Supercharging the Future of the Auto Industry

EVs are on the road to dominate the automotive industry. Global EV sales are set to reach nearly 17 million by year’s end, representing 20% of all new car sales. According to the International Energy Agency (IEA), the global authority on energy policy and statistics, this figure, which includes battery EVs (BEVs) and plug-in hybrid EVs (PHEVs), is likely to grow to 50% of car sales by 2035.

While EV momentum remains positive, the industry-wide shift to full electrification will take time. This year, EVs are expected to account for over 11% of all new car sales in the U.S., up from 10% of new car sales in 2023, but still presenting a long runway for growth. Projected 2024 EV market shares in Europe and China are predicted to exceed the U.S. market share, hitting 25% and 45%, respectively.¹ Along the way to full electrification, there will be many openings for long-term investors to get in at or near the starting gate.

Fueling the EV Boom

A number of secular trends are driving EV adoption in the U.S. and across the world.

More than two in five Americans already plan to buy an EV

EV ownership is still relatively low, but consumer demand is strong. According to 2024 findings from a Bloomberg Intelligence survey, 42% of prospective U.S. car buyers expect to purchase an EV as their next car.² EV-buying intent is even higher in China and Europe (up to 75% in certain regions). Consumer interest should rev up even more as companies expand their electric offerings, EVs become more affordable, battery and in-vehicle technology advances, and charging infrastructure improves.

Decarbonization policies support EVs’ bright outlook

Transitioning from conventional internal combustion engine (ICE) vehicles to EVs will play a key role in achieving net zero emissions targets in the fight against climate change. EVs typically have a much smaller carbon footprint than ICE vehicles, even when accounting for higher emissions during manufacturing and the electricity used for charging.³ While charging EVs becomes greener over time as electricity generation becomes cleaner, the carbon impact of ICE vehicles remains the same every year of use.⁴

The Inflation Reduction Act – the largest investment in decarbonization in U.S. history⁵ – signaled a turning point in EV production and adoption when it was signed into law in 2022, offering up to $7,500 in tax incentives for buyers of EVs and providing billions of dollars to support battery production in the U.S. and the mining and processing of minerals needed for battery cells and electric motors.

States are taking action as well. California and Washington have mandated that 100% of new vehicles sold in the state be zero- emission by 2035, while New Jersey will ban the sale of new gas-powered vehicles by that same year.

The adoption of EVs as a key component of the energy transition from fossil fuels to renewables is also strongly supported in Europe and China. In March 2023, the EU adopted a landmark law requiring all new cars sold in Europe by 2030 to produce 55% lower CO2 emissions than 2021 levels. By 2035, all new cars sold must be zero- emission.⁶ In China, substantial government incentives are being offered to Chinese consumers who go electric. From 2009 to 2022, the country spent more than 300 billion yuan (about $28 billion) on EV subsidies and tax breaks.⁷

As governments continue to roll out supportive policies over the next couple of decades, we expect both new and legacy auto makers to boost their investments in electrification to meet stricter mandates.

EVs are reaching price parity with gas-powered vehicles

Although there is a perception that EVs carry a relatively hefty price tag, that is simply not the case. The Tesla Model 3 starts at $40,380, well below the average cost of a new car in the U.S. of over $47,000. Other EV options are even cheaper, including the $27,495 Chevrolet Bolt, the $29,280 Nissan Leaf, and the $34,050 Hyundai Kona Electric.⁸ Federal and, in some cases, state tax credits make EVs even more affordable to both buy and own today compared to many traditional combustion engine vehicles.

Cost reductions in battery technology and streamlined manufacturing processes should continue to boost the affordability of EVs in the future. The average EV price could eventually become less than that of an entry-level ICE vehicle, while a potential return to the soaring gasoline prices witnessed in recent years could further motivate prospective buyers to go electric.

EV architecture improves efficiency and performance

EVs benefit from their efficient design and advanced power delivery systems. EVs tend to have a lower center of gravity compared to gas- powered vehicles due to the low placement of the battery pack. This enhances stability, allowing for quicker and smoother turns, more precise steering, reduced risk of tipping or rolling over, and a more balanced and controlled driving experience. Most EVs also use high- voltage systems to minimize the amount of electrical current needed, enabling the use of thinner cables and smaller components and reducing energy loss to heat. Higher-voltage batteries can also deliver more power to electric motors, improving regenerative braking and acceleration. Unlike traditional gasoline engines, which need to rev up to reach their maximum power output, electric motors can reach instant torque from a standstill, providing rapid acceleration and a more responsive and enjoyable ride for drivers.

We are long-time – and well-known – investors in Tesla, Inc., a top EV manufacturer. Tesla has a formidable competitive advantage built on its first mover status, household name brand, and exceptional cost efficiencies due to its vertically integrated manufacturing process.

As a pure EV company, Tesla was able to build its operations from the ground up. It controls much of the EV manufacturing process within its massive Gigafactories, often producing parts from raw materials all the way to finished components, allowing for greater efficiency, shorter feedback loops, and reduced production costs. The company has paved the way for greater EV adoption among both consumers and legacy gas-powered car companies (known as OEMs), which in turn has boosted investments in the EV supply chain and battery production, resulting in even better and more affordable batteries.

While most legacy OEMs are embracing the transition to EVs, investing tens of billions of dollars in developing BEVs or PHEVs and building battery plants, they are currently struggling to achieve scale, demonstrate attractive unit economics, and launch highly sought- after electric models. We think EV companies like Tesla can maintain their leading positions as OEMs continue to face structural and cultural challenges.

According to market research agency TrendForce, BYD is Tesla’s closest competitor in the all-electric market, lagging behind the leader by 2.8% in terms of BEV share, as shown in the table above. Combined, the two companies are responsible for 37% of all BEV sales in 2023.

Source: TrendForce.
Please note that this is the most recent data available.

Alongside EVs, we think autonomous driving will be the next seismic shift in the automotive industry. For close to a decade, Tesla and other companies have been working on perfecting and leveraging advanced driver assistance systems (ADAS) and other technologies to develop software-enabled, connected, driverless fleets that can be leased or rented, much like a taxi.

ADAS, which improves the safety and reaction times of the driver through early warning and automated systems, is already a common feature in many vehicles. The next step in the evolution of ADAS, we believe, is fully autonomous vehicles (AVs). By eliminating the need for human drivers, AVs promise reduced operational costs, enhanced safety, and greater service consistency.

Although still in its infancy, we believe the AV/ADAS opportunity is potentially larger than the opportunity presented by EVs alone. While projections vary widely, the mobility community is in broad agreement that autonomous driving has the potential to transform transportation, consumer behavior, and society at large.⁹

Cars are typically second only to homes in terms of cost of ownership and are used on average for just over one hour per day. In densely packed urban areas, the hassle and expense of car ownership typically far outweigh the benefits. For most people, it makes much more economic sense to hire a taxi. AVs have the capacity to make these services readily and widely available.

Tesla has been leading the charge in the self-driving software market since it launched its Autopilot system, a suite of ADAS features, in October 2015. Tesla has continued to update and expand Autopilot over the years, rolling out its Full Self-Driving (FSD) program, the most advanced and autonomous version of Autopilot, in 2020. Featuring self-parking, auto lane changes, and traffic navigations, FSD is working towards achieving fully autonomous driving through software enhancements and real-world data collection from Tesla’s extensive fleet. Most recently, Tesla announced plans to launch the FSD software in Europe and China in early 2025, contingent on securing regulatory approval.

There are dozens of other businesses involved in the development of self-driving cars, ranging from well-known companies like Alphabet (Waymo) to start-ups like Zoox and Nauto. We have a private investment in GM Cruise Holdings LLC, doing business as Cruise Automation. Cruise offers autonomous driving software and a fleet of AVs aimed at reducing costs and improving the safety of transporting people and goods. Despite achieving significant fundamental milestones in recent years, including covering millions of fully autonomous miles with passengers in various states and cities, the company lost its autonomous operating license in California last year due to an incident involving a pedestrian in San Francisco. While unfortunate, bumps in the road are almost inevitable when launching something as complex as an AV company.

GM, Cruise’s majority shareholder, has since reported a slew of new hires to support the regulatory and safety positioning of the organization as it charts a new course for Cruise and its capital needs. Most recently, Cruise announced its plans to resume autonomous driving testing on public roads (with safety drivers for now) and $850 million in funding from GM. While we strongly believe that the life- saving technology emerging from the autonomous revolution holds immense value for both investors and society at large, it is still early, and we are carefully monitoring developments in the space.

As both EV and ADAS penetration within the automotive market shift into high gear, compelling investment options have also emerged across the entire supply chain. Key suppliers for EVs and battery makers – including semiconductor manufacturers, chemical and material processors, and metals and mining companies – may be an attractive alternative to pure-play EV manufacturers, given that many benefit from a diversified customer base and derive revenue from multiple industries.

NVIDIA Corporation

NVIDIA hit headlines in November 2023 when it became apparent that its GPU chip is particularly well suited for generative AI (Gen AI), the technology behind ChatGPT that is widely considered the next iteration in AI. There are numerous case uses for Gen AI – and NVIDIA – with ADAS and self-driving technology among them.

NVIDIA has developed DRIVE, a driving platform for AVs powered by deep learning, along with other technologies geared toward the automotive industry. It has partnered with numerous car manufacturers, including Mercedes-Benz, Jaguar Land Rover, Volvo, Hyundai, and BYD, to bring AI and metaverse technologies into their design and development process.

indie Semiconductor, Inc.

Indie specializes in automotive semiconductors for ADAS and connected care, user experience, and electrification applications. The company’s highly integrated, customized platforms combine increasingly application-specific chips with sensor technologies such as photonics, radio frequency antennas, imaging, and ultrasound. Its 2023 acquisition of camera processing technology leader GEO Semiconductor helped round out its portfolio. Semiconductors are the building blocks of advanced automotive software and electronics, and with demand continuing to grow alongside EV and ADAS adoption, we think the outlook for providers like indie remains bright.

AMG Critical Materials N.V.

The ramp up in EVs is also accelerating demand for the materials needed to produce batteries, including lithium, cobalt, and nickel, among others. AMG, a global specialty metals and minerals company, applies metallurgical-based technologies to provide solutions for energy and resource conservation. The company is advancing its production of lithium and is building its own lithium hydroxide refining plant in Europe to produce higher value chemicals for the EV battery supply chain. The need for lithium and other materials in producing EVs should boost long-term growth for suppliers like AMG, offering investors another avenue of exposure to the secular trend in electromobility.

Conclusion

The EV revolution is here, driven by growing consumer awareness and demand, public policies incentivizing both EV production and ownership, increasing availability and pricing parity, and technological innovation. ADAS and fully autonomous driving are not far behind. We think the time to gear up is now. Companies exposed to or leading these trends could be stellar long-term opportunities.