What electric cars tell us about emerging markets

It is not a brand you may be familiar with, but you may be soon. China’s BYD – it stands for Build Your Dreams – has overtaken Tesla as the world’s top-selling electric car maker¹. The company, which began making vehicles in 2003, the same year as Tesla, produced over three million cars last year, including 1.6 million battery-only and 1.4 million hybrids.²

In four years China has gone from back of the leading pack of car exporting countries to the front, overtaking the US, South Korea, Japan and Germany. Other brands to watch out for include Dongfeng, SAIC (owner of the MG brand), Nio and Xpeng.

Sophistication

The electric car industry tells us much about China and about emerging markets generally. Its scale and sophistication are astounding and make me question the validity of this archaic term when so many countries in the category look pretty “developed” to me. BYD now has plants around the world, including Brazil, Hungary and India. Those who have seen its factories rave about the company’s technology – the only people seen on the factory floor are inspecting finished cars or fixing robots!³

Diversification

Much is reported here on the gloomy state of the Chinese economy. Amid that it is often forgotten what astonishing progress has been made there. China is the second-largest economy in the world. Two decades ago the average annual income was just $1,500, according to the World Bank. Today it is $12,850 – a near tenfold increase.⁴ The country is much less dependent on the US than it used to be and much more reliant on domestic consumers. So is East Asia generally, with China now the leading destination for exports in the region.⁵ Investors should take note of this gradual decoupling from the US. It makes China and the wider Asia region more useful as diversifiers within a global portfolio. And it means we should be more open to growing brands with their roots in emerging markets.

Historically, investors would access China through Western companies, such as Unilever, Diageo or Burberry. We are increasingly seeing the rise of domestic brands like BYD that are not only dominant at home but making an impact beyond.

It is not just cars. Look at smartphones and we find in China that brands like Huawei, Vivo, OPPO and Xiaomi have virtually pushed Samsung out of the market⁶. iPhone sales there fell 24% in the first six weeks of the year⁷. I bet I am not the only parent buying their child a cheaper, Chinese-branded phone in case it is dropped or lost. They are remarkably good.

From an ESG perspective, some may worry about China’s commitment to reducing climate change. The country produces more CO2 emissions than the next four biggest producers – the US, India, Russia and Japan – together.⁸ But consider CO2 per capita and China ranks 28th⁹. China’s reliance on coal is a problem, but it is the world leader in renewable energy and has ambitious targets to reduce emissions. It aims to cut them by 65% from their 2005 level by 2030 and be carbon neutral by 2060¹⁰.

Other EV investments

The investment opportunities around EVs go across emerging markets. We have a big position in South Korea’s Kia motors, which is targeting 1.6 million EV sales by 2030¹¹, matching where BYD is today. It will have 15 EV models by 2027.¹² Kia pays a high dividend – around 5.8% for 2023, challenging another common misconception – that emerging markets companies do not pay good dividends. Kia has also been buying back shares, suggesting management think they represent attractive value, too.

We do not own BYD at the moment, though our proprietary stock screening tool flags it up as a “contender”. Given how competitive the EV market is we are ultra-selective. Arguably a better way of accessing this growing market is through parts suppliers – and again emerging markets countries offer choice.

We also own Hankook, the South Korean tyre company – the world’s seventh-largest tyre manufacturer¹³. Some electric cars have as many as 3,000 semiconductors¹⁴ – twice the number in a traditional car. And that brings us to TSMC in Taiwan and also to South Korea’s chip design company, Novatek, which specialises in LCD displays used in modern vehicles. To this we might add another company we bought in China last year, Jiangsu Pacific Quartz, which produces a variety of quartz materials used in semiconductors.¹⁵

Autos and component parts are responsible directly for 6% of the Artemis SmartGARP Global Emerging Markets portfolio today, with more exposure through technology, materials and insurance. We see companies such as Gerdau (steel producer), Amara Raja Energy & Mobility (batteries), PICC (insurance) and Hon Hai (electronic components) as indirect beneficiaries.

I hope these companies will drive strong returns for us. They certainly should encourage investors who have not invested in emerging markets for some time to reconsider potentially outdated perceptions of the opportunity set in this arena.