On the Charge T -...
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BluePaper Electric Vehicles On the Charge T he shift to electric vehicles is gaining pace as regulation pushes carmakers to reset their strategies. Battery costs are falling, other hurdles look surmountable – we now model over a billion EVs on the road by 2050. We look at what this means across the supply chain and map companies exposed. Morgan Stanley does and seeks to do business with companies covered in Morgan Stanley Research. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of Morgan Stanley Research. Investors should consider Morgan Stanley Research as only a single factor in making their investment decision. For analyst certification and other important disclosures, refer to the Disclosure Section, located at the end of this report. += Analysts employed by non-U.S. affiliates are not registered with FINRA, may not be associated persons of the member and may not be subject to NASD/NYSE restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. August 31, 2017 09:00 PM GMT
Transcript of On the Charge T -...
BluePaper August 31, 2017 09:00 PM GMT
Electric Vehicles
On the Charge
The shift to electric vehicles is gaining pace as regulation pushes carmakers to reset their strategies. Battery costs are falling, other hurdles look surmountable – we now model over a billion EVs on the road by 2050. We look at what this
means across the supply chain and map companies exposed.
flict of nt decision.
ions on
Morgan Stanley does and seeks to do business with companies covered in Morgan Stanley Research. As a result, investors should be aware that the firm may have a coninterest that could affect the objectivity of Morgan Stanley Research. Investors should consider Morgan Stanley Research as only a single factor in making their investmeFor analyst certification and other important disclosures, refer to the Disclosure Section, located at the end of this report.+= Analysts employed by non-U.S. affiliates are not registered with FINRA, may not be associated persons of the member and may not be subject to NASD/NYSE restrictcommunications with a subject company, public appearances and trading securities held by a research analyst account.
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Blue Contributors Autos & Shared Mobility UtilitiesMorgan Stanley & Co. International plc+Harald C HendrikseEquity Analyst
Morgan Stanley & Co. International plc+
Victoria A GreerEquity Analyst
Morgan Stanley Asia Limited+
Jack YeungEquity Analyst
Morgan Stanley & Co. LLC
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Morgan Stanley Asia Limited+
Binay SinghEquity Analyst
Morgan Stanley & Co. International plc, Seoul Branch+
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Charles L WebbEquity Analyst
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Paul R WalshEquity Analyst
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Jack LuEquity Analyst
Morgan Stanley & Co. International plc, Seoul Branch+
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Vincent Andrews
Chemicals
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Carolina Dores, CFAEquity Analyst
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Technology & Semiconductors Morgan Stanley & Co. International plc+
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BluePaper
Morgan Stanley Research 3
In the past year, the view that the internal combustion engine’s days are numbered as it is superseded by the mass rollout of electric vehicles has become increasingly mainstream. But when this transition will play out and how it will impact the carmakers and their supply chain remains open to debate.
Battery electric vehicles (BEVs) still have plenty of hurdles to clear – cost, technology and consumer acceptance among others. Technology breakthroughs, for example in batteries and semiconductors, still need to be made for EV costs to come down to a level that would make them competitive with current petrol and diesel cars. Might battery technology follow the path of solar panels, whose cost fell 90% in less than 20 years? We think current technology roadmaps could bring component costs into line with ICE cars by 2025. On total ownership cost (which includes running costs), the gap could close much sooner – our estimates suggest it is already surprisingly small today.
The push to invest in the required technologies is getting stronger, as tightening emissions regulations drive up the cost of producing internal combustion engines and question their long-term viability. Increased global focus on NOx, as well as CO2, and much tougher global type certification tests will make future compliance much more expensive, especially for diesel engines. At what point costs converge is still unclear, but we think the regulatory focus is unlikely to ease, given global urban air quality problems and related health issues. Carmakers (the OEMs), who have to plan for the long term, appear to be taking the same view, as they pivot their strategies towards BEVs .
Enabling One Billion EVs by 2050
Exhibit 1:The costs of getting internal combustion engines to comply with CO2 and particulate emissions standards keep rising
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Drivetrain costs of CO2 and NOx compliance rise. BEV costs fall.
Battery electric Original drivetrain assumption
Add SUV Add diesel decline
Add NOx Add RDE
BEV
$10 0 / kWh
$250 / kWh
$140 / kWh
Note: NOx = Nitrogen oxide emissions; RDE = real-world driving emissions testing. The chart assumes no major changes to battery cost calculations. Source: Morgan Stanley Research estimates
One billion EVs by 2050?
Drawing on forecasts for GDP growth, population growth, and urbanisation and ageing trends, we’ve modelled global market size out to 2050. Our base case is that EVs reach 80% of global sales by 2050, but EVs could reach 90% of sales with tougher regulation and faster technology development. If regulatory pressure is removed, penetration could be capped at around 10% of sales. Our base case leads to a global fleet of BEVs of over one billion by 2050.
Assuming OEMs and their suppliers deliver on the technology, who will provide the charging infrastructure ? We estimate between 1 million and 3 million public charging points could be needed in Western Europe by 2030, and up to 10 times that number by 2050. Utilities can exploit a natural skillset here, and many are looking to get involved, but they could face competition from capital goods companies (who provide electrification equipment), OEMs and new entrants. The winning business model is up for grabs.
The additional annual electricity demand from BEVs is unlikely to be a challenge for a while. In Western Europe, the electricity required for the 15 million BEVs we expect by 2030 (45TWh) is less than half the 100TWh fall in demand we’ve seen since 2008. A bigger issue – and one that could become important relatively quickly – lies in managing networks for peak demand and concentrations of charging points. We estimate peak demand could as much as double by 2050, but we expect investment in smart grids and vehicle to grid technologies to mitigate this.
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Exhibit 2:We forecast a BEV fleet of one billion by 2050, while the ICE fleet grows until 2030 and only starts to fall sharply after 2035
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Source Morgan Stanley Research estimates
Game changer
For the OEM business model , BEVs are a game changer. Up to 50% of the value of the car could migrate from mechanical to electrical systems and electronics, and this transfer of power could challenge OEMs’ competitive position, branding and pricing. Our modelling of an illustrative OEM transition from ICE to BEV drivetrain suggests that price and volume pressures could push down ICE profitability sharply from 2021, as new BEV products cannibalise sales and pricing power, with potential for losses from 2028. BEV losses peak in our model in 2023 before production ramps on new model launches. The range of profitability outcomes is wide.
Margin pressure is likely to be passed down the supply chain. More-over, OEM suppliers for the powertrain, transmission and fuel sys-tems face loss of content – much of the electrical / electronic systems in an BEV could be supplied by new competitors. On the other hand, technology change and outsourcing are typically oppor-tunities for OEM suppliers. We map the change in component costs from ICE to BEV. Capital goods companies support design, testing and production processes, as well as metals content. Some will see a significant loss of business, while there will be gains for others – we look at how players are positioned for the likely changes.
Within the Chemicals sector, the value proposition will shift from autocatalyst manufacturers to producers of cathode material used in BEV batteries. Cathode producers should benefit from a 12-fold increase in battery capacity by 2025, but we see some risk to pricing from the rapid build-out in capacity. There may also be a near-term technology ceiling, and those positioned to develop ‘fit for future’ technologies that lower battery costs still further could be the long-term winners. Producers of semiconductors could see a market opportunity of $6-9.5bn by 2030, our BEV chip model suggests, if OEMS adopt new Silicon Carbide technology, which could increase BEV range by up to 20% compared to current IGBT chips.
Beyond autos
Change extends further back up the chain to commodities. The transi-tion to BEVs is too small to move the dial for oil in the context of other supply challenges in the next two decades and ongoing fuel demand – our model has the ICE fleet growing until 2030, only starting to fall sharply after 2035. But there will be an impact on demand for metals, via direct use in vehicles and associated infra-structure. In particular, we look at potential demand for cobalt, lithium, nickel, copper, aluminium and PGMs , and which markets could face supply challenges.
How green are electric vehicles? Much depends on how the elec-tricity is produced (from renewable sources or ‘dirty’ coal). The mining of cobalt raises sustainability and ethical concerns (most cobalt is extracted in the DRC, where artisanal mining is prevalent). Over time, battery recycling – currently challenged – could lessen these impacts.
It is clearly very early days. The BEV debate will be driven by (and in turn drive) ongoing developments in shared mobility and autono-mous driving, the other two megatrends in the mobility space. This Blue Paper brings together our initial models, analysis and thoughts on which companies could face disruption to their businesses and which could be the enablers in the shift from the internal combustion engine to electric vehicles.
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Morgan Stanley Research 5
One billion EVs by 2050 – mapping the companies exposed
Charging infrastructure Supply chain OEMs
Utilities could benefit from providing charging infrastructure, software services. Demand upside for electricity will take a while to play out
Auto Suppliers face the loss of ICE powertrain content OEMs will see a major disruption to their business models as they shift volumes from ICE vehicles to EVs
Iberdrola, EDP, Innogy, E.ON, Enel, Endesa, National Grid, SSE, Fortum, Edison Interna-tional, PG&E, Sempra, AGL Energy, Origin Energy, Plug Power
Global suppliers with highest powertrain exposure: BorgWarner, American Axle, WeiFu, Exedy, Hota Industrial, Tenneco, Schaeffler, Aisin Seiki
All the traditional OEMs: BMW, Daimler, PSA, Renault, Volkswagen, FCA, GM, Ford, Toyota, Honda, Hyundai, SAIC, BAIC, Great Wall, Geely, Brilliance China
Capital Goods players could provide charging stations and electrification equip-ment
Capital Goods players will be challenged by the loss of metal content (ICE powertrain, lightweighting) …
Some OEMs are already EV specialists. Near-term scale and cost challenges remain, but no business model shift is needed
ABB, Schneider Electric, Nexans, Hitachi NSK, SKF, Bodycote, Vesuvius, Sandvik, Han's Laser, Fanuc Tesla, BYD
In Commodities , copper demand will ben-efit from the roll-out of charging infrastruc-ture.
… but there are opportunities for others in new content (wiring, electrification, EV motors) …
Antofagasta, Freeport, Jiangxi Copper, KGHM, Kaz Minerals, Lundin Mining, Southern Copper, Zijin Mining
MELCO, Nexans, Inovance, Times Electric, Hitachi
… and in new manufacturing processes (robotics, testing, prototyping)
Siemens, Spectris, Renishaw, Fanuc, Yaskawa, Siasun, Atlas Copco
In Chemicals , cell component manufacturers (cathode/anode/electrolyte/sep-arator) are key in tackling cost/technology challenges ...
Johnson Matthey, BASF, Umicore, Wacker Chemie, Sumitomo Metals & Mining, Mitsubishi Chemical Holdings, Hitachi Chem, Asahi Kasei, Toray, Do-Fluoride Chem, Cangzhou Mingzhu
… and there will also be material volume opportunities for cell manufacturers (and integrated players)
Guoxuan High-Tech, LG Chem, Samsung SDI, Panasonic, BYD
Semiconductors players could see a $6-9.5bn market from EVs by 2030
Infineon, STMicroelectronics, Rohm
In Commodities , metals used in battery production (Co, Li, Ni, Cu) should see strong growth. Demand for PGMs (used to reduce emissions in ICEs) could be challenged.
Glencore (Cu, Co, Ni), Sumitomo Metal Mining (Cu, Ni, Co), China Molybdenum (Cu, Co), Freeport McMoRan (Cu, Co), Tianqi Lithium (Li), Mineral Resources (Li), AK Steel (electrical steel), NorNickel (Ni, Cu, Co, PGMs), Anglo American (Cu, Ni, PGMs), Anglo Platinum (PGMs), Albermarle (Li), SQM (Li)
Source: Morgan Stanley Research
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Blue Contents7 EVs: The picture today
8 Why BEVs are really coming this time
15 One billion BEVs by 2050
18 OEMs are ramping up
20 How quickly can EV costs come down?
25 Who will provide the charging infrastructure?
28 Will there be enough power?
31 Could China become the leader in Auto 2.0?
36 Company exposure
37 A game changer for the OEMs
43 (R)evolution for the auto suppliers
49 A mixed picture for Capital Goods
53 Chemicals – Value shift
57 Semiconductors – Sizing the SIC opportunity
60 How Utilities can benefit
62 Commodity implications
70 How sustainable are EVs?
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Morgan Stanley Research 7
EVs: The picture today
Exhibit 4:Internal combustion engine (ICE) vehicles were 96% of European vehicle sales in 2015, with hybrids at just 1.5% and battery electric and PHEVs at only ~100,000 cars each
2015 OEM splits by drivetrain
Diesel Petrol Hybrid-electric Battery-electric
Plug-in hybrid electric Other EU market
shareAverage EU 52% 44% 1.5% 0.5% 0.6% 1.5%Volkswagen 55% 42% 0.1% 0.1% 1.0% 1.1% 24.7%Renault-Nissan 53% 44% 0.0% 1.6% 0.0% 1.8% 13.6%PSA 58% 41% 0.4% 0.1% 0.0% 0.2% 10.4%Ford 45% 53% 0.1% 0.0% 0.1% 1.6% 7.4%General Motors 35% 62% 0.0% 0.0% 0.0% 2.8% 6.8%BMW 70% 29% 0.0% 1.0% 0.5% 0.0% 6.5%Daimler 64% 33% 1.0% 0.4% 0.8% 0.2% 5.9%Flat 39% 52% 0.0% 0.0% 0.0% 9.6% 5.8%Toyota 21% 47% 31.3% 0.0% 0.1% 0.0% 4.2%
Source: ICCT, Morgan Stanley Research
Exhibit 3:Electric Vehicles – a quick reminder of key acronyms
ICE - Internal Combustion Engine
Petrol or diesel-engined vehicle
AFV - Alternatively Fuelled Vehicle
Vehicle not powered by traditional fuel
EV - Electric VehicleVehicle powered by e-chargeable battery and electric motor
Hybrid VehicleVehicle powered by ICE with battery and electric motor to harness braking energy
BEV - Battery Electric Vehicle
Vehicle powered by battery re-charged from the grid with range ~100 miles+
PHEV - Plug-in Hybrid Electric Vehicle
Vehicle with plug-in battery and ICE engine - electric range ~30 miles
E-REV - Extended Range Electric Vehicle
Vehicle powered by battery with ICE engine generator adding range
FCEV - Fuel Cell Electric Vehicle
Vehicle powered by electric motor powered by fuel cell - range ~300 miles
NEV - New Energy Vehicle
Plug-in hybrids and BEVs
ULEV - Ultra Low Electric Vehicle
<75g/km vehicle with potential to run at zero emissions for >10 miles
ZEV - Zero Emission Vehicle
Vehicle that emits no exhaust gas from the onboard source of power (BEV and FCEV)
Full HybridHybrid vehicle that can operate on electric motor alone
Mild HybridHybrid vehicle that harnesses braking energy as supplemental energy only
Micro HybridHybrid with stop-start and regenerative braking with 12V battery
Source: Morgan Stanley Research
Exhibit 5:US and global EV sales have grown strongly off a low base (vehicles - global LHS, US RHS)
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Source: Inside EVs, Morgan Stanley Research
Exhibit 6:Global EV sales by model from IHS (vehicles)
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Tang Volt Zoe Model 3 Model 3 CUV
Source: IHS, Morgan Stanley Research
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Although many questions remain over battery electric vehicles (BEVs), post the VW 'dieselgate' scandal, the scientific and political concerns over vehicle emissions are driving tighter regulations on existing internal combustion engines (ICEs). The European focus on CO2 emissions only is being reviewed, and the new nitrogen oxide (NOx) test standards under real-world driving conditions (RDE) will prove much tougher to comply with, especially for diesel engines.
As regulatory oversight tightens in the wake of recent industry revelations, we think the cost of producing ICEs that comply with regulatory standards may become prohibitive for the OEMs – Volvo's plans to sell only electric or hybrid vehicles post 2019 will narrow the cost gap to full BEV by eliminating the cheapest current petrol engine option. At some point, depending on emission targets, EVs may not even be the cheaper alternative – they may become the only alternative. NEV (new energy vehicle, i.e. hybrid and BEV) penetration targets in China from 2018 and announcements regarding a full phase-out of ICE engines in France and the UK by 2040 highlight the risks to the current technology.
As a result, there is now a strong enough case for the OEMs such as Daimler and VW to move towards their ambitious BEV strategies. They have been followed by most global OEMs, with their own BEV launch plans. Even Japanese OEMs Toyota and Honda, long opposed to BEV technology, are now looking to introduce BEV models as soon as possible.
Why BEVs are really coming this time
The BEV trend is driven by emission regulations
Exhibit 7:Emission standards (CO2, NOx and other) have been tightening for a long time. Strategically, OEMs need to focus beyond 2020 targets – emissions may need to fall to zero in some regions
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CO2 emissions standards (g/km)
Source: Company data, IHS, Morgan Stanley Research
Exhibit 8:Headline NOx standards are not changing, but type certification tests are becoming more stringent as they move to real-world driving conditions, away from the previous standardised lab tests
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Source: ACEA, Morgan Stanley Research
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Morgan Stanley Research 9
The cost of regulatory compliance for ICE technology is rising sharply
Recent industry revelations have intensified regulatory oversight. Diesel was a key part of the OEMs' strategy for complying with future CO2 emissions standards. Helped by government incentives, diesel rose from 10% market share in Europe in 1990 to well over 50% by 2006/07. The shift in regulatory focus to NOx emissions and the related fall in diesel penetration is changing that strategy altogether.
Compared to the OEMs' original assumptions for the cost of ICEs, recent years have brought several changes that will make it much harder and costlier to comply with regulatory standards:
l the global customer preference for larger (and so higher-emission) SUVs;
l a gradual but accelerating decline of (lower CO2) diesel; l the introduction of the new WLTC (much tougher for NOx)
in Europe and China – see box; l the new RDE targets combining CO2 and NOx standards.
Modelling the cost of these changes, as we do in Exhibit 9 below, suggests it may be the rising cost of the ICE that is the real driver of OEMs' strategy towards BEVs, and not a sharp change in BEV cost competitiveness. The falling cost of battery technology remains unclear and dependent on technological/chemical breakthroughs, and we claim no precision on the exact shape of each curve or the timing of cost changes. But the overall trend is very clear. The higher the ICE costs, the sooner they cross over with falling battery EV drivetrain costs.
Exhibit 9:The costs of getting conventional engines to comply with CO2 and particulate emissions standards keep rising
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Drivetrain costs of CO2 and NOx compliance rise. BEV costs fall.
Battery electric Original drivetrain assumption
Add SUV Add diesel decline
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BEV
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Note: The chart assumes no major changes to battery cost calculations. Source: Morgan Stanley Research estimates
CO2 emissionsl CO2 is a regular by-product of the engine combustion process.
Burning one gallon of fuel generates approximately 18-20 pounds of CO2 (petrol/diesel). Each car emits an average of 6 tonnes of CO2 per annum, contributing significantly to global warming effects. Vehicle emissions make up 20% of European man-made CO2 emissions, of which passenger vehicles make up 12%. CO2 emissions have various different health effects by reducing the quantity of oxygen available to breathe.
l CO2 standards are based on fleet averages – in Europe OEMs must achieve an average CO2 g/km across their new-car sales in model year 2021 of around 95g (depending on mix – larger vehicles get a slightly higher allowance; BMW's 2020 target is 101g/km). Each OEM can continue to sell some high-CO2 models as long as there are enough low- or zero-CO2 cars in its mix.
l OEMs have achieved 3.7% average annual reductions in CO2/km in Europe since 2005, and must now achieve 6% p.a. to 2020 in order to meet the targets.
l The introduction of testing regimes in Europe in the next two years – Worldwide Light-duty Test Cycle (WLTC) from 2017 and Real-world Driving Emissions (RDE) standards from January 2020 – is likely to make it much costlier for OEMs to comply with emissions standards.
Nitrogen oxide (NOx) and particulates (PM2.5) emissions
l NOx and particulates emissions are residuals caused by the high temperature combustion process in an ICE. Emissions rise as the engine running temperature rises (as fuel efficiency improves). Smaller diesel and turbo-charged engines tend to run at higher temperatures and thus cause higher NOx and particle emissions.
l European governments have historically focussed on CO2 more than NOx, unlike some other regulators. However, post the VW diesel scandal, awareness of the health dangers of NOx, and the much higher-than-regulated levels of real-world NOx emissions, have caused a change in thinking, and vehicle NOx tests are being tightened significantly to reduce future NOx emissions.
l NOx gases cause smog and acid rain and are central to the formation of fine particles in the air, which cause lung and respiratory diseases and may also aggravate heart disease.
l For regulations around particulates such as NOx (e.g., the Euro-6 standard in Europe), every car must meet the standard, giving OEMs far less flexibility than under the CO2 regulation.
BluePaper
10
Strategically, OEMs are thinking out to 2025-2030 and beyond. While battery costs may not be coming down as quickly as OEMs would like, regulatory change means that the point at which ICE and EV drivetrain manufacturing costs match is getting closer. As yet, European emissions regulations post-2020 have not been agreed, but initial discussions suggest further reduction in CO2 emissions from 95g/km to as low as 65-70 g/km. US CAFE standards are planned out to 2025 (absent any changes from the current adminis-tration), and China and India visibility is also limited post current stan-dards. It is highly probable that emissions regulations will continue to tighten globally. Political demand for zero emissions is increasing, and the political environment for the previous industry CO2 solution, diesel engines, has changed considerably (see box below).
Increasing BEV sales penetration is helpful for CO2 – these regula-tions are based on a fleet average, so adding BEVs (which count as zero emission vehicles) helps OEMs' overall CO2 fleet averages. For
NOx and particulates, however – the element of emissions that is harmful to health – standards are absolute, and each car must meet them. Again, however, adding BEV penetration will reduce the overall concentration of NOx and particles in the air, thus reducing NOx pollution effects in urban areas.
As governments focus more on clean air, we expect NOx and par-ticulates regulation to get progressively tougher, adding costs to all ICEs (affecting hybrids also). Without detail of where these regula-tions could go, we cannot estimate how much this could be – and of course neither can the OEMs. But much of the cost is around devel-oping new engines, as well as adding more content to existing engines. As ICE (and particularly diesel) volumes start to fall, we think this makes for a tough investment proposition for OEMs, which can be avoided altogether by shifting development focus towards BEVs.
Regulatory changes – OEMS need to consider the direction of travel OEMs need to take the long view on regulatory changes, as they plan for the generations of vehicles that will be launched over a decade from now for sale in various guises until 2040 or so. Their strategies have to reflect political trends and potential for future changes in emission regulations as much as current laws and regulation.
UK – low-emission zones and ban for ICE from 2040. The UK government proposals suggest local authorities set up low-emission zones in many larger UK cities to tackle air pollution, potentially entailing diesel driving bans, as well as proposing a full phasing out of ICE powertrain production by 2040.
France – diesel ban in Paris and ICE production phase-out by 2040. Paris has enforced driving bans in periods when weather conditions contributed to particularly high smog levels, and since 1 July 2016, cars made before 1997 may not be driven in central Paris between 8am and 8pm Monday-Friday. France is also proposing to phase out all ICE powertrain production by 2040.
Germany – no explicit BEV targets. Although the German Bundesrat passed a resolution to ban the ICE starting in 2030, the Federal government continues to avoid commenting on a potential phase-out of ICE engines, as well as explicit BEV targets. City- and state-level authorities have recently proposed bans on diesel cars entering cities,
prompted by court cases over air quality standards brought under European clean air legislation (e.g. Stuttgart, Munich). The federal government has agreed a system of retroactive software upgrades for some older cars, as well as scrappage schemes for older diesels run by the OEMs, in an attempt to avoid such bans.
China – quotas for BEVs/PHEVs as soon as 2018? China is considering legislation requiring all automakers to sell a specific quota of zero- and low-emission vehicles, starting at 8% of overall deliveries (almost 2 million vehicles) by 2018, 10% by 2019, 12% by 2020, and 20% by 2025. OEMs that fail to meet the targets would face penalties or be required to buy credits from competitors.
South Korea – tighter fuel efficiency standards by 2020. The 2020 standards require fuel efficiency of 24.3km/l and 97g CO2/km, respectively, equivalent to a 30.7% reduction from a 140g/km fleet average target for 2015. Overall subsidies for EVs are W15 million ($13k) and will gradually decrease from 2014 to 2020.
California – zero-emission vehicle credits. In 2012, the Governor of California, Edmund Brown, issued an executive order calling for 1.5 million zero-emission vehicles (ZEVs) by 2025, versus around 1.8 million annual new car sales, and a total car parc of around 29 million. ZEVs include battery electric vehicles, plug-in hybrids and fuel-cell electric vehicles. In 2013, seven other US states signed an MoU with California, committing to a total of 3.3 million ZEVs by 2025.
BluePaper
Morgan Stanley Research 11
Diesel impact on clean air has been the tipping point for regulation in Europe
European consumers are now moving away from diesel. In Europe, governments (and emissions regulations) have been focussed on CO2 (rather than NOx) for many years. Through the 1990s and 2000s, regulations incentivised a shift to diesel, driving diesel share up to a peak of 56% in 2011, far ahead of the other major regions (US and China both <5% penetration). In addition to more lenient test standards for NOx in Europe (particularly versus the US), it has emerged that the gap between test results and real-world driving emissions is very significant. This year, a number of court cases brought by environmental pressure groups under European clean air regulations have rejected existing clean air measures as insufficient, prompting many of the European targets and announce-ments outlined above. For consumers, the widespread discussion of the health impacts of diesel, the concern that diesels could be banned in cities, and associated concerns over the residual values of these cars has prompted a move away from diesel. Diesel share had already begun to decline (particularly from very high levels in France), but in 2017, rising concern over air quality issues have driven a sharp fall in diesel share.
OEMs are reacting, but the only long-term solution is to shift away from ICE. In attempts to avoid diesel bans in key cities (particu-larly in Germany), German OEMs are now offering software upgrades for many Euro-5 and Euro-6 diesels, as well as scrappage schemes where customers trading in pre-Euro 6 diesels get a dis-count on a new car. We think these measures are unlikely to have a material effect on air quality in cities – in line with August 23rd com-ments from the German environment minister Barbara Hendricks. In our view, the changed regulatory environment around diesel is only likely to tighten from here, and we think this has been a major tipping point for OEMs to shift their strategies towards battery EVs.
Exhibit 10:Diesel share in Europe peaked in 2011; the decline began to accelerate in 2016 as clean air concerns became more prominent
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Source: ACEA, Morgan Stanley Research estimates (e)
Exhibit 11:Diesel share is now declining by ~500bps yoy, meaning absolute vol-umes down close to 10%
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Source: ACEA, Morgan Stanley Research estimates
Exhibit 12:In real driving conditions, European diesels emit many times the lab standard of NOx
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NOx real driving emissions vs test standards
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ICCT tests of real world driving suggest that Euro 5 diesels emit 1,150mg/km of NOx vs the lab standard of 180mg, and Euro 6 diesels emit 500mg/km vs the lab standard of 80mg/km. By 2020, European diesels must meet real-driving limits of 120mg/km
Source: ICCT, Morgan Stanley Research
Exhibit 13:Particulate emissions such as NOx are associated with tens of thou-sands of premature deaths per year
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Source: European Environment Agency, Morgan Stanley Research
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12
Why we think the hurdles can be overcome
1 – Cost of batteries can come down with new investment
Battery costs have been a major barrier to increasing EV penetration, with costs per kWh at over $200 until recently. We now expect bat-tery costs to fall to $100 by the early 2020s on today's technology, and further breakthroughs (for example, solid state batteries, which Toyota is now trialling) could see this fall further (see How quickly can EV costs come down? ).
In addition to the path we see to falling technology costs, we observe that other technologies have overcome similar obstacles in the past. The cost of solar panels fell from $70 per watt to less than $1 in the span of 40 years. Even since 1999, 20 years into the development of the solar panel, prices per watt have fallen 90%. The cost of lithium ion batteries, some 20 years after initial development, has fallen from over $1,200 per kWh initially to below $200 today. If solar panels are a guide, we believe lithium ion battery costs per kWh could easily fall below $100 by 2025, despite high material cost content.
Exhibit 14:Solar panel cost per watt (US$) has fallen 99% in 40 years. Can lithium ion batteries do the same?
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Source: CleanTechnica, Morgan Stanley Research
2 – Tesla shows that the consumer preference for ICE can be swayed
Even successful electric vehicles such as the Nissan Leaf have made little headway in gaining global car market share, and many vehicles have failed to sell in any volume at all. However, technology and usability are improving, and charging times are falling. There will come an inflection point where range and usability combine with the right price.
The Tesla Model S has taken a 30% share in the $100k plus US luxury market share, and with over 400,000 orders in less than a month after initial launch, the Tesla Model 3 launch also suggests there is plenty of consumer demand for the right electric vehicle product at the right price.
Exhibit 15:The Tesla Model S has outsold the main German competition in luxury sedans since 2012
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Source: Autodata, Morgan Stanley Research
Renault's electric car Zoe could be proving the same point. Renault has relaunched the Zoe with a range of over 400 km, and, with Euro-pean sales annualising at over 40,000 units. Although this remains small relative to high volume ICE models selling over 500k a year (globally), it is the best performance of a pure BEV in Europe to date. Renault installs a 7kW wallbox at your home with the car, allowing a full recharge in just three hours. A fast charger can do it in 54 min-utes at 43kW. (The German OEMs are now installing a 350kW charger network in Europe that would reduce that charging time to less than 10 minutes.) Renault is selling the Zoe with a 40kWh bat-tery with a starting price of £14,000 in the UK and a monthly battery lease cost of £59/pcm (which allows a change or upgrade of battery at some stage), or from £19,000 for a fully owned package.
3 – Consumer cost benefits and financing could soon be competitive
The price of EVs is still much higher than for ICE vehicles – especially cheaper petrol technologies – but this may not remain the case, if rising regulatory requirements continue to push ICE vehicle costs higher. Volvo's recent announcement that all launches after 2019 would be hybrid or BEV immediately reduces the BEV cost barrier by eliminating the cheapest current petrol engine option.
BluePaper
Morgan Stanley Research 13
OEMs are increasingly incentivised to sell plug-in hybrid electric vehi-cles (PHEVs) and EVs to meet fleet emission requirements. Con-sumers on the other hand could conceivably benefit from lower annual road taxes, lower road tolls or congestion charges, or even use of dedicated traffic lanes for low- or zero-emission vehicles. This is quite apart from any direct government purchase subsidies and the much lower costs of driving – electricity charging costs are far lower than similar petrol or diesel fuel costs, in Europe especially (less so in the US).
The all-in cost premium to the consumer is surpris-ingly small
We have attempted to model the monthly running costs of BEVs to the consumer, including the much higher (current) transaction prices – Exhibit 16 . Our assumptions suggest that the difference in total cost (transaction price + running costs) compared to an ICE car is sur-prisingly small.
We have assumed that (at least early on) EVs have much lower residual values than ICE cars. Car buyers may question the longevity of BEV batteries, and a fast rate of technological change (battery improvement) could cause a higher rate of obsolescence. This sug-gests that lease costs will be much higher for BEVs, as greater depre-ciation has to be covered during the life of the lease. Monthly lease costs for PHEVs and BEV could therefore be 50-100% higher than the
monthly lease costs for petrol-engined alternatives – if in fact non-hybrid petrol and diesel engines remain available in a tighter emission world.
But if we bring in total running and ownership costs, BEVs can start quickly to close that gap. We assume PHEVs and BEVs have 75-80% lower fuel costs, somewhat lower insurance costs (due to lower costs to fix and potentially higher active safety content), and lower service costs than current ICE vehicles. On this basis, assuming Euro-pean fuel prices, the fuel and running costs for BEVs could be as much as 75% lower than for current petrol or diesel engined cars. Lower fuel prices in the US mean that the running cost advantage for BEVs is much smaller.
If we add it all up, we calculate that, although hybrids and extended-range EVs are still 15-20% more expensive all-in, the BEV cost per month comes to just €534, versus €517 for our petrol and diesel cars – not a huge cost difference. If we raise our annual mileage assump-tion, or assume any closing of the relative new car purchase price, BEVs could soon become very competitive with existing cars on attractive finance rates (at low current rates) and in high fuel-cost countries. If, as Volvo has indicated, pure petrol or diesel vehicles dis-appear, then BEVs could actually become the cheapest option for consumers, even at current cost levels. This would support why OEMs' BEV strategies have become so much more ambitious.
Exhibit 16:Our comparative all-in cost model for different powertrains – BEV monthly costs are not much higher than for petrol/diesel cars*)
€ Petrol Diesel PHEV E-REV BEV FCEVPurchase price 18,000 20,000 26,000 28,000 25,000 40,000Assumed residual after 3 years 10,800 12,000 14,300 12,600 11,250 22,000Residual at year 3 as % 60% 60% 55% 45% 45% 55%Capital cost p.a. 2,400 2,667 3,900 5,133 4,583 6,000Monthly lease cost 260 289 409 512 457 629Annual running costs 12,000 miles / 19k km p.a. with fuel at €1.50 per liter, @ 35 mpg / 8l/100km Fuel (European costs) 2,280 1,938 1,647 420 420 2,500Insurance 400 400 400 300 300 400Servicing 400 400 500 400 200 300Annual running cost p.a. 3,080 2,738 2,547 1,120 920 3,200Monthly running costs 257 228 212 93 77 267Total cost ownership p.a. 5,480 5,405 6,447 6,253 5,503 9,200TCO pcm 457 450 537 521 459 767Monthly lease plus running costs 517 517 621 606 534 896
* Based on European fuel costs. Source: Morgan Stanley Research estimates
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14
OEMs can proactively generate demand
Automakers do not have to wait for demand for their vehicles to pick up. We believe that leading OEMs can use their distribution arms and Financial Services businesses proactively to generate demand for models as and when they need to. Globally lower interest rates have contributed to their ability to do so, as OEMs have been able to con-vert savings from lower interest costs into higher average selling prices – and content – per car. In our view, OEMs can achieve a similar feat with EVs, if they are incentivised to do so.
In the example above, it might be possible for OEMs to 'bundle' a total cost of ownership (TCO) for consumers, to capture the through-life savings to offset some of the initial capital cost of the BEV or PHEV. Alternatively, if OEMs face significant penalties for non-compliance
with emissions legislation, they could cross-subsidise EVs from their existing ICE business – and yet still maximise business profitability.
A key variable in this debate is the level of residuals on new BEVs. Although we have already allowed for significantly lower residuals for EVs than on current ICE vehicles, they could be lower still, depending on battery performance. On the other hand, higher taxa-tion due to emissions, or even driving bans, and the availability of BEVs with much lower TCO could also push down residuals of cur-rent ICE (diesel) vehicles. If consumer demand switches quickly, the market will face a glut of off-lease ICE cars, which could severely depress their residuals by 2025. This would have serious repercus-sions for the OEMs and how they manage their Financial Services bal-ance sheets and leasing strategies.
Further Morgan Stanley research:
Autos & Shared Mobility: Future car - EV earnings risks (15 Nov 2016) Harald Hendrikse, Victoria Greer, Adam Jonas CFA, Ryosuke Hoshino, Young Suk Shin
European Diesel Compendium (5 Jul 2017)Harald Hendrikse, Victoria Greer, Adam Jonas CFA
Autos & Shared Mobility: Diesel declines accelerate (7 Mar 2017)Harald Hendrikse, Victoria Greer, Adam Jonas CFA,Paul R Walsh, Charles L Webb
Daimler: Who can match Daimler's diesel action? (19 Jul 2017)Harald Hendrikse, Victoria Greer
Sustainability and Autos: Clean Air vs Climate Change (13 Aug 2017)Faty Dembele, Jessica Alsford CFA, Victoria Irving, Eva T Zlotnicka, Harald Hendrikse, Victoria Greer
BluePaper
Morgan Stanley Research 15
We have modelled the global car fleet out to 2050. We see global car sales growing by 50% to over 130 million a year, and expect battery electric vehicles to make up 80% of global sales by 2050. Looking at the global passenger car fleet as a whole, BEVs make up 7% of a growing fleet by 2030 in our base case, rising to 24% by 2040 and 57% by 2050.
But there is a wide range of potential outcomes. Our bull case of tougher regulation and technology breakthroughs sees BEV sales at 90% of global sales in 2050, but a plausible bear case where regulatory drivers are removed could cap penetration at less than 10% of sales by 2025.
We expect tighter CO2 and NOx regulations and new OEM strate-gies to deliver sharp growth in BEVs after 2020. Our global car sales forecasts out to 2050 are based on population growth, GDP per capita driving global ownership growth, and replacement demand. By 2050, 50% population growth (on World Bank forecasts) and higher ownership lead to 50% growth in car sales to over 130 million vehicles a year, and a doubling of the global car fleet to over 2 billion vehicles. We assume no recessionary periods in our model.
In our base case, BEVs are 9% of global passenger car sales by 2025, 16% by 2030, 64% by 2040 and almost 80% by 2050. In our bull case, which assumes a stricter regulatory approach to emissions reduction, we get to 60% sales penetration by 2040 and 90% by 2045. In our bear case, with reduced or delayed regulatory tight-ening, BEV models still reach 9% of global sales by 2025, but fade after that, as they have done previously, as consumers stick with their known ICE vehicles.
BEV penetration of the world passenger car fleet naturally lags the ramp in sales. Our model sees just 2.6% BEV share of the global fleet by 2025, 6.6% by 2030, and 27% by 2040. By 2050, we forecast over 1 billion BEVs, or 57% of the fleet. The negative impact on the ICE vehicle fleet doesn't accelerate sharply until 2035 and beyond, as the growth in the global fleet is greater than the absolute share taken by new BEVs.
One billion BEVs by 2050We expect hybrid and plug-in hybrid penetration to grow very quickly through 2020, but to fade sharply when BEV sales pick up and OEMs switch focus for emissions purposes. Once BEV technology produces sufficient range and fast charging times, and BEV models are fully available, we see little need for OEMs to continue selling expensive PHEVs.
Exhibit17:Our sales model – BEVs reach 80% of global car sales by 2050 ...
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Exhibit 18: … with the flip-side that global ICE sales are close to peaking – and could peak below 100 million units in the next 3-5 years (assuming no recession in our model)
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Source: Ward's, ACEA, CAAM, Morgan Stanley Research estimates (from 2017 onwards)
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16
Exhibit 19:There's a wide range of outcomes for BEV sales penetration
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Base penetration Bull penetration Bear penetration
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Base case: Tightening regulations incentivise OEMs to shift to BEV
Bear case: regulatory pressure reverses
Source: Ward's, ACEA, CAAM, Morgan Stanley Research estimates (from 2017 onwards). Note: Chart shows new battery EVs as a % of total new car sales.
Exhibit 20:Our fleet model: BEVs grow from 2.6% of the global passenger car fleet in 2025 to 57% by 2050 in our base case
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Source: Ward's, ACEA, CAAM, IHS, Morgan Stanley Research estimates (from 2017 onwards)
Exhibit 21:The ICE fleet continues to grow until 2030 and only starts to fall sharply after 2035
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Key assumptions in our model
l Global population continues to grow strongly – especially in India and Rest of World, on World Bank forecasts. GDP per head continues to grow as emerging markets catch up, and this in turn drives higher car ownership penetration.
l Global car sales are driven by replacement (of a growing fleet), population growth, and ownership changes. Global car sales rise from 90 million in 2017 to 134 million by 2050 in our base case.
l Ageing populations (in developed markets and China) slow down the rate of ownership growth. Urbanisation con-tinues to grow, but more slowly than before. We assume urbanisation drives higher shared mobility, which reduces ownership (but not car sales – due to higher replacement rates for a higher-mileage fleet).
BEV sales penetration will also depend on the shape of future regula-tions and the pace of development in BEV technology. Different regions are likely to develop at very different rates ( Exhibit 25 ).
Exhibit 22:Global car ownership correlates closely with GDP per head
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Source: IMF, World Bank, Morgan Stanley Research
Exhibit 23:World car ownership grows from 15% to 25%, as emerging market GDP per head continues to catch up with DM
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Source: World Bank, IHS, Morgan Stanley Research. Note: Chart shows car parc/total population. World Bank estimates for population growth; Morgan Stanley Research estimates for global car parc (from 2017 onwards).
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Morgan Stanley Research 17
Exhibit 24:Global car sales grow from 90 million in 2017 to over 130 million by 2050*
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* We assume no downcycles beyond 2021-22. Source: IMF, World Bank, Morgan Stanley Research, Morgan Stanley Research estimates for global car parc (from 2017 onwards).
Exhibit 25:BEV fleet penetration growth will vary by region: China, Europe and the US lead the way
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Source: Ward's, ACEA, CAAM, IHS, Morgan Stanley Research estimates
Further Morgan Stanley research:
One Billion EVs by 2050? (May 5, 2017) Harald C Hendrikse, Victoria A Greer, Adam Jonas CFA
BluePaper
18
2016 saw OEMs announce many new battery EV launch plans
A limited number of battery EVs are already in production – Tesla most obviously, but also Nissan's Leaf and Renault's Zoe; BMW's i3 also sells in modest volumes. However, the number of models currently available (and until recently, even the model launch plans) is clearly insufficient to support a significant increase in EV penetration. All this changed in the second half of 2016: both Volkswagen and Daimler used the October Paris motor show to
OEMs are ramping upannounce brand new EV concepts, alongside ambitious targets for EV penetration by 2025: 2-3 million cars for VW (>25% of annual sales); 15%-20% for Mercedes. A raft of EV product announcements from other OEMs also came in 2016: BMW plans an electric X3 by 2020; Ford a new fully electric compact SUV by 2020; JLR will launch the fully electric iPace SUV in 2018. Toyota, which has long favoured hybrids and fuel cell EVs, announced plans to commercialise a battery EV by 2020 – perhaps the clearest sign that the regulatory environment, both in Europe and China, has caused a fundamental shift in OEMs' product planning.
Exhibit 26:2016 saw a large number of EV model launch announcements from OEMs
GM: Chevy Bolt
BMW: i3 range upgrade
VW: I.D.
VW: Porsche Mission E
VW: Audi Q6 e-tron
Tesla: Model 3
2015 2020 2025
BMW: i5?
Mercedes: Generation EQ
Launch Start of production
Key:
BMW: X3
BMW: Mini Countryman
Jaguar: iPace
Toyota: ?
Hyundai: Ioniq
Ford: new small SUV
Chrysler: Portal
2019 2018 2016 2017
Source: Company data, Morgan Stanley Research
Exhibit 27:Battery EV targets and launch plans by OEM
OEM Targets Model launches
BMW 2019: Mini BEV; 2020: electric X3. iNext Daimler 15-20% of sales as EV by 2025 2020: first in the all-electric EQ range (SUV)Volkswagen 2m-3m battery EV sales by 2025 (>25% of sales) 2018: Porsche Mission E; 2019: Audi e-tron; 2020: VW ID
PSA Four electric models will be introduced by 2021, the first of which will reach the market in 2019. 80% of core models to have hybrid and/or BEV by 2023
RenaultFord 13 hybrids and BEVs by 2022, including hybrid F-150 and hybrid Mustang 2020: new small SUV BEVGM 2016: Chevy BoltFCA Half of all Maserati volume to be electric by 2022 After 2018: Chrysler Portal minivanJLR 50% of the models to have alternative drivetrains by 2020 2018: Jaguar iPace (SUV)Toyota 2020: BEV ready for marketNissan 20% of European sales to be EVs by 2020Honda Two-thirds of sales to be hybrid or electric by 2030
Hyundai / KiaHyundai and Kia are expected to introduce 31 eco-friendly models (10 hybrid, 11 PHEV, 8 BEV and 2 FCEV) by 2020. Annual production target of 300k for these vehicles in total by 2020
2016: Hyundai Ioniq EV (available in petrol, hybrid and battery EV variants) 2018: Hyundai Kona, Kia Niro EVs (both SUV B-segment). Kia Stonic EV (SUV A-segment)2021: Hyundai Genesis EV (high end sedan)
Volvo Cars (owned by Geely)
All Volvo cars to be hybrid or BEV by 2019. 5 BEVs to be launched between 2019 and 2021. 2019: compact BEV to be made in China for global export
Source: Company data, Morgan Stanley Research
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Morgan Stanley Research 19
Exhibit 28:VW I.D. concept
Source: Analyst photograph
Exhibit 29:Mercedes EQ concept
Source: Analyst photograph
Exhibit 30:GM Bolt
Source: Analyst photograph
Exhibit 31:Opel Ampere
Source: Analyst photograph
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Exhibit 33:Advances in semiconductors (silicon carbide) and battery technology could see EVs approach parity on component costs with ICE cars by around 2025
14,000 16,000
17,000
14,000+
16,000+
19,500 17,000+
16,500
7,000 4,000
-
5,000
10,000
15,000
20,000
25,000
ICE
(2
01
5)
Die
sel (
Eu
ro 6
d -
20
20
) Hyb
rid
Ba
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ry E
V -
50
kWh
@
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0/k
Wh
Pe
tro
l 20
25
Die
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02
5
Hyb
rid
20
25
Ba
tte
ry E
V -
4
0kW
h @
€1
00
/kW
h
Component cost/car (€) New emissions standardscompliance?Additional exhaust content
Euro 6d cost
Battery pack
Hybrid/EV powetrain
ICE powertrain
Exterior
Interior
Electrical
Vehicle body
Chassis
2017 2025
Source: Technische Universität München, ICCT, EPA, CARB, NHTSA, Company data, Morgan Stanley Research
We think that EV costs are falling rapidly, supporting our base case forecast of one billion EVs by 2050. We see two main areas of innovation that should bring component costs down: advances in battery technology should help reduce battery costs to close to $100/kWh (at spot metal prices) by the early 2020s, while we estimate silicon carbide chips within the EV powertrain components could save $1k/car, or 8% of the average cost of an EV.
Taken together, we believe these could see EVs approach parity with ICE cars on component costs by around 2025. As ICE emissions costs continue to rise, EVs are becoming the cheaper option.
How quickly can EV costs come down?
Exhibit 32:How quickly BEVs costs can fall to parity with ICE vehicles depends largely on the speed of decline in battery costs – but as ICE costs rise, it's clear that a crossover point is coming
0
50
100
150
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20
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Drivetrain costs of CO2 and NOx compliance rise. BEV costs fall.
Battery electric Original drivetrain assumption
Add SUV Add diesel decline
Add NOx Add RDE
BEV
$100 / kWh
$250 / kWh
$140 / kWh
Source: Morgan Stanley Research estimates
How do battery costs get to $100/kWh?
Battery costs are a major barrier to increasing EV penetration. On a per kWh basis, cost estimates today vary between $200/kWh and around $140/kWh at the low end. With a 50-60kWh battery, this means battery costs/car of anything up to $12k, compared with the total component cost of a petrol car at around $14k (and petrol engine costs of ~$3k). Plainly, battery costs need to come down.
We see battery costs of $100/kWh as achievable by the early 2020s on current technologies, by changing the mix of materials in the cathode (more nickel, less cobalt). A technology step change is needed for costs to fall further, and is unlikely before 2025, but potential disruptors are already a key R&D focus – see box below. At $100/kWh, a 50kWh battery cost would be $5k/car – a much more manageable level, particularly bearing in mind that fuel cost savings bring a further benefit to consumers on a total cost of ownership basis ( Exhibit 16 ).
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the battery cell is in the cathode. Improvements in the cathode's energy density will reduce the amount of metal required per kWh, thereby lowering the metal requirement and so also the metal price risk. The average market price of each metal depends on the supply and demand dynamics. For small markets, this can lead to unwanted metal price exposure for the automotive OEMs, which in some cases cannot be hedged (cobalt). (see Commodity implications ).
Most of the battery cost reduction will come from technology improvements and lower cost of materials. Battery cell costs have already fallen by ~30% a year in the past five years, thanks to the increasing scale of production and technological advances. We think the scale effects are already diminishing, with plants now at critical production levels and fixed costs only a small part of total production costs. Most of the battery cell costs are therefore driven by the price of materials and composition. Around half of the component cost of Exhibit 34:China LFP battery cell cost structure
China LFP batteryMaterial volume
Cost per unit
Cost (US$/kWh)
%
Cathode (kg) 2.4 17 40 23%Anode (kg) 1.4 9 12 7%Electrolyte (kg) 2.1 11 24 14%Separator (sqm) 23.0 1 14 8%Shell cover (kg) 4.0 5 18 10%(Cu) Current collector (kg)
1.2 9 11 6%
(Al) Current collector(kg) 0.5 4 2 1%NMP (kg) 1.3 4 5 3%PVDF (kg) 0.1 27 2 1%CMC (kg) 0.0 3 0 0%SBR (kg) 0.0 4 0 0%Conductive additives (kg) 0.2 5 1 0%Others (tabs, termimals, insulator, etc.)
6 3%
Manufacturing overhead 19 11%Labour 7 4%Others 14 8%Total 176 100%
Source: Morgan Stanley Research
Exhibit 35:China NMC battery cell cost structure
China NCM battery (US$)
Material volume
Cost per unit
Cost (US$/kWh)
%
Cathode (kg) 1.8 22.7 41 24%Anode (kg) 1.4 9.1 12 7%Electrolyte (kg) 1.6 11.4 18 11%Separator (sqm) 25.0 0.7 18 11%Shell cover (kg) 1.5 4.5 7 4%(Cu) Current collector (kg)
0.8 9.1 8 4%
(Al) Current collector (kg) 0.4 3.8 1 1%NMP (kg) 0.8 3.9 3 2%PVDF (kg) 0.1 27.3 2 1%CMC (kg) 0.04 2.6 0.1 0.1%SBR (kg) 0.04 3.8 0.1 0.1%Conductive additives (kg) 0.2 5 1 0.4%Others (tabs, termimals, insulator, etc)
6 4%
Manufacturing overhead 19 11%Labour 7 4%Others 27 16%Total 171 100%
Source: Morgan Stanley Research
The battery technology roadmap What are cathode materials? Cathode active materials are one of the three main chemical elements dictating the properties and performance of a battery cell. Along with the anode and electrolyte, the cathode facilitates the charge discharge process in a battery. Depending on the materials used, it influences properties such as energy density (kWh/kg), power density (W/kg), cost ($/kWh), safety and cyclability.
What are the leading lithium-ion technologies? There are five common lithium-ion technologies: LFP (lithium iron phosphate), NMC (nickel manganese cobalt), NCA (nickel cobalt aluminum), LMO (lithium manganese oxide) and LCO (lithium cobalt oxide). Within EV batteries, the preference is for the higher energy density materials to boost range, which favours NMC and NCA.
What is the technology roadmap? Improvements in the cathode technology (energy density) are paramount to maintain stable pricing ($/kg) given the cost roadmap laid out by the automotive OEMs. We believe that the current Li-ion battery technology roadmap will help to achieve ~$100/kWh, which would be 'Fit for Purpose'. Nickel manganese cobalt (NMC) has a clear technology roadmap, as we move from NMC(1,1,1) to the more nickel-rich NMC(6,2,2) currently in use, and to NMC(8,1,1) in the not-too-distant future. Simplistically, increasing the nickel content not only raises the energy density, but also thrifts cobalt – currently the most expensive ternary raw material by $/lb – and reduces the total metal required. To achieve battery costs materially below $100/kWh ('Fit for the Future') will require a technology breakthrough.
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Technology breakthrough needed to get <$100/kWh
Today's technology should take costs to $100/kWh, but further technological breakthroughs are needed to bring costs below this level. The transition towards EVs presents two challenges to OEM profitability – the obvious cost pressures in EVs from building vol-umes from a low base and in component costs, and the potentially
Battery costs of <$100/kWh will require breakthroughs in cathode technologyPossible technology disruptors ...
Lithium-sulphur (Li-S) – often cited as the long-term solution. It has very high specific energy of 550Wh/kg – three times that of a conventional lithium-ion battery – relatively low-cost raw materials, specific power density (2,500W/kg), and good cold temperature discharge characteristics, and low temperature charging at -60°C (-76°F). Limitations: material degradation, low cycle life and self-discharge.
High-voltage lithium-ion (Li-ion) – much research is going into next-generation Li-ion to increase the operational voltage (and therefore energy density) without compromising the stability of the cathode material. Limitations: reduced cyclability, material degradation at high voltages.
Lithium air – believed to offer 5-10x the energy density of a conventional Li-ion battery. The theoretical specific energy of 13kWh/kg would be on a par with a gasoline-fuelled vehicle. At least 10 years from commercialisation, with some material challenges to overcome. Limitations: material degradation due to air purity, short cycle life, poor thermal operating range.
Solid-state lithium – often viewed as the natural progression to current Li-ion batteries, able to store twice the energy, though with some concerns over loading capabilities. Limitations: material degradation of the anode, short cycle life, poor thermal operating range.
Fuel cells – fuel-cell vehicles typically run off hydrogen. Range and power are less of a limitation than for batteries, but the infrastructure build-out remains the greatest hurdle. Limitations: fuelling infrastructure, energy efficiency (liquifying hydrogen/transportation).
… and many others.
lower volumes and prices in the legacy ICE business (from EV canni-balisation as demand shifts to the new EV technologies). As a conse-quence, there is likely to be high demand for future battery technologies that can reduce EV costs – we think that investment will continue here. A number of potential technology disruptors are the subject of R&D focus.
Silicon Carbide can improve efficiency
SiC could add 20% to EV range at the same system cost
A second area of innovation where we see potential to bring costs down is in the semiconductors within the EV powertrain components.
Power semiconductors – devices that control and convert electrical power – are needed for both the high voltage of the running systems that supply power from the battery to the motor and the low voltage for other electrical systems in EVs. Today, the majority of electric cars use Silicon chips called IGBTs, which is currently the most powerful transistor architecture on Silicon. However, these are approaching their theoretical limits of performance (determined by the physical properties of silicon) and are unlikely to see dramatic improvements.
In our view, compound semiconductors, such as silicon carbide (SiC), are likely to be more frequently adopted in the future. So far, SiC adoption has been slow, and a number of issues need to be resolved to enable mass production. We therefore expect today's silicon IGBT chips to remain mainstream for the next five years or so. However, SiC materially improves efficiency (lower power loss, higher tempera-ture resilience), and we estimate that adoption would increase EV range by ~20% and cut charging time by 20%. SiC chips cost $25/unit, compared to just $10 for IGBTs, but given the efficiency potential, we think adoption could increase, bringing system cost to parity over time.
This view is supported by our discussions with industry participants. Market leader Infineon sees slow SiC penetration, based on its cus-tomers' roadmap for the next five years, but Tesla already uses SiC, and Toyota's new Prius development is dual-track, with IGBTs and SiC chips made in-house.
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A trade-off between increased range and reduced costOEMs could use efficiency improvements from SiC to increase range in some cases and reduce cost in others.
Range is ~200 miles today, going to 300 miles by 2018/19. Today, the newest EVs are achieving fully-electric ranges of around 200 miles (>300km) using the US EPA standard, which is tougher than the European NEDC certified ranges. The 2017 Chevy Bolt is EPA certified at 238 miles range; the Tesla Model 3 is expected to have at least 215 miles; the next generation Nissan Leaf (due 2018) is expected to step up range to 200 miles from the 2016 range of 107 miles (on the larger battery option) – both estimates are from CleanTechnica. Information remains closely guarded on new launches, but targets for the Porsche Mission E, Audi e-tron Quattro and the Mercedes EQ SUV are all around 300 miles, or almost 500km.
So far, new EV launches have mostly used improved energy density to increase battery capacity to achieve longer ranges. Although range per kWh has not really improved, the physical size, and cost, per kWh has come down. It's hard to gauge exactly where the tipping point would be in consumer acceptance, but we think that 300 miles is a major step on from current levels. We believe OEMs will seek to offer a range of battery capacities, not least to support pricing for variants with larger batteries. Tesla already prices its models in this way. OEMs could use the efficiency improvements that SiC brings to increase range in some cases and to reduce cost in others. Charging times are also key to making smaller batteries workable for consumers – and SiC is a further development that could reduce charging time.
All else equal, SiC could reduce EV component cost by €1k/car
If we assume that a 40kWh battery using SiC power electronics could achieve the same range as a 50kWh battery without, costs could come down substantially – moving to 40kWh from 50kWh could save $1k/car (assuming $100/kWh). As we expect total system cost for SiC to be the same as today's systems (efficiency savings should offset higher chip costs), we haven't flexed our assumptions for the hybrid/EV powertrain cost here (electric motor, inverter, converter, charger, wiring).
So far, it seems that SiC is not widespread even on orders for EVs – with a three-year time lag between orders and start of production in the auto industry, any SiC cost savings will be post 2020 at the ear-liest. However, this coincides with our expectations for EV penetra-tion to ramp up between 2020 and 2025, based on OEMs' model launch plans.
Towards cost parity by 2025
2017 – EV component costs still ~$5k higher/car. We estimate that component costs are around $14k/car today, based on a mid-level $25k car with a petrol engine. Of this, the powertrain (engine and auxiliaries, transmission and exhaust) is around $3k. This power-train content is removed in a battery EV, and replaced with a battery pack (including temperature management and power control soft-ware) and power electronics (inverter, converter, wiring). Even at the low end of today's estimate, $140/kWh, a 50kWh battery (also on the low side) costs $7k/car, with ~$1.5k/car for the power electronics. Overall, this leaves EVs at a material premium in terms of component costs to petrol cars – although on European fuel costs, passing on this level of component cost premium to consumers could be cov-ered by fuel cost savings in terms of total cost of ownership.
2025 – approaching component cost parity. With lower battery costs and better efficiency from SiC chips combined, we see signifi-cant cost reductions by 2025. We assume a 40kWh battery (with the efficiency gain from the SiC chip boosting the range to levels that a 50kWh battery could reach today) and $100/kWh – taking the bat-tery cost down to $4k from $7k. Further battery cost reductions below $100/kWh could bring EV costs down further. On the ICE side, we think there's a clear risk of ongoing cost increases as emissions regulations continue to tighten. The Euro 6d regulations (WLTC plus RDE) has already added materially to diesel costs (we estimate ~$1k/car). We don't have visibility on regulations post 2020, at least in Europe, but we think the direction of travel here is clear.
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Exhibit 36:Lower battery costs and more efficient chips could bring EV component costs close to cost parity by 2025
14,000 16,000
17,000
14,000+
16,000+
19,500 17,000+
16,500
7,000 4,000
-
5,000
10,000
15,000
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ICE
(2
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Eu
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h @
€1
00
/kW
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Component cost/car (€) New emissions standardscompliance?Additional exhaust content
Euro 6d cost
Battery pack
Hybrid/EV powetrain
ICE powertrain
Exterior
Interior
Electrical
Vehicle body
Chassis
2017 2025
Source: Technische Universität München, ICCT, EPA, CARB, NHTSA, Morgan Stanley Research
Further Morgan Stanley research:
Technology - Semiconductors: SiC chips increase EV mileage by up to 20% – sizing the opportunity (June 27, 2017)Francois A Meunier, Kazuo Yoshikawa CFA, Craig Hettenbach, Andrew Humphrey, Harald C Hendrikse, Victoria A Greer, Paul R Walsh, Charles L Webb
Chemicals: Will Cathode Evolution Drive the EV Revolution? (June 28, 2017) Charles L Webb, Paul R Walsh, Jack Lu, Kyle Kim, Harunobu Goroh, Vincent Andrews, Javier Martinez de Olcoz Cerdan, Harald C Hendrikse, Victoria A Greer, Tom Price, Susan Bates
Autos & Shared Mobility: Towards cost parity for EVs (July 5th, 2017) Victoria A Greer, Harald C Hendrikse, Francois A Meunier, Charles L Webb
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Exhibit 37:The number of EV chargers exceeded 2 million globally in 2016. Most are private chargers, for people to charge in the home
0%
100%
200%
300%
400%
500%
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500
1,000
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2010 2011 2012 2013 2014 2015 2016Publicly available slow chargers Publicly available fast chargersPrivate chargers Growth rate of private chargersGrowth rate of publicly available fast chargers Growth rate of publicly accessible slow chargers
Charging outlets (thousands) Year-on-year growth rate (%)
Source: IEA Global EV Outlook 2017, Morgan Stanley ResearchNote: Private chargers in this fighre are estimated assuming that each electric car is coupled with a pri-vate charger.
Who will provide the charging infrastructure?
For EVs to take off broadly, consumers need to be confident that they can charge their vehicle easily. Getting a network of charging points up and running will of course be key to the roll-out of EVs, but the growth in EVs alone, and the political and regulatory backing it gets, will mandate more charging infrastructure.
How much infrastructure will be needed, and who and how it will be operated are open questions. We run some estimates and consider the options.
This has already been a big growth area – the IEA shows that charging points grew from c.20,000 globally in 2010 to over 2 mil-lion in 2016. Unsurprisingly, most of these are private points, esti-mated at 1.8 million, while public charging points number around 300,000. There are over 6 times more EVs than public charging points, which is in line with the thesis that 80% of charging is done at home (or at a business).
How much public infrastructure might ultimately be needed? A consensus has yet to emerge on the number of public charging points needed to service the EV fleet. The current numbers vary widely from country to country, depending on the maturity of the market. The IEA calculates that the number of EVs per slow charging point was
broadly between 5 and 15 in 2015, with the global average at 7.8. The numbers of EVs per fast charging point was understandably much greater – at the country level it is often 100. For countries with a more developed EV market, the number of EVs to public charging infra-structure tends to be higher – in Norway (29% EV share of 2016 sales), the ratio was 16 for slow charging and 127 for fast charging. The UK has 4,000 public charging points, compared with 8,500 petrol stations. In the US, there are 15,700 electric stations and 41,600 charging out-lets, versus 115,000 gas stations.
We estimate 1 to 3 million public points could be required in Western Europe. The optimal EV to charge point ratio is still unclear. Most consumers with an EV will have the ability to charge at home (a couple of utilities have told us they expect 80% of charging to be done at home or work). For employers, utilities have told us that they are seeing one charging point for every two EVs. But this is only one part of the picture. How many public points might be needed? Taking the 5-15 range of EVs to slow charging points above would imply 7.7-23 million public charging points globally by 2030, based on our EV pen-etration forecasts (versus c.300,000 public points today). For Western Europe, this implies 1-3 million points on our 14.9 million EV estimate. That is clearly a sharp increase on the number of public charging points today. This could involve up to c.€10 billion of infra-structure spend. Presumably the power of chargers will increase as costs fall, but how this will play out, as well as the number of chargers needed, is unclear. Exhibit 38:There could be 1-3 million public charging points in Western Europe by 2030 – maybe 10 times this by 2050
Source: Morgan Stanley Research estimates
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Exhibit 39:The range of cost estimates for delivering 1-3 million charging points is very wide
Low HighNew charge points 1m 3mCost of slow charge 300 600 Proportion 80% 70%Cost of fast charge 5,000 10,000 Proportion 20% 30%Average cost 1,240 3,420 Total cost (EURm) 1.2 10.3
Source: Morgan Stanley Research estimates
Subsidies will be crucial for the roll-out. As with renewable energy in recent decades and EVs themselves, government incentives will play a key part in driving charging point growth. These subsidies are to enable consumers to add a wall box at home, for example. But there are also subsidies for public charging points, where site – and hence utilisation – is all important. A charging point that is not being used is clearly not a valuable asset to own.
Innovative city solutions. Some cities are coming up with innova-tive ways to deliver new points. Amsterdam will only deploy charging point infrastructure in areas where it knows there is critical mass for it, and only if there are no off-street or private alternatives (con-sumers can sign up to the municipality to have a charger installed near their home when they purchase an EV).
Exhibit 40:Support mechanisms are in place across many countries for EV supply equipment / charging points
Direct Investment Fiscal advantages Total EVSE stock per million inhab-
itants
Publicly accessible EVSE stock per million inhabitantsPublicly acces-
sible chargers Private chargers Publicly acces-sible charges Private chargers
Canada 612 98China 265 42Denmark 1,732 309France 970 159Germany 664 67India 5 0.3Italy 129 29Japan 1,171 174Netherlands 6,280 1,084Norway 15,143 1,372Portugal 302 114South Korea 113 26Spain 161 35Sweden 1,674 175United Kingdom 933 155United States 1,340 97
Legend: No policyTargeted policy *Widespread policy **Nationwide policy
Notes: * Policy implemented in certain geographical areas (e.g. specific states/regions/municipalities), affecting less than 50% of the country's inhabitants.
** Policy implemented in certain geographical areas (e.g. specific states/regions/municipalities), affecting more than 50% of the country's inhabitants.
Source: IEA Global EV Outlook 2017, Morgan Stanley Research
Types of charging infrastructureCharging points are defined primarily by the power they can produce (in kW), which determines the speed at which they can charge an EV.
l Slow charging is the lion's share of charging points today, mostly
located in residential properties and at businesses. Home charging
can range from 3kW to >20kW. To put these sizes into context, a
Renault Zoe EV with 40kWh battery will take over 10 hours to
charge with a 3.6kW box, but less than 6 hours with the 7kW box.
l Fast charging: The IEA in its Global EV outlook 2017 puts fast
charging at all charging above 22kW. At 22kW, the charging time
for a Renault Zoe EV would be less than 2 hours, but there is a
material cost difference for the box.
l Rapid and ultrafast charging. Rapid chargers are above 43kW.
Ultrafast chargers are above 50kW. As technology moves on, so
do the sizes of the EV batteries, and therefore the requirements to
charge them efficiently / quickly. Utilities and OEMs are looking at
150kW, and as high as 350kW for now (for Porsche testing).
Germany already has around 100 50kW charging points on
autobahns. These can cost up to €10,000 (and so even more
powerful charging infrastructure will cost more), but this depends
on location and the need (if any) to reinforce the grid – a more
likely issue with the higher charge, especially if there are a number
side by side.
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Morgan Stanley Research 27
What's the right business model?
The roll-out of charging infrastructure presents opportunities for companies in a number of sectors, and there is a range of potential business models that could be adopted.
l Charging stations sponsored by OEMs and used exclusively by cars of that brand. This approach supports OEM mar-keting, but it is questionable whether it could be sustained as the EV fleet grows and whether OEMs would want to be responsible for a large network of charging stations.
l Private charging stations connected to private distribution sources. This is already widespread in Japan, but requires the appropriate electrical infrastructure to support increased energy flows as well as the management of the station itself. It could be more feasible for large, modern buildings, whether residential or commercial.
l Public/semi-public network of charging stations managed and financed by governments/utilities: While this could allow broad-based installation, it raises some questions over funding. If financed through taxes, it would imply an effective taxpayer subsidy of EV owners. However, a utility could partner with businesses or municipalities to deliver the infrastructure as well as a service offering, which could lower the risk to the utility.
l Charging stations installed and managed by charging sta-tion manufacturers but commissioned by an external entity (for example, local governments, utilities or private enti-ties, such as hotels). This would entail manufacturers sig-nificantly extending their business model to fleet management and installation.
l Charging stations commissioned by an external entity, installed by contractors and operated by that same con-tractor or a tertiary entity: This model is closer to that of petrol stations but does not necessarily offer the flexibility of an heterogenous fleet base (more difficult to manage/install) and could require a significant step-up in power dis-tribution in some areas.
What about software access … Interoperability is crucial for the hardware (EV owners will want to be able to charge their cars at as many charging points as possible), but it is just as important on the software side. There are ever more web-based solutions coming – already there are platforms that allow drivers to unlock charging sta-tions with their navigation system or an app and to pay for the elec-tricity based on agreements established with charging providers.
… and payment? How will customers end up paying for EV charging at public points? There is no fixed model for public infrastructure today. In some instances, charging is free. This was one way Tesla incentivised new customers at first, although it has since started charging at its infrastructure. Hotels could also offer free charging – like wifi, it could be used to attract customers. In some instances, pay-ment can be made per visit. But there are also schemes where the end user pays a fixed monthly fee affording them unlimited miles (e.g. EON in Denmark) – akin to mobile phone pricing. This is a nascent market, and there will be many different ways to pay for EV charging in the coming years.
Utilities: Managing the Shift to Electric Vehicles (June 19, 2017) Nicholas J Ashworth, CFA, Carolina Dores CFA, Anna Maria Scaglia CFA, Tim-othy Ho CFA, Dominik Olszewski CFA, Arthur Sitbon
EVs & Capital Goods: Framing Threats & Opportunities (March 30, 2017) Lucie A Carrier, Ben Uglow, Ben Maslen, Robert J Davies Ph.D., Peter Murdoch, Victoria A Greer, Harald C Hendrikse, Yoshinao Ibara, Lisa Jiang, Kevin Luo, CFA
Further Morgan Stanley research:
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EVs will have only a marginal impact on power consumption in the next decade. Our estimate of 5 million battery EVs in Western Europe by 2025 would require just 3% of Germany's current annual total consumption. By 2050, 150 million European EVs could lead to 'another Germany' in demand, absent offsets.
Near term, peak demand is more important. Although overall peak demand will grow only slowly, localised EV penetration could cause local load issues on networks. Utilities are already looking at how this can be smoothed. Without new smart solutions, demand responses and vehicle to grid interactions, peak demand on national grids could double by 2050. That would require a lot of new utility investment.
Electricity demand looks manageable
The impact of EVs on electricity demand will be subdued in the medium term. If we assume the average EV drives 15,000 km a year, and take the rule of thumb that a standard EV will consume 20 kWh of electricity per 100 km, this implies annual average consumption of over 3,000 kWh. This is equivalent to the annual household elec-tricity consumption in the UK. So, in itself, it is not an insignificant number. Yet, although we expect very strong growth over the next decade, it will take time to get to a scale that makes a material differ-ence to European power networks.
Will there be enough power?Exhibit 41:If all the current car park were replaced today with EVs, it would add c.25-35% to total annual country demand across major EU countries
0%
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2020 2025 2030 2040 2050France Germany Italy Portugal Spain UK EV penetration (rhs)
Additional consumption as EV penetration grows EV penetration of overall fleet
Source: World Bank, Morgan Stanley Research estimates
Exhibit 42:Full EV penetration would add 0.5-1% to electricity demand a year on a straight line basis, assuming no offsets*
*In practice, growth would be back-end loaded, and smart grids and storage capabilities would provide some offsets. Source: Morgan Stanley Research estimates
Our forecast of 4.5 million EVs by 2025 in Western Europe implies an additional 13.5TWh of electricity demand – equivalent to less than 3% of the annual demand in Germany today (of over 500TWh). The near 15 million EVs we expect by 2030 implies c.45TWh. To put this into context, Germany, France, the UK, Spain, and Italy have seen electricity demand decline by a cumulative >100TWh since the finan-cial crisis in 2008 (or 6% of its initial demand), as recession and energy efficiency has pulled it back. EV demand can reverse some of this, but it will take time.
Exhibit 43:Since the financial crisis in 2008, demand has fallen by 4-10% in Western Europe
Source: Morgan Stanley Research
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EVs will not require new power generation near term. The IEA expects an additional 2,699GW of electrical capacity (with 53% from renewables) globally by 2030 versus retirement of 720GW. Bloom-berg New Energy Finance expects Europe to add twice as much new capacity as it retires to 2040 (1,037GW vs 503GW retired) while it expects demand to stay flat. It sees EV demand as supportive to total demand across Europe in the 2030s on its assumed ramp-up of EV cars. This suggests power generation should be adequate to meet new demand needs. This of course is not necessarily the case in every country, but with modest extra demand pull from EVs in the next decade, this is unlikely to require significant sources of new genera-tion capacity.
There could be some country-specific issues. The two large Euro-pean countries for which this could present challenges in the next decade are the UK and Germany. The UK's reserve margin (additional capacity over peak demand) is already tight. In Germany, some 11GW of nuclear power capacity will come off the grid by 2023, and lignite capacity will also start to be reduced. BNEF sees this capacity reduc-tion being offset by new solar PV and wind capacity. The introduction of a new capacity market means capacity requirements should be managed in time for any surge in EV registrations.
Network management is more of a challenge
Although the overall new load requirements from EVs in the next decade appear relatively manageable, where exactly EVs come on the grid matters for network management. We think load manage-ment will become important relatively quickly. For example, if all 6 houses on a street suddenly acquire a new EV, this could double the local demand on the network, and could have implications for grid operators.
Not only do distribution network operators (DNOs) potentially have to manage slow charging point growth in people's houses, they will have to contemplate growth in fast chargers as well. Eight super-fast chargers all sitting next to one another at a motorway service station or autobahn stop could cause some problems.
Managing peak demand
One of the main problems facing grid operators will be the potential additional demand at peak times. Reserve margins are built into the system so that there is enough generation to meet daily peak demand, and distribution networks are set up to be able to handle
Exhibit 44:BNEF sees EVs helping demand in the 2030s across Europe
2,000
2,500
3,000
3,500
4,000
2011 2015 2019 2023 2027 2031 2035 2039
TWh
Gross demand
Embedded generation
EV demand Net demand with
EVs Net demand without
EVs
Source: Bloomberg New Energy Finance
these peaks. Adding a new layer of demand from EVs at peak times could lead to greater system cost through the need for more genera-tion capacity, as well as investment in new transmission and strengthening existing transmission and distribution networks.
To put some context around this, we run a couple of scenarios. In Exhibit 45 we assume a 1kW addition to peak demand from each new EV (slow charging), taking into account current car parks by country and taking an EV assumption per country depending on our penetration expectations. This could see peak demand increasing by c.5% to 2030, and maybe 20% by 2040. Exhibit 46 assumes a bigger impact on peak demand as it assumes 2.4kW of capacity demand (with this potentially rising to 20kW or more depending on charging), compared to the regular peak demand for average house-holds of 3.5kW-5kW (NERA 2007 and MOT 2011). This could see peak demand increasing by 50% to 2040. Both scenarios are based on all EVs being electric (not hybrid).
Exhibit 45:Peak demand could rise 50% from current peak with new EVs on slow chargers, without any grid mitigation …
0%
10%
20%
30%
40%
50%
60%
70%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
2020 2025 2030 2040 2050
France Germany Italy Portugal Spain UK EV penetration (rhs)
Impact on peak demand as EV penetration grows EV penetration of overall fleet
*Assumes 1kW slow charge demand for EVs - the My Electric Avenue work assumed a 1kW increase in peak, using a 3kW plug, but demand will increase as charger power increases. This doesn't take into account any grid management offset. Source:World Bank, Morgan Stanley Research
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Exhibit 46:… but peak demand could double given our EV forecasts to 2050. Smart grids and storage could change this (potentially complicated by shared mobility)
*Assumes 2.4kW slow charge demand for EVs - the My Electric Avenue work assumed a 1kW increase in peak, using a 3kW plug, but demand will increase as charger power increases. This doesn't take into account any grid management offset. Source: World Bank, Morgan Stanley Research
Future grid design and management could reduce the impact
Our analysis doesn't reflect the likely impact from smart grids, time of use tariffs, and vehicle to grid capabilities – the actual impact on peak demand should be lower as there will be more ways to manage the grid to cope with peaks and troughs. But visibility on the actual impact is low today. Managing demand peaks will be important to manage system integrity, but also to avoid needless additional system costs (and therefore additional customer bill payments).
The UK's National Grid has run a simulation of the impact of a greater EV fleet on peak demand through to 2040. It sees demand increasing, but adding "only" 15% to peak demand by 2040 (versus our scenarios of a 20-40% increase to peak demand). That sensitivity assumes some hybrids in the mix, coupled with smart networks and time of use tariffs, which will shift demand away from peaks.
EA Technology's October 2016 "Smart EV Options paper", commis-sioned for SSE, looks at how some of the potential network cost from higher EV demand could be offset through external management of charging. Exhibit 47 shows how demand curves can be managed
(and potentially flattened) by using EVs combined with smart meters. This will be an important tool to lessen costs and to maintain system integrity. But this will require closer collaboration between regulators and consumers.
Managed charging allows a utility or third-party to remotely control vehicle charging by turning it up, down, or even off to better correspond to the needs of the grid, much like traditional demand response programs.
Many in the industry are also looking at vehicle to grid (V2G), which-will allow EVs in effect to be large mobile batteries, a store of energy. EVs will interact with smart grids to enable a two-way flow of energy and allowing smarter network management that reduces peaks and lowers costs. Whether the relationship between the consumer and the distribution network operators around managed charging of EVs should be based on regulation, consumer incentives, or market mechanisms remains subject to debate.
Exhibit 47:Managing EV charging via smart grids should enable demand curves to be flattened, reducing peaks and increasing troughs – but this is still some way off
Source: IEA Global EV Outlook 2017
Further Morgan Stanley research:
Utilities: Managing the Shift to Electric Vehicles (June 19, 2017)Nicholas J Ashworth, CFA, Carolina Dores, CFA, Anna Maria Scaglia, CFA, Timothy Ho, CFA, Dominik Olszewski, CFA, Arthur Sitbon
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China is already the world's largest market for what it refers to as NEVs (new energy vehicles – plug-in hybrids and BEVs), despite major challenges on charging infrastructure. NEV penetration targets are ambitious (12% for each OEM by 2020), and regulatory levers such as the permit systems in Beijing/Shanghai give the government more leverage than in other markets. Exposure to legacy ICE technology is less entrenched; China makes up a large proportion of global battery capacity; and China EV production is controlled by permit, several of which have been issued to entirely new entrants.
Chinese-made cars are almost entirely sold for domestic production today, but this could change as EVs become more prominent.
Targeting global leadership in NEVs
Slowing new car sales, stricter regulations, thinner subsidies and competition among OEMs – intensified by the addition of new entrants – is speeding up the pace of technological disruption in China’s auto industry. China is already the largest automobile market in the world, and we expect the share of EVs to grow from 1.4% now, to only 6% by 2020, but scale up rapidly to 30% by 2030. We believe China has tremendous potential to lead the global EV revolution and overtake developed markets. For EV technology, such as batteries and other components, the "Made in China 2025" blueprint details China's intention to be the global leader across the EV supply chain - see Chemicals – Value shift .
In Autos, we see the following 5 drivers:
1. More freedom from legacy technologies: China's auto industry is relatively young and lags largely behind developed market auto-makers in terms of traditional ICEs (both gasoline and diesel) and transmissions. This means less of a burden from legacy diesel or
Could China become the leader in Auto 2.0?
overall ICE-related facilities and technologies on a national basis when switching to EV and autonomous driving.
2. Regulatory push underpins EV/autonomous ambitions: The gov-ernment has a target of 2 million NEV annual sales in 2020 and NEVs making up 20% of total auto sales by 2025. On June 13 this year, the China's Ministry of Industry and Information Technology (MIIT) released a draft proposal for a scoring system to encourage OEMs to produce EVs. For autonomous driving, the government targets mass shipments of autonomous vehicles by 2025. We think the Chinese government is supportive of EV/autonomous driving on environmental grounds.
3. An abundance of data and capital: Data and capital, of which China has plenty, act as key elements of an electrified/autono-mous ecosystem. Some 95% of China’s 731 million internet users are on mobile devices (compared with 78% in the US), and this creates an immense motion capture database. The post-1980s generation is now the largest consumer group, accounting for 40%-plus of car purchases in 2016 (up from 20% in 2011) – they are more tech conscious and less concerned about data disclo-sure than older age groups. Separately, we see favorable capital flow funding China's R&D and potential outbound M&A for Auto 2.0. There were over 16 related fund-raising cases in 1H17.
4. Ruling the game: Last year, China accounted for 29% of global auto sales, or 80% of global auto industry growth, implying a market scale that is more than a match for that for the US. This, together with structural barriers to entry, such as regulation and more complex traffic conditions in China than in developed mar-kets, could mean that the standards for China's EV/autonomous ecosystem become the "proprietary standards" that future market entrants follow – which should favour the local supply chain.
5. Strong talent pool: Each year, China produces around 360k engi-neering graduates, 4 time that of the US. These legions of gradu-ates will provide support for the development of this secular new technology. The lucrative China market also attracts foreign talent – for example, the chief designers at Great Wall WEY and NextEV were hired from BMW and Porsche, respectively, and the former BMW i division chief has joined Faraday Future.
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China is already the largest market, and skewed to BEVs
China's NEV sales in the passenger vehicle market have grown strongly in the past five years (2011-2016), overtaking the US in 2015 with sales volume of over 207,000 units versus 114,000 in the United States. Compared to other markets, China is already notably skewed to BEVs over PHEVs: 76% of sales in 2016, compared with the US at 54% and Germany at 46%.
Exhibit 2:China is the most skewed to BEVs – 76% of NEV sales were BEVs in 2016
NEV Sales Breakdown in 2016China Japan Norway USA Germany Canada UK Netherlands
BEV 76% 62% 59% 54% 46% 45% 28% 15%PHEV 24% 38% 41% 46% 54% 55% 72% 85%
Source: OECD/IEA, Morgan Stanley Research
Exhibit 1:China is already the largest market for NEVs (PHEVs and BEVs)
0
50
100
150
200
250
300
350
400
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
China Canada France Germany
India Japan Korea Netherlands
Norway Sweden UK USA
Units ('000)
China
US
Source: OECD/IEA. Note: annual unit sales, Morgan Stanley Research
New game, new players? Although China is one of the world’s largest electric vehicle markets by sales volume, EV penetration remains low, at 1.4%. Among domestic OEMs, BYD, Geely and BAIC are among the largest of players and have secured a strong foothold in EV shares. However, as NEVs continue to develop, we expect the playing field to open up to
a variety of new players. The Chinese government has handed out 15 NEV production licenses to date and plans to halt the issuance of such permits as NEV policies are being revised. Of the 15 permits, 12 have been issued to unlisted players, many of which are relatively new to the auto industry.
Exhibit 3:NEV production permits issued between March 2016 and July 2017
Ticker CompanyCompany (Chinese Name)
License Approval Date
Project Investment (RMB Bn)
Project Investment (USD m)
Planned Capacity (Units '0 0 0 )
Product Examples
1958-HK BAIC Motor Corporat ion Limited 北气新能源 Mar-16 1.15 174 70 EU260 ; Arcfox; E180Private Changjiang EV 长江汽车 May-16 0 .80 122 50 E-Cool; EV-A1; A2; A3; C2Private Ch-Auto Technology 前途汽车 Sep-16 2.0 2 30 6 50 K50 ; EV SUVPrivate Chery New Energy Automot ive Technology Co Ltd 奇瑞新能源 Nov-16 2.0 5 310 85 Amizo 3,5,7 EV; S51; S71; S81Private Jiangsu Min'an Auto 敏安汽车 Nov-16 2.50 379 50 SUV EV, Coupe EVPrivate Wanxiang 万向汽车 Dec-16 2.75 417 50 At lant ic0 0 0 550 -SZ Jiangling Motors Group Co 江铃汽车 Dec-16 1.33 20 1 50 E10 0 ; E20 0 ; E30 0Private Sokon 金康新能源 Jan-17 2.51 381 50 B-class; C-classPrivate NEVS 国能新能源 Jan-17 4.27 647 50 NEVS9-3; Fastback; Crossover; SUV BEVPrivate Yudo New Energy Automobile Co. Ltd 云度汽车 Jan-17 1.89 286 65 n1; n3; n5; n7Private ZD 兰州知豆 Mar-17 0 .88 134 40 ZD; ZD 1Private China Sdev 河南 达 Mar-17 2.64 40 1 10 0Private Hozon Auto 浙江合众 Jan-17 1.16 176 50Private Greenwheel EV 陆地方舟 May-17 1.78 271 50
60 0 418-SH Jianghuai 江淮 Jun-17 iEV4; iEV6E; iEV7;iEV6S
Total 27.71 4205 810
Source: Company data, Morgan Stanley Research
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China policy framework Governments across the globe have been actively promoting the development of EVs to varying degrees, on the demand or supply side or both, driven by the desire to pursue an emission-free future, mitigate energy security concerns, and gain technological dominance and leadership in NEVs.
NEV credits and quotas – Inspired by California’s zero-emission vehicle (ZEV) programme, in September 2016, China’s MIIT put for-ward a ‘Temporary Management Regulation for Corporate Average Fuel Consumption’ and ‘New-Energy Vehicle (NEV) Credits’ proposal. The regulation will apply to all enterprises selling passenger vehicles in China, regardless of fuel type, and dictates that automakers will need to produce a certain amount of NEVs based on their annual pro-duction of passenger vehicles. Large-scale automakers with an annual production or import volume exceeding 50,000 traditional
PVs will need to fulfill the requirements of both the Corporate Average Fuel Consumption (CAFC) policy and NEV policy.
The NEV quota proposals are anticipated to begin next year, at 8% for 2018, 10% for 2019 and 12% by 2020. Carmakers operating in China will have to produce more EVs, purchase ‘NEV credits’ from peers or face severe fines. The details of the NEV trading mechanism are yet to be announced, but we expect that they will play a key role in determining auto manufacturers' strategies towards NEVs, partic-ularly those OEMs already heavily exposed to NEVs and which are more likely to have additional NEV credits.
Below we apply the NEV quota mechanism to our sales forecasts for China's passenger vehicle market, assuming an average NEV score of 3 points. Based on this, we expect the industry will need to produce and sell 680,000 NEVs at a minimum by the end of 2018, over 890,000 NEVs for 2019 and 1.12 million NEVs for 2020.
Exhibit 4:Our estimates for required NEV volumes in China, 2018-20e
2018E 2019E 2020E
Passenger Vehicles Sales (Units) 25,500,000 26,800,000 28,100,000 Government PolicyPercentage Requirement 8% 10% 12%NEV Points 2,040,000 2,680,000 3,372,000 Average NEV Score (per vehicle) 3 3 3Required NEV Annual Production 680,000 893,333 1,124,000
Source: MIIT, ICCT, Morgan Stanley Research estimates
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Exhibit 7:Beijing government subsidies, 2017
(Rmb)Driving Range
(R, Km)Central Local Total
100 R＜150 20,000 10,000 30,000
150 R＜250 36,000 18,000 54,000
R 250 44,000 22,000 66,000
PHEV R 50 24,000 - 24,000
Source: Ministry of Finance, Government Sources
Exhibit 8:
Shanghai, Shenzhen, Guangzhou government subsidies in 2017
(Rmb)Driving Range
(R, Km)Central Local Total
100 R＜150 20,000 10,000 30,000
150 R＜250 36,000 18,000 54,000
R 250 44,000 22,000 66,000
PHEV R 50 24,000 12,000 36,000
EV
Source: Ministry of Finance, Government Sources
Exhibit 6:Summary of adjustments to subsidies
80 R＜150
100 R＜150
150 R＜250
R 250
PHEV R 50
80 R＜150
100 R＜150
150 R＜250
R 250
PHEV R 50
Driving Range
(R, Km)
80 R＜150
100 R＜150
150 R＜250
R 250
PHEV R 50
35,200 35,200
35,000 33,250 31,500 30,000 24,000 24,000 19,200 19,200
60,000 57,000 54,000 55,000 44,000 44,000
20,000 15,000 15,000
50,000 47,500 45,000 45,000 36,000 36,000 28,800 28,800
2017 2018 2019 2020
EV
35,000 33,250 31,500
(Rmb) Driving Range (R, Km) 2013 2014 2015 2016
25,000 20,000
19,200 19,200
Driving Range (R, Km)
Central Government Subsidy
70,000 66,500 63,000 60,000 24,000 24,000
43,200 43,200
120,000 114,000 108,000 110,000 66,000 66,000 52,800 52,800
100,000 95,000 90,000 90,000
50,000 30,000 30,000 22,500 22,500EV
75,000 66,500 63,000
54,000 54,000
- -
Maximum Amount of Government Subsidy Available
(Rmb) 2013 2014 2015 2016 2017 2018
35,000 33,250 31,500 30,000 - -
2019 2020
25,000 10,000 10,000 7,500 7,500
14,400 14,400
60,000 57,000 54,000 55,000 22,000 22,000 17,600 17,600
50,000 47,500 45,000 45,000 18,000 18,000
Local Government Subsidy (E.g. Beijing)
(Rmb) 2013 2014 2015 2016 2017 2018 2019 2020
EV
35,000 33,250 31,500
Source: MIIT, Morgan Stanley Research
Regulations for the issuance of local government subsidies vary from city to city. The exhibits below summarise some key changes in four major cities: Beijing, Shanghai, Shenzhen and Guangzhou.
Government subsidies – As of January this year, both central and local government subsidies were cut, as China announced intentions to completely phase out subsidies after 2020. Local government subsidies were capped at 50% of national level subsidies, while cen-tral government subsidies fell by 20%. Thinner subsidies, coupled
with tightened vehicle qualification requirements, suggest govern-ment intentions to emphasize quality and avoid potential abuse of subsidies. The adjustments to subsidy regulations suggest a prefer-ence for NEVs with longer electric range, higher fuel efficiency, and enhanced battery energy density.
NEV targets – As part of efforts to lead in the development of elec-tric vehicles, the Chinese government has set increasingly ambitious NEV targets, targeting 2 million NEVs on the road and annual sales of 5 million NEVs by 2020. Although the auto industry perceived the government’s NEV credits and quota proposal to be highly ambitious, Chinese OEMs appear to be fully committed to developing NEVs. In fact, we see their sales targets for 2020 extending well beyond the government’s targets. If these can be achieved, China’s annual NEV sales for the passenger vehicle segment will exceed 5.2 million vehi-cles in 2020, 2.6 times the government’s targets and ~15.5 times 2016 annual sales.
Non-monetary incentives – Although the majority of China’s gov-ernment stimulus has been directed towards supply, mechanisms such as the removal of a sales quota, license plate lottery system exemption and installation of public charging piles have been used to incentivize demand.
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Exhibit 9:Non-monetary incentives for EVs
China United States Germany
Incentive Mechanisms 1. NEV purchase subsidies
2. No sales quota in mega
cities
3. Free installation of public
charging piles
4. No traffic restriction
etc.
5. License plate lottery system
exemption in large Chinese
cities (Beijing, Shanghai,
Hangzhou, Guangzhou,
Shenzhen and Tianjin)
1. Tax credit for cars and
charging stations
2. Free parking
3. Free registration
4. Access to HOV lanes
etc.
1. Motor vehicle tax exemption
2. Low purchase tax
3. Dedicated parking
4. Dedicated/public lanes
etc.
Source: OECD, IEA, Morgan Stanley Research
BluePaper
e charging nd play outsa, rna-n Energy,
harging
i
benefit ure.
GHM, Copper,
OEMs Supply Chain Charging Infrastructur OEMs will see a major disruption to their busi-
ness models as they shift volumes from ICE vehicles to EVs
Auto Suppliers face the loss of ICE powertrain content
Utilities could benefit from providinginfrastructure, software services. Demaupside for electricity will take a while to
All the traditional OEMs: BMW, Daimler, PSA, Renault, Volkswagen, FCA, GM, Ford, Toyota, Honda, Hyundai, SAIC, BAIC, Great Wall, Geely, Brilliance China
Global suppliers with highest powertrain expo-sure: BorgWarner, American Axle, WeiFu, Exedy, Hota Industrial, Tenneco, Schaeffler, Aisin Seiki
Iberdrola, EDP, Innogy, E.ON, Enel, EndeNational Grid, SSE, Fortum, , Edison Intetional, PG&E, Sempra, AGL Energy, OrigiPlug Power
Some OEMs are already EV specialists - near term scale and cost challenges remain, but no business model shift is needed
Capital Goods players will be challenged by the loss of metal content (ICE powertrain, light-weighting) …
Capital Goods players could provide cstations and electrification equipment
Tesla, BYDNSK, SKF, Bodycote, Vesuvius, Sandvik, Han's Laser, Fanuc
ABB, Schneider Electric, Nexans, Hitach
… but there are opportunities for others in new content (wiring, electrification, EV motors) …
In Commodities copper demand will from the roll-out of charging infrastruct
MELCO, Nexans, Inovance, Times Electric, Hitachi
Antofagasta, Freeport, Jiangxi Copper, KKaz Minerals, Lundin Mining, Southern Zijin Mining
… and in new manufacturing processes (robotics, testing, prototyping)Siemens, Spectris, Renishaw, Fanuc, Yaskawa, Siasun, Atlas CopcoIn Chemicals , cell component manufacturers (cathode/anode/electrolyte/separator) are key in tackling cost/technology challenges ...Johnson Matthey, BASF, Umicore, Wacker Chemie, Sumitomo Metals & Mining, Mitsubishi Chemical Holdings, Hitachi Chem, Asahi Kasei, Toray, Do-Fluoride Chem, Cangzhou Mingzhu… and there will also be material volume oppor-tunities for cell manufacturers (and integrated players) Guoxuan High-Tech, LG Chem, Samsung SDI, Panasonic, BYDSemiconductors players could see a $6-9.5bn
market from EVs by 2030 Infineon, STMicroelectronics, RohmIn Commodities metals used in battery pro-duction (Co, Li, Ni, Cu) should see strong growth. Demand for PGMs (used to reduce emissions in ICEs) could be challenged.Glencore (Cu, Co, Ni), Sumitomo Metal Mining (Cu, Ni, Co), China Molybdenum (Cu, Co), Free-port McMoRan (Cu, Co), Tianqi Lithium (Li), Min-eral Resources (Li), AK Steel (electrical steel), NorNickel (Ni, Cu, Co, PGMs), Anglo American
Company exposure
36
Source: Morgan Stanley Research
(Cu, Ni, PGMs), Anglo Platinum (PGMs), Alber-marle (Li), SQM (Li)
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Morgan Stanley Research 37
A game changer for the OEMs Exhibit 47:Our ICE to EV transition model
-3,000
-2,000
-1,000
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
20
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E
EV EBIT (€m) ICE EBIT (€m)
Price + loss of volume
push down ICE
profitability from 2021,
with potential for
losses from 2028. EV
losses peak in 2023
before production
ramps on new model
launches.
Source: Morgan Stanley Research estimates
Exhibit 48:Flexing our assumptions on ICE pricing, R&D offsets and EV gross mar-gins produces very different profit curves
-8,000
-6,000
-4,000
-2,000
0
2,000
4,000
6,000
8,000
2015 2017E 2019E 2021E 2023E 2025E 2027E 2029E
Model scenarios
Auto EBIT base case (€m) Reduce R&D offset to 0%
Deteriorate price asumption 100 bps Deteriorate ICE price by 5% shock in 2025
Improve EV gross margin / price performance by 150bps
EBIT is under pressure
to 2025 in all cases,
but thereafter the
curve is very
uncertain. Our most
bullish scenario on EV
gross margins
produces €8bn more
EBIT by 2030 than our
most bearish scenario.
We see this
uncertainty weighing
on the OEMs for some
time
The transition to EVs will present significant challenges to OEM profitability. We model an illustrative OEM transition from ICE to EV drivetrain, based on a number of assumptions, including forecasts on EV and ICE pricing, R&D spend and operational leverage. Starting at 10% EBIT margins, our group Auto EBIT margins turn negative in the mid 2020s as a result of ICE price deflation and the costs of EV development. Continued deterioration in the ICE business due to lower volumes (from EV cannibalisation) and lower prices offsets the improving EV profitability after 2025, despite our cost restructuring assumptions.
Post 2025 the outcome remains very uncertain. Flexing assumptions on ICE and EV pricing, gross margins and R&D offsets gives us a 15% EBIT margin range in 2030. Some OEMs may be better placed than others to win in EVs, but all OEMs face higher R&D costs and the potential declines in their legacy businesses – just as Nokia once did.
OEM business model change
The move to EVs is a game changer for many reasons. In the existing business model, OEMs control much of the value of the car:
l design and production of all of the major structures;l design of sub-structures manufactured by suppliers;l design and production of most of the powertrain;l all the major systems integration;l design of the final product, branding, and distribution.
With this level of control, the OEM can add significant value to the car in terms of design of the interior and exterior, the overall feel and branding of the product, driving characteristics and the selling process.
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Exhibit 49:Existing auto production supply chain: OEMs control much of the value
Source: Morgan Stanley Research
There is no natural cost saving with which to pay for higher ASPs. We believe this means ASP growth will slow, or may even start to reverse. If ASPs reverse, content growth comes straight out of OEM margins. At that stage, we believe OEMs would start to cut non-rev-enue content more aggressively, or at the very least increase annual price-downs they demand from suppliers on existing components. Net, this constitutes a huge transfer in the pools of global automo-tive revenues away from mechanical component suppliers towards the suppliers of electrical and electronic components.
The problem with the transition to EVs is the extent of the change it entails in content in the car. Some industry estimates suggest up to 50% of the value of the car could migrate to electrical systems and electronics, rather than mechanical systems. Much of this is pure content growth in areas such as ADAS, internet connec-tivity, and digital displays. Although automotive ASPs have grown sharply in recent years – and much of the historical content growth has been priced on to consumers – we believe this was enabled by the large proportion of cars being financed and the fall in global interest rates. OEMs have effectively replaced the interest rate saving in the monthly payment with a greater capital repayment portion, allowing them to charge higher ASPs. Although credit costs remain very low, they are no longer falling.
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For the OEM, we show this transfer of power from Auto OEM to 'tech' in Exhibit 50 , which includes some of the elements that would be required for autonomous driving. Although the OEM will continue to control major structures in the car plus overall design, branding and distribution, with a new auto operating system at the centre of the new electric vehicle, the question arises where the overall balance of branding power will lie. How much will the current OEM be able to control? Without control over powertrain, and with greater supplier content than ever before, it could be much harder for the major OEMs to maintain their competitive position, branding, and pricing power. And it could be much easier for new competitors to enter the market.
Modelling the EV transition – assumptions to consider
We have tried to model the impact of the transition from ICE engines to EVs for a European OEM. This reflects many different variables on growth, EV ramp-up, price impacts on ICE, pricing of EVs, initial EV losses, ICE operating leverage impacts, and EV gross margins ( Exhibit 51 ). Not all of our assumptions will turn out to be correct – perhaps none of them will – but it is a valuable exercise to start examining how these factors could affect overall OEM profitability. There are many aspects that are difficult for us – and the OEMS – to predict. We run through some of our thinking behind these drivers below.
Exhibit 51:EV transition model: Our assumptions
Assumptions:ICE growth ex China 1.0%
ICE price inflation 2015-2020 -0.5%
ICE price inflation 2020-2025 -1.0%
ICE price inflation 2025-2030 -1.5%
ICE unit loss leverage impact 7,500
ICE initial EBIT margin 10.0%
ICE restructuring savings from 2026 500
ICE R&D costs 5.0%
EV R&D offset 50.0%
EV models launched by 2025 10
Deliveries per EV model by 2025 40
EV cannibalisation pre 2025 75.0%
EV cannibalisation post 2025 100.0%
EV ASP premium (€) 5,000
EV ASP premium convergence p.a. 2020-25 600
EV ASP premium growth post 2025E 10.0%
EV initial loss per unit (€) -40,000
EV gross margin 2015-2020 -10.0%
EV gross margin improvement 2020-2025 2.5%
EV gross margin peak 15.0%
Note: These assumptions are for a European OEM. Source: Morgan Stanley Research estimates
Exhibit 50:Future EV production supply chain (including elements for autonomous driving)
Source: Morgan Stanley Research
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1 – How fast will the underlying market grow? We start with an illustrative OEM with 2 million units in sales. We assume 1% growth in deliveries globally (ex China) from 2015 to 2030. We assume a sep-arate EV cannibalisation rate, which we discuss below. Our global market assumption might be generous, given where we are in the cycle today, after a near 50% volume recovery from 2009 troughs. We exclude China, which might be the largest EV market in the world, but for European OEMs it is excluded from EBIT, and so we skew our analysis to focus on consolidated sales and EBIT. We have not assumed any change in overall global market unit sales due to the evolution of the vehicle or changes to the average cost per mile.
2 – How quickly will ICE vehicle prices fall? We assume ICE price deflation in 2020-2025 of 100 bps a year, rising to 150 bps a year after 2025 as new EV models start to take greater market share and OEMs seek to maintain total volumes. Again, these price assump-tions might be generous. ICE price deflation could be a key variable in this model, similar to Nokia's experience.
3 – Can the OEMs offset ICE declines by trimming costs? To offset the negative impact on the ICE business, we assume management finds incremental cost cuts of some €500m a year from 2026, when total ICE volumes start to fall more quickly. We have not assumed any balance sheet impact from restructuring costs in this model. Even with such cost reductions, on our assumptions, ICE EBIT falls to break-even by 2028. Increasing price deterioration to 2% (without cost compensation) reduces the ICE business to loss by 2026.
4 - What about the impact of lower ICE volumes on margins? We assume a further reduction in ICE production model operating lev-erage. For want of a better method, we assume a negative operating leverage of €7.5k per unit. Our normal assumption is for marginal profit per vehicle of 25-30% of revenues, or €5-10k, depending on the OEM. We assume negative pricing also on revenues, but we haven't assumed additional negative operating leverage from this pricing effect. On the other hand, managing costs as unit sales fall might be tough. The exact level of operating leverage risk depends on the pro-portion of assets that can be used in the production of the EV – a shared ICE / EV platform that could be assembled on one existing assembly line could reduce this leverage. We have assumed no cash restructuring costs in this model.
5 – How many EV model launches should we expect? This is a very tough assumption again. We assume that each OEM averages 30 model lines, and that each launches up to 10 EV models by 2025, starting in 2020. EV sales per model are much higher than those for ICE cars (25k) as we assume far fewer variants per nameplate. This gets us to EV sales of between 15% and 25%, depending on the
assumptions we make, and obviously, falls in production of ICE cars of a similar magnitude.
6 – To what extent will EVs cannibalise sales? We have assumed 75% EV cannibalisation for an individual OEM between 2020 and 2025, and we have assumed 100% after 2025. With most global OEMs starting to offer EVs from 2020, we see limited room for Euro-pean OEMs to take significant market share. In fact, any new entrants into the market for EVs could mean our assumptions are too gen-erous, with new entrants having no ICE sales to lose. By way of com-parison, Nokia, covered by Francois Meunier, saw a similar situation back in 2007-2012, when after an initial growth boost from smart-phones, it experienced falling revenues in both businesses.
7 – What price premium will EVs command? We assume that EVs command an average selling price (ASP) €5k higher than ICE vehicles in 2020 compared to ICE cars – although this may depend on the impact of global EV subsidies, if any. We assume this premium erodes by 10% a year between 2020 and 2025, as EV competition heats up (and we assume falling ICE prices anyway). We then assume that as demand for new EV products increases, EV prices hold up after 2025 as ICE pricing deteriorates. Again, the Nokia experience a decade ago suggests it is quite possible for ASPs on both sides of the business to fall simultaneously. Obviously, feature phone (legacy) prices fell much more than smartphone prices. At the time, some industry com-mentators saw legacy products (i.e. feature phones) as a business advantage: the thesis was that the feature phone portfolio was still strong and that consumer demand in emerging markets would con-tinue (driven by India), with smartphone adoption in emerging mar-kets remaining low for many years. However, aggressive pricing came more quickly than was expected, growing smartphone penetration in emerging markets also.
Exhibit 52:ICE and EV ASPs assumed in our model (€ per vehicle)
20
22
24
26
28
30
32
34
36
20
15
20
16
E
20
17
E
20
18
E
20
19
E
20
20
E
20
21
E
20
22
E
20
23
E
20
24
E
20
25
E
20
26
E
20
27
E
20
28
E
20
29
E
20
30
E
ICE ASP (€) EV ASP (€)
Source: Morgan Stanley Research estimates
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8 – How much will OEMs need to invest in R&D? We assume initial costs of R&D and development rising to €2.5 billion a year by 2019. One could argue that the net impact of this may be offset by lower spend on the ICE business – we have assumed an offset in our model of 50%. We suspect that may be overly generous in the early years as OEMs try to sustain their ICE business. We have assumed that fixed / R&D cost inflation for EVs comes down again in 2026, as the model launch schedule starts to slow down – but historically this has not happened, and it depends on what the OEMs are controlling or developing at that time. This is a very tough curve to consider.
9 – What level of gross margins will EV generate? Last, we have to assume initial EV gross margins and then the improvement in gross margins as EV volumes ramp up. This is incredibly challenging again. EVs are not like the iPhone, which ramped up quickly, where produc-tion is outsourced, and competition was limited for a high-end branded product. We have assumed initial gross margins for EVs of a 10% loss per vehicle, adding to fixed costs as production starts. We then assume that gross margins improve by 250bps a year from that initial 2020 assumption until they reach 15% by 2030. Of course, long-term pricing power in EVs is an outstanding question that needs to be answered. We think there is a risk that EVs become significantly more competitive than existing ICE business as supplier content is even higher, and hence, barriers to entry are likely to be lower.
Exhibit 53:ICE to EV transition unit sales model
2015 2016 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E 2030E
Unit sales
ICE deliveries starting ('000) 2,000 2,000 2,020 2,040 2,061 2,081 2,083 2,074 2,066 2,026 1,975 1,899 1,823 1,736 1,639 1,530
Underlying growth of ICE demand
('000)20 20 20 21 21 21 21 21 20 20 19 18 17 16 15
Cannibalisation of ICE from EV ('000) -19 -30 -29 -62 -71 -96 -95 -105 -115 -125 -135
Legacy car deliveries 2,000 2,020 2,040 2,061 2,081 2,083 2,074 2,066 2,026 1,975 1,899 1,823 1,736 1,639 1,530 1,410
ICE models 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20
ICE deliveries per model 100 101 102 103 104 104 104 103 101 99 95 91 87 82 76 71
ICE growth units ('000) 0 20 20 20 21 2 -9 -8 -41 -50 -76 -76 -87 -98 -109
Cumualtive ICE unit change 0 20 40 61 81 83 74 66 26 -25 -101 -177 -264 -361 -470
Growth (%) 1.0% 1.0% 1.0% 1.0% 0.1% -0.4% -0.4% -2.0% -2.5% -3.9% -4.0% -4.8% -5.6% -6.6%
EV models launched 1 1 1 2 3 4 6 8 10 11 12 13 14 15
Deliveries per EV model 25 25 25 25 30 32 35 38 40 45 50 55 60 65
BEV deliveries ('000) 25 25 25 50 90 128 210 304 400 495 600 715 840 975
EV growth units ('000) 25 40 38 82 94 96 95 105 115 125 135
EV cumulative units ('000) 50 140 268 478 782 1,182 1,677 2,277 2,992 3,832 4,807
Growth (%) 80.0% 42.2% 64.1% 44.8% 31.6% 23.8% 21.2% 19.2% 17.5% 16.1%
EV penetration (%) 1.2% 1.2% 1.2% 2.3% 4.2% 5.8% 9.4% 13.3% 17.4% 21.4% 25.7% 30.4% 35.4% 40.9%
Total unit deliveries ('000) 2,000 2,020 2,065 2,086 2,106 2,133 2,164 2,194 2,236 2,279 2,299 2,318 2,336 2,354 2,370 2,385
Source: Morgan Stanley Research estimates
Exhibit 54:ICE to EV transition revenue model
2015 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E 2030E
Revenues
ICE revenues (€m) 60,000 59,700 59,996 60,292 60,591 60,891 60,342 59,475 58,660 56,926 54,959 52,045 49,212 46,167 42,917 39,471
ICE ASP (€) 30.0 29.9 29.7 29.6 29.4 29.3 29.0 28.7 28.4 28.1 27.8 27.4 27.0 26.6 26.2 25.8
EV revenues (€m) 868 864 860 1,683 2,949 4,080 6,508 9,152 11,689 14,328 17,213 20,344 23,722 27,352
EV ASP premium (€) 5,000 5,000 5,000 4,400 3,800 3,200 2,600 2,000 1,400 1,540 1,694 1,863 2,050 2,255
EV ASP (€) 34.7 34.6 34.4 33.7 32.8 31.9 31.0 30.1 29.2 28.9 28.7 28.5 28.2 28.1
Auto revenues (€m) 60,000 59,700 60,863 61,156 61,451 62,574 63,291 63,555 65,168 66,078 66,648 66,373 66,426 66,511 66,640 66,823
Source: Morgan Stanley Research estimates
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Exhibit 55:EV transition EBIT model
2015 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E 2030E
EBIT
ICE EBIT ex EV (€m) 6,000 5,970 6,000 6,029 6,059 5,909 5,759 5,171 4,508 3,863 2,987 2,061 1,209 400 -443 -1,319
ICE EBIT margin (%) 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 9.5% 8.7% 7.7% 6.8% 5.4% 4.0% 2.5% 0.9% -1.0% -3.3%
ICE EBIT per unit (€) 3,000 2,955 2,941 2,926 2,911 3,000 2,500 2,500 2,500 2,500 2,500 2,500 2,500 2,500 2,500 2,500
Gross margin leverage 0 150 152 153 155 15 -69 -58 -306 -377 -572 -570 -651 -732 -815
Incremental price
assumption-299 -300 -301 -303 -304 -603 -595 -587 -569 -550 -781 -738 -693 -644 -592
Cumulative cost
restructuring0 0 0 0 0 0 0 0 0 0 500 500 500 500 500
ICE EBIT (€m) 6,000 5,672 5,850 5,879 5,909 5,759 5,171 4,508 3,863 2,987 2,061 1,209 400 -443 -1,319 -2,226
ICE EBIT margin (%) 10.0% 9.5% 9.8% 9.8% 9.8% 9.5% 8.6% 7.6% 6.6% 5.2% 3.8% 2.3% 0.8% -1.0% -3.1% -5.6%
ICE R&D costs -3,000 -2,500 -2,250 -2,000 -1,750 -1,750 -1,750 -1,750 -1,750 -1,750 -1,750 -2,000 -2,000 -2,000 -2,000 -2,000
EV R&D costs -1,000 -1,500 -2,000 -2,500 -2,500 -2,500 -2,500 -2,500 -2,500 -2,500 -2,000 -2,000 -2,000 -2,000 -2,000
R&D / fixed costs (€m) -3,000 -3,500 -3,750 -4,000 -4,250 -4,250 -4,250 -4,250 -4,250 -4,250 -4,250 -4,000 -4,000 -4,000 -4,000 -4,000
R&D cost to revenue
(%)5.0% 5.9% 6.2% 6.5% 6.9% 6.8% 6.7% 6.7% 6.5% 6.4% 6.4% 6.0% 6.0% 6.0% 6.0% 6.0%
EV-related incremental
R&D costs-1,000 -1,250 -1,500 -1,750 -1,750 -1,750 -1,750 -1,750 -1,750 -1,750 -1,500 -1,500 -1,500 -1,500 -1,500
Gross margin 0 -87 -86 -86 -168 -295 -408 -488 -458 -292 0 430 1,017 1,779 2,735
EV gross margin (%) -10.0% -10.0% -10.0% -10.0% -10.0% -10.0% -10.0% -7.5% -5.0% -2.5% 0.0% 2.5% 5.0% 7.5% 10.0%
EV EBIT (€m) -1,000 -1,337 -1,586 -1,836 -1,918 -2,045 -2,158 -2,238 -2,208 -2,042 -1,500 -1,070 -483 279 1,235
EV EBIT margin (%) -154.1% -183.7% -213.5% -114.0% -69.3% -52.9% -34.4% -24.1% -17.5% -10.5% -6.2% -2.4% 1.2% 4.5%
EV EBIT per unit -53,470 -63,455 -73,440 -38,366 -22,721 -16,859 -10,657 -7,262 -5,106 -3,030 -1,783 -675 332 1,267
Auto EBIT (€m) 6,000 4,970 4,663 4,443 4,223 3,841 3,126 2,350 1,625 780 19 -291 -669 -926 -1,040 -991
Auto EBIT margin (%) 10.0% 8.3% 7.7% 7.3% 6.9% 6.1% 4.9% 3.7% 2.5% 1.2% 0.0% -0.4% -1.0% -1.4% -1.6% -1.5%
Source: Morgan Stanley Research estimates
Further Morgan Stanley research:
Autos & Shared Mobility: Future car - EV earnings risks (November 15, 2016) Harald C Hendrikse, Victoria A Greer, Adam Jonas CFA, Ryosuke Hoshino, Young Suk Shin
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Morgan Stanley Research 43
(R)evolution for the auto suppliers In the autos supply chain, current suppliers for much of the powertrain, transmission, and fuel systems may face very significant loss of content as the industry transitions to EVs. Other legacy suppliers (seats, wheels, tyres, passive safety) will continue to supply into the new generation vehicles, though the price of that content may be called into question as OEM profitability is squeezed. More important, there is a whole new level of electrical / electronic systems suppliers (ADAS systems, sensors, radar, batteries, lithium, digital LED screens, internet connectivity software) into the central operating system that don’t exist today, or where at least content will grow very significantly.
We map content and cost changes from ICE through hybrids to battery EV. Many components will see technology changes (positive for suppliers), and outsourcing could rise. But we also consider three challenges for the suppliers – loss of powertrain content, loss of share (via in-sourcing and to new competitors) and deflation.
Exhibit 65:Suppliers face content losses, opportunities, and technology shifts from battery EVs
Tech shift
Minimal impact
Loss of content
Ris
k o
f new
en
tran
ts
Low
High
Engine components
Thermal/ HVAC
Exteriors
Interior electronics
Transmission
Passive safety
Displays, infotainment
Autonomous sensors
Lighting Seating Body-in-white
New content – who owns it?
Battery management software
Central autonomous software
Exhausts Increased content
Batteries
Electric motors
Axle
Brakes
Supplier product impact from battery EVs
Tires
Electrical
Battery thermal management
Power electronics
Steering
Connectors Lightweight materials
Source: Morgan Stanley Research estimates
Supplier opportunities and challenges in an EV world
Opportunity #1: Technology change
For tier-1 auto suppliers, technology changes are typically an oppor-tunity: newer products are higher price and higher margin, both of which get eroded over time as penetration (and therefore volume) rises. In electric vehicles, we see several areas of the car where tech-nology shifts could drive new product opportunities for suppliers: thermal management as engine cooling switches to battery thermal management; steering and braking (with a switch from hydraulic to wire-based systems); wire harnesses and connectors with the switch to high-voltage power within the car; and axle/chassis as the move from engine to electric motor shifts content onto the axle. As EV vol-umes phase in, we expect this to provide innovation opportunities for suppliers, although not necessarily greater than the normal innova-tion rounds that the industry has seen for many years.
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Exhibit 66:New products (active safety in this case) are initially higher revenue/unit and higher margin
35
20
53
107
30 32
18
50
71
29
Airbags Seatbelts Passive safety ECUs Active safety Group
Revenue per unit ($) Q114 Q416
Source: Company data, Morgan Stanley Research
Opportunity #2: Outsourcing
OEMs' investment budgets are coming under increasing pressure as they seek to invest in new technologies for EVs but also for autono-mous driving. Of the overall content in today's car (around €14k for a €25k car), half is done in house – the engine, many transmissions, and structural parts like chassis and body-in-white. The remainder is outsourced to tier-1 suppliers. We think that the shift to EVs could drive a change in which components OEMs see as essential or advan-tageous to control and which can be outsourced. This has been hap-pening slowly in transmissions, for example. Fully outsourced engine blocks don't seem impossible in the (very) long term, although this is already common for trucks where the engine is less central to the brand and development costs can be shared across larger volumes. In the shorter term, suppliers in other areas with low outsourcing today could see a benefit.
Exhibit 67:Total component costs on a €25k car are around €14k, of which the powertrain is a little over 20%
Interior: 3k (20%) High outsourcing
Exterior: 1.5k (10%) High outsourcing
Vehicle body: 3k (20%) Low outsourcing
Powert rain: 3k (20%) Engine outsourcing low; other components
high
Chassis: 1.5k (10%) Low outsourcing
Elect rical: 2k (15%) High outsourcing
Car component costs
We est imate total component cost of 14k, of which around half is outsourced. Engine, vehicle body and chassis
outsourcing is low; other components outsourcing is high.
Source: Shutterstock, McKinsey, Technische Universität München, EPA, NHSTA, CARB, ICCT, PwC, Fau-recia, Morgan Stanley Research
Challenge #1: Powertrain content loss
Engine, exhaust, fuel injection, turbochargers and most transmission content are obsolete on a battery EV. Around €3k of ICE powertrain content is removed, with around €1.5k of non-battery EV content added (electric motor, power electronics). The battery pack is the major cost in an EV, and includes the battery cell (typically provided by one of the consumer electronics battery specialists such as Sam-sung, LG or Panasonic); thermal management content, electronics and battery management software, which controls the flow of energy around the car.
Excluding the battery, component costs fall on an EV versus an ICE car.
Exhibit 68:Component costs are ~1.5x higher for a battery EV than for today's internal combustion engine vehicles ...
14,000
17,000
21,500
18,500
Internal combustionengine
Full hybrid Battery electric - €150/kWh
Battery electric - €100/kWh
Component cost/car (€)
Battery pack
Hybrid/EV powetrain
ICE powertrain
Exterior
Interior
Electrical
Vehicle body
Chassis
Source: Technische Universität München, ICCT, EPA, CARB, NHTSA, Company data, Morgan Stanley Research estimates. Note: Battery cost assumes 60kWh battery at €150/kWh.
Exhibit 69:… but most of this cost is in the battery, to which tier-1 suppliers are not exposed
14,000
15,500
12,620
Internal combustion engine Full hybrid Battery electric
Component cost/car, ex battery (€)
Hybrid/EV powetrain
ICE powertrain
Exterior
Interior
Electrical
Vehicle body
Chassis
Source: Technische Universität München, ICCT, EPA, CARB, NHTSA, Company data, Morgan Stanley Research estimates.
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Challenge #2: Share loss (new entrants/insourcing)
Consumer electronics firms such as LG and Samsung (both covered by Shawn Kim) have long looked to increase exposure to the auto industry, but until now have often been limited to tier-2 roles, such as screen supply. We think these companies' expertise in lithium-ion batteries could fundamentally change their relationships with OEMs: Samsung, LG and Panasonic are already the key EV battery suppliers globally, and in some cases (such as the Chevy Bolt) also make a large proportion of content that is typically provided by tier-1 suppliers: infotainment, HVAC, instrument cluster, power elec-tronics. Large-scale M&A has also proved to be a route in (such as the acquisition of Harman by Samsung Electronics). We see tier-1 sup-pliers with exposure to displays, infotainment, and interior elec-tronics as most at risk here.
Electric powertrain content (electric motors, power electronics) could also see competition from the battery specialists, as well as the potential for some OEMs to produce these components in house (as Daimler, Volkswagen and BMW seem inclined to do).
Challenge # 3: Deflation
Exhibit 70:Hybrid system costs (battery and powertrain)
0
500
1000
1500
2000
2500
3000
3500
4000
4500
5000
2000 2005 2010 2015 2020 2025
Powersplit hybrid (e.g. Prius) P2 (full hybrid) Mild hybrid
Historical and projected hybrid system manufacturing cost ($)
Source: ICCT, Morgan Stanley Research
We think that the €1,500 of content per car today for electric motors and power electronics could come down significantly. Auto suppliers typically face price-downs of ~2% per year on mature products, but this can be much higher on new products as they reach scale. Hybrid components (battery and electric powertrain) have come down by at least 15% every five years even without any major increase in volumes. Electric powertrain components (electric motor; power electronics; battery management software) are much less highly engineered than ICE components, so may have little pro-tection from deflationary pressures as volumes rise.
OEMs face an unprecedented profitability challenge in the shift towards EVs. Suppliers are heavily exposed to OEMs, partly in cus-tomer concentration (the top 5 OEMs are 50-70% of supplier reve-nues) but mostly as there is little product standardisation; new R&D and sometimes capex is needed for each new model contract win. As OEMs grapple with the challenge of high battery costs, we think sup-plier pricing could come under (further) pressure, particularly in more commoditised product areas.
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Car component costs: mapping the changes from ICE to EV
Internal combustion engine (ICE) – powertrain cost around €3k
Exhibit 71:ICE: engine, transmission and exhaust are the key compo-nents. Total component cost is ~€14k, of which €3k is power-train
Exhaust
Engine
Transmission
Source: Morgan Stanley Research
Powertrain component cost €3k: A conventional ICE pow-ertrain costs around €3k (higher for diesel by as much as €1k versus a petrol engine). Of this, the engine block is over a third (made by the OEM); transmission is under a third (mix between suppliers and OEMs) and the rest is engine auxilia-ries (fuel injection, valves, turbochargers) and exhausts.
Hybrid – add €3k
Exhibit 72:Hybrids: ICE content is almost all still relevant; additional con-tent costs ~€3k, of which around half is the battery
Power electronics: DC/DC converter, AC/DC inverter, wiring
High Voltage Battery
Electric motor
Hybrid Transmission
Exhaust
Engine
Transmission
Bold, italics = added content
Source: Morgan Stanley Research
Powertrain component cost €4.5k plus ~€1.5k battery: Almost all the ICE powertrain is retained in a hybrid, with a few small savings. In addition, an electric motor and power electronics are required (~€1.5k), plus a battery of around 8kWh (€1.5k). The battery cells are supplied by specialists (such as Panasonic, LG, Samsung), who can also do the pack-aging unless the OEM controls this in house. Electric motor/power electronics come either from OEMs or from suppliers.
Other technology changes: wire harnesses increase to add high-voltage content; thermal management of the battery is important; electric motors can be mounted directly on the axle/chassis; transmission content can be added to switch the car between battery and engine; exhaust energy recovery systems can be used.
Battery EV – add €1.5k for auxiliaries and up to €9k for battery; remove €3k of ICE content
Exhibit 73:Battery EV: ICE content removed; most additional hybrid con-tent remains with a much larger battery
High voltage bat tery (~60kWh)
Elect ric Motor
Power elect ronics: DC/DC converter, AC/DC inverter, wiring
On-board charger
Source: Morgan Stanley Research
Powertrain component cost €1.5k plus battery – up to €9k: ICE powertrain is removed entirely, reducing costs by ~€3k. The non-battery content is broadly the same as for a hybrid, costing ~€1.5k. The battery is much larger than for a hybrid, currently around 60kWh for ~200 mile range. It is typically moved to the base of the car to distribute weight evenly; the Chevy Bolt battery weighs over 400kg, vs an average compact ICE car weight of 1,400kg. The battery cost is the key swing factor here: at €150/kWh a 60kWh battery pack would cost €9k, falling to €6k at €100/kWh (Daimler's 2025 assumption).
Other technology changes: wire harnesses need to carry high-voltage power, although engine-related wiring content is lost; thermal battery management is important; electric motors can be mounted directly on the axle/chassis, higher power enables brake-by-wire and steer-by-wire systems rather than hydraulics.
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Exhibit 74:European supplier revenue impact for the shift to battery EVs
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
European suppliers' revenue impact from EVs (FY15)
Mostly unaffected
Tech change / risk ofdisruption
Growth - autonomous
Powertrain - lostcontent
Source: Company data, Morgan Stanley Research estimates. Note: Faurecia shown after the exteriors disposal.
Exhibit 75:European suppliers' revenue by product
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
European suppliers revenue by product (FY15) Other
Body in white
Axles/drivetrain
Safety - brakes, ADAS,sensors, airbagsThermal
Lighting
Interior - seats, trim
Interior - displays,electronicsPowertrain
Source: Company data, Morgan Stanley Research estimates. Note: Faurecia shown after the exteriors disposal.
Supplier exposures
Many European suppliers under our coverage are exposed to content losses from powertrain: by group revenue, we estimate 18% of Conti-nental (although less of EBIT), 26% of Valeo, 18% for Hella, 40% for Faurecia and 61% for Schaeffler. The remainder of content for most is then split between areas where there is technology change and/or risk of disruption, and those components that will see little change between an ICE car and a battery EV – such as body-in-white, passive safety, lighting, exterior, tires, seating. These areas should prove more defensive, though pricing pressure could be an issue, as OEM profitability is challenged. Lightweighting remains an important trend (especially relevant for body-in-white, seating and exterior), as battery range and performance are particularly affected by vehicle weight.
Alongside the tire stocks (Michelin, Nokian), Autoliv is the only Tier-1 supplier in our European coverage that we see as largely unaffected by the transition to EVs.
Globally, powertrain exposures are even higher for some suppliers: BorgWarner and American Axle and WeiFu High-Technology are close to 100% powertrain. Exedy, Hota Industrial and Tenneco are all >70% powertrain exposed.
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Exhibit 76:Global Suppliers – Powertrain revenue exposure
Note: Based on most recent reported figures if available, and analyst estimates. EBIT exposure shown for Continental. Source: Company data, Morgan Stanley Research
Further Morgan Stanley research:
Content (r)evolution: ICE to hybrid to EV (March 10, 2017) Victoria A Greer, Harald C Hendrikse
Autos & Shared Mobility: The Combustion Coalition (May 31, 2017) Adam Jonas, CFA, Carmen Hundley, Linda Teng
China/Taiwan Auto Parts: EV Supply Chain: New Game, New Rules; Likely New Winners? (May 22, 2017) Tim Hsiao, Vennie Kang, Eddy Wang CFA, Jack Yeung, Jack Lu, Victoria A Greer
China/Taiwan Autos & Auto Parts: Auto 2.0: Lessons From The Smart-phone Market (13 Mar 2017) (March 13, 2017) Tim Hsiao, Vennie Kang, Eddy Wang CFA, Jack Yeung, Jasmine Lu, Yunchen Tsai, Gill Yin, Sharon Shih, Howard Kao
BluePaper
Morgan Stanley Research 49
1. Vehicle manufacture
The transition to EVs will not entail fundamental changes to the man-ufacturing process. All the steps around the press shop, body-in-white/body shop, paint shop and installation of glazing and interior are broadly the same. The main difference, obviously, is what powers the car. Even here, the assembly process is similar: the installation of the battery pack, electric motor and inverters is made from below the car into an already assembled and painted body, the same way a com-bustion engine, powertrain and exhaust systems are installed.
But there are a number of areas where capital goods companies could derive new business.
1. Supporting the R&D process to build an entirely new portfolio. The increased R&D spend is an opportunity for capital goods compa-nies involved in the design of the vehicle and its components, and the design of the manufacturing process (including simulation), proto-
With $90 billion of capex in 2016, the Autos industry is a top-5 customer for the Capital Goods sector. The transition to EVs presents a range of risks and opportunities. The disappearance of a combustion engine led powertrain will eliminate close to c. 35% of metal content and around 50% of bearings in a car, but EVs will require a three-fold increase in the wiring/electrification management content. As OEMs ramp up a new portfolio, they will need to invest in R&D and comply with new testing/inspection requirements on new products. The EV transition will also require the build-out of charging infrastructure.
This entails some long-term shifts in portfolio for the Capital Goods space, but the earnings impact could be felt sooner. OEMs facing deteriorating margins as they transition to EVs may seek to share this burden with suppliers – as experienced in Lighting with the shift to LEDs. We would expect the focus here to be on components and equipment that are deemed less critical and for which multiple procurement is possible.
A mixed picture for Capital Goods typing, and new product testing.
2. Testing and certification for the new EV technology. The elec-trification of powertrains for EVs and hybrid vehicles requires a range of new approaches to automotive testing, from analysing the per-formance and safety of new components such as motors, batteries, relays and inverters to adapting environmental, thermal shock and sustained temperature testing methods.
3. Increasing productivity with robotics and digitalized manufac-turing. The stock of robots in the automotive industry has grown at 8% a year since 2006, we estimate, to some 700,000 units. Produc-tivity gains are likely to be a priority for OEMs facing margin pressure in the transition to EVs. The robotics industry is increasingly focused on lighter, more precise robots or on collaborative robots (able to work directly near human labour without a fence).
In other areas, the opportunities are less than might appear. EVs won't necessarily require new factories and the associated hardware and software that capital goods companies supply. Most car factories today can manufacture EVs alongside ICE vehicles – the Nissan LEAF and Chevy Bolt are produced this way.
Exhibit 78:Factories manufacturing both ICE vehicles and EVs
EV Model Factory ICE Model
Nissan Leaf Oppama Plant, JapanNissan Juke, Sylphy Cube
Smyrna Assembly Bat-tery Plant, USA
Nissan Altima, Maxima, Pathfinder, Rogue Infiniti QX60
NMUK plant, UKNissan Note, Qashqai, Juke Infiniti Q30
Chevrolet Bolt Orion Assembly, USA Chevrolet Sonic
BMW i3Group Plant, Leipzig, Germany
BMW 1 Series 5-door, 2 Series Coupé, con-vertible Active Tourer, M2 Coupé
Renault Zoe Renault Flins, France Renault Clio III, Clio IV
Renault Kangoo Z. E.Maubeuge Construc-tion Automobile
Mercedes-Benz Citan
Source: Company Data, Morgan Stanley Research
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Exhibit 77:Capital goods companies face a range of opportunities and threats from the transition to EVs
How will Electrical Vehicles be manufac-tured What is the car content of Electrical Vehicle
What is the infrastruc-ture needed for Elec-
trical Vehicle
Ro sFactory Automa-
Product Safety/Trans-formed Lights
ADAS/ El O&G e CElectrical T&D Infra-
ABB
Atlas
Body
IMI
Kion
Mets
Nexa
Osra
Prysm
Renis
Roto
Sand
Scha
Schn
Siem
SKF
SmitGrou
Spec
Vesu
Weir
Inova
Han's
Timetric
NSK
Hitac
ME
Fanu
YaskElect
: Le
Source: from the
Copco
cote
o
ns
m
ian
haw
rk
vik
effler
eider
ens
hs p
tris
nce
Laser
s Elec-
hi
c
awa ric
ss than 10%
Morgan Stanley R shift to EVs.
botic
Design QualityMetalsSensor equi t Chain Stations
structure
of sales
esearch estimates
tion
European Cap Goods : 10% - 30% of- Red signals a str
vius
sales
ong risk of deman
China Cap Goods
Japan Cap Go
: More than 30% of sales
d change during the transition; grey suggests the trans
ition is roughly neuods
tral on demand; gr
een suggests incr eValu
pmenLCO
ectrical
hargingased revenue opportunities
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Morgan Stanley Research 51
Exhibit 79:We see Siemens as better placed to increase content in the EV transi-tion; Kion forklifts will see little benefit from this shift
Company Different iator
Siemens Product Life Management / Digitalizat ion
Spect ris Test ing
Renishaw 3D Print ing & Prototyping
Fanuc Robot ics
Yaskawa Robot ics
Siasun Robot ics
At las Copco Tooling Set Up Design/ Standard Automat ion
Inovance
ABB
Sandvik
SKF
MELCO
Schneider Elect ric
Kion
Source: Morgan Stanley Research
2. Content
Capital goods companies are exposed to changes in the content of EVs, relating not just to how the car is powered, but also to maxi-mising energy efficiency and to the ongoing evolution in electronics (related to autonomous driving). Today the average car contains around 1000 kg of metal content and 25 kg of wiring. While a third of metal content will go with removal of the powertrain (engine, transmission, exhaust), wiring metal could triple in EVs in order to power the vehicle as well as AC/infotainment/existing electronics.
The challenge of requiring more wiring while minimising weight could drive innovation from the auto cable manufacturers – and potentially better pricing power. Already, some are developing cables with an aluminium and copper mix, more miniature compo-nents/connectors, or are minimising cabling for less critical compo-nents (typically multimedia and onboard navigation systems) – for instance the Nexans Datagreen cable.
The reduction in metal content is a long-term structural head-wind. The powertrain is roughly a third of the total metal content of the car, with an average value of around €3,000, or just over 20% of costs of goods sold for an average vehicle. This will disappear com-pletely from EVs. E-axles and electric motors are not a one-for-one replacement in terms of value, accounting for only 6% of COGS of an EV. Moreover, some non-critical metal components could be replaced by plastics or other chemicals to minimise weight. IHS esti-mates the use of plastics on an average car will increase from 200 kg in 2014 to 350 kg by 2020. Victrex has signaled it can produce plastic gears that are up to 70% lighter than metal gears, and BASF esti-mates the plastics content in a car could go from the current 15% to almost 30% by 2030.
The need for ball bearings could halve in EVs. Our channel checks suggest that in an EV world, about 75% of the ball bearings in the powertrain could disappear (offset by bearings required in the new electric powertrain) – or 50% of the total ball bearings in the car.
Exhibit 80:We see MELCO as well placed to generate new content for electric vehi-cles, followed by Nexans on the wiring, but metals-exposed names could lose content
Company Different iator
MELCO Inverter, EV Motor, ADAS
Nexans Wiring
Inovance Elect rif icat ion
Times Elect ric Sensors/ Semiconductors
Osram Sensor Capabilit y with Light ing
Hit achi EV Motor
Prysmian Wiring
Yaskawa
At las Copco
Schneider Elect ric
Siemens
ABB
IMI
Smit hs Group
Weir
Rot ork
Fanuc Machine tools/Metals Cut t ing
Han's Laser Metals Cut t ing
Sandvik Metals Cut t ing
Vesuvius Steel Processing
Bodycot e Metals Treatment
SKF Ball Bearings
NSK Ball Bearings
Schaef f ler Ball Bearings
Source: Morgan Stanley Research
3. Charging infrastructure
The mass adoption of EVs will clearly require the build-out of exten-sive charging infrastructure (see Who will provide the charging infrastructure? ). Although the technology and business model for the various aspects of this infrastructure are still work in progress, it clearly presents opportunities for capital goods companies pro-ducing charging stations and electrification equipment.
Exhibit 81:We see ABB as a key potential beneficiary of setting up infrastructure for electrical transmission thanks to its global leading position in elec-trification equipment
Company Different iator
ABB Charging Stat ion/ Global Leader T&D
Schneider Elect ric Charging Stat ion/ Power Dist ribut ion
Nexans Charging Stat ion/ T&D Cabling
Hit achi Charging Stat ion
Prysmian
Inovance
Siemens
Source: Morgan Stanley Research
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Further Morgan Stanley research:
EV & Capital Goods: Framing Threats & Opportunities (March 30, 2017) Lucie A Carrier, Ben Uglow, Ben Maslen, Robert J Davies Ph.D., Peter Murdoch, Victoria A Greer, Harald C Hendrikse, Yoshinao Ibara, Lisa Jiang, Kevin Luo, CFA
BluePaper
Morgan Stanley Research 53
Chemicals – Value shift The transition from ICE to EVs is shifting the value proposition for the chemicals sector. The migration to EVs provides opportunities and at the same time threatens the growth outlook and returns for well-established chemical products used in ICE vehicles. We believe that the cathode material is one of the key technology enablers within the battery, and will play a central role in the rate of EV adoption, depending on the cathode producers' ability to improve energy density (range) and reduce cost (the cathode equates to ~30% of total pack cost). These two are intrinsically linked, as higher energy density reduces the amount of material required to provide a set capacity.
We have some reservations around how much value will be crystallised by the chemicals sector in this migration, given the material supply addition across the battery chain, including the cathode, which will challenge future price discipline. Moreover, to capture the full value from the powertrain migration in EVs, producers will need to deliver technological advancements in chemistry and navigate industry cost pressures.
Exhibit 82:Battery material value chain and market participants
Source: Morgan Stanley Research
Cathode producers should benefit from a 12-fold increase in battery capacity by 2025.Our forecasts for EV penetration suggest automotive battery capacity will increase from ~38GWh in 2016 to close to 515GWh by 2025. This in turn should drive a material pick-up in demand throughout the supply chain. The cathode material is one of the key technology enablers within the battery, and will play a central role in the rate of EV adoption, depending on the cathode producers' ability to improve energy density (range) and reduce cost (the cathode is roughly 30% of total battery pack cost). These two are intrinsically linked, as higher energy density reduces the amount of material required to provide a set capacity.
Exhibit 83:Increased BEV penetration will accelerate battery capacity growth (GWh)
1.6 4.2 10.2 23.3 38.5
60.0 85.3
120.4
165.8 177.4
228.3
321.0
386.5
514.7
FY 12 FY 13 FY 14 FY 15 FY 16 FY 17 FY 18 FY 19 FY 20 FY 21 FY 22 FY 23 FY 24 FY 25
HEV PHEV BEV e-Bus
Source: SNE Research, Morgan Stanley Research estimates
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Ternary nickel-rich materials are likely to outgrow the broader cathode market in next few years. In our base case we forecast demand for cathode materials to increase three-fold between 2016 and 2020 to 275kt and 10-fold by 2025 to 780kt. This growth will be skewed to nickel-based ternary materials (NMC and NCA), which have become the material of choice owing to their balance of energy density, cycle life and safety. We forecast a five-fold increase in these nickel-rich ternary materials for automotive by 2020 and a 15-fold increase by 2025. As a result of this mix shift, we expect nickel-rich ternary materials to be used in 77% of automotive batteries, up from around 60% in 2016.
Exhibit 84:We expect ternary nickel-rich cathode materials to outgrow the broader market
2 5 11 20 29 39 49 63 82 82 96 114 129 150
1 1 5 17 32 55
75 108
149 153 205
293 341
453
0 2 3 4
9 14
25
36
49 58
72
106
132
174
0
100
200
300
400
500
600
700
800
900
FY 12 FY 13 FY 14 FY 15 FY 16 FY 17 FY 18 FY 19 FY 20 FY 21 FY 22 FY 23 FY 24 FY 25
kT of LFP/LMO/other cathode material kT of NMC cathode material kT of NCA cathode material
CAGR 2015-
45%
38%
22%
Source: SNE Research, Morgan Stanley Research estimates
Shorter term, integrated battery manufacturers, and leading Chinese manufacturers should benefit most from scale effects and/or China BEV exposure.
l Guoxuan High-Tech is a pure EV battery producer, with capacity of 5.8GWh at the end of 2016. It plans to expand this to 8GWh by end 2017 and 13GWh by the end of 2018. It targets 50% exposure to electric passenger vehicles this year as its NMC battery capacity ramps up. The company has provided its NMC batteries to Chinese OEMs such as BAIC, Geely and Chery and also plans to target international OEM customers in future.
l LG Chemis a top-three auto battery producer globally, with W25~30trn in order backlog. It is a leading auto battery provider to General Motors, Ford, Audi, Renault, Volvo, Hyundai, with global EV capacity of 10GWh (at end 2016). We estimate that, with W25-30trn in order backlog from global automakers from 2018 onwards, the company will grow capacity to 45-50GWh by end 2020. The company's total battery business is still loss making, given R&D costs and relatively low utilisation for its auto battery facilities, but it expects to break even in 2018.
What are ternary cathode materials?Ternary cathode materials are often used to describe two common types of lithium ion cathode materials, which includes NMC and NCA. They have become the materials of choice with regard to automotive battery applications, given their greater energy density. The energy density varies depending on the proportional make-up of each metal – nickel, cobalt and manganese/aluminium. In simple terms, the more nickel rich the material, the greater the energy density.
However, we see a number of risks to the supply chain for cathode material. All producers plan to increase capacity materially, so competition will intensify. Moreover, to capture the full value from the powertrain migration in EVs, producers will need to deliver technological advancements in chemistry and navigate industry cost pressures.
1. Aggressive capacity expansion could test price discipline
We expect the growth opportunity for nickel-rich ternary cathode materials to drive increasing competition as market participants accelerate their expertise and capacity in nickel-rich materials, and new entrants look to gain exposure. In 2011 two-thirds of the cathode material market (across all materials) was controlled by three players; by 2014, six players controlled around half the market, with four new entrants taking share from incumbents. Since then several Chinese players have entered the market and continue to accelerate their investment.
Capacity expansion announcements have picked up in the past year. These suggest NMC/NCA capacity will more than double by 2018, having already doubled since 2014. We would also expect new entrants from Chinese LFP producers, and possibly more further investment from Johnson Matthey and BASF, which already license NMC materials. Capital requirements to build new capacity are relatively low, and the time to build is also short. While supply additions will be needed in a market we forecast to grow >35% CAGR to 2025, we think the level of fragmentation and rate of proposed capacity expansion poses a risk to price discipline. Current NMC/NCA cathode producers are likely to front-load capacity additions to meet demand in 2025/30 and satisfy OEM requirements for supply security/availability. Recent announcements from all market participants suggest that this is already under way, similar to developments in fast-growth industries in the past (solar/electronics).
BluePaper
Morgan Stanley Research 55
Exhibit 85:Estimated NMC/NCA global capacity
53,500
106,300
246,340
0
50000
100000
150000
200000
250000
300000
2014 2016 2018
Internal
Jinhe
PuLead
LG Chem
Others
BASF
Toda
L&F
Reshine
Easpring
ShanShan
Nichia
Sumitomo
Umicore
kT
Source: Company data, Morgan Stanley Research estimates (for 2018)
Capacity additions could lead to pricing pressure. Based on announced capacity expansions in NMC/NCA, we believe that capacity for ternary materials will increase by ~130% by 2018. We forecast global capacity could exceed 500kt by 2021. Based on our demand expectation from EVs for ternary materials of 221kt by 2021, this suggests the market will be materially oversupplied. If we assume that no additional capacity is added beyond 2021 (which seems unlikely), the market would be effectively oversupplied until 2025. The risk is that an abundance of supply puts greater pressure on pricing in an already deflationary price environment.
'Made in China 2025' has meaningful implications for the EV industry
The 'Made in China 2025' blueprint details China's intention to be the global leader across the EV supply chain. It targets EV battery systems and drive systems reaching international advanced standards by 2020, with exports of EV battery systems and drive systems in scale by 2025.
A large portion of the capacity expansion in NMC/NCA is coming from Chinese producers, as China moves to build its own supply chain centred on lithium-ion batteries and other components. We estimate that some 20 Chinese companies are able to supply quality EV batteries and that many more are trying to enter the market, given government support for both the demand and supply sides of EV. China's total EV battery output reached 29GWh in 2016, with a utilisation rate of about 35%. Based on capacity expansion plans, we believe there is about 55GW of new capacity that will come on line by end 2017 – equivalent to a 48% increase in global capacity.
Easpring and ShanShan are leaders in NMC technology, with sales to domestic and global customers. Jinhe, Reshine, and PuLead also have technical competence in NMC materials, and intend to grow capacity materially, with aspirations to take leading market shares.
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2. There may be a near-term technology ceiling
We are concerned that current cathode materials and even next-generation materials will commoditise at a rapid pace, given the level of market competition and intended expansion plans. We would expect the technology leaders to be best placed to navigate pricing pressures, and NMC production assets can be repurposed within the same family of materials, which will allow producers to evolve the materials produced. However, there is a risk that current technology will reach a ceiling where the incremental performance improvements no longer justify the cost. In a scenario where curent current cathode materials commoditise, cost and security of supply could become the key differentiators.
Value could be captured by producers that develop a cathode material 'Fit for the Future'. We suspect a step change in the technology will be required for the battery cost/kWh to drop meaningfully below $100/kWh (see How quickly can EV costs come down? ). Most likely, we think this will entail an increase in energy density, which in turn reduces material cost. Producers that deliver this step change should capture a greater share of the incremental cost reduction or value the material would bring. On this basis, Umicore, BASF and Johnson Matthey look well best positioned globally. All have a strong relationship with Western automotive OEMs and proven R&D credibility and competence in material science. Johnson Matthey has built its competence in NMC (nickel, manganese and cobalt) cathode materials to a level it believes is comparable with leading peers in less than a year. We believe that its expertise in material science sets it to become a technology leader in cathode materials in the years to come.
Further Morgan Stanley research:
Chemicals: Will Cathode Evolution Drive the EV Revolution? (June 28, 2017) Charles L Webb, Paul R Walsh
Asia Pacific Insight: More Hype than Opportunity (June 2, 2016) Shawn Kim, Jack Lu, Kyle Kim, Andrew Choi
Guoxuan High-Tech: Double Upgrade to OW: Emission Cost Inflation Set to Drive EV Penetration (June 28, 2017) Jack Lu, Andy Meng
Johnson Matthey: Value, Optionality and Growth – Overweight (June 28, 2017) Charles L Webb, Paul R Walsh
Umicore SA: EV risks overlooked (June 28, 2017) Charles L Webb, Paul R Walsh
BluePaper
Morgan Stanley Research 57
Semiconductors – Sizing the SIC opportunity
Semiconductors can play an important role in increasing the range of EVs and thus penetration. For the same cost, we believe new Silicon Carbide (SiC) technology could increase the range of EVs by up to 20% and decrease charging time by up to 20% compared to current IGBT chips.
To size the potential opportunity for semiconductor players, we have built an EV chip model to explore a range of scenarios, based on assumptions around number of chips per car and pricing. Our pricing assumptions are derived from the statistical model we have used in the past for chip pricing, as well as some more benign pricing assumptions to reflect the view that pricing will not follow the usual decline, as new features are added. In all our scenarios, there is lots of growth to grab in this market – from a $250m market in 2017 to $6-9.5bn in 2030.
EVs could be a significant area of growth for Infineon, STMicro and Rohm. While IGBT chips will remain mainstream for at least the next five years, we expect a technology shift to Silicon Carbide (SiC), which could potentially reshape market share.Issues of reliability, raw material supply and powertrain redesign remain obstacles to mass production of SiC chips, but we view these as solvable.Power chips for EVs are still less than 2% of revenues for Infineon, STMicro and Rohm, but our discounted cash flow valuation of the potential power chip market equates to 7-10% of today's market cap for Infineon, 9-13% for STMicro and 7-10% for Rohm (assuming a $6.0-9.5 billion market by 2030).
Exhibit 86:Silicon Carbide could be a game changer for the EV and Hybrid car industry
Source: Morgan Stanley Research estimates
Alongside battery/cathode technologies, power chips are argu-ably the most important components in an electric car. Today most EVs use Silicon chips called IGBTs, currently the most powerful transistor architecture on Silicon. Our discussions with industry spe-cialists lead us to expect that transistors constructed on Silicon Car-bide (SiC) will take share in the next few years. SiC offers the benefit up to 20% more mileage from the same battery pack and 20% less charging time, with less weight, smaller form factor and reduced need for a heat dissipation device, thus simplifying vehicle architec-ture. The improvement in mileage depends on driving conditions ('stop start' versus long distances at constant speed).
Potential market size will hinge on the number of chips per car and pricing. Our discussions with industry specialists and analysis of EV design suggest there are currently two different architectures to build an EV car, which in turn impact the number of power chips. With pricing a key element in driving penetration of EVs, we believe that, while there will be a wide range of architectures for the EV power-train, solutions that feature a lower number of higher-end chips could prevail. This is what we have assumed in our model.
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Exhibit 8Scenario market g
0
1,000
2,000
3,000
4,000
5,000
6,000
20
15
pow
Source: Morga
Exhibit 8Sizing the
Note: Model a
What matters most is the incremental chip content. There is a range of outcomes here. Some high-end cars with super-fast charging and super-long range could require incremental chip content versus an ICE car of more than $1,000. For EVs optimised for cost, this could be just $300. Hence the mix is important, and with cost-sensitive cus-tomers, we believe chip architecture that is optimised for costs could prevail as volume ramps up.
Our industry research suggests the high-voltage IGBT chips cost up to $10, while a SiC MOSFET chip from STMicroelectronics costs $25 each for a quantity of 1,000. Our forecasts explore two scenarios for pricing evolution: 1) minimal price decline, as more features are added (the most widely held view); and 2) price declines in line with the his-torical trajectory for IGBTs at Toyota (roughly 7% a year) and using the statistical model we have used before for smartphone pricing.
7: opportunity: Our scenarios for power chip market evolution
8:2: SiC becomes the technology of choice very quickly and the rows to $6bn
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er chips TAM ($m) IGBT power chips TAM ($m) SiC power chips TAM ($m)
n Stanley Research estimates
Exhibit 89:If SiC becomes the technology of choice and the market grows to $6bn, Infineon could have still lots of growth ahead, but with more competi-tion from STMicroelectronics and Rohm
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Infineon STMicroelectronics Rohm
Source: Morgan Stanley Research estimates
ssumes a 10% WACC and 5% terminal growth rate. Source: Morgan Stanley Research estimates
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Morgan Stanley Resea
Exhibit 90:Scenario 1: IGBT remains dominant in the EV market and SiC becomes a high end solution only
0
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power chips TAM ($m) IGBT power chips TAM ($M) SiC power chips TAM ($M)
Source: Morgan Stanley Research estimates
Exhibit 91:If IGBTs remain the technology of choice, Infineon is likely to maintain its dominant position in the power chip market for EVs
0
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Infineon STMicroelectronics Rohm
Source: Morgan Stanley Research estimates
Exhibit 92:Main players in SiC power devices
Consumer Industrial Automotive Electric railway
Next generation Power Devices
US On Semicond (On Semicon (Fairchild) Cree (Wolfsp Gene SiC Transphorm EPC Alpha Omega Texas Instrum Vishay
Canada GaN Systems
Europe Infineon Techgies STMicroelect Nexperia Micro GaN
Japan Mitsubishi El Toshiba Fuji Electric Renesas Elec Rohm Hitachi Shindengen Panasonic Sanken Elect Toyota Moto Denso New Japan R Nihon Inter Sansha Elect Sharp Sumitomo El Furukawa Ele
Source: Morgan Stanley Research ba
Further Morgan Stanl
SiC chips increase EV m Francois A Meunier, Kazudrikse, Victoria A Greer, P
rch 59
Diode MOSFET IGBT/PM MOSFET IGBT/PM MOSFET IGBT/PM PM SiC GaN
uctor X X X X X X X X Xductor) X X X X X
X X X X X X X Xeed) X
XXX
X Xents X
X X X
X
nolo- X X X X X X X X X X
ronics X X X X X X XX X X X X
X
ectric X X X X XX X X X X X X XX X X X X X X
tronics X X X X X XX X X X X X
X X X X XX X X X X XX X X X X
ric X X X X X Xr X X
Xadio X
X X X Xric X X X
Xectric Xctric X
sed on Yano Research Institute data
ey research:
ileage by up to 20% – sizing the opportunity (June 27, 2017)o Yoshikawa CFA, Craig Hettenbach, Andrew Humphrey, Harald C Hen-aul R Walsh, Charles L Webb
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EV power consumption in the next decade will be marginal. Near term, localised EV penetration could cause some grid bottlenecks, but we view this as manageable for the utilities. The main opportunity for the sector lies in rolling out the charging point infrastructure and additional services.
Exhibit 93:Charging infrastructure will be of interest to utilities – there are c.100k public points across Europe (c.320k globally). By 2030, there could be up to 3 million, and >30 million by 2050 (€10bn of cost?)
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Source: Morgan Stanley Research estimates (low assumes 15 EVs per point, high assumes 5 EVs per point)
Demand upside will take a while to play out ... With an average annual consumption of c.3,000kWh for an electric vehicle, it will take a lot of EVs to materially impact the grid. Our estimate of 4.5 million EVs in Western Europe by 2025 implies an additional <15TWh of electricity demand. Compared with Germany's annual electricity demand at >500TWh, this is not a huge number. Even if our forecasts are very wide of the mark, and the actual number of EVs is 100% higher, it is still unlikely to be a significant demand boost near term (note that Germany, Italy, Spain, France and the UK have seen a >100TWh fall in demand since 2008).
… however peak demand needs to be considered. It will not take many EVs in a single street to potentially disrupt peak demand. Even charging on a slow charge, a single EV could double the household peak. This can have ramifications for local networks, and could require additional investment in new transmission and strength-ening transmission and distribution networks (see Who will provide the charging infrastructure? ).
How Utilities can benefit The more immediate opportunity for utilities is the provision of charging infrastructure. The German utilities are the most vocal, but are not alone in exploring this area. Both Innogy and EON have been open about the work they are doing in the space. Innogy set up a distinct division this year concentrating on e-mobility, whilst it has been active for many years already – it currently has >5,400 charging points. Likewise EON is not new to the game, and is using Denmark as its incubator – the Nordic countries have much higher sales pene-tration of EVs than other European countries to date (albeit a smaller number of absolute cars).
Iberdrola and EDP are spending a great deal of time working on EVs (Iberdrola hosted a day in London on this very topic on 21st June). Enel has 3,500 charging points in Italy and 1,000 in Spain, and is piloting more in Latam, on our understanding. It recently launched a new divi-sion (E-Solutions), led by the former CEO of Enel Green Power, which will focus among other things on the development of EV mobility related businesses globally (and therefore including Endesa). Engie has acquired an EV charging company to gain ground on this market. Although the UK utilities are not publically embracing this yet, work is clearly ongoing – National Grid recently launched its Future Energy Scenarios initiative, with views on EVs in the UK out to 2040. And SSE is considering its own scenarios, publishing work in combination with consultants.
Utilities have a number of natural advantages here. Complex management of energy needs is exactly what utility retail businesses do. This is no different, and it is no different from managing and opti-mising energy use for large businesses and municipalities elsewhere. Similarly, novel tariffs should be a utilities' strength – there are many ways payment for charging could evolve. Software that will handle customer billing should also be fairly routine for utilities, and some are already creating their own software to be used in the hardware. They can then sign contracts with businesses, municipalities and / or others to provide an end-to-end service; installing and maintaining the infrastructure, as well as delivering the electricity to the points, and maintaining and servicing the customer billing. All for a fee.
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How profitable could it be? Profits are unlikely to be meaningful in the near term, given the relatively low level of EV usage. And one has to be careful not to double count a potential increase in supply vol-umes as well as service contract revenues. But as one utility puts it, "Complexity is a strength for a utility. Utilities will not get rich selling more kWhs. It is about managing the chain".
"Not everybody can make a high voltage charging point, but even fewer people can do the whole back-end, the load management and whole accounting and audit, and that is where we specifically are strong in." Peter Terium, Innogy CEO, FY16 results call
Exhibit 94:Lots of utilities are looking at EVs, and could see benefits to different parts of the value chain
Company Grid investment Charging Point infrastructure Software Service Generation Supply
Iberdrola X X X X X XEDP X X X X X XInnogy X X X X XEON X X X X XEnel X X X X X XEndesa X X X X X XNational Grid X XSSE X X X X X XEON X X X X X XFortum X X X X X
Source: Morgan Stanley Research
But there are new entrants playing to win as well. The utility com-panies are not alone in seeking to exploit the EV infrastructure opportunity. Plenty of others want to get involved. OEMs are clearly overlapping with utilities around charging infrastructure, given their interest in engaging customers in buying integrated private charging kit. It is also in OEMs' interests to help develop a (large) public charging infrastructure network to address the perception that range is an issue for EVs. Dealing with grid management is not the natural forte of OEMs; they will likely need the help of utilities with this skill set.
Capital goods companies are looking into charging points – they already have good working relationships with utilities, which could extend into this new area (see Who will provide the charging infrastructure? ). Many other companies also specialise in certain parts of this new value chain – some are likely to be long-term win-ners, and utilities may need to find a way to work with these players or develop competing operations. Companies such as Chargemaster in the UK offer end-to-end charging point services (from the hard-ware through to software and contract servicing and maintenance). ChargePoint is a US equivalent. Garo concentrates on infrastructure kit, while PlugSurfing and Hubject develop IT software for payment platforms. And there are plenty more examples of these types of companies. It is too early to determine who will win the long game.
Further Morgan Stanley research:
Further reading: Utilities: Managing the Shift to Electric Vehicles (June 19, 2017) Nicholas Ashworth, Carolina Dores Utilities: Iberdrola on EVs: A slow growth opportunity (June 21, 2017) Carolina Dores, CFA, Nicholas J Ashworth CFA, Anna Maria Scaglia CFA, Timothy Ho CFA, Dominik Olszewski CFA, Arthur Sitbon
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Limited impact on oil demand
Conventional cars with internal combustion engines (ICE) account for ~26% of global oil consumption, so an important source of demand could in principle be under threat. However, EVs will impact the world's energy consumption only relatively slowly. First, it will take time for EVs to gain share in global car sales – our forecasts are for 9% of global sales from EVs in 2025, 16% in 2030 and 64% in 2040. Then, the car fleet turns over relatively slowly, so reaching a meaningful share of the global car fleet takes longer still – 7% by 2030, 24% by 2040 and 57% by 2050, on our numbers.
Still, even these estimates imply a limited impact on oil demand over the next decade. The exhibits below show the impact on oil demand in a sce-nario in which EVs reach 64% of new car sales by 2040. Yet, even on that trajectory, it takes until 2027 until more than 1 mb/d of oil demand would be displaced. This assumes average fuel efficiency of ~30 mpg and typical annual mileage of 10,000 miles a year (both based on data for the US from the EIA, which we have assumed to be indicative globally).
Oil – Electric cars have the potential to reduce oil demand considerably in the long term. However, this is unlikely to be the case over the next 10 years, and possibly longer. Even assuming rapid adoption, EVs will likely displace less than 1% of current oil demand by 2025.
Cobalt – EVs are already having an impact on the price of metals used in the battery, particularly cobalt, the most expensive of the cathode materials. We take a detailed look at the supply-demand dynamics that underpin our long-term price forecast for cobalt.
Lithium – While EVs will drive strong lithium demand growth, high prices are bringing new supply into the market quickly, generating market surpluses.
Other metals – Other metals that benefit from the rise of EVs include nickel (battery cathode material), copper (batteries; motor; infrastructure), aluminium (light-weighting; infrastructure) and electrical steels (motors). PGMs are likely to see demand erosion as their use in catalytic convertors for internal combustion engines wanes.
Commodity implications Over the next 10 years, there are many risks of the order of 1 mb/d – both to the upside and downside, and to oil supply as well as oil demand. Also, this amount is small relative to the natural decline rate of existing oilfields. Currently producing oilfields will likely see their production decline by ~25 mb/d over the next 10 years, according to estimates from Rystad. To keep production stable, the oil industry will need to develop a significant amount of new resources. The ~1 mln b/d impact from EVs does not meaningfully change this.
From 2030 onwards, the impact from EVs could grow substantially to as much as 9 mb/d by 2040. Still, on our forecasts, the ICE fleet continues to grow until 2030 and only starts to fall sharply after 2035. On this basis, demand for transportation fuels is likely to con-tinue to grow for some time to come.
Exhibit 96:Even if we assume EVs reach 64% of car sales by 2040 ...
0%
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50%
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70%
2010 2013 2016 2019 2022 2025 2028 2031 2034 2037 2040
Assumed EV adoption rate: share of new car sales (%)
Source: Morgan Stanley Research
Exhibit 97: … it takes until 2027 before more than 1 mb/d of oil demand is offset
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2014 2020 2026 2032 2038
Oil products displaced (mln bbl/d)
Source: Morgan Stanley Research estimates
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Further Morgan Stanley research:
Oil & Gas: From Molecules to Electrons - What Energy Transition Means for Oil & Gas Investors (January 5, 2017)Martijn Rats, Robert Pulleyn, Haythem Rashed, Sasikanth Chilukuru
Metals demand: assessing the impact
As OEMs transition to battery EVs, metal price volatility will present an additional challenge for them to navigate. Increased EV sales pen-etration is likely to underpin strong demand growth for those metals used in battery production (lithium, nickel, manganese, cobalt, copper, graphite). The need to reduce vehicle weight will be key to aluminium's demand growth, while new charging infrastructure will require copper. There will also be 'losers' in the shift to EVs – mainly platinum group metals, used in catalytic converters, are under threat from the rise of battery technology.
Exhibit 98:Electric vehicles as a percentage of global demand, by commodity
0.0%
0.8%
0.7%
7.3%
17.0%
0.2%
4.4%
14.9%
37.0%
65.0%
manganese
copper
nickel
cobalt
lithium
EV % demand 2025 EV % demand 2016
Source: Morgan Stanley Research estimates
Cobalt
For battery makers, cobalt is of particular concern due to its high price and relative scarcity. Interest in this minor metal soared in 2016-17, on a surge in consumer enthusiasm for electric vehicles. This shift quickly tightened cobalt's trade fundamentals, lifting the spot price to $29/lb ($65,000/t) – its highest since 2008. A co-incident reduction in Africa's copper-cobalt production was also price-sup-portive. The evolution of battery technology will see total metal requirement be thrifted, in order to reduce production costs, but the shift will be protracted and incremental.
Demand kick
Cobalt's principal end-uses are rechargeable batteries (50% 2016 global demand), superalloys (18%), and hardened materials (8%). We forecast average global cobalt demand growth of 6.7% a year to 2025, driven primarily by an 800% lift in cobalt's use in the electric vehicles sector over the same period.
Electric vehicles are taking over from a slowing consumer electronics sector as the key driver of cobalt demand growth. Our forecast for BEVs sales to reach 9.4 million in 2025 will require 55kt cobalt – up from 5kt for 730,000 BEVs in 2016. We estimate that other EV types (pure/plug-in hybrid vehicles, e-buses) will require a further 8.2ktpa cobalt by 2025, up from 1.9kt in 2016.
Exhibit 95:The ICE fleet continues to grow until 2030 and only starts to fall sharply after 2035
0
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2015 2020 2025 2030 2035 2040 2045 2050
ICE fleet
BEV fleet
Global Passenger Car Fleet (million vehicles)
Source (both exhibits): Morgan Stanley Research estimates
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Exhibit 99:We expect an 8-fold increase in demand for cobalt in electric vehicles (tonnes)
2014 2015 2016 2017e 2018e 2019e 2020e 2021e 2022e 2023e 2024e 2025e
Auto Sales 86 88 92 94 95 97 99 80 83 93 92 102
BEV Sales Penetration 0.2% 0.5% 0.8% 1.2% 1.7% 2.3% 2.9% 3.9% 4.8% 6.2% 7.5% 9.2%
BEV Sales 0.15 0.46 0.73 1.16 1.59 2.20 2.92 3.10 4.01 5.76 6.96 9.40
BEV Battery capacity (kWh per
vehicle)31 33 36 38 40 42 43 44 45 46 46 47
Cobalt g/kWh (average) 126 179 190 196 186 175 169 161 152 143 134 125
Cobalt content in BEVs (LH axis) 563 2728 5036 8618 11943 16052 21065 22010 27384 37782 43179 54744
Cobalt content in other EVs (hybrid,
etc.)723 1437 1927 2702 3378 4435 6175 5736 6356 7162 7535 8196
Total cobalt in EVs 1,285 4,165 6,963 11,320 15,322 20,487 27,240 27,747 33,740 44,944 50,714 62,940
235% 224% 67% 63% 35% 34% 33% 2% 22% 33% 13% 24%
Source: Morgan Stanley Research
Costly cobalt riskWe estimate that batteries make up 37% of EV manufacturing costs; materials account for 60% of battery cell costs; cathodes, 32%. The most commonly consumed NMC battery (lithium-'nickel-manga-nese-cobalt') requires 395g/kWh cobalt, accounting for 20% of the weight of the cathode; 60% of cost. This, together with supply secu-rity (dependence on DRC/China) and the cobalt industry's ethical concerns is leading end-users to seek to reduce cobalt content in NMC batteries or use alternative technologies. Such shifts in battery technology could alter cobalt's demand growth. Our base case assumes declining average cobalt content in automotive batteries – from 190g/kWh in 2016 to 125g/kWh by 2025 – but growth in global cobalt usage in the sector reaching 63kt by 2025.
Cobalt-free future?In the long run, a cobalt-free battery future is possible, most likely via substitution by new technologies (lithium air and lithium sulphur are R&D themes). However, near term, battery producers seeking to secure long-term supply are placing upward pressure on price. In China, the trend is towards increased cobalt usage per vehicle, as new regulations drive an industry shift towards higher energy density bat-teries (NMC/NCA).
Exhibit 100:Battery electric vehicle sales (million units) + cobalt demand (t)
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Cobalt content in BEVs (LH axis) BEV Sales
Source: Morgan Stanley Research
Supply response
Snapshot on sourcesThe majority of cobalt is mined as a by-product of copper (67%) or nickel (31%), limiting the supply response to a high cobalt price (i.e. supply is price-inelastic). Copper by-product output is dominated by the DRC (62%), while nickel-associated material is mined in Australia (5%), Russia (4%) and Canada (3%). Key sources of medium-term supply growth are concentrated in the DRC – any expansion in mine capability there will lift the DRC's market share to 65-70% of global mined supply by 2020.
We expect total cobalt mine supply to grow 6% in 2017, and forecast mine supply growth to underperform demand at 6.6% CAGR to 2025. Refined output is concentrated in China, which produces 51ktpa (54%) of total global supply. With limited domestic resources, China requires 50ktpa of imports (as concentrates and intermedi-ates, mostly from the DRC). We expect output to expand to 90ktpa by 2025, lagging mine output.
BluePaper Price outlook
We forecast small market deficits in 2017-18, supporting the price above its historical average level at $26/lb in 2017 and $27/lb in 2018. For 2019-20, we see a return to balance, as industry inventories nor-malize and new supply comes on stream. This takes the price lower in 2019-21 to $18-23/lb.
Beyond 2022, the EV roll-out sees demand growth outstripping our forecast supply growth, creating a persistent deficit, holding the
Exhibit 101:Cobalt mine supply by source
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price at US$23/lb (real 2017$) from 2023. Despite strong demand growth from EVs, we expect battery industry's propensity to thrift in response to sharply higher cost inputs, and the ongoing develop-ment of recycling flows, will act to limit upside price risk.
Exhibit 103:Cobalt supply-demand balance + price forecast (tonnes, $/t)
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2015 2016 2017e 2018e 2019e 2020e 2021e 2022e 2023e 2024e 2025e
Market balance Cobalt price
Source: Morgan Stanley Research
Lithium
Unlike cobalt, lithium is abundant – identified resources total 47Mt (USGS) – found in high concentrations in the brine lakes (salars) of Chile, Argentina and Bolivia, as well as in hardrock deposits in Canada and Australia. Rechargeable lithium ion batteries are already the big-gest consumer of lithium (53% of demand in 2017); but electric vehi-cles are now displacing electronics as the key end-use and a major new source of demand growth.
EV impact on demand
The five different lithium-ion technologies currently in use: LFP (lithium ferro phosphate), NMC (lithium nickel manganese cobalt), NCA (lithium nickel cobalt aluminium), LMO (lithium manganese oxide), and LCO (lithium cobalt oxide) contain varying quantities of lithium in the cathode and electrolyte. In the medium term, our chem-icals analysts expect the segment to move away from the use of LFP/LMO/LCO technologies (which require around 750g/kWh LCE) towards NMC/NCA (600-700g/kWh LCE). This shift to lower-inten-
Source: USGS, CDI, company data, Morgan Stanley Research
Exhibit 102:Cobalt mine supply by region, tonnes
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
2010 2011 2012 2013 2014 2015 2016DRC Australia Canada China Russia Zambia Others
Source: USGS, CDI, company data, Morgan Stanley Research
Supply risks + project pipelineGlobal cobalt resources are estimated at 25Mt Co (USGS), with reserves of 7Mt (48% DRC). The global dominance of DRC mine supply, and of China's refined supply, are a source of concern among cobalt's end-users – particularly auto-OEMs. The DRC's history of power shortages and political conflict pose ongoing risks for cobalt supply. In the near term, automakers' attempts to secure long-term supplies from elsewhere present upside risk to price, since little growth in mine supply is forecast ex-DRC: much of which is tied to the nickel price outlook.
The recent price lift has prompted the roll-out of several greenfield projects outside the DRC, including Syerston (3,200tpa) in Australia, NICO (2,000tpa) in Canada and Idaho (1,500tpa) in the US. As with most mined metal markets, there is limited visibility on projects post-2025. Most supply is expected to still be a by-product of copper and nickel mining; with some incremental supply from growth in battery recycling. It follows that cobalt's production is heavily dependent on the demand/price outlook for copper and nickel, and not that of cobalt itself.
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Longer term, the push to improve energy density and reduce costs are expected to drive a shift in technology to next-generation bat-teries, such as lithium or aluminium air or solid-state batteries.
sity lithium batteries means that growth in EV production will out-pace growth in lithium demand to 2025. We forecast a rise in lithium's use in EVs to 275kt by 2025 – 65% of global demand (31.5% volume CAGR from today's 48kt).
Exhibit 104:Electric vehicle sales drive strong lithium demand growth
2015 2016 2017e 2018e 2019e 2020e 2021e 2022e 2023e 2024e 2025eAuto Sales (millions) 88 92 94 95 97 99 80 83 93 92 102BEV Sales Penetration (%) 0.5% 0.8% 1.2% 1.7% 2.3% 2.9% 3.9% 4.8% 6.2% 7.5% 9.2%BEV Sales (millions) 0.46 0.73 1.16 1.59 2.20 2.92 3.10 4.01 5.76 6.96 9.40BEV Battery capacity (kWh per vehicle)
33 36 38 40 42 43 44 45 46 46 47
Lithium g/kWh (LCE in cath-odes)
723 711 703 692 684 679 671 662 650 641 629
Lithium content in BEVs 11034 18874 30940 44495 62610 84676 91706 119511 171488 206368 276374Lithium content in other EVs (hybrid, etc.)
5813 8463 11247 14504 19687 27809 27365 31713 37034 41198 47285
Total lithium in EV cathodes 16,847 27,337 42,187 58,998 82,297 112,485 119,070 151,223 208,522 247,566 323,660Additional lithium in electro-lyte
2,331 3,846 6,002 8,528 12,039 16,577 17,744 22,835 32,104 38,646 51,475
Total lithium in EVs 19,178 31,184 48,189 67,526 94,336 129,062 136,814 174,058 240,626 286,212 375,134
Source: Morgan Stanley Research estimates
Supply response
Lithium's mine supply is highly consolidated: four companies (Albe-marle, SQM, FMC and Tianqi Lithium) delivering 86% of global supply (brine + hardrock) in 2016. But that dominance is set to be eroded with the expansion of brine supply from new players in Argentina and the entry of new hardrock miners in Australia – reducing the top four's market share to 53% by 2025, on our esti-mates.
Brine output expands: Chile has dominated output from brine sources (62% of brine supply in 2016), but Albemarle and SQM hold the only licences to exploit them. Albemarle has an agreement to produce 80ktpa LCE to 2043; SQM is approaching the limit of its 1Mt quota. Meanwhile, with lithium resources totalling 9Mt (USGS), and an investment-friendly government, Argentina is rapidly growing its lithium output rate. It is set to expand from 29kt LCE in 2016 (28% brine supply) to 95kt by 2025, we estimate (40% brine supply).
The last corner of the lithium triangle – Bolivia – is also seeking to exploit its vast brine reserves, backed by President Evo Morales' poli-cies. A pilot project is under way on the 11,000sq km Salar de Uyuni, estimated to contain as much as 9Mt of lithium (per USGS). But com-mercial-scale production is a long way off, and higher levels of mag-nesium than found in Argentina and Chile make refining more
challenging. We do not include this potential output in our base case forecast to 2025.
Australia's new supply: Significant supply growth is also in the pipe-line in Australia, where there are plans to double output from the 80ktpa LCE Greenbushes lithium mine. New mines ramping produc-tion in the near term include Mineral Resources' Mt Marion + Wodgina operations; Galaxy Resources' Mt Cattlin; and Pilbara Min-erals' 44ktpa LCE Pilgangoora Lithium-Tantalum project. In total, Australia's mined output is set to climb from 66kt LCE in 2016 to as much as 324kt LCE by 2025 (51% of global supply). The additional work required to convert spodumene concentrate into hydroxide or carbonate means that hardrock operations are typically higher cost than brine, around US$3,000-5,000/t vs US$2,000-4,000/t; but still significantly below current price levels.
Mineral conversion, a near-term constraint: Hardrock mining pro-duces a spodumene concentrate, which must be converted into either lithium carbonate or lithium hydroxide for use in vehicle bat-teries – typically by mineral converters in China. Conversion capacity growth is difficult to track, but it is currently lagging expansions in mine production and is likely to act as a cap on hardrock supply growth in the near term. Both Sichuan Tianqi and Albemarle plan to add new processing capacity within Australia to serve the Green-bushes mine – but these are 2-to-4 years away from production.
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Albemarle is also adding capacity at its recently acquired Jiangli New Materials plant in China (from 2019). In China, there are several con-version projects and expansions in the pipeline, which should ease pressure on the market from 2019. Prior to this, we expect the con-version rate to drop as low as 64% of mine output in 2018, keeping the market close to balance.
Price outlook
Contract and spot prices diverge: A tight market during 2015-1H17 has driven China's lithium price (trade-based) to highs around US$18,000/t (VAT-adjusted), while major Chilean producers report-edly raised contract prices more modestly, to US$11-12,000/t in 1Q17, continuing the divergence between contract and spot pricing that emerged in mid-2015.
New supply outweighs demand in the medium term: We expect the market to remain close to balance through 2017-18, as total supply growth is constrained by available conversion capacity. In the medium term (2019-22), we forecast that the wave of new supply will outpace demand growth, returning the market to surplus and capping price (MSe US$11,800/t 2017; US$11,000/t 2018 basis Chile contract price). In the long run, current supply-demand projections suggest moderate deficits will re-emerge towards the end of the forecast period. However, we expect pricing to be sufficient to incentivize new supply to fill this gap; while increased recycling of lithium-ion bat-teries is also likely to emerge as a market-balancing factor in the long run. Our long-run price forecast is US$7,298/t (real 2017$).
Exhibit 105:Lithium supply-demand balance and price outlook (kt LCE, US$/t
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Market balance Lithium carbonate (Chile contract price)
Source: Morgan Stanley Research estimates
Other metalsNickelWhile stainless steel accounts for 70% of global nickel demand, it is also consumed in the cathode of lithium-ion batteries and is there-fore exposed to growth in electric vehicles. That exposure is cur-rently minimal – a typical 1:1:1 NMC vehicle battery requires 391g/kWh of nickel. EVs are estimated to have consumed 14kt Ni in 2016 (<1% global demand). However, the general trend towards higher-nickel/lower-cobalt NMC batteries (as much as 730g/kWh), as well as Tesla's preferred NCA (nickel-cobalt-aluminium) battery (939g/kWh) mean that nickel's use in electric vehicles is set to increase rap-idly over the next 5-to-10 years.
We estimate that nickel's use in EVs could reach 86kt by 2020; rising to as much as 340kt by 2025 based on current projections of 8:1:1 uptake. Such rapid growth would likely put significant upward pres-sure on the nickel price, which would need to rise to a level sufficient to incentivize new mine supply, as well as an expansion of conversion capacity to produce the nickel sulphate required for batteries. Our long-term nickel incentive price is $7.12/lb (real 2017$) – presenting significant upside from our forecast for 2017 of $4.51/lb.
AluminiumAlthough Tesla's battery of choice – NCA – incorporates aluminium in the cathode (MSe 27g/kWh), this represents a negligible volume of aluminium, with respect to the total market size. However, the need to reduce costs and increase vehicle range is likely to further incen-tivize the existing push towards light-weighting of vehicles, increasing aluminium demand. The Aluminium Association estimates aluminium's consumption will rise by 50kg/vehicle over the next ten years as a result. Aluminium's demand may also benefit from the build-out of the power grid to support EV charging infrastructure.
CopperElectric vehicles have a dual impact on copper demand – via copper's use in the vehicle battery itself, as well as via increased demand for copper wiring in charging infrastructure. Quantifying the in-vehicle use is relatively straightforward: we estimate that an average com-bustion engine vehicle requires 20kg Cu (mostly in the vehicle wiring harness); while an average battery electric vehicle uses 75kg Cu, of which 40kt is in the battery itself; the remainder in the electric motor and vehicle wiring. Using our automotive team's projections, we esti-mate that total copper consumption in all types of electric vehicle will reach 1.1Mt by 2025. Risk around this stems from the substitution of copper by aluminium for some vehicle wiring applications; and ulti-mately the potential removal of the wiring harness altogether as wireless technology is developed.
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Exhibit 107:Gross PGM demand by source – 2016 (%)
40%
79% 80%
30%
2% 22%
19% 17%
8%
-6%
3%
Pt Pd Rd
Investment Industrial Jewellery Autocat
Source: Johnson Matthey, RMB Morgan Stanley Research
Exhibit 106:Copper consumption by vehicle type (kg/vehicle)
1
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395
20
30
30
35
92
0 100 200 300 400 500 600
ICE
HEV
PHEV
BEV
E-bus
Battery pack Ex-battery
Source: International Copper Association, Morgan Stanley Research
The secondary impact of electric vehicles on copper's use in charging infrastructure is more difficult to quantify. Estimates vary of the copper required per charging unit – from <1kg per standard, slow charger, to as much as 8kg per ultrafast charger. But the installation of rapid charging stations would also require investment in addi-tional grid infrastructure, multiplying the impact on copper demand. Total copper consumption is therefore highly dependent on govern-ment policy and national grid infrastructure. China set clear goals for charging infrastructure in its 13th five-year plan – 4.56 million charging units by 2020 and 12,000 charging stations – but by the end of 2017 is projected to have installed 950,000 units (National Energy Administration), with cities working towards a goal of a charging facility every 5km.
ManganeseSteel dominates demand for manganese ore (90%), with EVs set to account for just 0.2% of global demand by 2025 (we estimate 40kt). While the ore price has fallen 32% YTD, at $6.18/lb it remains above the marginal cost of production, and any increase in demand can be met by the reactivation of latent capacity. Our long-term manganese ore price forecast is $3.40/mtu real 2017$.
PGMsDemand erosion: The primary source of demand for PGMs is as a catalyst in the reduction of auto emissions in internal combustion engine powertrains. In 2016, this source accounted for 40% of plat-inum demand, 79% of palladium demand and 80% of rhodium demand. Non-PGM bearing battery electric vehicles thus pose a sig-nificant threat to PGM demand, and PGM producers are effectively beholden to technological change in the auto industry with little to no supplier power.
The very factor driving PGM demand in autos – emission regulation – is, over the medium to longer term, also making ICEs a less competi-tive powertrain. Put differently, it is not just falling battery costs, but
tighter emission regulations adding regulatory compliance costs to ICEs, which together are moving the electric and fossil fuel power-trains towards cost parity. A large range of forecast error exists around the actual point at which cost parity may be reached; how-ever, the trend is clear. PGMs operate within the most exposed por-tion of the auto value chain – as a pure-play supplier to ICE.
Hybrids and fuel cells offer support. Hybrid vehicles (be it mild, full or plug-in) are often included in the ambit of an electric power-train; however, the presence of an ICE in these vehicles is less con-cerning for PGM demand. We believe hybrid PGM loadings are currently similar, or even slightly higher, than comparable gasoline vehicles. Our forecasts assume the hybrid penetration grows rapidly through 2020 and largely precedes growth in BEV demand. The impact on PGMs would likely be benign, assuming hybrids (rather than BEVs) achieve future powertrain dominance. PGM-loaded hydrogen fuel cells (FCEVs) present another alternative to BEVs, holding the potential to deliver power to an EV with near-zero GHG emissions. However, fuel cell technology remains at a cost disadvan-tage and thrifting of platinum loadings remains one of the two pri-mary manners in which manufacturers are attempting to reduce cost (the other being improvement in energy density).
Companies exposedExhibit 108:Companies with material exposure
Positive exposure Mixed exposure Negative exposure
Glencore (Cu, Co, Ni) NorNickel (Ni, Cu, Co, PGMs)Anglo Platinum
(PGMs)
Sumitomo Metal Mining (Cu, Ni, Co) Anglo American (Cu, Ni, PGMs)
China Molybdenum (Cu, Co)
Freeport McMoRan (Cu, Co)
Tianqi Lithium (Li)
Mineral Resources (Li)
AK Steel (electrical steel)
Note: Copper stocks will also benefit from EV-related infrastructure-build. Light-weighting is an important part of the process to extend the driving range offered by electric vehicles. Aluminium is a beneficiary of this, but the incremental impact on demand is not big enough to warrant a place in this table. Source: Morgan Stanley Research
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Further Morgan Stanley research:
Commodity Matters: Cobalt, Measured (June 28, 2017) Susan Bates, Charles L Webb, Tom Price
Chemicals: Will Cathode Evolution Drive the EV Revolution? (June 28, 2017) Charles L Webb, Paul R Walsh, Susan Bates
Glencore PLC: Popular material underpins cash flow(June 28, 2017) Menno Sanderse
China Molybdenum: The only cobalt play on the Hong Kong market (March 7, 2017) Lindsay Hu, Rachel L Zhang
Lithium miners – Charging into the future; Initiate on GXY (OW) and ORE (UW) (August 2, 2017) Rahul Anand, Susan Bates
Tianqi Lithium Industries: Watch your step: EW on short-term lithium price headwinds(July 27, 2017) Han Fu, Susan Bates
Going Platinum #5: What place for PGMs in an electric future?(July 23, 2017) Christopher Nicholson
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Without a doubt, Electric Vehicles offer the possibility of carbon-free transport. However, it is naïve to assume that this is the case without investment in the sustainability of the full value chain.
Fuel versus electricity
Switching from an ICE vehicle to an EV clearly removes the emissions from burning petrol, with the vehicles powered instead by electricity. But if that electricity comes from a coal-fired power station, and this station needs to be running longer hours to generate more output to satisfy the EV consumption, is that an environmental positive?
Exhibit 109 from the IEA looks at the effectiveness of EVs in decar-bonisation efforts. It looks across regions globally, taking into account average car sizes and grid carbon intensities under different decarbonisation scenarios. In France, for example, the decarbonisa-tion benefit provided is significant, as power generation has a rela-tively large nuclear (and therefore "clean") skew. However, the benefits to decarbonisation from the EV transition in China are less clear, given its power generation skew to relatively dirty coal-fired technology.
Exhibit 109:For EVs to be cleaner than ICEs, the transition needs to be accompa-nied by decarbonisation of electricity generation. So, in some regions, like China, the EV benefits are offset by the skew to coal power
Source: IEA
How sustainable are EVs? Looking ahead, though, our Utilities analysts expect the economics of renewable energy to continue to improve, thus significantly reducing the carbon intensity of the global power sector, which in turn has pos-itive implications for the “green” credentials of electric vehicles. See Renewable Energy: What Cheap, Clean Energy Means for Global Util-ities (7 Jul 2017).
The sustainability of Electric Vehicles is not only connected to the fuel versus electricity debate, though. Throughout the value chain, there are other sustainability risks that need to be managed.
Sourcing raw materials
Cobalt – The high concentration of cobalt supply in the DRC (51%) presents raised political and supply risk compared to other minerals that are sourced from a more diversified group of countries. Trans-parency International ranks the Democratic Republic of Congo at 156 out of 176 countries, with a score of just 21 out of 100.
Reports from the Washington Post (30th September 2016) and Amnesty International have highlighted human rights concerns within cobalt mining in the DRC. Artisanal mining is prevalent (around 20% of cobalt exported from the DRC) (source: "This is what we die for", Amnesty International and African Resources Watch, 19th January 2016) and, while this provides much-needed jobs, it also raises the risk of poor health and safety practices. Exposure to cobalt dust while not using protective equipment can lead to respiratory illness, while poor construction in underground mines raises the risk of tunnel collapses. Several sources document the existence of child labour within cobalt mining in the DRC, including the US Department of Labor and UNICEF.
The US State Department defines "conflict minerals" as those whose exploration and production are potentially connected to human rights violations in the DRC or adjoining countries. At present, the term only applies to tantalum, tin, tungsten and gold (otherwise known as "3TG"); however, there is the potential for an expansion of the list to include cobalt. Should this happen, the companies that use cobalt in their products would need to file conflict mineral disclosure reports to the SEC, under The Dodd-Frank Wall Street Reform Act of 2010.
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In Europe, the EU recently finalised regulations that will require com-pliance in 2021 and in some ways are more rigorous than those of the US – for example, the geographical application goes beyond just the DRC and adjoining countries to encompass any "conflict-affected and high-risk areas" globally. However, again cobalt is currently excluded from the list of affected minerals (tantalum, tin, tungsten and gold).
For now, the responsibility is on end users of cobalt to improve trans-parency of their supply chain. We believe that companies using con-flict minerals in their supply chain are vulnerable to reputational damage, increased regulation, stricter customer demands, and even operational disruption due to social unrest.
Lithium – Lithium is primarily mined in Australia (35% in 2017, we estimate), South America (32%) and China (28% of global supply). It can be extracted in three ways: hard-rock mining (33% of supply), mineral conversion (32%) and extraction from salt lakes (35%). It is a very water-intensive process which is a particular problem given that some of the major salt-lake lithium mines are located in regions of Argentina, Chile and China where there is medium to high risk of water scarcity, according to our analysis of water risk data from the World Resources Institute. This could have both environmental and social consequences, as local communities compete for use of lim-ited water resources.
Lithium is also highly flammable. While fires caused by lithium bat-teries are very rare, it is one important consideration for battery man-ufacturers.
Nickel – Key locations of nickel mines include Russia, Canada, Aus-tralia, Indonesia and the Philippines. Almost 50% of global nickel demand comes from scrap. According to the Nickel Institute, about 68% of end-of-life nickel was recycled in 2010, which reduces global nickel-related CO2 emissions by one-third.
Environmental concerns about nickel mining were evident earlier this year, when the Philippines' Department of Environmental and Natural Resources announced the results of a mining industry audit and recommended that 19 nickels mines were closed or suspended. Key pollutants include sulphur dioxide, while the bi-products of nickel production need to be disposed of in a safe way.
Other ESG considerations include the health aspect of nickel. It takes a long time for nickel dust to be removed from air and it can end up in surface water. High concentrations can harm health (e.g., cancer, respiratory failure, birth defects and asthma).
Recycling batteries
Post-consumption recycling of minerals from electronic waste and used EV batteries is needed for the products to have an environmen-tally positive life-cycle. Collecting e-waste has proven difficult – only 10-15% of gold in electronic goods is recycled, according to the United Nations Environment Programme (UNEP), compared with 70-90% of gold in industrial applications. Instead, much e-waste ends up in developing countries where it isn't processed appropri-ately; this leads to health and environmental problems. The size and cost of EV batteries should make this type of battery recycling some-what easier – although at present, there are no large-scale facilities.
Tesla's recycling process with Umicore is an early example of recy-cling for EV batteries, which saves over 70% of CO2 emissions, and the recovery and refining stage for the core valuable metals. The most valuable material within the battery is cobalt, and Umicore's recycling process uses it to make lithium cobalt oxide – a product that can then be resold back to the battery manufacturers. According to Tesla, this has a positive economic as well as environmental impact. There is also a by-product from the recycling process, which is a lithium-based slag. This can be used in a number of different ways, including construction material. Cement manufacturing is a very car-bon-intensive industry, and using this by-product instead of some tra-ditional raw materials can reduce emissions as well as demand for incremental finite resource consumption.
One of the challenges of making battery recycling economically viable is the quantity of battery material that is needed to keep utili-sation rates of recycling facilities sufficiently high. The risk, therefore, is that there may not be the necessary infrastructure in place in time for the first significant wave of EV batteries to reach end of life.
Manufacturing vehiclesThe energy consumed during the manufacturing process is far smaller than energy used during the operation of ICE vehicles or EVs. However, it's still worth considering in order to get a complete per-spective on the sustainability of the two different types of vehicles. Using renewable energy to power manufacturing plants is one way to further increase the green credentials.
Further Morgan Stanley research: Sustainability: Conflict Minerals Back in the Regulatory Spotlight (May 17, 2017) Eva T Zlotnicka, Jessica Alsford, CFA, Victoria Irving, Faty Dembele Sustainability: Measuring Impact: Climate Change Solution Stocks August 15, 2017 Jessica Alsford, CFA, Victoria Irving, Faty Dembele, Eva T Zlotnicka Sustainability: Measuring Impact: Addressing 3 Investor Questions August 25, 2017 Jessica Alsford, CFA, Victoria Irving, Faty Dembele, Eva T Zlotnicka
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The following analysts hereby certify that their views about the companies and their securities discussed in this report are accurately expressed and that they have not received and will not receive direct or indirect compensation in exchange for expressing specific recommendations or views in this report: Jessica Alsford, CFA; Vincent Andrews; Nicholas J Ashworth, CFA; Lucie A Carrier; Robert J Davies, Ph.D.; Carolina Dores, CFA; Harunobu Goroh; Victoria A Greer; Harald C Hendrikse; Craig Hettenbach; Timothy Ho, CFA; Yoshinao Ibara; Victoria Irving; Hitoshi Isozaki; Adam Jonas, CFA; Kyle Kim; Jack Lu; Kevin Luo, CFA; Francois A Meunier; Joseph Moore; Peter Murdoch; Christopher Nicholson; Dominik Olszewski, CFA; Tom Price; Martijn Rats, CFA; Menno Sanderse; Anna Maria Scaglia, CFA; Young Suk Shin; Binay Singh; Ben Uglow; Paul R Walsh; Charles L Webb; Jack Yeung; Kazuo Yoshikawa, CFA; Eva T Zlotnicka.
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Coverage Universe Investment Banking Clients (IBC)Other Material Investment Services Clients
(MISC)Stock Rating Cate-
goryCount % of Total Count % of Total IBC % of Rating Category Count % of Total Other MISC
Overweight/Buy 1150 36% 299 40% 26% 556 37%Equal-weight/Hold 1413 44% 349 47% 25% 692 46%
Not-Rated/Hold 61 2% 7 1% 11% 10 1%Underweight/Sell 607 19% 93 12% 15% 242 16%
Total 3,231 748 1500
Data include common stock and ADRs currently assigned ratings. Investment Banking Clients are companies from whom Morgan Stanley received investment banking compensation in the last 12 months.
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