Electric vehicles drive disruptive changes in transportation

• The future of mobility is being spurred on by a shift to electric vehicles, which themselves rely on battery technology advances
• In the near-term, the focus is on electric cars but flying taxis could also become commonplace within our lifetimes
• Investment opportunities also exist among those rolling out charging stations and offering ways to recycle lithium-ion batteries

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Radical change in transport technologies can happen quickly.

In the images below, the photo on the left shows New York in 1900, when the horse and cart was the dominant mode of road-based travel.

A decade later – as can be seen in the central photo – the combustion-engine motor car ruled the road following the launch of Ford’s Model T.

Now another gear change is happening thanks to the need to cut carbon emissions, increase convenience and improve safety and affordability, said investment manager Thaiha Nguyen at a recent Baillie Gifford event themed around disruptive innovations.

By 2030, President Biden wants half of all car sales in the US to be zero-emission, the bulk of which are likely to be electric vehicles. Half a world away in China’s Shenzhen, tens of thousands of buses and taxis are already EVs. Stand by a busy road and all you may hear is a hum.

Tesla, NIO and Li Auto are three electric vehicle makers that Baillie Gifford has backed, which are already experiencing strong sales growth. But this is just the start.

“It’s highly likely that over the next few decades we’ll see even more rapid disruptions in transportation than we did over the last century,” said Nguyen.

Flying taxis, self-driving vehicles and hyperloop pods could all be on the horizon, she added. And further into the future, Baillie Gifford holding SpaceX hopes to pioneer interplanetary travel.

Second-order effects

The consequences of all this should be far-reaching.

Pre-pandemic, the average commute to work in the US was already just under one hour a day.

Free up that time, Nguyen said, and you create fresh earnings opportunities.

For example, entertainment apps such as Facebook and TikTok could show users more ads. Or real estate companies, like Zillow, could benefit from more people moving home. The US home sale and rental platform has said 30 per cent more of its own employees moved property after it offered flexible working arrangements than the previous pre-pandemic year.

This indicates that travel does indeed affect where people decide to live.

“What if we can live in the suburbs and use autonomous driving or flying cars to travel to work?” added Nguyen.

“That could reduce the pressures we have in our cities and make housing more affordable for everyone.”

Flying taxis

The idea of electric vertical take-off and landing (eVTOL) aircraft becoming a form of mass transit might sound like the stuff of science fiction.

But Nguyen said they may not be as far off as you might think.

Many of the foundational technologies already exist and will become better and cheaper over time, including:

• high-energy density batteries
• lightweight materials
• electric-powered propulsion systems
• machine learning techniques to help develop and power software to autonomously pilot the aircraft and provide air traffic control

Building the infrastructure required for eVTOLs is also much less costly than constructing a sealed-tube hyperloop for electric pods or other suggestions for next-gen land-based transport, Nguyen noted.

Baillie Gifford has invested in two companies developing eVTOLs: US-based Joby Aviation and the German firm Lilium Air Mobility.

They suit Baillie Gifford’s strategy of making long-term bets on early-stage companies offering asymmetric returns - those where the upside potential for growth is vast and the maximum loss is capped at the cost of the stake.

Nguyen said the quality of the two firms’ engineering talent and the time they had spent developing close relationships with regulators also gave the two a competitive edge over rivals.

“We look at the management team, we look at the founders – they must be committed, have vision and be motivated by more than monetary value to do good things for society,” she added.

“In Joby and Lilium’s case they want to solve the challenge of urbanisation happening so quickly. What do you do when you run out of space on the ground? Obviously you go up to the sky.”

Shared mobility

A shorter-term solution to freeing up space in our cities is to make people less dependent on their own cars.

Baillie Gifford owns a stake in the ride-hailing service Lyft. And via equity in Alphabet is involved in the robo-car project Waymo, which is testing a driverless pick-up service in Phoenix, Arizona.

WATCH: Baillie Gifford webinar on the future of mobility

But while these businesses may ease pressure on city centres by reducing the need for so many parking spaces, there's been research suggesting they increase traffic at busy times by providing an inexpensive alternative to public transport. Lyft is trying to tackle this by relaunching its shared ride option, which now provides the option to book a pick-up 30 minutes in advance. It says this should give it a better chance of matching the user to other passengers going in the same direction, and then offering them all a reduced fee.

In addition, Nguyen said she had recently met with Via Transportation, a New York-based unlisted company that provides technology to others to run their own on-demand shared transit systems. This paves the way for schools, businesses and local authorities to run fleets of mini-vans and shuttle buses that can be summoned via an app and then ferry groups of people travelling in the same direction.

Nguyen also highlighted the role electric bikes and scooters can play, which Baillie Gifford has exposure to via SoftBank’s investment in Tier, as well as Hyundai’s activities.

“Apart from being environmentally friendly, they are a great solution to the first- and last-mile challenges, especially for more marginalised communities in society,” she said.

Supply chains and charging

The switchover from petrol and diesel to electric power presents long-term investors further opportunities both in terms of the huge number of batteries that will be required as well as the infrastructure to charge them.

“We probably have capacity for about three million EVs a year,” said Nguyen.

“But in the future we’re going to need hundreds of millions of EVs.”

Tesla already produces some of its own battery packs at its Gigafactory in Nevada using Panasonic’s cells, but also relies on CATL for supplies. The Chinese firm is a global leader in the production of lithium-ion battery cells and packs, counting Daimler, Volkswagen, Geely, NIO and BMW among other clients.

One issue with this technology, however, is it involves cobalt and nickel. Cobalt raises ethical issues because of the use of child labour in the Democratic Republic of Congo, where much of it is mined. And environmental concerns have been raised about nickel production’s contribution to pollution and global warming.

CATL has developed lithium iron phosphate batteries as an alternative. These exclude cobalt and nickel but provide a lower energy density, meaning cars that currently use them travel less far between charges.

It is also experimenting with sodium-ion technology, which has the added benefit of removing lithium from the equation. This would cut costs, but its energy density is even lower – at least at present.

It will take time and more research for these to reach their potential, but the rewards could be great for patient investors.

Other related holdings include:

• Northvolt – the unlisted Swedish company building Europe’s largest battery facility
• LG Chem – a supplier of battery cells to Tesla, Volkswagen and General Motors
• Redwood Materials – a recycler created by Tesla’s co-founder JB Straubel, which plans to produce anode and cathode components for batteries from reclaimed materials
• Umicore – a Belgian materials technology company, which recycles electric car and e-bike batteries among other products

Charging networks

Keeping batteries charged is the other side of the equation.

And it’s unlikely that petrol stations will simply be replaced by car-charging ones.

Chargepoint has instead created the US’s biggest charging network by selling its equipment to existing companies and homes. It is now expanding quickly into Europe, where demand for EVs is even greater.

“It’s working with employers to install the charging ports at the office for staff, and is also partnering with shopping malls, hotels, restaurants and bars,” explained Nguyen, “so cars can recharge while their owners relax.”

NIO, by contrast, thinks EV drivers will prefer to exchange their car batteries for pre-charged packs instead of waiting for a top-up. It has designed its EVs with this in mind and aims to have 1,400 ‘battery swap stations’ up and running by 2025.

Climate change, battery advances and a convergence of other technologies are all set to transform our methods of travel more quickly than some people appreciate.

By being exposed to so many pioneering firms as well as drawing on other sources of expertise, Baillie Gifford is well-placed to invest its clients’ funds in those already on the road to success.

WATCH: Baillie Gifford animation on disruptive innovation

About the Investment Manager
Thaiha Nguyen
Thaiha is an Investment Manager who joined Baillie Gifford in 2014. She is an analyst in the US Equities Team and has been involved in running the North American portion of the Managed Fund since 2020. She is also a Portfolio Adviser to the Positive Change Strategy. She is a CFA Charterholder and graduated BA (Hons) in Economics from the University of Cambridge in 2014.

Words by Leo Kelion
Assistant editor, Intellectual Capital

You can read our other articles on disruptive innovation via the links below.

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