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A 2019 Chevrolet Bolt plug-in electric vehicle is displayed at the North American International Auto Show in Detroit, on Jan. 15, 2019.Rebecca Cook/Reuters

It was a period of frenzied innovation and some considered the invention nothing more than organized lightning in a box. But the push to find new ways to move the newly urbanized masses inspired rapid advances in electric vehicles.

Ford’s Model T ultimately won out.

And while it’s taken more than a century, some of the traditional auto makers appear to be betting like never before that the electric future is arriving sooner than many think. Consider, for example, that Volkswagen AG boosted its production plans for the electric vehicle (EV) last month, saying it will produce 22 million electric cars over the next decade, up from earlier plans to build 15 million cars. Meanwhile, that same week, General Motors Co. announced a US$300-million investment to produce a new EV in line with previously stated goals to sell one million units annually by 2026.

Industry watchers such as Deloitte are forecasting a 950-per-cent increase to 21 million units in global sales of EV units by 2030, up from about two million in 2018. Yet, other prognosticators are far less jubilant.

Still, there’s little question that the global auto industry is undergoing a dramatic transformation. And where there’s change, there’s opportunity. The quandary for many with an interest in marrying their desire to address climate change with shareholder returns is in discerning where best to invest their cash. Is it wise to throw money at players such as Volkswagen and GM, or wait until Groupe Renault and others juice their production and EV fleets?

With so many disparate views of the near-future, investors would do well to follow the supply chain.

Global growth of the EV market

China currently buys more than half of the world’s new electric cars, according to the International Energy Association (IEA). Norway boasts the deepest market penetration; Sweden, Germany and Japan have also been posting strong growth rates. While the most recent figures show that the United States sold the second-largest number of EVs in the world after China, it’s still a very small fraction of the overall auto U.S. market, the IEA report said.

Pure plays, such as Tesla Inc., undoubtedly proved that people would buy EVs if they were designed well enough. Regulation provided the window of opportunity. Much of the growth around the world has been driven by government policy initiatives as well as through financial incentives. Just last month, for example, the federal government introduced new subsidies for EVs in its most recent budget.

Certainly, I believe there’s a valuation argument to be made, looking to the auto sector in 2019, assuming we avoid a recession in the near-term. Auto stocks were pummelled throughout much of 2018, driven lower by a confluence of factors – including trade tensions between the United States and China and in Europe, and higher interest rates, which hurt consumer financing and added to an overall dampening of demand for vehicles in North America.

While traditional auto makers such as VW and GM are boosting EV production, investors would be wise to weigh how spending billions over the next five years to boost production will impact their massive legacy businesses. Is there currently enough demand for EVs to justify the investment? Not to mention how the raft of new players in countries such as China – which are racing ahead, pumping out new EVs at breakneck speed – will impact the global marketplace. In our opinion, combustion engines will still be the largest fleet for decades to come and shouldn’t be discounted, despite the acceleration in demand for EVs.

Follow the supply chain

Investors would be wise to kick the tires of the conventional technologies that assist in reducing emissions from combustion engines, but also in EV exposed companies further down the supply chain. Many of the future opportunities are likely to be found in the supply-chain companies that produce batteries or their inputs such as cathodes, separators or lithium, and those that manage the flow of power from the battery to electric propulsion motors.

Consider the following three companies, which AGF currently owns, for example. Umicore of Belgium is a global player in producing cathode technology for the lithium batteries necessary for EVs to really take off. Meanwhile, Cree Inc., a semiconductor company in Durham, N.C., manufactures switching devices that allow EVs to charge quickly. Johnson Matthey PLC, by comparison, a London-based company, manufactures emission control technology for diesel and gasoline engines.

There’s little question EVs are an important stepping-stone to fully autonomous vehicles, which will ultimately transform the transportation industry. In an era of such meaningful change, many of the traditional auto makers are already forging alliances with new suppliers, while creating a wealth of new opportunities for investors.

The views expressed in this blog are those of the author and do not necessarily represent the opinions of AGF, its subsidiaries or any of its affiliated companies, funds or investment strategies. References to specific securities should not be considered as investment advice or recommendations.