Part 3 – ElectrificationThaiha Nguyen, Investment Manager
A wave of revolutionary new technologies is set to transform the way we travel from A to B. In this short series, Thaiha Nguyen, a Baillie Gifford investment manager, takes an in-depth look at the business of personal transport on the brink of change.
The value of any investment can fall as well as rise and investors may not get back the amount invested.
Surprisingly enough, it was electric motors and battery engines, not the internal combustion engine (ICE), that had the upper hand in the early days of motoring. The first electric carriages were built in the 1830s in Scotland and the Netherlands. Subsequent breakthroughs in battery storage capacity led to the commercialisation of battery-powered cars in France and Britain in the 1880s and in the US in the 1890s.
The vehicles were quiet, clean and simple to operate. ICE vehicles by contrast were complex, noisy, dirty and dangerous.
What happened? A remarkable convergence of ICE technology, particularly the invention of the electric self-starter, which eliminated the hand-crank, made ICE vehicles easier and safer to start. Henry Ford’s low-cost mass production techniques, the discovery of oil in Oklahoma and Texas, road development, public policy and consumer demand all conspired to enshrine ICE as the predominant power. EVs were banished to the fringes.
Over the years, there were sporadic attempts to revive EV technology, but they never surmounted high production costs, limited range (particularly in cold weather) and lengthy charging times. The most notable attempt was by General Motors (GM) in the late 1990s. It leased, and then promptly took back and crushed all its electric EV1 vehicles. Looking back, the former head of R&D at GM who was responsible for EV1 programme said:
“We blew it with the EV1…because of the short-term pressure of rewarding shareholders with appropriate returns, the health care and pension costs hamstringing us in the early nineties and the need to do a whole lot of spending on our fundamental business to get back in the game.”
GM later regretted it, believing Tesla’s first car, the Roadster, 16 years after EV1, was less innovative and that electric car technology would be a lot further along than it is today if GM had kept the programme going.
GM’s troubles encapsulate the innovation dilemma faced by traditional carmakers and explain the slow transition to EVs. It was the challenge from Tesla and the tightening of CO2 emissions rules around the globe that made the difference.
Roadblocks: barriers to breakthrough
Support from regulators can transform the pace of adoption. China has led the way by subsidising EV buyers and mandating the car industry to produce EVs. By contrast, under President Trump, the US Government loosened emissions standards and reduced tax rebates on EVs.
Battery technologySpurred by the limited range and high cost of lithium-ion batteries, the search is on for better batteries, including smaller, lighter ‘solid-state’ electrolyte alternatives. If manufactured at scale, EVs could compete on cost with petrol-powered equivalents.
InfrastructureProliferating charging stations and higher charging speeds will help reduce ‘range anxiety’. The next technology leap will be around charging on the go, either wirelessly or by conductive rails.
China has been at the forefront of promoting EVs. Whether its aim is to address a rapidly increasing pollution problem, to reduce reliance on imported oil, or simply to stake a leadership claim on the next era of global mobility, China is currently leading global EV sales, accounting for more than half of the total. It is also driving the electrification of other types of vehicle, such as buses and two-wheelers, accounting for more than 99 per cent of these two modes of electric transportation stock globally. To meet its goal of becoming the undisputed EV champion by 2025, China is implementing a two-pronged approach: offering subsidies to EV buyers while mandating automotive companies to amass credits on the sales of EVs that can be transferred or traded.
India is another country heavily reliant on imported oil. In an effort to manage its massive oil bill, the government intends that by 2030, EV sales will account for 30 per cent of all new vehicle sales.
EV adoption is picking up in Europe. In the EU-15 nations (broadly, the western European countries) alone, the share of diesel engine-based vehicles declined from 56 per cent in 2011 to 45 per cent in 2017. This was set off by consumer reaction to the Volkswagen “dieselgate” scandal in 2015, when it was discovered the company had been rigging diesel-powered vehicles to cheat on government emissions tests. The subsequent decision by the German federal court to allow individual cities to ban diesel vehicles and the imposition of additional taxes on diesel vehicles in countries such as the UK are causing buyers to think twice before committing to ICE.
A few countries, including the UK, Norway, France and the Netherlands, have already announced plans to ban the sales of vehicles that run on conventional petrol and diesel fuel. This is planned over the next two to three decades, which should bode well for EVs.
North America, however, is likely to lag for some time. Consumers there prefer to drive vehicles with petrol (gasoline) engines, as the price of ‘gas’ is significantly lower there than elsewhere. Further, US Government policy has shifted to looser emissions standards and the government is tightening the screws on tax rebates. Together these policies have dampened EV adoption.
For example, President Trump wanted to end the federal tax credit of up to $7,500 on new electric vehicles and plug-in hybrids, to save (the White House claims) $2.5 billion over the decade. Right now, the credit is phased out to buyers once the manufacturer has sold 200,000 electric cars, removing some of the incentive for that company to further expand its EV offerings. Only Tesla and General Motors have breached that cap so far.
Development of battery technology
Customers’ biggest concerns about BEVs are the driving range and the price premium, both related to the state of battery technology. The lithium-ion batteries in use today are iterations of a technology developed almost 40 years ago and commercialised by Japan’s Sony Corporation back in 1991. As the years go by, we’re squeezing more juice from the pack: energy density is rising by up to 8 per cent per annum, thanks to the continuing optimisation of existing lithium-ion cell chemistries, as well as the introduction of new battery cell materials. At the same time, advances in battery management systems contribute towards extending vehicle range while simultaneously improving safety and extending battery life. Many original equipment manufacturers (OEMs) have announced planned new BEV models with ranges more comparable to their ICE counterparts.
Battery prices have dropped by more than 80 per cent since 2010, from $1,160/kWh to $156/kWh in 2019. Battery prices are inversely correlated with production volumes. Historically, for every doubling of cumulative volume, there was an 18 per cent reduction in price. Based on this observation and battery demand forecasts, it is expected that the average price will be approximately $90/kWh by 2024 and $62/kWh by 2030. Experts believe that when battery costs fall to $100/kWh, EVs will be cheaper than ICE vehicles.
These are the average price figures. Tesla/Panasonic’s batteries are believed to be roughly 20 per cent cheaper. On Tesla’s recent ‘Battery Day’, Elon Musk unveiled a plan to produce a newly designed battery in-house to dramatically reduce costs, and ultimately allow the company to sell its vehicles for the same price as gasoline cars. Musk anticipates that Tesla will deliver a compelling $25,000 passenger electric vehicle within the next three years.
But the ‘super battery’ hasn’t yet been invented. At some point, we will run into the limitations of chemistry as well as of manufacturing efficiencies. Academic researchers and companies are racing to come up with new battery technologies.
Of all the possibilities, the solid-state battery is often the most cited and has received the most investment. This involves substituting out the liquid electrolyte found in lithium-ion batteries in favour of a solid electrolyte. For example, in 2019, Toyota announced a joint venture with Panasonic for a solid-state design; while Hyundai, Samsung, Ford and BMW all invested in Solid Power (a solid-state battery start-up). Interest is high because solid-state batteries are smaller and lighter, provide 50 per cent more power density and are less flammable than lithium-ion batteries based on liquid electrolytes.
An electric car with a solid-state battery could simplify the thermal management systems in favour of a larger battery, and thus achieve a longer range. However, the main barrier to its widespread adoption has been the search for a solid electrolyte with enough conductive capacity for large batteries, as well as a manufacturing method allowing economies of scale.
Although many breakthroughs are being claimed, we shouldn’t underestimate the time it takes for a new technology to be fully commercialised in the car sector. Historically it has taken four to five years to develop a new vehicle model. The move to electrification is shortening these timelines but safely getting below three years is very difficult, even after the battery has been rigorously tested. Hence it is likely to take more than five years for any new battery technologies to reach commercialisation. J.B. Goodenough, one of the lithium-ion battery’s creators, was criticised over his claims about a superior solid-state battery developed in his lab. Even Elon Musk, a specialist in bold claims, is a sceptic on battery development:
“When somebody has like some great claim that they’ve got this awesome battery, you know what? Send us a sample. Or if you don’t trust us, send it to an independent lab where the parameters can be verified. […] everything works on PowerPoint. If you like, I’ll give you a PowerPoint presentation about teleportation to the Andromeda Galaxy.”
Overall, my take on this is that while it is important to track the development of solid-state batteries, they are not needed to enable electric vehicles to be competitive with petrol cars. Such a technology will arrive and push EVs forward, but in the meantime current incremental improvements in lithium-ion batteries will be sufficient to make EVs highly competitive and desirable.
Development of charging infrastructure
Over time concerns about a lack of EV charging infrastructure will decrease for three reasons. First, the next generation of BEVs will have a greater range; second, charging infrastructure is rapidly being built; and third, charging time is falling dramatically.
Tesla has been building its proprietary charging network across the globe for years. Currently, there are over 20,000 individual Superchargers at over 2,000 stations. Last year, Tesla introduced its V3 Superchargers, which support a peak rate of up to 250kW and can charge up to 1,500 electric vehicles a day. This means that up to 180 miles of range can be added to the battery in just 15 minutes on a Model 3 Long Range. In June 2020, the German government mandated every filling station in the country to provide charging for electric vehicles.
But charging technology can go much further. A special route called eRoadArlanda has been built in Stockholm that charges modified electric vehicles as they drive along, thanks to a conductive electric rail. This is part of the Swedish government’s plan to move from petrol and diesel and achieve a fossil fuel-free transport system by 2030. Another example comes from the European Union-funded FABRIC, which investigates the feasibility of wireless charging spots at car parks, road junctions and at traffic lights.
I started researching the automotive industry back in 2015 when I first looked at BMW. My conclusion at the time, gathered from conversations with BMW executives and industry experts, was that the time was not right for EV technology. I felt that fuel efficiency could be achieved largely through better engineering and aerodynamics, without the need for electrification. At that time, no major OEMs were committed to EVs.
Fast forward to 2020: BMW plans to mass produce 12 EV models by 2025. Daimler plans to unveil 130 electrified vehicles by 2030 and has budgeted $30bn for investment in batteries. Volkswagen will invest up to $91bn in battery and EV technology to electrify all 300 of its models by 2030. Ford will invest $11bn in green technology and has given guidance that it will produce 40 all-electric and plug-in hybrid vehicles by 2022. Volvo has committed to putting one million electrified cars on the road by 2025. The field is moving fast, and my conclusions of five years ago feel naïve and unimaginative.
Global sales of EVs have risen significantly over the last few years and will continue to grow, driven by government policies encouraging vehicle owners, along with tighter emissions standards and advances in lithium-ion battery technologies and charging infrastructure. Five or so years since I first looked into the automotive industry, I am convinced that the world is shifting to EVs faster than we imagined.
Thaiha Nguyen Investment Manager
Thaiha is an Investment Manager who joined Baillie Gifford in 2014. She is an analyst in the US Equities Team and has been involved in running the North American portion of the Managed Fund since 2020. She is also a Portfolio Adviser to the Positive Change Strategy. She is a CFA Charterholder and graduated BA (Hons) in Economics from the University of Cambridge in 2014.
New transport terminology: a glossary
Advanced driver assistance systems such as automatic emergency braking, lane departure correction and adaptive cruise control
Air traffic management
Battery electric vehicles
Distributed electrical propulsion
Electric vertical take-off and landing vehicles
Hybrid electric vehicle
Internal combustion engine
Light detection and ranging sensing system, which uses pulsed laser beams to measure depth and distance to build up a 3-D map of the environment
Transportation schemes designed for short distances, using lightweight, usually single-person vehicles, such as scooters and bikes
Non-internal combustion engine vehicles
This encompasses battery electric vehicles (BEVs), plug-in hybrid electric vehicles (PHEVs) and hybrid electric vehicles (HEVs)
Original equipment manufacturers (carmakers)
Over-the-air updates for firmware and software, performed wirelessly rather than via cable
Plug-in hybrid electric vehicles
Small unmanned aircraft system
Transportation as an asset
Transportation as a service
Urban air traffic management system
Small airports for eVTOLs
Airports for VTOL aircraft
Pads for one or two VTOLs with minimal infrastructure
Vertical take-off and landing vehicles
Important Information and Risk Factors
The views expressed in this article are those of Thaiha Nguyen and should not be considered as advice or a recommendation to buy, sell or hold a particular investment. They reflect personal opinion and should not be taken as statements of fact nor should any reliance be placed on them when making investment decisions.
This communication was produced and approved in December 2020 and has not been updated subsequently. It represents views held at the time of writing and may not reflect current thinking.
This article contains information on investments which does not constitute independent research. Accordingly, it is not subject to the protections afforded to independent research, but is classified as advertising under Art 68 of the Financial Services Act (‘FinSA’) and Baillie Gifford and its staff may have dealt in the investments concerned.
All information is sourced from Baillie Gifford & Co and is current unless otherwise stated.
The images used in this article are for illustrative purposes only.
Baillie Gifford & Co and Baillie Gifford & Co Limited are authorised and regulated by the Financial Conduct Authority (FCA). Baillie Gifford & Co Limited is an Authorised Corporate Director of OEICs.
Baillie Gifford Overseas Limited provides investment management and advisory services to non-UK Professional/Institutional clients only. Baillie Gifford Overseas Limited is wholly owned by Baillie Gifford & Co. Baillie Gifford & Co and Baillie Gifford Overseas Limited are authorised and regulated by the FCA in the UK.
Persons resident or domiciled outside the UK should consult with their professional advisers as to whether they require any governmental or other consents in order to enable them to invest, and with their tax advisers for advice relevant to their own particular circumstances.
Baillie Gifford Investment Management (Europe) Limited provides investment management and advisory services to European (excluding UK) clients. It was incorporated in Ireland in May 2018 and is authorised by the Central Bank of Ireland. Through its MiFID passport, it has established Baillie Gifford Investment Management (Europe) Limited (Frankfurt Branch) to market its investment management and advisory services and distribute Baillie Gifford Worldwide Funds plc in Germany. Baillie Gifford Investment Management (Europe) Limited also has a representative office in Zurich, Switzerland pursuant to Art. 58 of the Federal Act on Financial Institutions (“FinIA”). It does not constitute a branch and therefore does not have authority to commit Baillie Gifford Investment Management (Europe) Limited. It is the intention to ask for the authorisation by the Swiss Financial Market Supervisory Authority (FINMA) to maintain this representative office of a foreign asset manager of collective assets in Switzerland pursuant to the applicable transitional provisions of FinIA. Baillie Gifford Investment Management (Europe) Limited is a wholly owned subsidiary of Baillie Gifford Overseas Limited, which is wholly owned by Baillie Gifford & Co.
Baillie Gifford Investment Management (Shanghai) Limited
柏基投资管理(上海)有限公司 is wholly owned by Baillie Gifford Overseas Limited and may provide investment research to the Baillie Gifford Group pursuant to applicable laws. Baillie Gifford Investment Management (Shanghai) Limited
柏基投资管理(上海)有限公司 is incorporated in Shanghai in the People’s Republic of China (PRC) as a wholly foreign-owned limited liability company under the Company Law of the PRC, the Foreign Investment Law of the PRC and its implementing rules, and other relevant laws and regulations of the PRC.
Baillie Gifford Investment Management (Shanghai) Limited
柏基投资管理(上海)有限公司 is registered with the Shanghai Municipal Administration for Market Regulation, with a unified social credit code of 91310000MA1FL6KQ30, with its registered office at Unit 4203-04, One Museum Place, 669 Xin Zha Road, Jing An District, Shanghai 200041, China. Baillie Gifford Investment Management (Shanghai) Limited
柏基投资管理(上海)有限公司 is a registered Private Fund Manager with the Asset Management Association of China and manages private security investment fund in the PRC, with a registration code of P1071226.
Baillie Gifford Asia (Hong Kong) Limited
柏基亞洲(香港)有限公司 is wholly owned by Baillie Gifford Overseas Limited and holds a Type 1 and a Type 2 licence from the Securities & Futures Commission of Hong Kong to market and distribute Baillie Gifford’s range of collective investment schemes to professional investors in Hong Kong. Baillie Gifford Asia (Hong Kong) Limited
柏基亞洲(香港)有限公司 can be contacted at Room 3009–3010, One International Finance Centre, 1 Harbour View Street, Central, Hong Kong. Telephone +852 3756 5700.
Baillie Gifford Overseas Limited is licensed with the Financial Services Commission in South Korea as a cross border Discretionary Investment Manager and Non-discretionary Investment Adviser.
Mitsubishi UFJ Baillie Gifford Asset Management Limited (‘MUBGAM’) is a joint venture company between Mitsubishi UFJ Trust & Banking Corporation and Baillie Gifford Overseas Limited. MUBGAM is authorised and regulated by the Financial Conduct Authority.
This material is provided on the basis that you are a wholesale client as defined within s761G of the Corporations Act 2001 (Cth). Baillie Gifford Overseas Limited (ARBN 118 567 178) is registered as a foreign company under the Corporations Act 2001 (Cth). It is exempt from the requirement to hold an Australian Financial Services License under the Corporations Act 2001 (Cth) in respect of these financial services provided to Australian wholesale clients. Baillie Gifford Overseas Limited is authorised and regulated by the Financial Conduct Authority under UK laws which differ from those applicable in Australia.
Baillie Gifford Overseas Limited is registered as a Foreign Financial Services Provider with the Financial Sector Conduct Authority in South Africa.
Baillie Gifford International LLC is wholly owned by Baillie Gifford Overseas Limited; it was formed in Delaware in 2005 and is registered with the SEC. It is the legal entity through which Baillie Gifford Overseas Limited provides client service and marketing functions in North America. Baillie Gifford Overseas Limited is registered with the SEC in the United States of America.
The Manager is not resident in Canada, its head office and principal place of business is in Edinburgh, Scotland. Baillie Gifford Overseas Limited is regulated in Canada as a portfolio manager and exempt market dealer with the Ontario Securities Commission (‘OSC’). Its portfolio manager licence is currently passported into Alberta, Quebec, Saskatchewan, Manitoba and Newfoundland & Labrador whereas the exempt market dealer licence is passported across all Canadian provinces and territories. Baillie Gifford International LLC is regulated by the OSC as an exempt market and its licence is passported across all Canadian provinces and territories. Baillie Gifford Investment Management (Europe) Limited (‘BGE’) relies on the International Investment Fund Manager Exemption in the provinces of Ontario and Quebec.
Baillie Gifford Overseas Limited (“BGO”) neither has a registered business presence nor a representative office in Oman and does not undertake banking business or provide financial services in Oman. Consequently, BGO is not regulated by either the Central Bank of Oman or Oman’s Capital Market Authority. No authorization, licence or approval has been received from the Capital Market Authority of Oman or any other regulatory authority in Oman, to provide such advice or service within Oman. BGO does not solicit business in Oman and does not market, offer, sell or distribute any financial or investment products or services in Oman and no subscription to any securities, products or financial services may or will be consummated within Oman. The recipient of this document represents that it is a financial institution or a sophisticated investor (as described in Article 139 of the Executive Regulations of the Capital Market Law) and that its officers/employees have such experience in business and financial matters that they are capable of evaluating the merits and risks of investments.
This strategy is only being offered to a limited number of investors who are willing and able to conduct an independent investigation of the risks involved. This does not constitute an offer to the public and is for the use only of the named addressee and should not be given or shown to any other person (other than employees, agents, or consultants in connection with the addressee’s consideration thereof). Baillie Gifford Overseas Limited has not been and will not be registered with Qatar Central Bank or under any laws of the State of Qatar. No transactions will be concluded in your jurisdiction and any inquiries regarding the strategy should be made to Baillie Gifford.
Baillie Gifford Overseas is not licensed under Israel’s Regulation of Investment Advising, Investment Marketing and Portfolio Management Law, 5755–1995 (the Advice Law) and does not carry insurance pursuant to the Advice Law. This document is only intended for those categories of Israeli residents who are qualified clients listed on the First Addendum to the Advice Law.
YOU MAY ALSO LIKEInsights.Visit Baillie Gifford's Insights page.Emerging Markets Article: Coming of Age.It’s time to stop looking in the rear-view mirror when it comes to emerging markets. Conventional wisdom always extrapolates recent experience, but after a decade in which both economic growth and equity returns have been lacklustre relative to the rest of the world – and with relative valuations now back at multi-decade lows – we worry that investors have badly misunderstood the depth of the transformation that has been taking place in our asset class.Investing in sustainability by looking beyond ESG scores.Investing in sustainability by focusing on opportunities for reward rather than ESG scores.International Smaller Companies: Under the Radar.Part 6 - Alignment.