Last year’s Inflation Reduction Act delivered a raft of incentives for US manufacturers and consumers to build and buy electric vehicles (EVs). Despite leaving the factory floor with a higher carbon footprint than internal combustion engine (ICE) vehicles, EVs have an unequivocally better emissions profile over their lifetime, even after accounting for fossil fuel-heavy electricity sources. And thanks to the new legislation, momentum already underway in the EV market is expected to accelerate further.
As investment managers who fervently support the transition away from fossil fuels, we are often approached by those who equate vehicle electrification with a handful of big names in EV manufacturing: disruptive companies such as Tesla or Rivian, or stalwarts like Ford, GM, Hyundai and Volkswagen. Key suppliers to these manufacturers will be just as important, But while vehicle manufacturers will be unquestionably central to the EV transition, companies with a range of other backgrounds also need to step up in order to make that transition successful.
Batteries and Battery Materials
Mechanically, EVs are much simpler than ICE vehicles. But one key part is more complex, and more critical. Electric vehicle batteries not only determine how far an EV can travel between charges; they make up a much larger share of overall vehicle weight and volume than in ICE vehicles. Companies that can produce high volumes of lightweight, longer-lasting EV batteries could become key to the transition. Early-stage, solid-state battery companies like Quantumscape and Solid Power, for instance, hope to challenge more established battery producers such as CATL and LG, by developing next-generation battery technology.
Equally critical are battery materials. From the mines that produce minerals like lithium and rare earths to the companies looking further ahead to recycled inputs, those with high environmental and labor standards could do much to make the EV transition sustainable. Companies like Lithium Americas and MP Materials are focused on building out US-based supply chains for these inputs, which were previously almost nonexistent. These sources should be held to much higher environmental standards than many overseas. And several early-stage startups are convinced they can make lithium batteries fully recyclable.
Charging Infrastructure
Much has been made of the need to rapidly scale up charging infrastructure in the United States, and rightly so. McKinsey has estimated that the US needs 1.2 million public chargers and 28 million private chargers by 2030, nearly 20 times what existed last year. Public chargers in particular are critical to combatting “range anxiety” among potential EV customers, who worry their cars will run out of power on long trips for lack of a place to charge them. Even if this fear is overblown, the prospect of longer wait times at public charging stations may not be, especially if ports are not built out rapidly enough. Established companies like ABB and Siemens are joined in these efforts by newcomers like ChargePoint and EVgo, the latter of which also offers only 100% renewable energy at its charging stations.
Grid Upgrades and Expansion
Even further from the vehicle itself, upgraded electric grids will be needed to support increased, often heavily localized electricity demand. Utilities have a central role to play, not only in increased distribution capacity, but also in rolling out and fine-tuning strategies like time-of-use pricing (i.e. incentivizing charging at off-peak hours) and other demand-response mechanisms.
Equally important are companies deploying emerging technology to make grids more scalable and responsive. Bi-directional charging, for instance, allows vehicles to power homes in situations where balancing grid load is critical. Solar microinverter company Enphase already offers one such solution, as does Wallbox. Other well known names have developed real-time meter-reading systems (IBM), automated fault location, switching and restoration (ABB), and complete smart grid optimization and even installation (Siemens).
Software
While simplicity of manufacturing is a notable feature of EVs, the same cannot be said of the software that will power the vehicles of the future. The US Bureau of Labor Statistics (BLS) predicts an overall employment increase of 5.3% from 2021-2031, but employment of automobile assemblers and fabricators is expected to contract about 7% over that same timeframe. While the contraction should be offset by an expansion in the employment of electricians and related laborers, it is in software where the largest employment gains stand to occur: the BLS projects software jobs in EV-related fields to grow 26% over the same timeframe.
The software solutions that will be needed to support the EV transition encompass all of the above categories, and more: the management and interoperability of grids and charging stations, route planning and increased support for highly efficient, self-driving vehicles, and power management and interactive software for the drivers of electric vehicles themselves. In many of these applications, artificial intelligence (AI) and machine learning will play a key role, using algorithms to optimize the performance of vehicles and the electric grids they run on. Companies as diverse as Verizon and Samsara already offer robust solutions for the management of electric vehicle fleets; earlier-stage companies are at work on making similar technologies available to end consumers.
Putting it All Together
Last month, new proposed rules from the US Environmental Protection Agency (EPA) suggested a 60% target for new vehicle EV sales in 2030, up from the 50% target recently set by the Biden administration. Regardless, the stage is set for a transition of unprecedented speed. An entire ecosystem of companies will be needed to maintain this momentum; not mentioned above, for instance, are automotive suppliers already heavily focused on electrification technologies, like Aptiv and BorgWarner, or those, like Air Products, seeking to rapidly advance green hydrogen and other carbon-free fuels for heavy vehicles (including machinery and even airplanes).
Perhaps the only thing we can predict with certainty about the vehicle landscape of 2030 is that it will look very different than it does today. Our work will be to ensure that the companies that get us there do so in the most sustainable way possible, building a low-emissions future that is both fair to workers and consumers, efficient in its use of resources, and circular in its handling of waste.
