The Merrill Perspectives Podcast
The EV Revolution
Head of BofA Global Research
Chief Investment Officer,
Merrill and Bank of America Private Bank
And Haim Israel,
Head of Global Thematic Investing Research
BofA Global Research
Please listen to important information at the end of this program. Recorded on 9/28/2022
Candace Browning: Picture this, a technology with the potential to significantly reduce the planet’s greenhouse gas emissions. That could one day be an indispensable part of daily life for billions of people around the world. Now, picture that it might already be sitting in your driveway, and if not now, possibly in the very near future.
Hello, and welcome to this edition of the Merrill Perspectives podcast. I’m Candace Browning, head of BofA Global Research. If you guessed we’re talking about electric vehicles, you guessed right. And while they still make up a small share of the overall market, sales of electric vehicles, or EV’s, had been hitting overdrive in the past few years.
According to the International Energy Agency, global electric car sales more than doubled between 2020 and 2021. In some circles, they’re being hailed as essential to solving the planet’s climate crisis. But there’s some very real challenges to this so-called EV revolution and the road ahead could be bumpy.
Joining me to shed light on this topic are Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank.
Chris Hyzy: Hello, Candace.
Candace Browning: And Haim Israel, head of Global Thematic Investing Research for BofA Global Research.
Haim Israel: Great to be with you, Candace.
Candace Browning: Okay, Haim, let’s start with you. So, the concept of electric cars has been around for a really long time. In fact, the first successful EV debuted in the U.S. in the late 19th century. Now, it was actually more of an electrified horse carriage, but it worked!
So, fast forward to today, and still only about 1% of the 215 million cars in the U.S. are fully electric. So, what do you think needs to happen for the EV market to finally really take off?
Haim Israel: That is a great question, Candace. Right now, we’re in the dawn of a completely new technology around cars, the EV technology, but as you said, things need to happen; stars need to align in order for this technology to really catch up.
First and foremost, the technology. The functionality there’s still many issues with the battery. Did you know, Candace, that batteries don’t function well above 40° Celsius or under minus17°. The battery gives you today an average of 200 kilometers, 250 kilometers. But most people still do not feel comfortable with the current ranges.
Economics. Up until now, electric vehicles were more expensive than combustion engine cars and the gap was quite high. Without subsidies, in order to get a car, you need to pay more, much more, 40-50% more. We’re seeing that changing quite dramatically, but economics is always a key issue.
Maybe just the last thing that I want to mention here is the infrastructure. When we’re talking about EVs, usually, we’re talking about the car itself, but what about the charging stations? How do I take care of it? How do I change the battery? All the ecosystem around it has to change dramatically.
We also need to explore the human behavior. We need to change our attitudes. We will feel comfortable with a range of at least 500 to 600 kilometers in order to buy an EV. But most of us, actually 95% of us don’t do more than 50 kilometers a day. So, it will actually need us to change our behavior as well.
Candace Browning: That’s really interesting about human behavior and how few kilometers we actually drive on average per day. I didn’t know that.
Now, Haim, talking about humans, who do you think is most likely to make up the coming generation of individual EV owners and also, what about commercial vehicles. Are businesses getting onboard to this too?
Haim Israel: Oh, yes. First of all, there always has been with the new technology; it’s the early adopters. Usually, we are talking about younger generations, which are much more open to the idea and willing to explore a different route.
From a business perspective, we’re actually looking at fleets that are probably earlier adopters of this technology. We’ve seen more and more adoption of services around EV. We’ve seen more adoption of fleets when the scalability managed to decrease costs quite dramatically.
So, actually, we look at two routes here. I look at businesses, fleets, and I look at the early adopters which are usually the ones that are taking new technologies and take it abroad.
The third element here which I’m sure we’ll be discussing today is the environmental impact of EVs. People that are willing to take the extra step that in the long-term EVs will decrease emissions are more likely to adopt EVs.
Candace Browning: Okay, great. Well, Chris on that note, Congress recently passed the Inflation Reduction Act of 2022 and that includes some major new initiatives to increase clean energy investments, including tax credits for qualifying purchases of both new and used EVs.
How important, Chris, do you think these kinds of policy initiatives will be to increasing EV ownership in the U.S.?
Chris Hyzy: Yeah, thanks, Candace. What’s pretty interesting here is that going back in time, most so-called revolutions usually are subsidized in some way at the beginning. So, government subsidies, government credits within the IRA, the Inflation Reduction Act, are pretty sizable, and could be a boon to additional capital investment. In other words, this could kickstart a so-called clean capex super cycle.
And there are a wide range of forecasts here, ranging from anything from $100 to $150 billion extra per year going out over the course of the next decade. If that is anywhere close to what those forecasts suggests, we’re looking at a situation here that could be equivalent going back to the investment that was needed in the Shale era, which is very substantial.
So, the Inflation Reduction Act is a great way, in our view, to kickstart additional private market investment.
My last point here is, Haim mentioned infrastructure. There is a very, very significant so-called coming exponential growth in EV ownership, electric vehicle ownership. However, we need an infrastructure that can handle that. What we’re witnessing right now with some of the storms in Florida, it is estimated that tens of thousands of vehicles will need to be charged to evacuate. So, if you just considered that small, difficult example, we’re going to need a whole new infrastructure to support the coming demand in EVs as well.
Candace Browning: That’s a very interesting and powerful point on infrastructure. Haim, what’s your view on the infrastructure challenges?
Haim Israel: Chris is completely right. Infrastructure is probably going to be one of the biggest bottlenecks out there when it comes to EVs. So, let’s look at the numbers, Candace, according to some estimates out there, 40% of all new cars sold will be EVs by the end of this decade. Now, if we’re selling every year, globally around 90 million cars, now do the math. When I’m talking about millions of millions of EVs so we need massive infrastructure spending.
So, the current estimate today that in the United States, you will need roughly 100 million charging stations. It could be public; it could be private. Now, it might be quite easy for me if I have a private home, right? So, I’m going to be my charging station. What about everyone else? If we are talking about the residential area, if we are talking about cities and so on, who pays for that? Who can use that? That’s a huge, huge effort altogether.
The second point about infrastructure is what kind of infrastructure are we deploying? If I’m going to the gas station today to pump my car, usually I spend two minutes, three minutes tops. Right now, I need to spend 20 to 25 minutes at least to get 60%, 70% charge. Fast infrastructure is a must here.
The third point which I think no one really talks about is the grid today cannot sustain a mass adoption of EVs. You need to completely change the grid, the infrastructure around that in order to support all those charging stations. So, every dollar that you spend today on charging stations, you will need to spend at least $4.00 on the ecosystem and infrastructure around it.
So, if we are talking about the U.S. 100 million charging points, you will need at least four times more expenditure just on the grid itself, or the upgrade of the grid itself.
So, if we are talking about the environmental issues or energy independence issues, we do not want to pump the grid with fossil fuel. Otherwise, what have we done here? So, we’ll have to upgrade the entire grid with renewable energy infrastructure in order to keep the entire ecosystem.
Candace Browning: Okay, so the infrastructure is a challenge and clearly, the grid is a challenge, but I think there are also some potential headwinds related to the batteries used in EVs. In addition to the costs, there’s also supply chain issues with the metals and the minerals needed to make them, such as lithium and cobalt and nickel.
So, Haim, can you talk a little bit about the future of EV batteries?
Haim Israel: Of course, Candace. As you mentioned, we need a lot of materials and rare earth metals and everything that are going to be required to all those batteries. But first of all, let’s look at the numbers. We just don’t have enough batteries to begin with. If we are talking about 40% of total new cars sold by 2030, we will need roughly between 3,000 to 4,000 gigawatt hours of batteries. The current capacity right now is one-tenth of that. So, we are missing a lot of capacity to begin with.
But then we are coming to what you mentioned, Candace, about the raw materials and I think this is probably one of the biggest bottlenecks that we are facing. We are living in a world of scarcity. Everything from raw materials, commodities, infrastructure, even human capital and technologies, we are running out of. So, some of the materials that you mentioned from batteries are actually already facing severe scarcity.
Lithium, which is probably the material that is associated the most with batteries, we are running into structural deficit as soon as 2024. Nickel is expected to happen in 2025, one year after that, and recent geopolitical issues, the war in Ukraine and nickel which is mainly produced in Russia today might bring this timeline even forward. So, it might be way before 2025.
The other problem that we have with nickel and actually we have the same problem with lithium is that roughly 80% of it is being refined in China.
And a lot of those raw materials are also facing supply line problems. Did you know, Candace, that before you buy an electric car, the lithium itself has to travel up to 50,000 miles from the mine to your battery before you even get your car. So, all those issues will have to be resolved.
Candace Browning: It sounds like there are lot of challenges related to batteries. Is there any good news, or are there any breakthrough technologies that we can look forward to?
Haim Israel: Oh, there are a lot. As I always say, trust technology. First of all, we will change the composition in the batteries and we’re already doing that. If we are missing lithium, we can replace it by other metals. If it’s magnesium, or nickel, or cobalt, and so on. So the composition is changing dramatically.
The second thing is that we are seeing new generations of battery; lithium-ion, solid-state, phosphate-based, and so on, which have their own challenges and have their own economics, but the technology is progressing very, very fast.
The third point is that the challenges around supply lines, it has been there for a very long time, but now that we are heading into an environment of deglobalization. We believe that those supply lines will change dramatically. You mine lithium in Chile. You can’t change where the mine is, but why not refine it on U.S. soil? Why not do all the other processes here? That will dramatically decrease the cost.
Just maybe the last thing that we can rely on is recycling. We are just not recycling enough, and recycling technology, because of what we’ve seen with the jump in commodity prices and metal prices became much more economical, much more scalable. And this is definitely going to change the equation.
Candace Browning: Chris, clearly, as Haim’s been outlining for us, the EV revolution is really dependent on global inputs, all these commodities from around the world. Can you discuss, Chris, a little bit what role you think China and other geopolitical factors are going to play in all of this?
Chris Hyzy: Every revolution, as it relates to economic change, we mentioned before has some sort of subsidization to it, and it starts there at the government level. We’re witnessing this also with the EV revolution. But more importantly, we also need a chief competitor. Competition helps kickstart and accelerate the investment.
Haim mentioned technology, one of the greatest innovation accelerators is the fact that technology gets ahead, and it’s a competitive race right now to apply technology to this revolution and that lends me to semiconductors. Semiconductor design and manufacturing works hand in glove with EV demand and a whole new infrastructure grid to support that. That also comes into play in terms of competition with China.
Candace Browning: Let’s take a look at demand outside of the U.S., because electric vehicles are taking off in many countries, and not just traditional passenger cars. For example, I read that India is seeing a boom in electric rickshaws, and that could just completely transform its pollution and energy issues.
So, Haim, where do you see the greatest EV growth in other parts of the world?
Haim Israel: Of course. So first and foremost, China. Most of the new models that the world has seen and been introduced globally in the last couple of years actually all came from China. China is controlling most of the supply lines, most of the raw materials, directly or indirectly, the technology, and been introducing it to the market. The Chinese market is huge and will continue to be.
You mentioned, Candace, about rickshaws, that’s a global trend that is becoming big in New Asia. Right now, we have 280 million electric two-wheelers all over the world. That’s becoming a huge market. That is actually 40% of all electric vehicles sales today. You mentioned India, but we’re seeing the same thing happening in Vietnam, in Cambodia, in the Philippines, and so on. So that’s another big market.
If we take the other parts of the world, Europe is, by far, ahead of that when it comes to regulation, when it comes to enrollment of infrastructure. Europe was there before the crisis in Ukraine, before the energy crisis that we’re seeing right now. It will continue for the long term, to decrease dependency on oil. Of course, for the short term, there are many challenges when it comes that, but I think that Europe will continue to lead the world.
Maybe just the last country that I want to mention is Australia. It’s related to the reasons that we spoke before about the grid, about the infrastructure. Australia, today, is one of the key leaders when it comes to renewable energy and scalability of renewable energy, and cheap cost of renewable energy, which could help pump the grid. So, many challenges for many different reasons in different countries.
Candace Browning: Let’s talk about investment opportunities, and Chris, EVs are still a nascent market, obviously. But how could investors view the potential long-term opportunities here? And, besides autos, are there related industries that could benefit such as materials and metals?
Chris Hyzy: That’s a great question, Candace and yes, every decade has had some sort of a build out similar to what we’re experiencing right now with electric vehicles where you have this theme that begins to take over. And the direct beneficiaries, at least at the outset, seem to be the ones that everybody points to as far as an investment is concerned, and then they get overvalued. Most of those companies are unprofitable.
But we look at some of the secondary elements of the beneficiaries. First and foremost, electric machinery companies, building material companies, the areas that build out the infrastructure. We look at the grid system, the capex that’s going to be needed potentially to increase the number of nuclear power plants in the United States, which is increasingly becoming cleaner and cleaner.
We can’t just flick the switch away from the fossil fuel area, but if we can target some of that capital investment that has traditionally gone there to some of the other areas in concert with building out an infrastructure, those are the second line beneficiaries that are very profitable areas, again, like electric machinery stocks, utility companies that are using cleaner fuels, the building material companies.
And last but not least, this concept of scarcity that Haim talked about, scarce precious metals to feed into things like battery storage. Battery storage becomes even more critical when you have scarce elements that drive the components of what an EV needs. So, battery storage and the components within that are absolutely critical. And that, from my perspective, seems to be the wider opportunity set from an investment perspective.
Candace Browning: Haim, how do you think that the evolution of the EV industry will actually affect some of the other thematic areas that you cover, such as future mobility, future jobs? What do you think the impacts will be?
Haim Israel: Oh, there’s going to be a massive impact. One of the things we keep talking about in thematics is that each and every theme cannot be viewed as standalone. So, for example about EVs, of course, we’re going to talk about climate change, and I’m a big believer that eventually EV is a big part of the solution in the long term.
The healthcare market. Today, pollution is probably one of the biggest killers out there. More than 40 million people a year are dying from pollution. So, if we are moving to an EV world which will decrease pollution, that’s a big change to healthcare.
The future of jobs, you mentioned that, Candace. We are talking about a new technology. We are talking about new markets, new infrastructure investment, reshoring of activities, that can be a huge opportunity to so many sectors. We’re going to need new jobs, and we’re going to need completely new professions out there.
We always talk EVs as a car with a battery. That’s roughly about it, but an EV is something much bigger. It’s a connected car. EV is a hub of technology which will need chips, as Chris said. Actually, if you bought a car, roughly four years ago, it probably had 10, 20 chips in it. Today a car has roughly 5,000 chips in it. So, connectivity will be a big part of it.
So, it goes across the thematic world. It could be an internal technology for AVs in the future – autonomous vehicles. It would definitely be based on the same technology. So, we see that as one big ecosystem.
Candace Browning: I have a final question for both of you. How important could electric vehicles be in promoting the transition to a low carbon world? Chris?
Chris Hyzy: I look at this, following on what Haim just said. Imagine one big orchestra of many musicians playing various instruments, getting together; that have never met each other, that show up on stage, and begin to play music delivered by a maestro. And that big orchestra has a whole collection of, again, different instruments, but the maestro is the infrastructure. In trying to bring these great musicians altogether to play great music. And the horn section could be battery storage, the violins could be nuclear power.
Other parts of the orchestra could be technological components and elements that drive this. EVs and electric vehicles in general, could be the percussion which includes the bass to keep everybody on target So, that’s how I look at EV and how important it is to a low carbon world.
Haim Israel: I cannot agree more. I think that EV is an incremental part of the solution. In the short term, there are challenges. Yes, we will need more electricity, meaning that, at least in the short term, we might even use more oil. But in the long term, this will dramatically decrease oil consumption.
The second thing about EVs is that if we will use this model for other forms of transportation, if it’s ride hailing, car sharing and so on, this is a big, big change in behavior. This is a big change in decarbonizing.
Many countries have, today, the incentive to move to this world. The situation that we’re seeing right now with oil dependency and this situation in Ukraine will actually move us faster to net zero, and I’m quite sure that EVs are going to be an incremental part of it.
Candace Browning: Well, that optimistic note is a great way to wrap up this very interesting conversation. So, Haim, Chris, thank you so much for joining me today.
And thank you all for tuning in to this edition of the Merrill Perspectives podcast. My guests have been Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank; and Haim Israel, head of Global Thematic Investing Research for BofA Global Research. I’m Candace Browning, Head of BofA Global Research.
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