Listen: Private Markets 360° | Episode 4: Investing in the electric vehicle era (with Michael Robinet of S&P Global Mobility)

View Full Transcript

Brandon Newland

Hi, everyone. Welcome back. My name is Brandon Newland. I lead our private markets product management team at S&P.

I'm joined by Jocelyn Lewis. Jocelyn, how are you doing today?

Jocelyn Lewis

Hey, Brandon. Doing great. Thanks.

I'm Jocelyn Lewis, managing director at S&P Global Market Intelligence, where I'm head of private debt commercial strategy across software and services.

Question and Answer

Brandon Newland

All right. So we're going to jump into some exciting guests and focus on the leading industry trends for private markets here on the podcast. Jocelyn, should we jump right into it?

Jocelyn Lewis

Yes, for sure. So this podcast is dedicated to enlightening you to the world of private markets from different views, so yes, Brandon, let's go.

Electric vehicles. They are here, and we are in the midst of "a once in a century" transition from combustion engines to electrification. Do you wonder how far along the auto manufacturers and suppliers are on this journey? Or where is the capital coming from to fund this transition? Perhaps you're interested in the environmental benefit of electric vehicles reducing pollution from gas emissions. Or are you on the fence because you've heard about the lithium-ion batteries used to power these vehicles ending up in landfills?

With numerous private markets participants providing capital in various forms for this transition, today's guests will provide some context on the role of private market participants. Today, we are joined by an expert in the automotive field, Michael Robinet, an executive director of automotive advisory services at S&P Global Mobility with over 3 decades of experience driving industry thought leadership focusing on the light vehicle automotive market dynamics and supplier strategy.

Michael is a leader and innovator in automotive research. He works with decision-makers at suppliers and OEMs in the fields of supplier strategy and profitability, global production forecasting, tracking future product programs and analyzing sourcing and production strategies to serve OEM supplier and government entities throughout the global auto ecosystem.

Michael, it's a pleasure to have you join us today. How are you?

Michael Robinet

I'm well, Jocelyn. How are you?

Jocelyn Lewis

Doing well. Thanks. Excited for today's discussion.

Michael Robinet

Me as well.

Brandon Newland

Michael, I have to ask. Do you have an electric vehicle?

Michael Robinet

I do not have an electric vehicle, but I have put the proper power in my garage. And I have a wall that's ready for a charger when I'm ready to purchase one.

Brandon Newland

Brilliant. Well, I guess, let's jump into it. So as you see smart capital allocation decisions and some organizational agility can help automotive suppliers prepare for the EV transition, can you help us understand a little bit more broadly, what does that actually look like today?

Michael Robinet

Capital markets are integral to the automotive entity. You've got government providing overall regulations both at the -- really at the state, the local and the federal level, but really it's private markets that are more or less, let's call it, driving the bus from private all the way through public entities. And to be completely honest: Everybody is going to need to -- is really going to need to do their part as we make this what we call ICE-to-BEV transition, internal combustion engine to battery electric vehicle. This ICE-to-BEV transition, it won't be the -- let's put it this way. It won't be the last time you hear that moniker, Brandon.

Brandon Newland

So I guess a lot of attention around the supply chain to create the batteries. I mean, is there anything else that's being either invested in served, underserved that is a focus in the supply chain?

Michael Robinet

Yes. Well, it's a burgeoning supply chain, and we're going to start to move up to 6 million or 7 million vehicles by the end of the decade. You can imagine what's going on in the industry with respect to ramping up lithium supply and lithium refinement and the separators and all the thermal that goes into a battery. We're bringing in all these new battery technologies and everybody thinks that they can do it better than the next person, so that's why we call it the Wild West.

There is going to be sort of a settling-out period for probably, I would say, at least 10, 15, even 20, years until someone figures out what the optimal technology is. And then sort of like [indiscernible] rest of the industry is going to follow in that direction.

Brandon Newland

I guess, just tying it back to the private markets for a second, like, where do you see the investment firms playing the biggest role in this transition? Are they attaching to the private companies in the supply chain? Like where is it where private markets is making the most impact?

Michael Robinet

Private markets are looking at a couple of different sectors. They're looking at some new opportunities; for instance, the charging structures. They're looking at where charge points are going to be. And then obviously you can put a charge point in and it's almost as if it's real estate. That real estate will pay off over a period of time, so they're looking at that. I would say they're also looking at the upstream refinement of minerals and putting in investments to help bring that along, knowing that that's going to have a long tail to it as well. On the flip side, you see especially private equity organizations getting involved in the ICE side.

So what will happen is you'll make something like a throttle body, which is required for an engine. There's usually one per engine. And those throttle body manufacturers, their market is declining over time. Well, if you're a throttle body supplier and you're declining over time, you're going to have increasing financial pressure not only internally but from your bank. Maybe your investors and shareholders may say, "What's the long-term prognosis of this company?"

And so at some point, private equity, which has a -- usually a different mindset more from a cash flow service perspective may say, "You know what, I can take 2 throttle body manufacturers, bring them together, rationalize them and ride this out for the next 10 or 15 years; and it would be an interesting business model," so it's interesting. We see them way upfront on the battery electric side. We also see them sort of as a consolidator of sorts on the ICE side, so there are some really interesting roles for private money in this industry.

Jocelyn Lewis

It's also fascinating. There are so many different aspects of this transition from the ICE to BEV, as you've called it, so the pessimist in me kind of thinks, is this going to be slow and kind of bumpy with delays? Are there going to be slower launch curves with stranded capital? What are some of the headwinds and some of the mitigations that, I guess, companies along that spectrum are putting in place?

Michael Robinet

That's a great point because we call it lumpy. And it's going to be lumpy from a perspective of we've got 100 years to figure out how to launch ICE vehicles, launch meaning get it into production, get it up to speed, but a BEV is new battery, new battery enclosure, new battery structure. And so the dynamics of the vehicle have changed. The way that we build the vehicle has changed. And all these aspects really drive this whole idea of everything is brand new. And all the -- as we say, all the ducks have to align, and if they don't, then we can't build a vehicle.

Jocelyn Lewis

I don't know if there's any statistics on how much of the investment is coming from because -- to your point, like, some of this is really brand new, brand-new ideas. Is there any advice that you could offer firms that are investing in the electrification that could potentially mitigate the likelihood of stranded capital?

Michael Robinet

I think that diversification, and that's kind of a really -- in the automotive space, that's kind of [indiscernible]. I've got many, many customers. If one doesn't do so well -- the other does okay. And therefore, my capital gets utilized as best as I could expect it, but I would think diversification is number one, and going into this industry with eyes wide open.

Jocelyn Lewis

In terms of the whole geographical area, do you think that there is a particular area that would perform best in terms of meeting launch targets?

Michael Robinet

Your geography question is an important one. North America is the third horse in a 3-horse race in this one. And I know that as a, obviously, native North American. I don't like to hear that, but the Europeans and the Chinese are way out ahead in electrification, some of it driven by -- well, actually, most of it driven by regulations. But it doesn't mean that North America is kind of bringing up the rear.

There are some really interesting technologies that North America will bring in and add to that sort of global soup of battery electric. And there are going to be some regions that aren't going to move very quickly over to battery electric mainly because of cost, infrastructure and other factors. It's just how new all of this infrastructure and ecosystem is. It's just the nature of the beast.

Jocelyn Lewis

Just watching this whole transition, that's kind of fascinating. One of the other things I'm just curious about too is the lithium-ion batteries. Like I just feel like they're controversial, so I just wonder: Are there any better alternatives that you think will reduce the associated disposable volumes that really end up in the landfills?

Michael Robinet

The vehicle manufacturers are smartly also investing. And not only vehicle manufacturers or what we call OEMs, but you've got other entities as well that are investing in recycling. If you can't find lithium, you've got to source where you can pick up an old battery and recycle the lithium and the nickel and the cobalt out of it. And for good or for bad, the batteries are pretty good. There's a lot of thought that, "Oh, after 4 years, I'm going to have to get a new battery." We don't hear about that, to be honest with you. We hear about batteries that can last 8, 10, 12 years. The effectiveness and charge rate goes down, but there's a lot of engines that don't last out long.

I mean we build anywhere between 90 million and 95 million vehicles a year on average around the world. That's a lot of vehicles. And even by 2030, if we're assuming that, I don't know, 40% of them might be battery electric, that's a lot of lithium. A lot of nickel and cobalt is going to be required. The world may not have enough.

Or if they do, it's going to -- it will be quite dear to mine it out of the different deposits, so the point I'm getting at is there's a lot of eyes on this right now. And a lot of organizations are trying to find new chemistries; the ability to charge faster, use less lithium, use less cobalt. Cobalt is a big deal. I mean, if you can get cobalt out of your battery, that really helps with the costs. So there's a lot of activity in this space.

Brandon Newland

I'm still on the fact that you said, German and Italian manufacturers, Lamborghini, those guys are ahead of the curve there, not surprising.

Michael Robinet

Let me back up a little bit. There are a lot of European manufacturers that are ahead. Think about it this way from a perspective of I have an infrastructure to build engines and transmissions. And now you're telling me that I need to abandon that infrastructure with all the people and the resources and the skills and capital involved and move to a different infrastructure.

Most businesses, in their lifetime, never have to make this kind of transition. Automotive is basically being told, "Within about a decade, 1.5 decades, you're going to have to completely change the way you do business and do it completely differently," so there's -- automotive is really going to be on the cusp of change, let's put it that way, over the next decade or so.

Brandon Newland

And do you think they've been given a fair-enough amount of time?

Michael Robinet

From my perspective, depending on the region, maybe not, but any supplier that is surprised by this, I frankly have no sympathy for them because this has been well known for a long time. Some suppliers have chosen not to choose. I'm sure there's a song out there that goes by that lyric, but if you're your average BEV-negative supplier -- BEV negative means you build components for engines and transmissions and driveline and then maybe fuel systems and exhaust system, basically systems that we don't really need when we go to battery electric vehicle. Or at least, if we do, we don't need as much of them; and they're much, much different.

Brandon Newland

As you see private markets and specifically private equity jump in over the next 5 years, where are those opportunities for consolidation? Where does that sit?

Michael Robinet

We've seen some sectors that are seeing some consolidation already, the engine component space. We know that there's major Tier 1 suppliers, the largest suppliers that supply to the vehicle manufacturers, many of them that were in the engine component or what we call the powertrain space. They've decided to spin off those operations; or sell them off to another company, sometimes private equity; and then take what capital they gain from that as well as some of their other profits and focus and channel them towards BEV-positive areas.

So I mean that obviously is going to be a factor, but there's going to be -- just the level of transition that we're going to see in our industry as they make one of those choices going forward is really going to, as Jocelyn said earlier, displace a lot of capital. Some of it is going to be well placed and other parts of capital are going to be not very well placed, but private organizations have a critical role as we consolidate and transition this industry going forward.

Brandon Newland

What does the downstream impact look like to the broader, I guess, infrastructure projects in the country? Like what does real estate look like? What does gas stations or, I guess, charging stations look like as a result?

Michael Robinet

Good question. I -- actually one other aspect I thought of as you were saying, mentioning that question is we didn't talk too much about what we call Tier 2 and Tier 3 suppliers. So the company down the road that makes aluminum tubes that goes into a driveshaft that goes into a vehicle, so they're a Tier 2 supplying into a Tier 1 that is supplying the vehicle manufacturer directly.

A lot of those Tier 2s are private companies, family-run companies. They might have some cash in the bank, but sometimes they have some debt. And banks these days, they look at ICE suppliers and they read forecasts just like everybody else. They want to make sure that, if they loan money out, they can get it back. And they're also taking a look at what the longevity is for some of these suppliers, but to your point, the infrastructure side is an area where there's a significant amount of investment going on.

We see rental companies moving into charging stations. We see -- this is nothing new, but we've been contacted by the operators of fuel stations, of gasoline stations to say, "How do we become a charge point?" What's required? What kind of real estate is going to be required? And I think that the mindset has always been I have to park the car. It needs to sit there for half an hour or an hour or 1.5 hours to charge. That, frankly, is a little bit of a fallacy. They have fast chargers now that can get you 100 miles in 10 or 15 minutes, sometimes even a little bit faster.

Brandon Newland

So what does the end of the tunnel look like? You mentioned 95 million vehicles produced a year. I guess, where are the exits on the road maybe? I hate to use that phrase, but like what are some of the checkpoints, I guess, over the next 5 to 10 years?

Michael Robinet

Well, I think those -- the kind of thought of product adoption is definitely going to work its way through with automotive. You're going to have kind of early adopters and we've already seen some of that. We've got to remember we're only at -- I think the latest numbers I saw were 5%, 6%, 7% battery electric right now but a lot of new investment moving in that direction. 2024 through 2026 is a heady time in BEV, in battery electric, in North America. We've got a number of new vehicles coming on to the market.

A lot of battery plants are ramping up, a lot of e-motor plants and the like, to kind of build out that supply chain, so in my opinion, another checkpoint is probably around 2026, 2027, where the vast majority, not all but the vast majority, of new investment by the vehicle manufacturers is going to be focused on battery electric.

I would say a checkpoint is going to be probably in about 3 -- 2 to 3 years. Probably 2025, 2026 is another checkpoint; and a checkpoint that's well known in the industry, mainly because it's the end of the decade, but 2030. Where are we going to be by 2030? The federal government has given a target by 2030. There are vehicle manufacturers that have a target by 2030. There are various private Tier 1 entities that have a target in terms of what portion of production is going to be battery electric by that point, but to your question earlier, what's beyond battery electric? To be honest: A lot of private money is looking at that too. They're looking at what's going to happen with hydrogen.

So any time they have to charge a vehicle up in Japan, it usually is coming from imported power from oil or gas or some other carbon fuel to burn or to transform into energy, but they look at hydrogen as they're surrounded by water. The combination of power and water, making hydrogen is an interesting combination. It uses -- it can use the existing sort of liquefied fuel infrastructure.

It's not exact -- it's not perfect, but again a gas station could do hydrogen with some modifications or some significant modifications, versus battery electric, which again, hydrogen, you can fuel quickly. There is thought that you can use hydrogen in a internal combustion engine. The better form is to take hydrogen and drive it through a fuel cell, generate power. And then that electric power, that AC power, DC power, basically drives the vehicle. So a lot of moving parts here.

Brandon Newland

So I guess, as we continue to evolve energy more broadly, right, the downstream impact falls broadly in automotive as well, which is clearly what we all can benefit from. One comment you made were 95 years on ICE and combustion engines. Now we've got to -- taking up maybe less time, maybe not 100 years, to kind of perfect this view.

Michael Robinet

Yes. And one other factor, I didn't mention, but it's especially with S&P Global and some of our efforts in ESG, is that is also a pretty significant initiative within automotive. So can we use green power? How renewable is -- are all the different systems and components that we're using? Can they be recycled? These are questions, frankly, that automotive asked itself for years, probably need to pay a lot of attention to it, to be completely honest, but now the market is basically driving the agenda and saying this is an important factor, this whole idea of renewable and the like. And how carbon neutral are you going to be?

Brandon Newland

Well, Michael, thanks for the time today. This was an enlightening discussion. I think we all got a lot out of both public and private markets, where is -- electrification for the automotive vehicle is really going.

And for folks that are listening: Thanks for joining us today. Don't forget to subscribe and like Private Markets 360. And we'll join you in the next one. Thanks to our wonderful guests. We had a lovely chat today, really appreciate everyone for listening in. And if you're looking for more private markets content, go to spglobal.com/research-insights. And you can stay tuned to find our next episode.

Cheers, everyone.

Jocelyn Lewis

Thank you so much. You can also connect with us on LinkedIn. Have a great day.