Disclaimer: Views in this blog do not promote, and are not directly connected to any Legal & General Investment Management (LGIM) product or service. Views are from a range of LGIM investment professionals and do not necessarily reflect the views of LGIM. For investment professionals only.

Tesla’s squabbles don’t undermine the battery industry

Improved battery technology is transforming industries from automotive manufacturers to utilities. For investors looking to align their portfolios with this long-term growth, exposure should be focused on the battery value chain but diversified across it.

In batteries, the positive and the negative are finely balanced in the electrical circuit. But when it comes to investing in battery technology, we believe the positive should outweigh the negative.

Highly charged issue

Even when a headline about this market seems negative at a superficial glance – consider the recent public spat between Tesla and Panasonic over its jointly operated battery plant – the underlying story is positive. The root of the disagreement between Tesla and its supplier of lithium-ion battery cells, for example, is the former’s desire for a faster pace of production.

More broadly, though, it must be remembered that the growth of the battery market is not dependent on any individual company – or even any single sector.

The next generation of global energy infrastructure, for instance, is proving just as important a source of demand for battery technology. According to a new paper by Strategen, nearly four gigawatts of storage capacity were installed in 2018 alone, which doubled the cumulative installed capacity; that should rise to an estimated cumulative total of around 1,000 gigawatts by 2040.

Not all of that newly installed storage will come in the form of electric batteries, but this technology should remain critical in making the power generated by wind and solar plants more reliably available through the day.

Usage by electric vehicles, meanwhile, is expected to grow from below 50 gigawatt hours per year at present to almost 1,600 gigawatt hours per year by 2030.

Plugging in to the opportunity

Overall, these businesses therefore represent a compelling investment opportunity for those interested in capitalising on this high-growth megatrend. But as investors we must also be aware that many companies engaged in this emerging theme are in their early stages of growth and there can be difficulties in assessing the long-term viability of their battery projects. This necessitates working with dedicated independent experts who can drill down not just into what specific companies are doing today, but how such a nascent market is evolving.

This rapid adoption of electric vehicles alongside the robust growth in renewable energy capacity should benefit both battery-technology providers and the mining companies that produce the raw materials

For example, today lithium-based batteries are the dominant technology for electric vehicles, but tomorrow that could change. In 10 years’ time, flow-based batteries could well have the greater market share in grid storage, so that area of the ecosystem should not be ignored.

Investing in miners – particularly those already producing the raw materials rather than explorers and developers – can add further diversification. All else being equal, lithium producers will benefit from higher prices for the metal, potentially offsetting the negative impact on companies that consume lithium.

So when thinking about battery technology as a thematic investment, active research into the extent of a company’s involvement in this space is crucial. Given how new much of this technology is, it is vital that investors confirm the financial feasibility of a business’s battery projects. Running an operational grid storage facility is one helpful litmus test.

And then when constructing a portfolio of these firms, it is essential to diversify across the full battery value chain. The objective is to invest in the secular growth theme itself through a diversified and fully transparent portfolio.

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