Several auto manufacturers have had to change their business plans due to stalling consumer growth in the electric vehicles (EV) market of late. But Newton head of mixed assets investment Paul Flood is positive on the sector’s outlook at a time when Newton has boosted its alternative investment capabilities.
In January, Renault announced it was cancelling the listing of its EV and software arm due to market conditions1. This followed announcements in Q4 last year from Ford, General Motors and Tesla that they would be slowing plans to increase EV manufacturing capacity due to a reduction in consumer demand2.
Flood acknowledges the EV segment of the auto industry has been through a cyclical trough. He notes that last year a downturn in the market eased pressure on manufacturers to produce EVs. This was fuelled in the UK by the Conservative government reining back several green policies, while more recently the Labour Party abandoned its £28bn green investment plan.
“There was not as much pressure on the build out of EVs as governments seemed to be backtracking on their climate commitments,” he explains. “So, we’ve seen excess supply because companies in this space are building manufacturing plants on a 10-year horizon.”
EV tailwinds
But Flood thinks the long-term secular tailwind behind EVs and, by extension, battery development remains in place. One of the reasons he is optimistic is because of forthcoming measures which will force auto manufacturers in the UK and continental Europe to meet certain EV production targets.
In the UK, the zero-emission vehicle (ZEV) mandate requires 80% of new cars and 70% of new vans sold to be zero emission by 2030. This will increase to 100% by 2035. At least 22% of each manufacturer’s new cars sold in 2024 must be zero-emission or they will potentially face fines of £15,000 per internal combustion engine (ICE) sold3. This comes despite prime minister Rishi Sunak’s decision to delay a ban on the sale of ICE vehicles from 2030 to 20354.
In addition, notes Flood, in the European Union, CO2 rules are due to tighten again from January 2025. This mandates a 15% reduction versus the 2021 baseline5. Tougher CO2 rules mean that European auto makers will need to increase their battery electric vehicle (BEV) volume in 2025 by about 40% on average versus their 2023 levels. Flood thinks not being compliant is hardly an option for European auto makers who could face more than €10bn fines collectively if CO2 emissions remain flat in 2025 versus 2023.
Flood says it is likely as this 2025 deadline approaches, subsidies will come to the fore that could help to jump start the EV market, either through governments or manufacturers providing discounts. He adds governments are unlikely to backtrack on the measures because the proceeds from these fines would go directly into their coffers.
Manufactures across the whole supply chain, including the auto makers have already spent building out the manufacturing lines, notes Flood. In effect, he adds, this means they are poised to both comply with and benefit from regulatory pressures.
“So, we think we are going to see more EVs because they [manufacturers] have pivoted from traditional ICE vehicles to EVs and have spent the money, so it is going to come.”
Flood says there remains a challenge around enticing consumers to buy EVs due to the price point, but he thinks it pays to be in different areas of the supply chain.
“We’re not ready to pull the carpet from under this trade yet,” he adds. “There are aspects that are constantly changing so we may we change tack and move positions around different companies in the supply chains.”
Auto expert boost
Flood’s comments come as Newton welcomes back Mathieu Poitrat Rachmaninoff, a former automobile engineer, to its mixed assets and charities team. Rachmaninoff brings specific expertise in the EV supply chain, but he will also boost Newton’s capabilities in all areas of alternative assets.
Rachmaninoff worked at Newton between 2014 and 2021 as a global industrials analyst, including automotive and transport. Before joining the investment management industry, Rachmaninoff worked at Renault as an electronics engineer.
At Newton, Rachmaninoff will build bottom-up alternative investment models, speaking with company management teams and assessing the overall investment cases for alternative assets. He will also monitor existing alternatives holdings across Newton’s mixed asset portfolios.
Before rejoining Newton, Rachmaninoff worked at Brook Asset Management as a fund manager on a global emerging markets strategy.
Flood says: “Mathieu worked really well with us previously and has a huge amount of knowledge in lots of areas of alternative investment, particularly the electric vehicles supply chain.
“He is a very experienced investor, is independently minded and says what he thinks. He looks at what individual assets are worth and the fundamentals of the asset class.”
