Morgan Stanley
  • Thoughts on the Market Podcast
  • Apr 22, 2021

Electric Vehicles, Pt 1 – Follow the Fleet

With Andrew Sheets and Adam Jonas


Andrew Sheets: Welcome to Thoughts on the Market, I'm Andrew Sheets, chief cross asset strategist for Morgan Stanley Research.

Adam Jonas: And I'm Adam Jonas, head of Morgan Stanley's Space and Global and Shared Mobility Teams.

Andrew Sheets: And on this special Earth Day edition of the podcast, we'll be talking about the intersection of electric vehicles, climate change and public policy. It's Thursday, April 22nd, at 3p.m. in London.

Adam Jonas: And 10 a.m. in New York.

Andrew Sheets: So, Adam, for Earth Day, it seems appropriate to talk about the outlook for electric vehicles, or so-called Auto 2.0, given the outsized role that vehicles play in carbon emissions. Consumers and auto manufacturers have certainly made some strides towards electric and away from internal combustion cars. But we still have a long, long road ahead for EV adoption. Maybe you could just catch us up on how you see the pace of electric vehicle adoption in the years ahead.

Adam Jonas: So the starting point of EV adoption is pretty low in the U.S., we're at around 2% of auto sales are fully electric. We don't include hybrids in that definition. Anything with a tailpipe we consider internal combustion. And out of all vehicles on the road in operation, it's less than a half a percent. So really, really small number as the park penetration will lag. By mid decade, we get to around 7 or 8%. By end of decade, we are targeting about 25% penetration in the U.S. and around 31% globally. We do have modestly higher penetrations in markets like the European Union and in China, where at least at this point they have more aggressive national policies to incentivize EV adoption.

Andrew Sheets: So, Adam, in the US, one of the hurdles for adoption for some consumers is the upfront cost of electric vehicles. And a large part of this cost is the battery. Where is the US in terms of a domestically sourced battery market? And could you give me some sense of how much the overall cost of an electric vehicle currently comes from the battery economics?

Adam Jonas: So batteries up to this point have been anywhere between, you know, 25% and maybe 30% plus of the cost of a vehicle. That's at an industry price of maybe 150, maybe $200 per kilowatt hour at a pack level. The battery scientists we're talking to and the chief technology officers of the electric vehicle companies, you know, they're targeting a path towards $100 a kilowatt hour at pack level within a couple of years and then mid to latter part of the decade, not rolling out numbers substantially below $50 per kilowatt hour.

Adam Jonas: But the cost only tells part of the story, Andrew. The costs are important, but then there's fast charging batteries that can be charged to their full capacity in under 15 minutes, maybe even less. And then having a more ubiquitous network of charging infrastructure so you can get around the non-cost kind of use case impediments to widespread EV adoption. And so we're looking very carefully at not just the chemistry in the battery, but also the policies for the stations and the use cases. Again, I'll highlight, a lot of our clients think that EV adoption is going to be retail folks like you and me. That's part of it. We think the real inflection is going to be businesses that deliver things to your front door that are having a massive impact on a carbon footprint. Those are the folks that are going to have the real fast adoption over the next five years.

Adam Jonas: To your point about domestic source, it's a big blind spot in our opinion. The last thing our policymakers and our folks at the DOE want to do is to get off liquid fuels and build this renewable transport case, but then become really dependent entirely or very substantially dependent on foreign supply chains and not controlling our own destiny. Particularly if we had the ability to do it in the U.S. and source it here to drive innovation, create employment. You know, not turn our backs on our trading partners, but to have some skin in the game and control our own destiny. And then that's something we think a lot of policies are going to be shaping, not just to help adoption, but where those batteries come from. It's going to be a big factor.

Andrew Sheets: So, you know, related to that point you mentioned on greater domestic production, you know, what do those components look like? What are some of the key materials that either are used today or might be more important in the future as you think about this, you know, major change in infrastructure, as you mentioned, that needs to be rolled out to make electric vehicles more ubiquitous?

Adam Jonas: Yeah, one of the dirty little secrets about batteries is there- it's kind of a dirty industry, frankly, in many ways. In terms of CO2, in terms of water usage, questionable labor practices, strip mining. Right? So the last thing we want to do is in the in the name of trying to solve for climate change and strike at renewability to create new ESG problems faster than we're solving them. But certainly we need to solve for renewable energy at the source of making the batteries, renewably sourced materials that don't rely on questionable labor practices, a supply chain that doesn't have materials flying around the world on barges, getting caught everywhere, but, you know, taking the kilometers and the CO2 out of the supply chain. Right?

Adam Jonas: All of these things really matter. And I think another one is solving for recycling. The best source of material you could use, and frankly the lowest cost, would be one that could be taken out of a recycling source and then given and then brought back into the refining operation. You're going to get far greater yield, less waste, and for a variety of reasons, a major source of renewably making batteries. So we're hopeful, although time will tell Andrew that as these policies roll out to incentivize EV adoption, that it's done with the arc of a 10 or 20 year renewable and recyclable kind of full cycle supply chain along the way. And we hope that programs like this and our work with our colleagues at Morgan Stanley can help raise some awareness around that.

Andrew Sheets: So, Adam, you also talked about the infrastructure, and I do think that's so important because, I know this is a priority for the Biden administration as it thinks about infrastructure in the future, but it's also a potentially large opportunity or issue for the private sector. And, you know, maybe if you could share a little bit about what you're hearing about progress and opportunities from both the public and the private sphere.

Adam Jonas: You know, EV infrastructure is the elephant in the room. What you didn't mention would be even things like grid stability. So even if we had the charging poles out there, if everybody in your cul de sac plugs in at the same time on a hot afternoon in California, you shut down part of the grid. Right? And you get you create all sorts of problems there. So we're very fortunate to have folks like Steven Byrd, who is our power and utility analyst in the U.S. who helped helping us tap into his network and some of our policy contacts as well in the scientific community to understand this this multi-dimensional issue.

Adam Jonas: So, yeah, 90% of charging for EVs tends to be done at home. OK, that's great, but again, you could still have problems on a node of the grid. So we're talking stepdown transformers, smart grid software, you know, all sorts of different equipment between the car and the power source. The other issue, again, is we don't want to necessarily have a draw on even more natural gas and coal and nonrenewable power generation, too. So it's much more than just converting gas stations to charging stations. I won't name the SPACS and the startups, but there's a host-- maybe a half a dozen and ultimately more-- EV infrastructure startups, a whole genre that's getting access to capital and put the stuff in the ground. And I kind of look at them as more real estate operators and infrastructure policy lubricators, so to speak. Their skill is getting an MTA, a local utility commission and a lot of investment dollars and the relationships with the electric utilities all working together and then working with the users of those of those vehicles or the ultimate consumer, whether it's a Morgan Stanley employee parking lot, a multistory dwelling unit or a fleet of delivery trucks. Right.

Adam Jonas: And then on that last point, though, and this is very important, we think that EV infrastructure, the solution will be following the fleets. So you might see this is a recurring theme with me. But I'll go back to the late 19th century when Thomas Edison and George Westinghouse were rolling out their electric utility grids. You didn't just suddenly start wiring houses in the middle of Manhattan or, you know, Shaker Heights, Ohio. It was a B2B consumer. It was a smelting operation in Buffalo. It was a streetcar operator in Scranton, Pennsylvania. that built up enough infrastructure and rolled out the grid to a point where, oh, now a new suburb in Pittsburgh could be electrified, and so we think, yeah, you're always going to have your wealthy people buying those electric vehicles. But frankly, most of those have one or have two or three cars. So they can kind of cherry pick which trips they do and get around that infrastructure problem. But the real solution is going to be the cities and the policymakers working with those big fleets, get that stuff in the ground. And then over time, you end up solving these inevitable problems with the grid. And you allow that time to address important issues like grid stability and upstream generation. And then when you're into the 2030s, you get another part of the S curve. I think there's a there's a nuance there that we think investors should appreciate.

Andrew Sheets: Thanks for listening. We'll back in your feed soon with part two of my conversation with Adam Jonas.

Andrew Sheets: As a reminder, if you enjoy thoughts on the market, please take a moment to rate and review us on the Apple Podcasts app. It helps more people find the show. 

Price, charging infrastructure and dirty battery production are limiting the impact of EVs, but look to fleet operations to lead the way to broader adoption.

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