Legacy automakers may finally be shifting toward electric now that climate change has become the top driver of auto industry fundamentals. Here's how to track their progress toward a cleaner future.
Investors have spent the better part of 2020 pouring into electric-vehicle stocks, widening the market gap between EV manufacturers and legacy automakers. Indeed, the world's largest car manufacturers have been underperforming global markets dating back to the 2008 financial crisis.
“The market is convinced of the long-term secular bear thesis of legacy automakers, and their underperformance has been even more pronounced in the COVID-19 era," says Adam Jonas, Head of Global Auto and Shared Mobility Research.
But the market may be missing something: Legacy automakers are finally pivoting toward electric now that climate change has become the number one driver of auto industry fundamentals—and many are making real progress toward a more sustainable future. “We think this is a significant opportunity for legacy automakers to reinvent themselves, but they need to move quickly and demonstrate meaningful change," Jonas adds.
Not all legacy automakers are making equal progress. As this EV revolution takes hold, investors will have to zero in on automakers that are on the fast track toward reducing their overall CO2 footprints. “It isn't enough to simply look at the percentage of their vehicles that will be EV," says Jessica Alsford, Head of Sustainability Research. “To understand the true impact that automakers have on the environment, investors also need to look at EV as a percent of its total fleet on the road."
With this in mind, Morgan Stanley's auto and sustainability analysts joined forces to create a proprietary framework to gage how quickly each automaker is able to reduce its CO2-emissions footprint. In a recent report, The Global Auto Climate Opportunity: Is Your Car Company 'CLEAN,' they use this framework to identify potential beneficiaries and laggards in the years ahead.
For companies serious about making the switch to EV, this represents a pivotal moment to reinvent themselves, do their part to help curb the emissions that contribute to climate change, and earn higher stock valuations in the process.
EV Shifts Into High Gear
The past several years have seen a significant change in the narrative surrounding automakers. Until recently, investors viewed the EV segment as niche—posing little threat to gas-powered players. Today, the market value of the world's largest EV maker is more than the “Big Three" combined. And yet, investors have also written off any transition from internal combustion engines (ICE) to EV as a costly endeavor with an uncertain payback.
Morgan Stanley's view is that, although the process will take years and involve many hundreds of billions of dollars, auto manufacturing is poised for a once-in-a-lifetime shift. In fact, Morgan Stanley estimates that EV sales will surpass combustion engines around 2035.
“Over the long run, EV adoption should prove cheaper than staying with internal combustion engines, and ultimately quite profitable," says Jonas, whose team has overweight ratings on more than a dozen global automakers.
Among other factors in favor of a move to EV: Improving economies of scale, cost reductions associated with dedicated EV platforms, growing policy and infrastructure support, and increasing consumer appetite for EVs across many segments.
Meanwhile, most legacy automakers’ stocks have fallen very much out of favor with investors. “Legacy autos are currently the worst-performing subindustry within the already underperforming industrials sector," says Jonas.
Companies that can make the transition to EV could attract capital from the growing universe of environmental, social and governance, or ESG, investors and see a significant rerating of their stocks. The alternative? With few exceptions, companies that don't address CO2 emissions could see their stock price-to-earnings multiples compress further.
Quantifying Real Change
To compare the leaders and the laggards, the Morgan Stanley team plotted the world's largest automakers on four quadrants that revolve around two key metrics: Current CO2 exposure, coupled with the actual rate of change driven by percentage of EV sales. By focusing on achieved EV penetration as a percentage of vehicles sold (rather than EV penetration targets), the framework screens out potential noise from loss of market-share and total-unit growth or declines.
Morgan Stanley's Key EV Metrics
|Global Autos Data - MSe||2020||2025||2030||2040||2050|
|Total Unit Sales (mm)||73||84||85||100||108|
|Total Car Parc (mm)||1,211||1,244||1,260||1,294||1,235|
|EVs as % of Sales||2.8%||11.6%||26.0%||72.2%||81.5%|
|EV Sales (mm)||2||10||22||72||88|
|EVs as % of Parc||0.6%||2.9%||8.8%||38.1%||67.8%|
|EV Parc (mm)||7||36||111||492||837|
|ICE Miles (bn)||11,838||12,669||13,237||10,794||7,192|
|EV Miles (bn)||57||353||1,342||8,649||21,369|
|Total Miles (bn)||11,895||13,022||14,579||19,443||28,561|
|EV Efficiency (Miles/KwH)||3.00||4.00||5.00||6.00||7.00|
|Total EV TwH||19||88||268||1,441||3,053|
|ICE Fuel Gallons (bn)||423||421||406||290||176|
|CO2 Emissions (Gt)||3.8||3.8||3.6||2.6||1.6|
Based on this framework, CO2 emissions from fleet sales could fall by approximately 60% by 2040, while companies with some of the most aggressive plans could cut overall emissions by more than 80%—and at a time of accelerated replacement demand.
“If our call is correct, we're going to see years of prolonged replacement demand that equates to roughly $25 trillion of replacement demand, and with legacy original equipment manufacturers supplying 90% of EV cars in the future," Jonas says.
For more Morgan Stanley Research on how climate concerns are driving change in the auto industry, ask your Morgan Stanley representative or Financial Advisor for the full report, “The Global Auto Climate Opportunity: Is Your Car Company 'CLEAN,'" (Aug 10, 2020). Plus, more Ideas from Morgan Stanley's thought leaders.