We expect automobile electrification to accelerate in the ongoing global shift towards carbon-neutrality, with xEV penetration progressing alongside tighter environmental regulations, core technology innovations and falling costs. Europe has led the way in terms of environmental regulations, but we focus on trends towards tighter greenhouse gas (GHG) standards in the US as well. In this report we review our xEV demand forecasts based on analysis of cost simulations compared with the internal combustion engine (ICE), and then select core technologies within the various supply chains and summarize our focus stocks.

 Green Transformation (GX) unstoppable; focus on changes in the US: 2020 was a year in which tighter environmental regulations originating in Europe accelerated automobile electrification, but we do not think this underlying trend will change in 2021, either. In particular, we expect stricter GHG emission standards in the US under the Biden administration, triggering a delayed shift to xEVs, including HEVs. We think any sharp tightening of US regulations would increase the probability of renewed growth in HEVs as a realistic solution in addition to BEVs.

 Conditions for cost parity gradually aligning: Tesla disclosed a roadmap for a 56% cost-reduction in lithium-ion batteries (LiB) from the current level at its Battery Day, but existing OEMs have also started to set out similar cost trajectories, and the possibility of cost parity with ICE has begun to emerge.

Europe is due to tighten its exhaust emission restrictions (Euro 7), and ICE costs are expected to rise in this market. We thus think it will be relatively easy to achieve cost parity in the European market. A roadmap for independent BEV uptake has started to fall into place in China as well on factors including greater penetration by lithium ferrophosphate (LFP) batteries than expected, and the appeal of ultra-low-end BEVs led by the recent GM Wuling Mini. We expect BEV penetration to advance further in developed nations too if costs of below $100/kWh can be achieved (pack cost basis) in 2025 on.

 xEV demand to reach 56.3 million units in 2030: We forecast global 2030 xEV demand of 56.3 million units (14.8 million BEVs, 37.4 million HEVs). We expect BEV growth in the European and Chinese markets to be driven by regulations and subsidies through 2025, with independent demand growth from 2025 on. In the HEV segment we expect stable growth through MHEV/SHEV combinations tailored to regional characteristics. We focus on demand growth potential in North America in particular.

 Related supply chains and focus stocks: Under a scenario of expanding xEV demand, we focus on value-added growth in the PCU, traction motor, battery and peripheral material supply chains. Our focus stocks in individual domains are Toyota Industries (e-compressors) and Denso (inverters/HVAC systems) among automobile OEMs and auto-parts companies, Nidec (E-Axle), Nichicon (film capacitors) and Rohm (SiC power semiconductors) in electronic components, and Sumitomo Chemical (separators) in the chemicals sector.