Reflections on the Automotive Industry in 2022
Written by Chris Stebbings
The world has changed with the Russian invasion of Ukraine in February, and this has also impacted the automotive industry.
The price of oil has surged to as high as $115 per barrel, with some saying it could go as high as $300. Energy security across Europe has become a primary concern, leading to a renewed interest in nuclear, oil and gas production, and accelerating the renewable agenda. Moreover, while CO2 emissions targets may take a back seat during this crisis, the reality is that electric and hydrogen vehicles are well on their way to become far more economical than petrol and diesel transportation.
Recent actions from global automotive OEMs suggest that the transition to EV and hydrogen vehicles is a permanent structural change to the industry. For example, Ford announced plans to split up its EV and traditional engine businesses earlier this month, as it is speeding up its shift toward electrification. And it is not stopping there: the carmaker now has Europe – the world’s second-biggest EV market after China – in its sights, pouring another $1 billion into its main European production site in Germany. After all, that should help it churn out the seven new EV models – both cars and vans – it has pledged to launch in Europe over the next two years. If all goes to plan, Ford predicts it will sell around 600,000 EVs in the region every year from 2026, a step toward its goal of only selling fully electric models by 2035.
As carmakers pursue broad rollouts of EV models, gyrating raw material and energy prices are adding to the pressures. Russia is a key exporter of a host of inputs, including nickel and palladium as well as steel, while the ability of manufacturers to pass on higher costs to consumers is limited. Car prices have already rocketed as the chip shortage idled plants amid strong vehicle demand. Disruption from the war in Ukraine has forced VW to shut plants more recently. Ukraine produces half the world’s neon, which is used in chip manufacture.
For investors in AIM, there are several interesting opportunities to play the clean energy revolution in transport. Saietta Group plc (SED), which recently IPO-d, is helping OEMs accelerate the change to electric vehicles in lightweight electric motors and drivetrains and is focused on motorcycles and buses; Equipmake, which will be looking to IPO very soon, is currently focused on electric buses; and of course, there are also various lithium miners and other more conventional battery plays.
Buses are particularly interesting. They have a predictable workload: unlike trucks they return to the same depot every night where they can be recharged. They are also by and large publicly owned so governments can use them to push through decarbonization plans (and reduce urban pollution), and there are a huge number of diesel buses out there. Moreover, the manufacturing process (coachbuilders put the body on bought-in chassis) facilitates the substitution of electric for diesel and even hybrid drive trains.
Of the more established AIM automotive plays, we see significant value in AB Dynamics (£11) and Surface Transforms (42p), both of which have halved in value over the last six months yet are global leaders-in-waiting in their fields of simulation products and testing services and, in the case of Surface Transforms, carbon ceramic braking systems.
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