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For investors, EV batteries may drive future returns

Storage capacity must increase and charging speeds must get faster for electric cars to go mainstream.

The recent spate of announcements from some of the largest automakers suggests that electric vehicles (EVs) may soon be everywhere on our roads.

Since mid-January, General Motors Co. has made a $1-billion investment in its CAMI Assembly Plant in Ingersoll, Ont. to make commercial electric vehicles, struck a partnership with Microsoft Corp. and Honda Motor Co. to build the software and interfaces that will run EVs, and set a goal that all GM vehicles will be emissions-free by 2035. Ford Motor Co. announced a partnership with Google for its cloud and artificial intelligence expertise. And in October, 2020, the former Fiat-Chrysler Automobiles NV announced an investment of $1.5-billion in its Windsor, Ont., assembly plant to make EVs.

For investors, batteries and related charging technology represent an interesting opportunity. Batteries are the single most expensive component of electric vehicles – about 25 per cent of the total.

“EVs are sometimes referred to as a battery with four wheels,” jokes Rene Reyna, head of thematic and specialty product strategy at Atlanta-based asset manager Invesco Ltd.

Elliot Richards is Chief Investment Officer at Evolve ETFs in Toronto. Credit: Supplied Photo

Although the cost of batteries has fallen dramatically, it must come down further to make prices comparable to gas-powered options, says Elliot Johnson, chief investment officer at Evolve Funds Group Ltd. in Toronto. He notes that between 2010 and 2020, the price of a kilowatt-hour of capacity in an automobile battery pack dropped by 87 per cent to US$156 from US$1,160.

But for electric vehicles to become mainstream, two other things must improve, he says: Battery storage capacity must rise to extend the distance between charges and charging speeds must get faster.

Both are critical because they play to the fear among EV buyers dubbed “range anxiety,” which is the worry that a car will run out of charge before they can find a place to plug it in, leaving them stranded. In addition, buyers also worry about how long it will take to get back on the road if they do find a charger.

A big part of the gain is going to be in charging infrastructure,” Mr. Johnson says. “There’s a huge amount of research going into it.”

In a sign of the times, Israel-based lithium-ion battery company StoreDot Ltd., which counts BP PLC and Daimler AG as strategic partners, has manufactured the first battery for electric vehicles that can be charged in five minutes. That’s a step toward making recharging as quick as a fill-up at the gas station.

Evolve’s Automobile Innovation Index Fund (TSX:CARS) holds companies developing EV drive trains, autonomous driving, and network services. It has $96-million in assets under management (AUM) and is managed passively, with 44 holdings.

An electric vehicle charging station on Lakeshore Rd. in downtown Oakville., Ont. Credit: Adam Mayers

Some of the holdings overlap with Invesco’s clean-energy ETFs, which have a broader emphasis. Invesco WilderHill Clean Energy ETF (NYSE: PBW) has a North American focus while its Invesco Global Clean Energy ETF is more global. Both are managed passively, with Invesco Wilderhill Clean Energy ETF holding 56 companies, of which about 25 per cent are in battery and related technologies. It had US$2.2-billion in AUM as of Jan. 31.

The Evolve and WilderHill funds have been strong performers, with the former producing a total return of 122.6 per cent in the 12 months ended Jan. 31 while the latter has had a total return of 206 per cent in the same period.

One area to keep an eye on, Mr. Johnson and Mr. Reyna say, is the development of batteries to be used in electric long haul trucks. The technology doesn’t exist as it should yet because the lithium-ion batteries used in cars don’t do the job. For now, they would be too large and too heavy to pull the loads and would also take too long to charge.

The solution might be some form of fuel cell, possibly hydrogen, which produces electricity by a reaction between hydrogen and oxygen-producing electricity and water vapor. Fuel cells offer better mileage and are faster to refuel than batteries.

Mr. Johnson and Mr. Reyna say that China is the global leader in battery technology, with Europe a distant second.

“China has had a huge focus on batteries and it has really paid off,” Mr. Reyna says. “It manufactures about 77 per cent of all battery cells and 60 per cent of battery components. No one is really close.”

Rene Reyna is Head of Thematic and Specialty Product Strategy with Atlanta-based Invesco Ltd. Credit: Supplied Photo

Both funds hold Nio Inc. (NYSE: NIO) a Chinese electric carmaker that wasn’t in business when Evolve launched CARS in 2017. They opened their doors in early 2018 and have gone from zero to a US$9.2 billion market capitalization in three years.

The Evolve and Invesco ETFs hold Fuelcell Energy Inc. (NDQ: FCEL) one of the largest North American fuel cell power companies. Another is Vancouver-based Ballard Power Systems Inc. (TSX: BLDP) which is involved in fuel cell development and commercialization.

Both Mr. Johnson and Mr. Reyna see massive potential in this space.

“We’ve reached a tipping point at which owning an electric vehicle is becoming extremely attractive,” Mr. Johnson says. “If we have this conversation in a year or two, these trends will only be further along.”

Mr. Reyna, for his part, adds that “If market share of EVs in North America is 2.6 per cent today and you want net-zero [carbon emissions] by 2035, the conversion is going to be massive.”

This is an edited version of an that article appeared in the Globe Advisor section of the Globe & Mail’s Report on Business on Feb. 19, 2021. For information on how to reprint this article please view this page.

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