Janus Henderson: Electric shock for dirty diesel

Tom Ross, Portfolio Manager, and James Maxwell, Analyst, within the Credit Team, London:

Clearly the ban has ramifications for the automotive industry as well as for electric utilities that will need to invest heavily in charging infrastructure. We consider 2040 a realistic timeframe for the phasing out of the internal combustion engine. Auto manufacturers and suppliers are already investing heavily in alternative powertrain technologies (hybridisation, pure electric vehicles; EVs) alongside the other mega-trends of connectivity, autonomy, and shared mobility. We anticipate a significant number of new model launches incorporating hybrid /EV technology over the next couple of years, gaining pace beyond 2020 as manufacturers look to meet increasingly stringent emissions targets. As the cost of battery technology reaches parity with the internal combustion engine, perhaps within 5-7 years, the switch to alternative powertrains will undoubtedly accelerate: leading suppliers such as Continental AG predict close to 60% of the car market will be electrified (hybrid, pure EV) by 2030. Our near-term concerns for the industry centre on the high level of research and development required, the potential drag on margins (alternative powertrains are less profitable), and the risks to used car residual values, particularly for diesel vehicles; this could threaten the profitability of the manufacturers’ sizeable captive financing businesses and impact new vehicle demand. In terms of alternatives, we are watching with interest the progress Toyota and Honda are making with hydrogen fuel cell technology. In terms of our fixed income holdings, we are taking a more defensive approach to the sector, especially given global vehicle sales appear close to a cyclical peak, in our view. In terms of suppliers, we are cautious about those companies with a high degree of exposure to engine components.

Hamish Chamberlayne, portfolio manager for Global Sustainable Equities:

The announcement by the UK government to ban the sale of petrol and diesel cars by 2040 is a vindication of everything we have been saying about the march of electric vehicle adoption. What is most interesting is how quickly the debate about propulsion in vehicles has leaned further towards fully electric vehicles as the solution. It would be remiss not to mention Tesla here, because this company has been instrumental in advancing the profile of electric vehicles. Tesla’s move into mass production and its ability to grab market share has thrown down the gauntlet to other vehicle manufacturers. 

Political support is necessary to speed up the infrastructure to support electric vehicles, but the economics of electric already make sense in terms of fuel pence per mile travelled and will increasingly do so as the initial purchase costs of electric vehicles fall. Beyond the economics are the equally welcome benefits of a less-polluting vehicle in terms of particulates and carbon emissions. Over the coming decade or so the increasing market share of electric vehicles will begin to raise the old ‘Betamax/VHS cassette*’ dichotomy, as car owners worry that purchasing a petrol/diesel vehicle will leave them with a legacy format, with dwindling infrastructure support and resale value. We expect improvements in battery performance and further cost declines associated with electric vehicles. The adoption rate of new technologies often follows an ‘S-curve’; ie, once a tipping point is reached it can often surprise people how quickly a technology transition can occur. In our view oil is a sunset industry – we have identified as much as £5 trillion of market capitalisation at risk of disruption from the transition to a low carbon economy. 

For further details please read our report “Global Warning – the case for low carbon investing, today”, which is available on our website.

 *Betamax and VHS were different video tape formats that competed against each other in a fierce format war that took place from the late 1970s into the 1980s. Betamax lost that war and became a redundant format.