The race towards net-zero emissions is intensifying, and electric vehicles are at the forefront of this green revolution. Imagine a future where Southeast Asia’s bustling cities are powered by clean energy, with electric vehicles (EVs) zipping silently through the streets, reducing pollution and dependency on fossil fuels.
This vision is becoming a reality. As Southeast Asia gears up to embrace this change, investors have a unique chance to capitalise on a market poised for explosive growth and innovation.
Source: McKinsey Centre for Future Mobility
The Electric Vehicle ecosystem involves a diverse network of stakeholders, including original equipment manufacturers (OEMs), charging infrastructure providers, battery swapping services, fleet management companies, and other related services.
When investors express interest in the EV sector, it’s essential to understand precisely where they are directing their investments. Choosing the right focus area within this complex web is crucial for success in this rapidly evolving industry.
Globally, the demand for EVs has been rapidly increasing. Sales rose by about 30 per cent in 2023, and while this is slower than the impressive 54 per cent growth observed in 2022, the market continues to evolve with strong momentum. Projections indicate that EV adoption will reach 86 per cent by 2030, more than double the 40 per cent previously projected in April 2023.
Also Read: Infographic: A visualisation of Indonesia’s electric vehicle transition
Several driving forces contribute to this rapid ascent:
- Government policies: Governments around the world are announcing a growing number of net-zero targets to meet the commitments of the Paris Agreement, which has trickled down to decarbonising the transportation sector.
- Product variety and quality: There are now a variety of EV options with more designs, better quality, and longer range, especially from manufacturers in China, the US, and Europe.
- Technological advances: Competition among global players has driven costs down. The cost of lithium-ion batteries, which make up about 40 per cent of EV production costs, has plummeted by 97 per cent since 1991 and is expected to continue to fall by an average of 11 per cent per year through 2030. Demand for batteries remains high, prompting a surge in battery manufacturing plants worldwide.
Few sectors today enjoy such strong macro tailwinds. Many global private and public investors have profited from the IPOs of Tesla, XPeng, Nio and BYD. Yet, we are still scratching the surface as global EV penetration is still relatively low, accounting for somewhere between 14 and 18 per cent of car sales in 2023.
The good news is that investors in Southeast Asia can still benefit from the growth of the EV sector. While the adoption in Southeast Asia is still in its infancy and lower than the global standards, there exists a delicate balance of investment opportunities and challenges.
Some of these opportunities include:
- Abundance of raw materials: The region is well-positioned to become a strong EV supply market given the availability of raw materials in the region. Indonesia is home to 22 per cent of world’s nickel reserves, a crucial material for EV battery cathodes.
- Large market potential: The region’s growing 690+ million population, with over 240 million motorised two-wheelers (2w) and 75 million cars (4w) represents a significant and attractive market.
- Government Incentives: All Southeast Asian governments have set goals and incentives for EV adoption, ranging from tax breaks, exemptions from odd-even plate rules, and reduced fossil fuel subsidies (although the success rates differ from country to country).
Source: Redseer – SEA Electric Vehicles – Charging Up Part 2
On the flip side, there are also mounting challenges facing the region:
- Market fragmentation: The fragmentation of the markets meant that we were unlikely to enjoy the economies of scale to rival that of China and the US.
- Manufacturing expertise: The region faces a disadvantage compared to global competitors due to a lack of expertise in EV manufacturing and supply chain management.
- Charging infrastructure: A severe lack of charging infrastructure is unable to assuage range anxiety for long distance driving, hampering EV adoption.
Source: Attribution 4.0 International and Shutterstock
To navigate these opportunities and challenges, let us deconstruct the EV ecosystem into three key areas:
- Original Equipment Manufacturers (OEMs)
- Infrastructure
- Services and enablers
Original Equipment Manufacturers (OEMs)
EV OEMs are companies responsible for designing, producing, and assembling essential components of EVs. These components include batteries, electric drivetrains, chassis, charging systems, and other parts crucial for functionality and performance. They can be broken down further in 4W and 2W of which the latter has seen very strong interest from regional investors.
Also Read: The growth of electric vehicles is saving the planet, one trip at a time
Some notable examples of 2W in the region include DatBike, Edde Rides, Charged Asia, Electrum, Volta, & Alva. While various business models exist, OEM operations are generally capital-intensive – manufacturing EVs and managing the supply chain require substantial investment. Unlike Internal Combustion Engine Vehicles (ICEs), EVs have fewer moving parts. Consequently, the sector has lower barriers to entry, leading to a proliferation of 2W EV brands in Southeast Asia.
Winning and dominating the market are likely to be determined by several factors, including a differentiated brand and design that resonates with Southeast Asian aspirational consumers, the broadest coverage of distribution and accessibility, superior product performance and driving and riding experience, and the most efficient manufacturing and supply management.
Infrastructure
EV infrastructure encompasses essential structures, machinery, and equipment to support EV adoption. This includes charging stations, battery swapping facilities, and end-of-life battery recycling. Investment in this sector tends to be capital investment-intensive, especially in battery leasing and swapping services where working capital plays a significant role.
While the technology is reaching maturity, digital tools, software, and data would enhance operational efficiency. Success hinges on securing financing from deep-pocketed funds (such as infrastructure funds or bank debt) and executing its business plan flawlessly.
For instance, in the competitive landscape of charging infrastructure and battery swapping, players like Eboost and Tiger New Energy must secure prime real estate locations, establish strong partnerships with utility providers and local governments, invest in skilled manpower for operations, maintenance and security, and potentially explore franchising models to scale. In battery recycling, securing proprietary feedstock channels at competitive prices will become a critical differentiator.
Services and enablers
EV services and enablers, a lighter facet of the EV ecosystem, encompass a wide range of offerings and support systems aimed at facilitating the adoption, maintenance, and efficient use of electric vehicles. These services span various areas, including logistics (leveraging EV fleets), vehicle servicing, battery intelligence systems, fleet management (both software and know-how), and financing/leasing.
A critical differentiator for EVs, compared to ICEs, lies in their data-integrated telematics capabilities. EVs generate substantial driving, performance, and telematic data during operations, which presents exciting opportunities.
For instance, battery performance data could revolutionise EV underwriting, creating a secondary market for the industry. Insurance premiums could be tailored based on drivers’ behaviour, and resale values could vary depending on vehicle ownership. Logistics companies like APX, Mober, Dash, and Blitz can track driver/rider behaviour and performance, incentivising better delivery outcomes.
Observations from our 10 months of analysing the Southeast Asian EV market reveal compelling investment opportunities. Many venture capitalists and infrastructure investors in the US, Europe, and China have already reaped rewards. Favorable macroeconomic and regulatory conditions, increased EV choices, cost parity with internal combustion engines (ICEs), improved charging infrastructure, and growing consumer awareness drive this trend.
However, challenges persist: Southeast Asia lags in manufacturing know-how, talent availability, and fragmented markets. Investors must also choose their focus, given the wide variety of ecosystems that present different risk/reward scenarios.
From a climate perspective, we also have to bear in mind that the only way to get to zero-emission driving is to decarbonise the grid, even with breakthrough EV penetration, Southeast Asia’s grids still rely on coal, fossil gas, and other polluting fuels, a significant issue that must be addressed.
The Radical Fund is seeking business models that are capital-light while delivering a twin strategy of scaled commercial and climate impact. Please reach out to us for feedback or comments to share regarding the EV industry in Southeast Asia.
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