The rapid electrification of the car market illustrates global opportunities for the region’s technological leaders.
- The Asian region boasts many companies that command niches in fast-growing areas of the new global economy, including environmental solutions like electric vehicles (EVs)
- The emergence of an Asian EV ecosystem owes much to leadership in associated technologies, like batteries, and active government intervention – particularly in China – to create EV markets
- As in other industries that are key to the transition to a sustainable global economy, we believe the most compelling opportunities within the EV sector lie in specialist technologies
Technological innovation has helped propel Asian economic growth since the 1950s, when Japanese companies were pioneering technologies including video tape recorders and high-speed trains. Today, the region accounts for more than two-fifths of the world’s research and development, and dominates sectors that underpin the modern global economy, including advanced semiconductors and industrial automation.1
Innovative Asian companies have also captured strong positions in key environmental technologies. A look at the global electric vehicle (EV) market illustrates how, with supportive public policy and pre-eminence in related sectors like batteries, they have developed commanding niches within technologies that are poised to accelerate the transition to a more sustainable global economy.
Policy tailwinds behind environmental solutions
We believe a growing focus on technological leadership and climate action among the region’s governments combine to support Asian companies whose products can address environmental challenges, not least in the EV space.
Heightened geopolitical tensions have driven a push for more technological independence across major Asian economies. This has catalysed support for indigenous innovation. Semiconductors, upon which many advanced technologies heavily depend, have been a focal point of trade squabbles and state funding. South Korea, which dominates global production of memory chips, has for instance introduced tax incentives and subsidies to help its industry compete in the higher-value non-memory chip space.
National high-tech ambitions extend far beyond semiconductors, including to other technologies that hold the key to environmental solutions. The Chinese government is backing a range of sectors deemed strategically important, including renewable energy equipment and EVs. Five of the largest 11 recipients of state subsidies in 2021, which totalled roughly US$31bn, were EV manufacturers or battery makers.2
National climate targets and local air quality concerns meanwhile drive broad policy support for EVs and other environmental solutions. China has pledged that its CO2 emissions will peak before 2030. India – home to seven of the world’s ten most polluting cities in 2022 – aims to reduce its emissions intensity to 45% of 2005 levels by 2030.3
The decarbonisation of personal road transport – which accounts for roughly 11% of global man-made CO2 emissions – is key to achieving both climate targets and cleaner air.4 Under the IEA’s roadmap to net zero by 2050, it estimates that 60% of global new car sales should be electric by 2030.5
Driving innovation in electric vehicles
The emergence of an Asian EV ecosystem has been a product of leadership in associated technologies, government policy and corporate innovation.
First, pre-eminence in critical EV components has been an advantage. Lithium-ion batteries, which are widely used in consumer electronics, can contribute up to 40% of the cost of making an EV.6 Asia accounted for 90% of global lithium-ion battery manufacturing in 2021, led by Chinese companies including CATL and BYD (which is also a large EV maker).7 Leadership in semiconductors also helps: the latest EVs each contain a few thousand chips.
Second, active government intervention in China over the past two decades has fostered the creation of the world’s largest EV market. As well as subsidies and tax breaks for battery and EV companies, policies like license plate rationing have encouraged people to buy EVs. Roughly half of the 6.6 million EVs sold worldwide in 2021 hit the road in China.8 This is not only a function of market size: as illustrated below, EVs’ share of new cars in China (16%) is more than double that of any other major Asian economy and is comparable with France and the UK (19%). Looking ahead, bans on internal combustion engines by 2035 stand to accelerate EV adoption this decade in China, as well in as other key markets including South Korea and Japan. More than half of Chinese new car sales are forecast to be electric by the end of the decade.
Third, the fast-growing EV ecosystem has fostered innovation by the likes of Shenzhen Inovance, an automation specialist that has applied its technology to enhance the energy efficiency of EV drivetrains. The company is now one of the largest third-party providers of motors and motor control systems to China’s EV makers.
Innovation in the EV space is not limited to China or the advanced car-making economies of South Korea and Japan. A new generation of mobility-focused software companies is emerging in India where local IT talent and expertise has been cultivated, at least partly, by its world-beating technology outsourcing industry.
Among them is KPIT Technologies, which provides technologies that go into the world’s largest carmakers’ vehicles. As well as supplying a range of components for EV powertrains, KPIT specialises in advanced driver-assistance system software that can support varying degrees of autonomous driving.
Our focus on innovative niches
As in other industries that are key to the transition to a sustainable global economy, we believe that the most compelling opportunities within the EV sector lie in specialist technologies. These include those that make vehicles more efficient and that can enable trends within the electrification of personal mobility, like autonomous driving.
The Asian region boasts a large and growing number of companies that command niches in fast-growing areas of the new economy, and whose focus on technological innovation and leadership provides high barriers to entry to competitors and can help protect profit margins.
Although China’s gradual decoupling from the global economy poses risks for companies and their investors, concerns may be overdone. The critical mass of the domestic market will continue to afford growth opportunities for Chinese technology leaders. For companies elsewhere in the region, particularly in the ASEAN countries of Malaysia, Vietnam and Indonesia, we believe the possible loss of access to the Chinese market could be offset by the relocation of Western supply chains and the substitution of China-made goods.
With policy support for tackling air pollution and mitigating climate change across major Asian economies, we believe long-term opportunities will continue to be fostered for innovative companies in the region whose products and services help solve ever more pressing environmental challenges.
References to specific securities are for illustrative purposes only and should not be considered as a recommendation to buy or sell.
1 National Science Board, 2020
2 Nikkei Asia, 22 July 2022: Made in China 2025 plan thrives with subsidies for tech and EV makers
3 AQI, 2023
4 Our World in Data, 2020: Global CO2 emissions from transport
5 IEA, 2022: An updated roadmap to Net Zero Emissions by 2050
6 König, A. et al., 2021: An Overview of Parameter and Cost for Battery Electric Vehicles. World Electric Vehicle Journal
7 Wood Mackenzie, 2022: Global lithium-ion battery capacity to rise five-fold by 2030
8 IEA, 2022: Electric Vehicles
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