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Electric Cars: Plugged In
Batteries must be included
Rod Lache
Research Analyst
(1) 212 250 5551
rod.lache@db.com
Dan Galves
Associate Analyst
(1) 212 250 3738
dan.galves@db.com
Patrick Nolan, CFA
Associate Analyst
(1) 212 250 5267
patrick.nolan@db.com
Fundamental, Industry, Thematic, Thought Leading
Deutsche Bank Company Research's Research Product Committee has deemed
this work F.I.T.T. for investors seeking differentiated ideas. Rising oil prices,
regulations, and advances in battery technology set the stage for increased
electrification of the world’s automobiles. We see implications not only for
automakers and traditional auto parts suppliers – but also for battery companies,
raw material producers, electric utilities, alternative power, oil demand, and the
global economy.
Deutsche Bank Securities Inc.
All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from
local exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies.
Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should
be aware that the firm may have a conflict of interest that could affect the objectivity of this report.
Investors should consider this report as only a single factor in making their investment decision.
Independent, third-party research (IR) on certain companies covered by DBSI's research is available to customers of
DBSI in the United States at no cost. Customers can access this IR at http://gm.db.com, or call 1-877-208-6300 to
request that a copy of the IR be sent to them.
DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1
FITT Research
Companies featured
General Motors (GM.N),USD17.05 Hold
BorgWarner (BWA.N),USD50.61 Hold
Ford Motor (F.N),USD6.40 Hold
Johnson Controls (JCI.N),USD33.44 Hold
Magna International (MGA.N),USD69.51 Hold
TRW Automotive (TRW.N),USD24.47 Buy
Samsung SDI (006400.KS),KRW82,700.00 Hold
Sanyo Electric (6764.T),¥282 Sell
Rockwood (ROC.N),USD40.00 Buy
Continental (CONG.DE),EUR71.12 Hold
Fundamental: monumental challenges for the global auto industry
Rising gasoline prices have caused unprecedented shifts in industry mix, along
with sharp declines in the residual value of less fuel efficient vehicles. Already we
have seen the sales of hybrid vehicles rise markedly last year and in 2008 to date.
There is also growing recognition that it may not be possible to meet onerous fuel
efficiency targets through upgrades to conventional powertrains and drivetrains.
Industry: from change comes opportunity
Even if oil was not as large a driver as it is today, regulatory initiatives aimed at
improving fuel efficiency/CO2 emissions present a huge obstacle for the global
auto industry. Taken together, we believe that peak oil and a barrage of stiffer
regulations are likely to spur the electrification of the automobile – sharply.
Thematic: the battery is key – and we see lithium ion technology winning
High energy, cost-effective, long lasting, and abuse tolerant batteries will be the
key technical enablers for this shift. There have been recent breakthroughs in this
area. Based on discussions with automakers and suppliers, we have almost no
doubt that lithium ion battery chemistries will take over from nickel metal hydride –
ultimately dominating this market.
Thought Leading: the repercussions are far-reaching
We find electric vehicles destined for much more growth than is widely perceived.
But beyond that, ultimately we see even bigger beneficiaries. We see tremendous
growth potential in large-format lithium ion batteries – in other markets as well as
autos. Along with the battery makers, producers of inputs consumed in battery
manufacturing are also nicely positioned. Connection to the electric grid holds
unexplored potential too, and this technology could transform alternative power.
Opportunities for many traditional auto parts companies – and elsewhere
We see many companies we cover now benefiting from this trend, including
BorgWarner, Johnson Controls, TRW and Continental. In this report, we also
describe the competitive landscape in the emerging lithium ion battery market and
in the vital commodity, lithium. Another intriguing theme is the emergence of
service-oriented companies that can take upfront costs away from the consumer.
Table of Contents
Executive summary ........................................................................... 3
Outlook: dramatic change fosters the rise of Electric Vehicles.................................................3
Risks ........................................................................................................................................4
Key themes for the global auto industry......................................... 5
Peak oil is driving change… ......................................................................................................5
…along with a barrage of regulations .......................................................................................5
From change comes opportunity ..............................................................................................7
However, more dramatic changes are likely .............................................................................7
Rise of the Electric Vehicle ............................................................. 10
Fuel savings potential .............................................................................................................10
Cost/benefit proposition is straightforward and compelling ...................................................11
Government sponsorship is a key variable..............................................................................11
New business models will emerge… .....................................................................................12
…led by breakthroughs in energy storage technologies.........................................................12
…which could find many other large and important markets .................................................13
Alternative power could be transformed by this technology ..................................................13
Electric vehicles: under the hood................................................... 14
Why go hybrid?.......................................................................................................................14
Hybrid categories....................................................................................................................15
Plug-in electric vehicles and extended range electric vehicles................................................16
The battery is key ............................................................................ 21
Today: nickel metal hydride (NiMH) ........................................................................................21
The future: lithium ion chemistries..........................................................................................21
Lithium ion batteries have several advantages…....................................................................22
…as well as challenges...........................................................................................................22
There are four main types of automotive lithium ion batteries................................................23
Analysis of cost.......................................................................................................................25
Analysis of market...................................................................................................................27
Lithium ion battery competitors .................................................... 32
We see 10 developers at the leading edge.............................................................................32
Johnson Controls, A123, and Ener1........................................................................................33
LG Chem, Sanyo, Samsung, Hitachi, Valence, GS Yuasa, Polypore, Asahi Kasai, Enova,
Quantum................................................................................................................................34
Ultracapacitors: a complementary market ..............................................................................36
Commodities: lithium...................................................................... 38
Overview: industrial metals.....................................................................................................38
Lithium supply and demand....................................................................................................41
Leading producers ..................................................................................................................43
Appendix A....................................................................................... 45
Overview of CO2 based vehicle taxes in the EU .....................................................................45
Appendix B....................................................................................... 48
European city congestion tax overview ..................................................................................48
Executive summary
Outlook: dramatic change fosters the rise of electric vehicles
Rising oil prices, increased societal concern about climate change, and a barrage of
regulations focusing on fuel/energy efficiency/CO2 emissions have the potential to cause
profound changes in the global auto industry over the next five to 10 years. Industry market
share, mix, competitive advantages, vehicle content levels, used vehicle values, the
frequency of consumer purchases, and powertrain technology – all could change more
dramatically over the next five years than they have in the past 50.
We are already bearing witness to profound changes… Rising gasoline prices have had
several repercussions:
Unprecedented shifts in industry mix: U.S. segment market share for light trucks fell 720
basis points in May 2008.
Dramatic residual value declines for less fuel efficient vehicles: A new Chevy Tahoe large
SUV costs $13,000 more than a Toyota RAV4 small CUV, but a four-year-old used Tahoe
now sells for $3,000 less.
The emergence of new technology: Sales of hybrids in the U.S. rose 39% in 2007 and
are up 17% YTD 2008).
These changes raise many questions about the intermediate-term prospects for the auto/auto
parts companies in our universe. Yet we continue to see opportunities for companies
focused on technologies that enhance energy efficiency – notably BorgWarner.
…and lately, we have become more convinced of further dramatic changes to come.
Automotive engineers are recognizing that it may not be possible to meet the onerous fuel
efficiency targets required of them through upgrades to conventional powertrains and
drivetrains. A growing number of industry executives predict that increased levels of
electrification will be required.
We believe that rising fuel prices and regulatory challenges are likely to increase the
electrification of the automobile – sharply. There’s another major influence here – advances in
battery technology. High energy, cost effective, long lasting, and abuse tolerant batteries will
be the key technical enablers for this shift, and there have been recent breakthroughs in
meeting these requirements.
We find electric vehicles destined for much more growth than is widely perceived. This
includes hybrid electric vehicles, plug-in hybrid electric vehicles, and even fully electric
vehicles.
In the U.S. alone, 13 hybrid electric vehicle models were available in 2007, 17 are
expected by the end of 2008, and at least 75 will be available within by 2011. NHTSA’s
April 2008 report on proposed Corporate Average Fuel Economy Standards projected
that hybrid vehicles could rise to 20% of the U.S. market by 2015, from just 2% of the
market in 2007. Global Insight projects 47% hybridization of the U.S. market by 2020.
In Europe, where fuel economy requirements are on an even steeper trajectory, Roland
Berger and J.D. Power estimated that the market for hybrids/electric vehicles could rise
to 50% by 2015 (mostly micro hybrids), from approximately 2% in 2007.
Batteries – and their inputs, especially lithium – should benefit in particular. Several of
the largest traditional Tier One Auto Parts suppliers (including Continental, Denso, Magna,
and Delphi) are involved in developing control systems that integrate hybrid powertrains. But
we believe that ultimately the biggest beneficiaries may be:
Automotive battery manufacturers
Producers of resources and components consumed in battery manufacturing
Based on discussions with automakers and suppliers, we see almost no doubt that lithium
ion battery chemistries will ultimately dominate this market. We see tremendous growth
potential in the market for large-format lithium ion batteries – to $10-$15 bn in the automotive
market alone by 2015, versus $7 bn for the overall lithium ion battery market today. The
automotive market for lithium ion batteries could reach $30-$40 bn by 2020.
In addition to the impact on automakers, traditional auto parts suppliers, and battery
companies, we see significant opportunities arising for electric utilities and alternative power.
Perhaps the most interesting near-term opportunity resides amongst raw material producers,
given the rapid growth in demand we see for key commodities including lithium. Based on
current plans for lithium production capacity, and our projection of material that will be
consumed in automotive battery production, we believe that lithium production could bump
up against supply constraints by 2020.
Risks
We are bullish on the long-term prospects for electrification of automobiles and long-term
demand for products such as large format lithium ion batteries. Still, we would caution that
near-term demand (i.e. 2009, 2010, 2011) for lithium batteries from this market will be
relatively low, as automakers and suppliers are still validating products and gearing up for
large scale production (we also believe that nickel metal hydride batteries may still dominate
mild and full hybrid applications even in 2015).
Consequently, expectations for near-term spikes in demand for commodities and battery
production values may turn out to be overly optimistic (growth in lithium supply may exceed
growth in lithium demand near term). In addition, we note that many of the companies
leading the field for automotive lithium ion battery production have limited experience in
producing these products on an automotive scale. Consequently, the ramp up to commercial
production involves risks.
Note on valuation: By its nature, this report is not oriented toward our Buy, Hold, and Sell
recommendations on Deutsche Bank’s standard 12-month time horizon. Our typical valuation
methods include an EV/EBITDA valuation methodology for our companies with extensive
liabilities and P/E valuation methodology for companies that generate considerable free cash
flow and exhibit an ability to consistently grow earnings.
For disclosures pertaining to recommendations or estimates made on a security mentioned
in this report, please see the most recently published company report or visit our global
disclosure look-up page on our website at http://gm.db.com.
Key themes for the global
auto industry
Peak oil is driving change…
In a recent report on peak oil, Deutsche Bank’s Oil Research team laid out the world’s acute
oil problems very succinctly: They estimated that the world is currently consuming 87 million
barrels of oil per day. Trend demand growth is roughly one million barrels per day per year.
They noted that a growing chorus of oil industry executives, including the CEOs of
ConocoPhilips and TOTAL, believe world is converging on peak oil production of up to 100
MM barrels per day.
These production concerns are partly responsible for the 115% rise in oil prices since January
2007. Those price increases are already having a profound impact on the auto industry, which is
experiencing unprecedented shifts in segment mix away from less fuel efficient vehicles.
In April 2006, when asked about the implications of $100/bbl oil, GM Vice Chairman Bob Lutz
was quoted saying “that would basically bring the industry to a halt.” Yet prognostications such
as this have ended. Now automakers, auto parts suppliers, and investors are developing
strategies to deal with oil’s recent rise, and the very real potential for oil to move even higher.
The EIA and IEA both expect oil demand to exceed 100 mb/d demand by mid-next decade. If
the views of the oil “peakists” are proven correct, Deutsche Bank’s oil analysts believe oil
could rise to $150/bbl oil in the intermediate term. Under such a scenario, we believe there
would be significant upside to the $3.99/gallon U.S. average retail price for regular gasoline
($5.95 per gallon in Brazil, the $8.38 in the UK, $8.73 in Norway, and $9.28 in Germany).
…along with a barrage of regulations
Even if oil was not as large a driver as it is today, regulatory initiatives aimed at improving fuel
efficiency/CO2 emissions present a monumental challenge for the global auto industry. This
barrage of regulations, and the momentum behind it, should drive dramatic changes.
The cost of compliance with U.S. CAFÉ standards is increasing… On April 22, 2008, the
U.S. NHTSA released final draft regulations outlining new U.S. Corporate Average Fuel
Economy (CAFE) standards for 2010 through 2015. The rules are part of the Energy
Independence and Security Act of 2007, which requires that U.S. light vehicles will have to
achieve a CAFÉ standard of 35 MPG by 2020, vs. 25 MPG in 2010. More than half of this
(31.6 MPG) improvement is to be achieved by 2015. NHTSA estimated the cost of
compliance with the 2015 standards at $47 bn.
GM estimates that achieving the U.S. CAFÉ standard of 35 MPG by 2020 will cost the
industry $100 billion per year ($5,000 per vehicle). And given the 5-7 year product cycles that
prevail in the industry, automakers have begun to consider the technologies that will be
required to meet these standards, and standards beyond this timeframe. Margo Oge, director
of the EPA’s Office of Transportation and Air Quality, indicated in an April speech that
passenger cars and light trucks may have to average 75 miles per gallon by the 2030’s in
order to meet a widely backed scientific-community proposal to cut greenhouse gas
emissions by 50-80% by 2050 from 2000 levels.
…and the EU wants to make European standards even stiffer. Average fuel economy
levels in Europe are already at the equivalent of 35 MPG (European standards limit CO2 per
kilometer, which is essentially the same as mandating CAFÉ, since each gallon of
gasoline/diesel burned will always produce 19.4/22.2 pounds of CO2). But the EU is pushing
for 130 grams/km by 2012 (vs. 160 g/km today), which is roughly equivalent to 45 MPG.
Based on an analysis by Roland Berger published in July 2007, the cost of compliance with
these regulations could be in the $23 bn range ($2.2 bn for Ford and Volvo, $1.9 bn for
General Motors. And many European automakers expect significant tightening beyond this
level (to 100 g/km, or 60 MPG) as they look out to 2020.
Various jurisdictions are using carrot and/or stick. Many countries, cities and states are
placing taxes, fees, and other restrictions on less fuel efficient/higher CO2 emitting vehicles,
and providing benefits to stimulate purchase of more efficient vehicles.
Several cities in Europe have begun assessing charges for less fuel efficient vehicles to
enter the city; hybrids and electric vehicles are free.
France has begun implementing a “feebate” system, charging fees ranging from Euro
750 to Euro 1,600 to purchasers of large vehicles, and passing along rebates (Euro 200
to Euro 700 in most cases) for smaller vehicles and hybrids.
Denmark and Israel are promoting the purchase of electric vehicles by offering these
vehicles tax free, whereas purchasers of internal combustion vehicles pay taxes ranging
from 60-150%.
California has enacted a Zero Emissions Vehicle program mandating automakers to
achieve ZEV credits for a small percentage of total vehicle sales, and the state is looking
into other ways to regulate CO2 emissions.
Several cities in China, including Shanghai and Beijing, have already placed significant
restrictions on gasoline powered 2-wheelers, which has resulted in the world’s largest
(30 MM units) market for plug-in electric motorcycles. And these cities are taking similar
steps against less fuel efficient cars, by applying license plate fees ranging from 2% to
20%, depending on engine size.
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