicle. Modern automation technology layers on another 1000 MLCCs. It’s estimated that a top of the range Tesla, with its industry leading electronics and automation capabilities, has as many as 20,000 MLCCs.
With many industry experts now calling for electric vehicle penetration to hit 30-40% of new sales by 2030, we are talking about a massively expanded, addressable market for a company like Murata with a dominant global market share and strong competitive moat. In our view, these are the sorts of companies without the name recognition of Tesla, but which are none the less poised to capitalise on and facilitate one of the great sustainable mobility transitions of our lifetime.
We believe another potential way to play the sustainable mobility transition is on the materials side. Umicore is a global materials technology and recycling group. It is a leading supplier of materials that help support clean mobility across the full range of vehicle drive trains:
» It supplies battery cathode materials to full electric vehicles, as well as plug-in hybrids
» It supplies electro-catalyst and battery cathode materials to fuel cells
» It supplies emissions control catalysts to ICE vehicles
Umicore is the market leader in supplying cathode materials used in lithium-ion batteries, and its materials have a direct impact on cost/performance ratio, charging speed, as well as safety. As demand for high-quality, high-performance lithium ion batteries ramps up enormously over the next several decades, we believe Umicore could be a key facilitator through its high-performance materials.
Don’t forget the humble bicycle
But as well as being futuristic, sustainable mobility may well involve a reversion to some much older forms of transportation. The humble bicycle evolved in the early 19th century, with a German baron by the name of Karl von Drais creating the first steerable two-wheeled model in 1817.
Cycling has seen a major renaissance in 2020, as families cooped up at home turned to healthy outdoor activities, and commuters fearing the cramped confines of trains and buses opted instead for cycling commutes. In the UK, there were more than 1 million new cyclists on the road in 2020, cycling miles completed in April-June during the peak of lockdown were up 250% from normal pre-Covid levels, and retail sales from March onwards rose 60% YoY. These are unprecedented levels of growth for the cycling industry in modern times. More than 300 cities in the world have added materially to their cycling lanes in the last year, which should help making this cycling boom stick.
We believe Shimano is a potential way to play the return to cycling. It is the undisputed global titan of the bike components industry, controlling almost 80% of the gears and breaks market – a dominance akin to Google’s in the search market. Japan has a long history of world-class metalwork, including iron forgers who crafted some of the greatest swords ever made for the Japanese warrior class, Samurai. Shimano has 100 years of experience in the space, and produces impeccable quality metal gears and breaks at its large campus in Osaka, using its patented cold forging processes that it’s been perfecting since 1962, as well as heat forging at 500°C, to turn sheets rods of raw metal in strong, precision components. There is a perfectionism in the DNA of Shimano, and that has helped make its components the default for the cycling industry, in our view putting it in a strong position to contribute to and profit from this particular form of sustainable mobility.
Meet Harry Waight
Meet Harry Waight
Harry joined BMO GAM in 2013, and works as a portfolio manager on the Global Equities team. He focuses on Japan, as well as global stocks contributing to Technological Innovation and Health and Well-Being. Outside of work he is interested in understanding history, as well as mastering Jiu-Jitsu – both of which are proving equally challenging.