Emerging markets are increasing their investments in green energy generation as they aim to reduce pollution, create jobs and develop value-added products for export.
One area in which they are already dominant is in the batteries and other components that go into electric vehicles. For investors, that presents opportunities, says Laurence Bensafi, portfolio manager and deputy head of emerging markets equities at RBC Global Asset Management (UK) Ltd. in London.
“In two years’ time, it won’t make sense to buy an internal combustion car,” she says. “You will have a lot of choice of electric vehicles, but we think you’d be better off looking at the parts makers or the components you need for electric cars.”
In a recent interview with Globe Advisor, Ms. Bensafi, who manages RBC Emerging Markets Dividend Fund, discussed why emerging markets are moving quickly with green technologies and why Tesla Inc. TSLA-Q, the pioneer in electric vehicles, faces challenges as the industry evolves.
Why are emerging markets going green faster than North America?
It’s a fight against pollution. It’s about modernizing the power grid and a desire for a cleaner economy. China and India are net importers of oil, so they’re keen on renewable energy. They want to go from relying on energy imports to becoming exporters of green energy components. They also see it as a way to create jobs and move away from low value-added exports toward more sophisticated ones.
Are they succeeding?
Well, pretty much all solar panels are produced in China. The biggest electric vehicle battery company in the world, Contemporary Amperex Technology Co. Ltd., known as CATL, is also in China. The country dominates other parts of the electric vehicle value chain.
How quickly are these transitions happening?
For green power, it will be much faster than people are expecting because of grid parity, which is the cost to generate solar and wind energy. The price of solar panels has dropped by 90 per cent in the past 10 years and solar power is now as cheap or cheaper than other sources of energy.
So, where it once cost a lot of money to install solar panels and recoup the investment, you don’t really need subsidies anymore. That’s a major turning point. Wind power is not there yet, but it’s going to be a big one. The move to electric cars will also be faster than you think.
What are the implications for investors?
These are huge areas of growth; it’s as simple as that. The penetration of electric cars and renewable energy is tiny.
In China, solar power constitutes about 3.5 per cent of electric generation. China will have almost 30 per cent of installed power capacity in solar by 2030.
In 2020, 5 per cent of cars sold globally were electric. That was up from 3 per cent in 2019. China is currently at 6 per cent.
What does this mean for Tesla?
Tesla was the pioneer, but it’s going to be challenging for the company because everyone is going to be making electric cars. There are going to be 50 or 60 electric vehicle companies. In China, you already have 20, and if you add them all up, they already produce more electric cars than Tesla. So, there’s a lot of competition.
How should investors approach this area?
Auto manufacturers aren’t always the best investments. They’re capital intensive, cyclical and there’s lots of competition.
With the parts makers or the components needed for electric cars, you don’t have to pick the winner. They are going to be winners regardless. They have the knowledge, there are high barriers to entry in their businesses and the components tend to be high value.
What is ADAS and is it an area worth watching?
Advanced Driver Assistance Systems (ADAS) are intelligent systems inside a car that help with safe driving and parking. They use sensors and cameras to detect obstacles and respond accordingly. They provide information about traffic congestion and suggest routes to avoid it.
It’s about cars that drive themselves and includes computers, sensors, and cameras. There are only a few companies in the world that can do that.
How would you summarize the opportunity?
Green infrastructure is a great opportunity for an emerging market country to create jobs, growth, and lower the dependence on oil and gas. It’s a win-win on so many levels.
Investors need to look at the prospects for long-term growth and companies that have technologies with high barriers to entry, strong technology, and strong management. Those are the kinds of companies you should back.
Adam Mayers is a contributing editor to the Internet Wealth Builder investment newsletter.