Western carmakers have weathered competition from Japanese and South Korean newcomers in the past. Yet, according to investors, not all will survive the current upheaval, as reflected by the depressed valuations of some legacy automakers.
“These stocks are a value trap,” warns Charles Lilford, manager of the BGF Future of Transport fund, in a recent interview with Investment Officer. This fund has been active in the entire future transport value chain since 2018.
“Consolidation is likely,” says Lilford. “Only when companies strike a better balance between capital expenditure and returning capital to shareholders will investors’ prospects improve.”
Persistent low market share
Despite recent softening in the electric vehicle (EV) market, Lilford remains bullish on its long-term trajectory. “When we started the fund, global EV sales were around two million—less than 2 percent of total new car sales. Today, that figure has surged to 14 million, or roughly 15 to 16 percent of total sales.”
Currently, about 50 million plug-in cars are on the road, out of a global fleet of 1.3 billion, keeping penetration at a modest 4 to 5 percent. “Given this low penetration, the growth trajectory could continue for the next 15 to 20 years,” Lilford predicts. “The shift from fossil fuels to electric is transformative and promises significant growth potential over the coming decades.”
The fund focuses on suppliers that stand to gain from the EV boom. “We’re interested in companies increasing their revenue share from electric vehicles—chip manufacturers, component suppliers, and cable producers. We also invest in battery manufacturers and mining companies that provide essential raw materials.”
Cyclical slowdown temporary
While chip suppliers are currently seeing a cyclical slowdown, Lilford views this as temporary. “Electric vehicles require more semiconductors, and software is becoming a differentiating factor. The share of technology and safety features in cars is on the rise.”
Electrification represents 50 to 60 percent of the fund’s portfolio. The remainder is spread across autonomous driving, transport efficiency solutions like Mobility as a Service, and mass transit infrastructure. Investments also extend to trains, buses, and, looking forward, sustainable aviation.
China’s rapid ascent
China’s EV market is advancing at breakneck speed, with penetration surpassing 50 percent of new car sales, up from just 10 percent a few years ago. This has led to a significant decline in Western carmakers’ market share in China, now down to around 30 percent.
To keep pace, Western automakers are pouring resources into new electric models. “They have robust brands and have fended off competition from Japan and South Korea before. Yet, some will not make it, leading to industry shake-ups and job losses in certain regions,” Lilford notes.
Investor sentiment supports this view, as seen in the low valuations of some traditional automakers. “These are value traps. Consolidation seems inevitable. Only when companies better balance investment and shareholder returns will their investment appeal improve.”
Selective strategy
Lilford remains cautious with legacy automakers, favouring companies with the potential to achieve significantly higher earnings growth than the global index over a three-to-five-year horizon. This outlook, he acknowledges, depends on the economic cycle and other external factors.
The EV trend in Europe could gain momentum next year when stricter emissions standards come into effect, mandating a 15 percent reduction. “This change alone could boost EV sales by 30 to 40 percent in Europe. Battery manufacturers and component suppliers might see even greater profit growth, driven by operating leverage,” Lilford adds.
This article originally appeared in Dutch on InvestmentOfficer.nl.