Lower cost of ownership

For the consumer, it’s not just a lower sticker price that will make EVs more compelling. “You're thinking about what an EV can be from a total cost of ownership versus the internal combustion engine,” Murphy notes. For example, typical battery-powered cars will have far lower maintenance and running costs than cars that burn fossil fuels.

Gasoline is an acidic, corrosive liquid that tends to wear down engines, so regular maintenance is required. The U.S. Department of Transportation has estimated that the average American driver spends about 12 cents a mile on gasoline and 9 cents on maintenance.

“And electricity is generally cheaper than gasoline, so running costs are lower over the life of the car,” Ge adds.

Rolling software

Another important innovation that will not only drive cost considerations, but also transform the total customer experience is the introduction of software-defined EVs. The software can receive over-the-air updates to improve functionality and safety while also providing entertainment.

Of course, these over-the-air updates aren't going to solve all challenges associated with cars, but more innovative manufacturers will be able to make vehicles that can learn and improve, become safer and introduce more services over time, Murphy says.

“With that approach, an EV maker can reverse some of the severe depreciation associated with older cars,” she notes.

Murphy says she is seeking to identify the companies with the potential to not only make money selling the cars but also roll out subscription packages that include managing your battery, providing in-vehicle entertainment, improved safety and self-driving technology.

“It’s important to identify who can build this out the fastest,” she says. “Another question I ask myself is how much better is this product going to be, through the software updates, in five years than it is today?”

Just down the road: Driverless cars

Perhaps the most important software update for some models will be the potential for autonomous driving. It seems like we’ve been hearing that driverless cars are only five years away for about 10 years, but as essayist and writer William Gibson once quipped, “The future is already here. It’s just not very evenly distributed.”

Waymo, Google’s driverless car division, has been testing vehicles in the Phoenix area since early 2017. Cruise, its counterpart at General Motors, is testing fully driverless cars in San Francisco, while Chinese startup AutoX has deployed an autonomous fleet in Shenzhen without backup human drivers.

“Over the next few years, they'll begin to launch in more markets, and investors will begin to understand this is a real business, not a science project,” says equity portfolio manager Chris Buchbinder. “By 2030, I believe we will have widely deployed fleets of autonomous electric vehicles [https://www.capitalgroup.com/advisor/insights/articles/world-2030-investing-next- decade.html] operating in most major and many secondary cities around the world.

Many will still have vehicles — just like people ride horses or bicycles for fun — but ownership of personal vehicles will go from being a necessity to a luxury.”

Identifying winners and losers

Indeed, advances in electric and driverless vehicles represent transformational change that is likely to redefine the industry in the coming years. Although EVs are on the threshold of profitability, some models will get there sooner than others. “As investors in companies, not industries, our job is to identify those likeliest to produce cars that can generate earnings over the long term,” Ge says. In 2020, the clear leader was Tesla, a pioneer in battery technology and vehicle software initiatives. Other front-runners included Volkswagen, which has invested heavily in EV production, and BYD in China. Going forward, those companies quick to embrace structural change and rapidly adapt have a better chance of success over the long term, whether they are auto industry titans or startups.

Capital Group