Climate Matters: Electric vehicles—rising sales and falling equities
Despite facing challenges in recent years, Craig Cameron of Templeton Global Equity Group believes the current environment for electric vehicles (EVs) is appealing. In this article, he explores the key supply and demand factors shaping the future of the EV sector and offers insights into where investment opportunities may be found.
The electric vehicle (EV) industry has hit a temporary speed bump, but we believe the fundamental investment case remains solid. With reset valuations creating an attractive entry point, we see opportunities across the supply chain that could fuel long-term growth.
A slowdown – not a stop
The electric vehicle (EV) revolution once looked unstoppable. Just a few years ago, companies across the EV supply chain saw soaring valuations driven by inflated pricing and growth optimism. Today, momentum has stalled. Growth has slowed and valuations have dropped sharply.
What's behind the shift? A mix of factors: rising interest rates, margin pressure, and reduced growth expectations. Policy changes have also weighed heavily. In the US, executive orders have rolled back EV tax credits, while in Europe, governments have softened emission targets and subsidies. The result: global EV growth rates have fallen from 33% in 2023 to a more modest 24% in 2024.
Despite the setbacks, we believe the EV growth story remains compelling. Demand should regain traction, supported by ongoing technological innovation, regulatory tailwinds, and environmental pressures. Current lower valuations and reset expectations also mark an appealing entry point - especially across the supply chain.
Where we see opportunity: the supply chain
The EV supply chain plays a pivotal role in the transition from internal combustion engines to electric vehicles - a difficult, costly, and tightly regulated shift. Established carmakers are feeling the strain, while early movers like Tesla are taking market share but also pressurising competitors’ margins.
In our view, the most attractive investment opportunities lie not with automakers themselves, but with the suppliers that enable the EV transition. These companies span the globe and provide essential materials, components, and technologies.
Take batteries for example: while assembly lines are largely based in East Asia, key materials are sourced globally – from Australia and South America to Indonesia and the Philippines. Similarly, power semiconductors are made in East Asia and the US. It’s a diverse ecosystem with pockets of value across the chain.
Batteries: Key to cost and adoption
Battery innovations are central to making EVs more affordable. Batteries are the biggest single driver of EV costs, and cost reductions are crucial to expanding adoption.
Chinese battery makers lead on scale and cost, but we see compelling alternatives. A major South Korean battery manufacturer, for example, has built a competitive edge in chemistry, manufacturing, and integration.
We also see promise in India, where a local battery manufacturer is gaining traction amid government-backed EV adoption. As cities electrify public transport, a domestic battery industry is emerging that is less reliant on imports.
Power semiconductors: enabling electrification
Power semiconductors are vital for converting battery power to drive motors. One leading chipmaker already generates over half its revenues from this segment, positioning it well for further EV growth.
These components are also used in industrial machinery, solar and wind power, and consumer electronics. While these markets can be fragmented, auto contracts tend to span multiple years, allowing companies to deepen integration and improve efficiency.
Although semiconductor stocks have recently struggled – due to high inventories, weak EV sales and concerns around China’s economy – we see long-term opportunity. Valuations have pulled back, creating an attractive entry point into a broader electrification theme.
Raw materials: lithium and aluminium
Further up the supply chain, raw materials such as lithium and aluminium are essential to the EV transition.
Lithium is a major component of EV batteries, and consequently, 90% of demand for lithium comes from the battery industry. Lithium prices have collapsed 80% from their 2022 peak as sales forecasts weakened and inventories rose – leading to underperformance by lithium-related equities.
We believe the market is now pricing lithium too conservatively, assuming persistently low prices. This could create future supply shortages if demand rebounds, offering potential long-term value.
Aluminium also stands to benefit from the EV transition. It’s three times lighter than steel, supporting efforts to build lighter, more efficient vehicles. Demand for low-carbon aluminium – produced with fewer emissions – is rising. We see a Norwegian aluminium producer as well positioned to capitalise on this dual trend.
Conclusion: a reset, not a retreat
The EV sector is facing a reset but not a retreat. As the need for sustainable transportation solutions continues, so will demand for the materials and technologies behind it. For investors, today’s environment offers a chance to recharge and position for the next phase of growth.
