Road to 2030 is a thematic project designed to highlight undiscounted change. We believe that understanding the key long-term structural thematic drivers is the basis of good investment thinking. The project provides our clients with a useful framework for making investment decisions.

January 2020: the world was on the precipice of a global medical emergency that would empower the state, increase the might of technology firms, the pace of technological adoption, upend our cities, and dramatically accelerate the rise of China.

We did not know this, but that is not unusual. Not being able to prepare adequately for the future is the norm, not the exception.

“Forecasting is difficult, especially about the future… but one can prepare for the future that has already happened”
Peter Drucker

Think back to 1970. Oil was at $3.20 a barrel, the US had just begun détente with the Soviet Union, and the shah of Iran was the US protégé in the gulf.

• By 1980, Iran was in revolution, oil was 7 times more expensive, the US was the world’s largest creditor, and Deng Xiaoping started opening up China to the world
• By 1990, the USSR was within a year of dissolution, and the US was the world’s greatest debtor
• By 2000, China was joining the WTO, and the internet had begun to transform our lives
• By 2010, the US financial system had collapsed, and China was the world’s second largest economy.

Managing risk—that is to say, building strategies that are resilient to events like these—is not easy. So what can investor’s do?

In Road to 2030, we take a practitioner’s perspective aided by both internal and external experts to ask the ‘what if’ questions and consider major changes to the status quo. Road to 2030 explores the investment consequences of different scenarios – even those you wouldn’t imagine.

Road to 2030 explained

The Road to 2030 project is an investment led project designed to articulate possible visions of the future, the key drivers behind those outcomes, and to highlight areas of undiscounted change.

The project engaged investment teams at Ninety One around a series of roundtables held in 2019 and 2020. The primary purpose of these exercises was to ask “what if” questions in a structured way, encouraging us as investment managers to stretch our thinking and consider possibilities that seemed remote today. A pandemic, for instance, was one of the potential game changers highlighted early on in our research process, precisely the sort of extraordinary risk such a project should be able to concentrate minds on.

At the very least, the Road to 2030 is a horizon scanning and risk management exercise; at its best, it provides a foundational understanding of the main drivers that will transform markets over the next decade.

仰观宇宙之大, 俯察品类之盛 – 既懂得宏观世界 又懂得微观世界
“Raising one’s head to view the vastness of the universe; lowering one’s eyes to inspect the intricacies of things.”
– Calligraphy by the fourth century writer Wang Xizhi

Undiscounted change

The role of undiscounted change for investors

When a structural theme begins to form, the market typically lacks the ability to look that far forward, so the trend is progressively discounted through time.

For the investor, this is a point to get behind future tailwinds – a point at which future change is undiscounted.

When a theme has been in place for some time, on the other hand, it can result in an imbalance or a false equilibrium. At this point, the market has overly discounted change. Because a structural theme plays out over time, investors can determine when to invest in these themes, when not to, and when they should be tactically take a view opposite to their structural view.

In Road to 2030, the themes and scenarios are designed to help challenge our thinking and highlight areas of undiscounted change.

Why a thematic approach?

A thematic approach is useful for three main reasons

1. A thematic approach identifies structural themes and imbalances that influence the global economy and asset markets on a multi year horizon. We believe that a clear understanding of those key tailwinds and headwinds can provide a valuable analytical advantage and inform longer run strategic preferences and aversions.
2. Thematic research is an effective interdisciplinary means to address the problem of overspecialisation by cutting through traditional indices and narrow specialisations by country, region, sector or market capitalisation constructs that have been undermined by globalisation and increased correlations.
3.  An understanding of structural themes enhances individual security selection decisions in a general sense, through better contextualisation (“thinking as companies think”) or, more specifically, by incorporation into the investment thesis as growth drivers or inhibitors.

Explore themes

Explore the themes on Ninety One’s website

• Climate change
• Debt
• Demographics
• Technological disruption
• The rise of China

Explore scenarios

For decision makers, our scenarios are designed to help stir the imagination and highlight areas of undiscounted change.

We have sketched out a number of scenarios related to our themes and subthemes. Their role is to avoid the extremes of “interesting but useless” on the one hand and “useable but not very interesting” on the other. They are presented as stories because stories are memorable in a way dry facts cannot be—and thereby aid in imagining and planning for the future.

Explore the Road to 2030 project

Download the full presentation here

Who is racing ahead in the EV transition? Passenger cars have got a head start, but trucks – responsible for 8% of global GHG emissions – are key drivers in the journey to net zero.

How are winners emerging from the transition?

01 Riding electrification tailwinds
02 Policy catches up to the climate crisis
03 Going the distance: challenges facing the commercial EV transition
04 Is hydrogen the answer?
05 China leads the way in the electrification transition
06 Far reaching opportunities across the global universe

01 Riding electrification tailwinds

Collaboration is a key ingredient to success in the commercial EV transition.

As the world moves towards a decarbonised future, the spotlight has centred on the electric car transition as the tangible evolution that will touch our everyday lives. However, it is often overlooked that commercial vehicles constitute the largest or second largest source of transport sector emissions in every major economy globally, according to the US Department of Energy. Trucks have a huge part to play, contributing around 8% of global GHG emissions (Figure 1). This is perhaps reflected in that trucking remains the dominant form of freight distribution in both the US (67% of the total) and the EU (75%)¹ .

Figure 1: Trucks represent 8% of global GHG emissions

_{Source: Bloomberg New Energy Finance, “Global Review of Vehicle Efficiency Standards”, 13th August 2019.}

2020 marked a turning point for the industry, as the seven largest players in the European truck industry collaborated to announce that all new vehicle sales would be fossil-free by 2040. Broader adoption of battery-powered trucks is expected to become a reality in the near future, but other technologies are also being explored to achieve decarbonisation. Development of trucks powered by ‘green’ hydrogen – produced from renewables – is in its infancy, but it may provide a solution to decarbonise trucking before too long.

Looking at the nearer future, adoption of battery-powered electric vehicles is gathering pace. A recent survey of large commercial fleet owners in the US found that 81% were currently electrifying vehicles, while half of owners are pursuing explicit goals for EV adoption (Figure 2) . While individual order sizes remain small as customers adapt to the new technology, the next year or two could see significant progress towards mass production. Globally, multiple major OEMs (original equipment manufacturers) – such as Daimler, PACCAR and Volvo² – have expanded their EV product lines and announced their intention to ramp up production of battery-run electric trucks through 2021 and 2022. Meanwhile, waiting in the wings are new entrants, such as Tesla and Hyliion, looking to grab market share from incumbents.

Figure 2: Fleet electrification goals and current EV adoption status

_{Note: Combined survey responses to the questions: “Does your organisation have an explicit goal for electrifying your fleet or reducing your fleet’s emissions?” and “Have you begun to transition any of your fleet vehicles to electric?”.
This graphic has been recreated by Ninety One.
Source: Lynn Daniels and Chris Nelder, “Steep Climb Ahead”, Rocky Mountain Institute, 2021.}

However, disruption may not be a destructive force in the trucks industry. Rather than the margin-dilutive competition seen in the passenger auto sector, we believe that the trucking industry is adopting a collaborative approach to the EV transition. Participants are seeking a broad coalition (across both public and private sectors) to help spread the costs of the R&D and infrastructure build-out needed to accelerate adoption. Success in the commercial EV transition requires overcoming a different set of challenges from those facing passenger cars, such as customer acceptance, the creation of charging networks, servicing and so on. Collaboration between the biggest trucking participants makes overcoming such challenges more likely and importantly creates opportunities for investors in those companies that can race ahead in the EV transition.

_{1 Source: Eurostat, March 2020, Bureau of Transportation Statistics, 2019.
2 One of these stocks is held in 4Factor portfolios.}

_{No representation is being made that any investment will or is likely to achieve profits or losses similar to those achieved in the past, or that significant losses will be avoided.
This is not a buy, sell or hold recommendation for any particular security. For further information on specific portfolio names, please see the Important information section.
The value of investments, and any income generated from them, can fall as well as rise.}

02 Policy catches up to the climate crisis

While industry participants are collaborating, policy drivers give extra impetus to the decarbonisation transition.

The decarbonisation agenda has been propelled forward in Europe by the EU green stimulus package to aid the post pandemic recovery and reach the climate change objectives set out by the Paris Agreement. This includes the launch of the Recovery and Resilience Facility, which offers support for the provision of ‘recharge and refuel’ stations to promote clean technologies¹. Europe’s turbocharged drive towards cleaner transportation is pertinent as transportation remains the only major economic sector in Europe in which emissions have increased since 1990².

In the US, until recently most efforts to de-carbonise the trucking sector have been at state level. Last year, California adopted the ‘Advanced Clean Trucks’ rule, imposing mandated sales quotas for zero-emission trucks that manufacturers must meet from 2024 (Figure 1). A broader group of 15 states and Washington D.C. have pledged to make at least 30% of new medium- and heavy-duty truck sales zero emission by 2030 and 100% by 2050. The recent ‘American Jobs Plan’ unveiled by President Biden contains an eye-catching US$174 billion of investment in EVs. This includes plans to build a network of 500,000 chargers by 2030 and electrify the federal fleet, including the US Postal Service.

Figure 1: Phased mandated zero emissions sales quotas for manufacturers in California
Percentage schedule by vehicle group and model year

_{Source: International Council on Clean Transportation, July 2020.
1 Source: European Cluster Collaboration platform, “Flagship area: Recharge and Refuel”, 23 November 2020.
2 Source: European Environment Agency, data from May 2014 and December 2020.}

_{The value of investments, and any income generated from them, can fall as well as rise.}

03 Going the distance: challenges facing the commercial EV transition

While destructive disruption characterised the passenger car electric transition, unique challenges for trucks are accompanied by distinct market characteristics.

We see a number of significant differences between the commercial and personal auto markets that will likely define the rate of EV adoption and the winners that emerge from the transition.

These are broadly that commercial vehicles:

• tend to have a greater focus on the economics of new truck purchases, with end-users taking into account the “total cost of ownership” (defined as the full cost of owning a vehicle, including initial purchase price, lifetime fuel costs, insurance, maintenance, and licensing).
• see much heavier day-to-day usage and thus buyers will have a preference for ‘tried and tested’ technology, typically waiting for millions of miles of testing prior to adoption.
• need a longer range and this is an important factor when assessing usage cases for commercial vehicles.
• require much more support, with uptime (time in use) a key determinant of fleet profitability. This necessitates extensive maintenance networks able to service vehicles.

The production of trucks also tends to differ from that of personal autos in that they are typically made to order, with far more customisable features (such as engine, transmission and weight distribution). Consequently, a much higher proportion of components will be supplied by third parties rather than being developed in-house. Therefore, companies’ own technology may not be key to defining the winners in the commercial EV transition. This reduces the risk of a squeeze on profits and cashflow from elevated investment in internal R&D, but it does introduce greater risks around product sourcing and supply chain concentration.

While there are challenges to overcome in the EV transition, distinct market characteristics have potential advantages for investors. Regional truck markets are relatively consolidated, with the EU, US, Indian and Chinese markets dominated by two to five players. Such companies have strong brand recognition and extensive service and maintenance networks that are difficult for new entrants to replicate. Market shares are relatively stable and competition on price is rare, which means less risk of disruption from new entrants and potential pressures on margins from price wars.

“Range anxiety” ramps up a gear

A challenge the personal and commercial auto sector share is “range anxiety”, but this is more complex for trucks. Current battery technology is not yet able to offer the 500-700 mile range required for long-haul trucking. While manufacturers can in theory extend range by stacking multiple batteries, weight then becomes the constraining factor. Based on current technology, US investment bank Raymond James estimates a battery weight of 10,000lbs would be needed to reach 500 miles of range, reducing the available commercial payload by over 20% versus a diesel engine (Figure 1).

Figure 1: Battery weight creates a payload challenge for EV trucks

_{Source: Battery University, Environmental Protection Agency, Raymond James (RJ) estimates, “Shifting Gears from Boom & Bust Pre-Buys to an Underlying Desire for New Equipment”, 20 November 2019. EV= electric vehicle. ICE= internal combustion engine.}

Larger batteries require more powerful charging stations to keep charge times down. Truck stops and fleet yards that service Class 8 heavy-duty trucks¹ require enough power supply for ultra-chargers of 1.7MW or more per charger, compared with most powerful direct current (DC) fast chargers currently available in the 350-500kw range². Infrastructure needs to be expanded and upgraded to meet such high charging requirements. Some health regulations limit human interaction with high voltage electrical feeds, which makes the development of robotic charging infrastructure important.

Such substantial charging requirements could result in stresses to grid capacity. The reliability of charging infrastructure is crucial for commercial transportation, requiring large backup generators. To give some idea of the scale of the necessary potential build-out, there are currently only 5,000 DC fast-charging stations in the US out of a total of nearly 42,000 EV charging stations³. This compares with a Class 8 population of around 3.4 million⁴. While President Biden has pledged to build a network of 500,000 EV chargers by 2030, it is not yet clear what proportion would be suited to charging commercial vehicles. Collaborative efforts between governments and industry participants are key to overcoming challenges such as these.

_{1 Class 8 trucks are defined in the US as trucks over 33,000lbs in weight.
2 Source: Lynn Daniels and Chris Nelder, “Steep Climb Ahead”, Rocky Mountain Institute, 2021.
3 Source: Alternative Fuels Data Center, April 2021.
4 Source: truckinginfo.com, January 2019.}

_{The value of investments, and any income generated from them, can fall as well as rise.}

04 Is hydrogen the answer?

Hydrogen could fuel our decarbonised future. How could such fuel-cell systems offer a solution for trucks?

Hydrogen fuel-cell systems may offer a solution to the potentially intractable battery-related issues for long-haul freight. Hydrogen truck manufacturer Nikola is targeting a 900-mile range for its Nikola Two model, with a full tank comparable in weight to diesel alternatives¹. Filling up the tank should also be easier and safer than with battery electric alternatives, as surplus spillage turns to water.

Commercial hydrogen production is currently largely for non-transportation uses, such as ammonia production and oil refining. Around 95% is generated from natural gas and coal², but hydrogen could eventually be a pollution-free energy source. Solar and wind power can be used in conjunction with electrolysers to create emission-free hydrogen (‘green’ hydrogen). Conversion of electricity to hydrogen could take place either off-site and be piped in, or via on-site electrolysers at the fuelling station (Figure 1).

Figure 1: From energy creation to energy consumption across the hydrogen value chain

_{Source: Nikola website, April 2021.}

Significant investment in hydrogen fuel-cell development and the infrastructure required to power fleets will be needed over the coming decade. We are encouraged by signs that manufacturers are in many instances looking to adopt a collaborative approach to this investment, helping to spread the burden of significant upfront investment. Notable examples of JVs in fuel-cell development include Daimler-Volvo, Toyota-PACCAR and Nikola-Iveco. H2Accelerate, a collaboration between manufacturers (Daimler, Volvo and Iveco) and fuelling infrastructure providers (OMV and Shell)³ to support synchronised investments into hydrogen adoption was announced last year. A decade long rollout is expected to begin with groups of customers willing to make an early commitment to hydrogen-based trucking.

_{1 Source: Nikola, April 2021.
2 Source: International Renewable Energy Agency, “Hydrogen: A renewable energy perspective”, September 2019.
3 One of these stocks is held in 4Factor portfolios.}

_{No representation is being made that any investment will or is likely to achieve profits or losses similar to those achieved in the past, or that significant losses will be avoided.
This is not a buy, sell or hold recommendation for any particular security. For further information on specific portfolio names, please see the Important information section.
The value of investments, and any income generated from them, can fall as well as rise.}

05 China leads the way in the electrification transition

The global nature of decarbonisation efforts in transportation highlights the depth of this structural trend and why it’s key to take a global lens to investment opportunities.

Asian OEMs have a head-start on their Western peers when it comes to fuel-cell technology. Toyota delivered its first hydrogen-powered truck to the Port of Los Angeles in November 2019. Meanwhile, Hyundai delivered the first 50 trucks of a 1,600 truck order to customers in Switzerland last year.

While broader Asia leads the way on hydrogen fuel-cell technology, China as the world’s largest auto market is well positioned for the EV transition, supported by government policy and declining battery costs. The global e-bus fleet has grown 93 times over seven years to over 516,000 in 2019 (Figure 1). The Chinese market is expected surpass the 1 million e-bus mark by 2023 and reach 1.3 million by 2025¹.

Figure 1: China dominates the electric bus market

_{Source: BNEF, Bloomberg Intelligence, “Electric Vehicle Outlook 2020, Bloomberg New Energy Finance”, 19th May 2020.}

Outside of China, EV adoption is also expected to accelerate in the next decade. 26 major cities globally have now signed the ‘C40 Green and Healthy Streets and Clean Bus Declaration’, committing to procure only zero-emission buses from 2025. Multiple European cities have adopted or are trialling EV refuse trucks. Paris, for example, has had electric trucks since 2011. US municipalities have generally been slower to adopt EV in the absence of clear policy drivers towards this transition, but this is changing as discussed earlier, particularly with the support of the Biden administration.

The global nature of these efforts highlights the depth of this structural trend and why it’s key to take a global perspective when it comes to investment opportunities. While the urban transport of cities is becoming increasingly electric, similarly manufacturers are introducing electrification across their product chain to meet carbon-free goals and improve profitability.

_{1 Source: Wood Mackenzie, “The growing global e-bus landscape in China and beyond: E-bus and infrastructure forecast for China, Europe and the US”, 16 September 2019.}

_{No representation is being made that any investment will or is likely to achieve profits or losses similar to those achieved in the past, or that significant losses will be avoided.
This is not a buy, sell or hold recommendation for any particular security. For further information on specific portfolio names, please see the Important information section.
The value of investments, and any income generated from them, can fall as well as rise.}

06 Far reaching opportunities across the global universe

The transition is not only in electrification, but also in company business models. A global approach enables investors to capture the primary as well secondary winners of this structural evolution.

Transition to ‘equipment as a service’

The shift to EV means truck manufacturers will increasingly be paid by distance travelled. Buying a truck outright is a significant capital expenditure (typically US$100-150,000 per truck), with demand levered into the economic cycle. Moving to an ‘equipment as a service’ model, could involve customers leasing the battery and charging infrastructure, while paying for certain services (such as driving and service & maintenance) on a per usage basis.

Truck manufacturers have historically traded at a discount to other industrials due to their elevated cyclicality. If they can smooth out their revenue stream by replacing a volatile capex cycle with more stable service revenues, we believe the market will reward them with higher earnings multiples. Such a transition can also increase customer “stickiness” as customer owners will become more tied to manufacturer battery/fuel-cell systems. More truck owners will take out extended service contracts with the manufacturer post the warranty period, especially as they will not have the in-house expertise to service the battery nor the company-specific software.