Key takeaways
- The U.S. Inflation Reduction Act (IRA) and Infrastructure Investment and Jobs Act (IIJA) allocated billions to the development of the electric vehicle (EV) industry, spurring greater demand by reducing costs for consumers, while supporting more production capacity.
- Autonomous driving functions are becoming commonplace in new car models and real- world trials are bringing us closer to fully autonomous vehicles (AVs).
- We believe investors can benefit from the growth of EVs and AVs using ETFs such as iShares Global Electric and Autonomous Vehicles Index ETF (XDRV), which invests in segments that capture the EV/AV value chain.
The electricity-powered and autonomous future of transportation is arriving. EVs are fast taking market share after more than a century of internal combustion engine dominance. And with recent advances in autonomous driving technologies, drivers too might become relics of the past.
Exploring developments in the electric vehicle market
EVs might soon overtake their long-entrenched gas-powered counterparts as consumer demand, innovation, and support from automakers and governments accelerate adoption.
EV demand is surging as sales accelerate
EVs are already the fastest growing automotive segment — the annual number of EV sales was 7.8 million in 2022, compared with 6.8 million vehicles in 2021.1 (Exhibit 1)
EVs are significantly cheaper to purchase than they were a decade ago. The upfront EV purchase costs are moving closer towards price parity with internal combustion engine (ICE) counterparts. Lower lifetime ownership costs — due to cheaper fuel and maintenance - and environmental sustainability are attracting swaths of consumers who are willing to pay an upfront premium.2
More expansive charging networks and improved battery ranges are also playing a role, making EVs a realistic option for a wider range of driver. And those drivers are not just in the market for commuters or family haulers. The Ford F-150 is the best-selling vehicle in America and is an iconic symbol of a heartland which many believed would be resistant to going electric. The release in 2022 of the electric version of the pickup truck — and massive associated waiting lists — certainly marks a milestone.
Exhibit 1: Electric vehicles are rapidly capturing market share from ICE vehicles
Annual Global EV sales (# in millions, LHS) & EV market share(%)
Source: Businessinsider.com, EV-Volumes.com, Jan 2023.
Declining EV battery costs are key to adoption
There would be no EVs on the road without lithium-ion batteries. They are the power storage solution that makes electric cars – and e -bikes, which are seeing similar strong growth – possible. And, as the most expensive component at the heart of EVs, their cost largely dictates the economics of an EV purchase.3
In the past, high battery costs made EVs expensive. This dynamic is changing. Advances in battery technology and rapidly scaling production are driving costs down – today’s lithium-ion batteries are 89% cheaper than they were in 2010.4 Yet, battery packs still represented 30% of EV manufacturing costs, compared to 18% for engines in traditional vehicles in 2020.5 While maintenance and fuel savings make up for this over time, upfront costs must decline further if EVs are to claim market share dominance.6 That journey is already underway, as are other innovations that could also contribute to the decrease in overall EV costs.
Several developments could bring EVs price lower. Alternative battery chemistries like lithium iron phosphate (LFP) are driving costs lower, while reducing supply chain pressures. LFP batteries use cheaper metals like iron, rather than the more expensive nickel and cobalt. LFP batteries are already seeing success, accounting for 57% of battery production in China.7 Sodium-ion batteries, too, show promise, though they are still in development. These batteries use sodium, which is abundant and affordable, unlike lithium, which is becoming increasingly expensive and faces shortages.8
Exhibit 2: Electric vehicle batteries are significantly cheaper than in the past
Lithium-ion battery pack costs (US$/kWh)
Source: BloombergNEF, December 2022. Lithium-ion battery pack costs (US$/kWh): weighted average survey values in real 2022 dollars.
These new battery technologies, along with continued economies of scale and next-gen battery recycling, could make EVs even more price competitive with ICE vehicles. This could happen as soon as 2025, and potentially sooner with subsidies.9
EV enablers beyond batteries
Automakers and governments are both playing outsized roles in facilitating the transition to electric vehicles. Global policymakers are allocating public funds and legislative muscle in support of EVs. In 2020, China set an ambitious target for EVs to achieve a 20% market share by 2025.10 Just one year later, country-wide EV sales nearly tripled.11 In Europe, the EU proposed a 100% reduction of vehicle emissions by 2035, which would effectively ban sales of ICE vehicles, as well as a requirement to install public charging stations along all major roads.12
In the U.S., the Inflation Reduction Act (IRA), which became law in August 2022, includes approximately US$370B in energy-related spending and the EV value chain is a significant component. The IRA includes tax credits for qualifying consumers to purchase new and used clean energy vehicles. It also includes billions to build new clean vehicle manufacturing facilities, manufacture clean heavy-duty vehicles, convert postal service vehicles to EVs, and retool existing auto manufacturing facilities to manufacture clean vehicles. This emphasis on EVs as a critical piece of the clean energy transition is likely to continue.
Outside of the public sector, traditional automakers are committing massive sums to develop electric vehicles in the face of increasing competition from EV incumbents and new policy pressures. Between now and 2030, global car companies are on pace to spend over US$515 billion rolling out new EVs, presenting potential for economies of scale and market capture driven by product diversity.13 Many of these companies also plan on investing billions more in charging infrastructure. Charging networks are the lifeblood of EVs and increasing charging station density will help remove the range limitations, decreasing battery costs in the process.
Exhibit 3: Electric vehicle (EV) supply chain
Lithium-ion battery pack costs (US$/kWh)
For Illustrative Purposes only. Source: BlackRock as of December 2022.
Autonomous vehicles (AVs) are hitting the road
Continued trials, innovation, and greater regulatory clarity are bringing us closer to autonomous transportation, with several milestones ahead that represent far greater levels of automation. Moreover, the IRA’s subsidies for EV production have the potential to free up additional research and development dollars for automakers to spend on advancing self-driving.
Progress on autonomous vehicle development
Consumers today can choose from several vehicle transit options across varying degrees of automation. Of these options, robotaxis are the closest to being fully automated. Several driverless robotaxi services are currently in operation, offering public rides to passengers in multiple cities. Driverless private vehicles are earlier stage, though progress is encouraging. Many automakers have successfully rolled out partially automated steering, braking, and acceleration. At the end of 2021, 92% of new car models featured some degree of automated acceleration and 50% could automate certain steering functions.14 The next step is taking human drivers fully out of the equation.
Exhibit 4: Each level of automated driving is a milestone on the path to fully autonomous vehicles
| Level | Definition/Description | Fallback | Driving conditions |
|---|---|---|---|
| L0 | No automation | Human driver | - |
| L1 | Driver assistance
Automates either steering or acceleration, with human driver monitoring environment and controlling non automated functions |
Human driver | Some conditions |
| L2 | Partial automation
Automates both steering and acceleration, with human driver monitoring environment and performing dynamic driving tasks |
Human driver | Some conditions |
| L3 | Conditional automation
Automates all functions, but will sometimes request intervention from human driver |
Human driver | Some conditions |
| L4 | High automation
Automates all functions in some conditions, without requiring human intervention |
Driving system | Some conditions |
| L5 | Full automation
Automates all functions in all environments, without requiring human intervention |
Driving system | All conditions |
Source: Ahmed, H.U.; Huang, Y.; Lu, P.; Bridgelall, R. Technology Developments and Impacts of Connected and Autonomous Vehicles: An Overview. Smart Cities 2022, 5, 382-404. Caption: Table showing each level of vehicle automation prior to and including full automation. This shows the milestones that need to be reached before fully autonomous vehicles hit the road.
Where do AVs go from here?
A recent survey of auto executives pointed to fully autonomous vehicles reaching streets as early as 2025.15 Getting there will require continued technological advancement and supportive regulatory frameworks. On the technology side, it is less a matter of core technologies existing, than of enhancing and harmonizing them. Cameras, sensors, artificial intelligence (A.I.), edge computing, an network connectivity are already present in today’s partially autonomous vehicles and steady improvements to them are moving the needle. Most importantly, continued trials are serving as teachers for A.I. and establishing goalposts for what needs to improve. These must accelerate for driverless cars to be street ready.
On the policy side, automakers need regulatory clarity so that they can develop technology to conform with future standards. Germany’s approval of conditionally automated vehicles is extremely encouraging, marking the first time that drivers can ride without paying full attention to the road. Encouragingly, frameworks for private vehicles that are fully automated in certain conditions are underway. In January 2022, Japan announced that it is in the process of creating a legal framework for such vehicles.16 We expect AV development to ramp up as more countries follow.
Access EV and AV exposure with RBC iShares
Continued innovation and support from the public and private sectors are bringing us closer to fully electric and automated transportation. Policies like the IRA in the United States and others around the world, are likely to drive further investment and EV sales. This paradigm shift will likely drive immense growth for EVs and AVs that investors can capitalize on by investing in ETFs that holistically capture the EV and AV value chains.
Our iShares Global Electric and Autonomous Vehicles Index ETF XDRV leverages Morningstar’s Equity Research team to identify companies that are positioned to benefit from increased global adoption of electric and autonomous vehicles. The ETF’s holdings range from producers of key battery inputs, to auto computing software and related goods and services for vehicle manufacturers, across developed and emerging markets.
Morningstar Global Electric Autonomous Vehicles Select Index
Management Fee: 0.39%17