We may be on the cusp of a great global boom in the automotive industry. That may be hard to believe given all the ink spilled on the troubles at the mossbacked mastodons known as GM, Ford and Chrysler. But there are reasons to believe something big is afoot here in the land of wheels. And the investment opportunities it opens up are surprising.

The first little nugget comes from The Economist, which points out that in 2008, for the first time ever, consumers in Brazil, Russia, India and China (the BRIC countries) bought more cars than U.S. consumers. The year, despite all its troubles, may still hit 59 million vehicle sales, an all-time record. By the end of this decade, which is not far off, China will pass the U.S. as the world’s largest auto market.

All that must give even the most gloomy mind reason to pause. It gets better, though. Yes, all those cars will need roads. But perhaps even more interesting is to think about what will power the cars of the future.

Someday, most of these new cars may be electric or hybrids. This is not some pie-in-the-sky vision. China – and the rest of the emerging markets – has an opportunity to leapfrog technologies here, just as it did with communications. China isn’t laying out miles and miles of phone lines. The country is going wireless. In the same way, don’t expect China to invest heaping piles of money in gas stations.

So reasons Alex Molinaroli of Johnson Controls, which makes car parts and specializes in battery technology. He thinks electric vehicles in China on a large scale could well happen before they do in the U.S. “They don’t have the legacy costs chasing them around,” he says, referring to America’s vast network of service stations and all that supports them.

Whether that happens or not is beside the main point. The bigger idea is that we’re moving into an era when electric cars are going to be a big part of the pie, rather than a novelty. It is only a matter of time. “Just about every manufacturer is now planning to launch vehicles with hybrid powertrains within the next few years,” reports The Economist. In these so-called hybrid electric vehicles (HEV), battery technology will play a big part. The battery market is hot right now.

The above chart “Battery Market Booms” shows the growth in the size of the rechargeable battery market by battery type over the years. In 2008, despite all the economic woes plaguing nearly everything, the market really took off.

A Key Resource in Batteries is Lithium

But there is another interesting material in the mix, too. And here we get to the surprising opportunity. If you look at that chart again, you’ll see lithium-ion batteries have come to dominate the market. In its last conference call, OM management said that “even with the recent global economic uncertainty, the lithium-ion battery market is expected to grow by 6-8% in 2009,” which is about half of the 2008 growth rate, but healthy, nonetheless.

Note it’s lithium-ion, not nickel, batteries. As HardAssetInvestor.com notes: “While calling the winner in the battle of the HEVs’ battery technologies is currently impossible, one thing is clear: The winning technology will be lithium based.”

The automobile will continue to be an important and highly prized product. The biggest markets for it will be emerging markets. And the fastest growing segments will be hybrids and electric cars. Rather than buy the manufacturers of these cars, or even the makers of the batteries, it may be more profitable to look at what goes in the batteries – lithium, for instance.

Until Next Time,
Chris Mayer

December 19, 2008

Chris Mayer

Chris Mayer studied finance at the University of Maryland, graduating magna cum laude. He went on to earn his MBA while embarking on a decade-long career in corporate banking. Chris is the editor of Capital and Crisis and Mayer’s Special Situations, a monthly report that unearths unique and unconventional opportunities in smaller-cap stocks. In 2008, Chris authored Invest Like a Dealmaker: Secrets From a Former Banking Insider.

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