Emerging markets are increasing their investments in green energy generation as they try to reduce pollution, create jobs and develop value-added products for export.
One area where they are already dominate is in the batteries and other components that go into electric vehicles. For investors, this presents opportunities, says Laurence Bensafi, portfolio manager and deputy head of Emerging Markets Equities at RBC Global Asset Management (UK), based in London.
“In two years time, it won’t make sense to buy an internal combustion car,” she says. “You will have a lot of choice of electric vehicles, but we think you’d be better off looking at the parts makers or the components you need for electric cars.”
Ms. Bensafi manages the RBC Emerging Markets Dividend Fund. In a QA, she discussed why emerging markets are moving quickly with green technologies and why Tesla, the pioneer in electric cars face challenges as the industry evolves.
Why are emerging markets going green faster than North America?
It’s a fight against pollution, it’s about modernizing the grid and a desire for a cleaner economy. China and India are net importers of oil, so they are keen on renewable energy. They want to go from relying on energy imports to becoming exporters of green energy components. They also see it as a way to create jobs and move away from low value-added exports to more sophisticated ones.
Are they succeeding?
Well, pretty much all solar panels are produced in China. China has the biggest electric car battery company in the world, Contemporary Amperex Technology Co. Lt., known as CATL. China dominates other parts of the electric vehicle value chain.
How quickly is the transition coming?
For green power, I think it will be much faster than people are expecting because of grid parity, which is the cost to generate solar and wind energy. The price of solar panels has dropped by 90% in the last ten years and is now as cheap or cheaper than other fuels.
So where it once cost a lot of money to install solar and recoup the investment, you don’t really need subsidies anymore. That’s a major turning point. Wind is not there yet, but it’s going to be a big one. The move to electric cars will also be faster than you think.
What are the implications for investors?
It’s a huge area of growth. As simple as that. The penetration of electric cars and renewable energy is tiny. In China, solar is about 3.5 per cent of electric generation. China will have almost 30 per cent of installed power capacity in solar by 2030.
In 2020, 5 per cent of cars sold globally were electric cars. That’s up from 3% in 2019. China is currently at 6 per cent.
Can North American companies overcome Asian EV dominance?
China and Korea saw it coming and invested in it, so it’s quite tricky for others to catch up. You need size and you need to produce a lot of them to be efficient.
What does this mean for Tesla?
Tesla was the pioneer. But it’s going to be challenging for them because everyone is going to be making electric cars. You’re going to have 50 or 60 EV companies. In China you already have 20 and if you add them all up, they already produce more electric cars than Tesla. So, there’s a lot competition.
Who are the big players?
Volkswagen AG is one. Hyundai Motor Co. and Kia Corp. are sister companies. Both have been working on electric cars for a long time. Kia is South Korea’s second-largest car maker after Hyundai. They have the right products at the right time.
How should an investor approach this area?
Auto manufacturers aren’t always the best investments. They are capital intensive, cyclical and there’s lots of competition. There’s a couple of exceptions like Hyundai and Volkswagen.
With the parts makers or the components you need for electric cars you don’t have to pick the winner. They are going to be winners regardless. They’ve got the knowledge, there are high barriers to entry in their businesses and the components tend to be high value.
What is ADAS and why is it an area to watch?
Advanced Driver Assistance Systems (ADAS) are intelligent systems inside a car that help with safe driving and parking. They use sensors and cameras, to detect obstacles and respond accordingly. They provide information about traffic congestion and suggest routes to avoid it.
It’s about cars that drive themselves and includes computers, sensors and cameras. There’s only a few companies in the world that can do that. One of the leaders is in Korea.
How would you summarize the opportunity?
Green infrastructure is a great opportunity for an emerging market country to create jobs, to create growth and lower dependence on gas and oil. It’s a win-win on so many levels.
As an investor,you need to look at the prospects for long term growth and companies that have technologies with high barriers to entry.
That’s the kind of company you should back. A company that operates in an industry where barriers to entry are high, with strong technology strong management as usual.