Is it the right time to buy electric vehicle (EV) stocks?

• Electric vehicles (EVs) are seeing accelerated adoption on the back of decreasing costs. Continued advances in battery technology could soon make EVs cost-competitive versus internal combustion engine (ICE) counterparts.
• Autonomous driving functions are becoming commonplace in new car models and real-world trials are bringing us closer to fully autonomous vehicles (AVs).
• We believe investors can benefit from the growth of EVs and AVs by investing in segments that capture the EV/AV value chain, including EV and AV manufacturers, EV battery producers, EV battery material suppliers, and EV and AV technology enablers.

The electricity-powered and autonomous future of transportation is arriving. EVs are fast taking market share after more than a century of internal combustion engine dominance. And with recent advances in autonomous driving technologies, drivers, too, might become relics of the past.

EVs commanded 14% of the global car market in 2022, more than tripling their 2020 share.¹ After a period of slowed progress, autonomous vehicles (AVs) are also advancing. In 2021, Germany became the first country to approve a conditionally automated driving system; cars equipped with this system can, on suitable highway sections and where traffic density is high, autonomously navigate with a driver behind the wheel.² Building on this achievement, in 2023, this same driving system was certified in both Nevada and California, making it the first AV system of its kind approved for use within the U.S. The first cars with this technology are expected to be delivered to U.S. customers in late 2023.³

We expect EV sales to accelerate further on the back of continued innovation and public and private sector support. Driving systems featuring greater automation are also on the horizon; advances in underlying technologies and heightened data proliferation will bring new AV options to streets soon. In the near future, transportation could become both electric and autonomous, becoming cleaner, safer, and less expensive than ever before.

EVs might soon overtake their long-entrenched gas-powered counterparts as consumer demand, innovation, and support from automakers and governments accelerate adoption.

Declining EV battery costs are key to adoption

There would be no EVs on the road without lithium-ion batteries. They are the power storage solution that makes electric cars — and e-bikes, which are seeing similar strong growth –possible. And, as the most expensive component at the heart of EVs, their cost largely dictates the economics of an EV purchase.⁵

In the past, high battery costs made EVs expensive. This dynamic is changing. Advances in battery technology and rapidly scaling production are driving costs down — today’s lithium-ion batteries are nearly 90% cheaper than they were in 2008.⁶ Yet, battery packs still represented 30% of EV manufacturing costs at the end of 2020, compared to 18% for engines in traditional vehicles.⁷ While maintenance and fuel savings make up for this over time, upfront costs must decline further if EVs are to claim market share dominance.⁸ That journey is already underway, as are innovations which could separately decrease overall EV costs.

EVs still cost 22% more than ICE vehicles.⁹ Several developments could bring them closer in price. Alternative battery chemistries like lithium iron phosphate (LFP) are driving costs lower, while reducing supply chain pressures. LFP batteries use cheaper metals like iron, rather than the more expensive nickel and cobalt. LFP batteries are already seeing success, last year accounting for 95% of battery production in China.¹⁰ Sodium-ion batteries, too, show promise, though they are still in development. These batteries use sodium, which is abundant and affordable, unlike lithium, which is becoming increasingly expensive and faces shortages.¹¹

These new battery technologies, along with continued economies of scale and next-gen battery recycling, could bring EVs to parity with ICE vehicles in short time. This could happen as soon as 2025, and potentially sooner with subsidies.¹²

EV enablers beyond batteries

Automakers and governments are both playing outsized roles in facilitating the transition to electric vehicles.

Global policymakers are allocating public funds and legislative muscle in support of EVs. In 2020, China set an ambitious target for EVs to achieve a 20% market share by 2025.¹³ Just one year later, country-wide EV sales nearly tripled.¹⁴ Today, China is the largest market for EVs in the world.¹⁵ Even before the hundreds of billions of energy-related spending in the IRA, U.S. President Biden enacted legislation that will invest $15 billion in EVs and charging networks and issued an executive order that establishes a 50% market share goal for EVs by 2030.¹⁶ In April 2023, the U.S. Environmental Protection Agency (EPA) proposed a series of stricter federal vehicle emissions that would accelerate the ongoing transition to EVs. While this proposal is still in early stages, it points towards a broader focus on the future of transportation.¹⁷ In Europe, the EU proposed a 100% reduction of vehicle emissions by 2035, which would effectively ban sales of ICE vehicles, as well as a requirement to install public charging stations along all major roads.¹⁸

In the U.S., the Inflation Reduction Act (IRA), which became law in August 2022, includes approximately $370b in energy-related spending and the EV value chain is a significant component. The IRA includes tax credits for qualifying consumers to purchase new and used clean energy vehicles. It also includes billions to build new clean vehicle manufacturing facilities, manufacture clean heavy-duty vehicles, convert postal service vehicles to EVs, and retool existing auto manufacturing facilities to manufacture clean vehicles. This emphasis on EVs as a critical piece of the clean energy transition is likely to continue.

Outside of the public sector, traditional automakers are committing massive sums to develop electric vehicles in the face of increasing competition from EV incumbents and new policy pressures. Between now and 2030, global car companies are on pace to spend over $515 billion rolling out new EVs, presenting potential for economies of scale and market capture driven by product diversity.¹⁹ Many of these companies also plan on investing billions more in charging infrastructure. Charging networks are the lifeblood of EVs and increasing charging station density will help remove the range limitations, decreasing battery costs in the process.

Continued trials, innovation, and greater regulatory clarity are bringing us closer to autonomous transportation, with several milestones ahead that represent far greater levels of automation. Moreover, the Inflation Reduction Act’s subsidies for EV production have the potential to free up additional research and development dollars for automakers to spend on advancing self-driving.

Each level of automated driving is a milestone on the path to fully autonomous vehicles

Progress on autonomous vehicle development

Consumers today can choose from several vehicle transit options across varying degrees of automation. Of these options, robotaxis are the closest to being fully automated. Several driverless robotaxi services are currently in operation, offering public rides to passengers in multiple cities. Driverless private vehicles are earlier stage, though progress is encouraging. Many automakers have successfully rolled out partially automated steering, braking, and acceleration. At the end of 2021, 92% of new car models featured some degree of automated acceleration and 50% could automate certain steering functions.²⁰ The next step is taking human drivers fully out of the equation – and many consumers seem interested in that outcome. A recent consumer survey showed that a quarter of car buyers are highly interested in an autonomous feature for highway driving, and two-thirds of the surveyed group would be willing to pay $10,000 for a premium autonomous feature.²¹

Where do AVs go from here?

Even with growing consumer interest, getting autonomous vehicles on highways around the world will require continued technological advancement and supportive regulatory frameworks. On the technology side, it is less a matter of core technologies existing, than of enhancing and harmonizing them. Cameras, sensors, artificial intelligence (A.I.), edge computing, and network connectivity are already present in today’s partially autonomous vehicles and steady improvements to them are moving the needle. Most importantly, continued trials are serving as teachers for A.I. and establishing goalposts for what needs to improve. These must accelerate for driverless cars to be street ready.

On the policy side, automakers need regulatory clarity so that they can develop technology to conform with future standards. Nevada and California’s approval of conditionally automated vehicles is extremely encouraging, marking the first time that U.S. drivers can legally ride without paying full attention to the road. Encouragingly, frameworks for private vehicles that are fully automated in certain conditions are underway. In January 2022, Japan announced that it is in the process of creating a legal framework for such vehicles.²² We expect AV development to ramp up as more countries follow.

The NYSE® FactSet Global Autonomous Driving and Electric Vehicle Index “is a rules-based equity benchmark designed to track the performance of globally listed companies involved with Autonomous Driving and Electric Vehicles.”²³ To capture these EV and AV companies, the index uses revenue data from FactSet’s Revere Business Industry Classification System (RBICS) and supply-chain data from FactSet’s Supply Chain Relationships databases to determine business involvement across the following segments: EV manufacturers, EV battery producers, EV battery material suppliers, AV manufacturers, and autonomous driving and EV technologies enablers.²⁴

Continued innovation and support from the public and private sectors are bringing us closer to fully electric and automated transportation. Policies like the Inflation Reduction Act, in the U.S. and around the world, are likely to drive further investment and EV sales. This paradigm shift will likely drive immense growth for EVs and AVs that investors can capitalize on by investing in ETFs that holistically capture the EV and AV value chains. We believe this is best achieved by targeting EV and AV stocks that range from EV and AV vehicle manufacturers to companies that produce enabling technologies like EV batteries, EV powertrains, and AV sensors and cameras.