It's nearly 10 years since the documentary film 'Who Killed the Electric Car' was released at the Sundance Film Festival. The film explored the reasons why a nascent electric vehicle industry in the US failed to gain traction in the mid-1990s. The film examined the roles played by automobile manufacturers, the oil industry, and the US government, while feeding into the contemporary narrative that any alternative to petrol-fuelled automobiles was unthinkable in the face of entrenched vested interests.
Fast forward a decade and everything has changed. At some point - probably much sooner than many of us might have anticipated - the global automotive market will reach a tipping point; when buyers are as likely as not to opt for a low/zero-emission vehicle. Such a scenario holds profound implications well beyond the petrol station forecourt. As with any disruptive technology, shareholder value will be destroyed and shareholder value will be created. The bottom line is that investors need to be mindful of the need to reposition their portfolios ahead of the coming sea change.
The bottom-up/top-down dynamic
There is gathering evidence to suggest that the take-up (and prospective take-up) of environmentally friendly vehicles is being driven through a bottom-up/top-down dynamic; increased interest from environmentally conscious motorists coupled with beefed-up regulatory requirements and enhanced government incentives. More than 30 vehicle models in the UK are already eligible for grant aid with another 40 or so expected to come to market over the next three years.
In the UK, sales of electric vehicles (EV) in the year to date are already 230 per cent up on the same period in 2014; around 21,000 motorists have made the leap to plug-in hybrids and EVs in 2015 with the Mitsubishi Outlander PHEV the preferred option. The surge has been brought about by punters taking advantage of the existing plug-in car grant scheme before the government moves to a proposed new arrangement that will tier vehicles according to their total zero emission range and tailpipe emissions. In short, less efficient hybrid vehicles, those that fall under the so-called Category 3, probably won't attract any subsidies under the new scheme. So they're being snapped up by savvy buyers ahead of the change. Though details still need to be fleshed out, it appears that the government is weighting incentives towards Category 1 cars - those capable of more than 70 miles of zero emissions travel and tailpipe emissions of less than 50 grams of carbon-dioxide per kilometre. Soon we'll all be breathing easy.
Global commitments
Barely a month has gone by in 2015 without a major automaker committing to a low-emission future. Recently Korea's Kia Motors (KS:000270) revealed plans to become a global leader in environmentally friendly motoring by the end of the decade, through the roll-out of 11 vehicles that will dramatically reduce the group's CO2 output. The fleet of vehicles will employ several 'green' technologies, ranging from miniature, turbocharged engines to hybrid power-trains through to hydrogen fuel-cell vehicle (HFCV) technology. Hyundai (KS:005380), Kia's partner and parent company, already markets a hydrogen fuel cell car and a Kia plug-in electric version of its Soul compact crossover, but the new expansion of the fleet will require a further $10.2bn (£6.7bn) investment - that's a serious commitment by any standard.
And just prior to the announcement of Kia's plans, the world's biggest auto-maker Toyota Motor Corp (JP:7203) said that it planned to all but eliminate petrol and diesel engines from its fleet by 2050. Toyota's planned transition has been seen as overly ambitions by some, but it has taken on a new complexion in light of the Volkswagen (GER:VOW3) emissions scandal. The iconic German marque intends to cut investment in its key diesel fleet by €1bn (£0.7bn) a year and step-up the development of EV.
Diesel set for the exit
Meanwhile, the UK Supreme Court recently ruled that urgent steps must be taken to reduce worryingly high levels of smog in our cities. As mounting data shows that diesel cars and trucks emit huge amounts of poisonous nitrogen dioxide, they could well go from being the recommended choice to one of the first casualties. That's certainly become a major talking point in France. There diesel's reign looks at risk, namely because the mayor of Paris has threatened to ban them.
The negative sentiment towards diesel was evident even before the exposure of Volkswagen's dirty little secret; a fiasco that has been described by many industry analysts as the final nail in the coffin. The German giant's test-manipulation has seen opposition to diesel engines reach a new level, to the point where carmakers worldwide are reportedly looking at new ways to reduce vehicle emissions.
Henri Winand, chief executive of British hydrogen fuel-cell technology supplier Intelligent Energy (IEH), agrees, claiming there's been a rush of inquiries from manufacturers following the emissions-rigging debacle. "If you have an event that brings the cost home to the boardroom - the true cost of emissions and cleaning up those emissions - then it is no surprise the manufacturers are more exercised as to how they deal with that," he adds.
A renewed focus on European emission regulations has followed in the wake of the scandal. According to analysts at Barclays, achieving European fuel economy standards for 2020 will require a degree of electrification. The same was said for the US, despite standards there being among the least stringent globally and potentially in Asia, where emissions are suddenly being taken very seriously.
Following Norske incentives
We're obviously seeing a step-up in interest in the UK, but we've some way to go before we match the clamour for low/zero-emission vehicles in Norway. China and the US lead the way in overall sales, but Norway is streets ahead on a pro-rata basis with one in five motor vehicles sold this year unconventionally powered. Norway is now on track to meet its near-term goal of 7 per cent of all vehicles on the road running on renewable electric power by 2018.
Norway has ambitious targets in place for air quality, so Oslo has put wide-ranging incentives in place. Norwegian motorists may well be more environmentally aware than most, but that doesn't mean they aren't price conscious. A range of ancillary motoring costs, such as parking fees and bridge tolls, are waived for EV drivers, while those schlepping about in conventional vehicles are forced to stump-up the kroner. If you were to tot-up the list of savings for Norwegian EV buyers, including the initial sales breaks, it equates to something in the region of £11,700 over the first five years of ownership. And there's a structural, or tax-linked, incentive at play. Though Norway is Western Europe's biggest oil producer, you certainly wouldn't guess it at the pump. It is the most expensive country in the world to fill up your tank with petrol averaging £1.52 per litre, according to recent analysis from Santander bank. That's about a quarter in advance of the rate in the UK, which itself is relatively expensive in global terms.
Oslo realises that until scale benefits of production kick in a substantive roll-out of low-emission vehicles won't be achieved unless generous incentives are in place. China provides a case in point. Though sales of electric vehicles in the People's Republic are gathering momentum, Beijing acknowledges that an accelerated roll-out of charging infrastructure and improved financial incentives are needed to initiate a decisive shift. We might getter a clearer idea of where China is headed through final directives contained within its 13th Five-Year Plan, which is expected to include ambitious targets for the use of low emission vehicles as part of a wider drive for improved air quality.
At this stage, industry incentives are vital, but they won't have to stay in place forever. The technologies that are now driving down manufacturing costs for low emission vehicles - cheaper batteries, more efficient power-trains - will be widely available by the end of the decade. By then, countries that have stolen a march by prioritising charging infrastructure can shift their investment to accelerate the take-up of green motoring. And while it's too early to determine which auto-makers and supply chain companies stand to profit from the inexorable rise of low/zero-emission vehicles, major change is on the way. There have been any number of false dawns for low-emission motoring down through the years, but auto-makers the world over aren't just paying lip service to environmental concerns - they're investing heavily to get the drop on rivals. The IC will certainly be keeping tabs on consumer trends and industry capital flows to determine where future earnings will accrue.
Hydrogen or electric/hybrid?
Many industry analysts view the move from petrol- and diesel-driven vehicles in favour of a sustainable alternative as a straight race between EV and HFCV. This view was supported by news that Toyota plans to follow Tesla, by making its 5,680 HFCV patents open-source.
Toyota's move was designed to accelerate the refinement of new fuel cell components by eliminating corporate IP boundaries. Toyota believes that hydrogen electric will be the primary fuel for the next 100 years, but HFCV technology has no shortage of doubters. Analysts at Goldman Sachs think that fuel-cell cars will remain a "niche proposition" for a decade or so, while Tesla's founder Elon Musk rather uncharitably dismissed HFCV technology as 'bull****'. However, there are some other heavy-hitters placing big bets on the long-term future of HFCV – most notably Royal Dutch Shell (RDSB).
Shell expands downstream hydrogen in Germany
A strategic shift in favour of HFCVs may have seemed fanciful to Europeans at the start of the year, particularly as 53 per cent of the continent's drivers rely on diesel engines. But as governments across Europe realise the diesel technology they previously backed is failing to adequately tackle air pollution, it could only be a matter of time before other leading nations follow suit.
Indeed, proponents of HFCV will have been buoyed by news that Royal Dutch Shell recently signed a declaration of intent with its H2 Mobility joint venture partners and Germany’s federal transport ministry that will lead to hydrogen fuel pumps being available at around 400 locations across the country by 2023.
The pumps at these sites will refuel HFCVs in a few minutes, with the cost broadly comparable to filling vehicles powered by conventional combustion engines. Shell already operates two demonstration hydrogen filling stations in Los Angeles designed to evaluate a range of technologies, drive down costs and better understand consumer behaviour.
A glimpse of 'the future'
Last month Toyota launched its eagerly awaited hydrogen fuel-cell vehicle - the Mirai. Initially, sales of the vehicle will be confined to California, where there are 10 hydrogen filling stations in place. (California has enacted laws that require major manufacturers to build a specific proportion of zero emissions vehicles if they want to sell cars there).
There’s good news for potential UK buyers ahead of the roll-out at home. The Office for Low Emission Vehicles (OLEV) has added Mirai to the list of models that qualify for a £5,000 reduction on the car’s purchase price. The Mirai is the first hydrogen-fuelled model to be featured in the approved list, alongside plug-in vehicles – among them the Toyota Prius hybrid.
Japan's Prime Minister Shinzo Abe was one of the first punters to get their hands on the new Mirai car, and has made no secret of his desire to rev-up the hydrogen revolution. That includes offering generous subsidies to Tokyoites buying these vehicles and spending billions in public money on building filling stations across the country. In collaboration with Toyota, French industrial gas company Air Liquide (FR:AI) is in the process of building 100 hydrogen stations along the main thoroughfares of Tokyo, Fukuoka, Nagoya and Osaka by the end of the year.
The Japanese auto-maker is essentially testing the waters in California and has included some generous incentives to entice punters to snap up the Mirai: all fuel is included in the purchase price for the first three years of operation; and the car comes with an eight-year/100,000-mile power-train warranty. Whether that will be enough to convince eco-conscious Californian motorists to abandon their hybrid/electric vehicles is debatable, especially given the existing price differential, although we stress - this will be a temporary effect.
After US tax incentives, the Mirai - which means "the future" in Japanese - will cost Californians around $45,000 (£29,100), which sounds OK until you realise that a Nissan Leaf electric vehicle costs half that amount. With prices starting at $101,500, upmarket eco-warriors might like to consider a standard Tesla Model S Roadster.
Lack of scale obscures cost evaluation
But any discussion concerning price differentials on low/zero-emission vehicles are unlikely to be particularly illuminating while production runs are relatively low. After all, it’s not as if early generation petrol-driven vehicles were snapped up by average consumers; they were initially produced with wealthy buyers in mind. Before we reach the aforementioned tipping point it's likely that substantive economies of scale will have kicked in for low/zero-emission vehicles.
The high price of battery packs was long seen as a major impediment against the commercial roll-out of EV, but a paper published earlier this year in the Nature journal indicated that the cost of producing battery packs has fallen dramatically between 2007 and 2014, to lower price points than the most optimistic projections had anticipated. This suggests that we already may have underestimated the rapidity of change in our midst - it wouldn't be the first time.
