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How innovative Asian firms have conquered niche environmental solutions


In this article:

    The rapid electrification of the car market highlights the global opportunities for the region’s technological leaders.  

    Technological innovation has helped propel Asian economic growth since the 1950s when Japanese companies were pioneering technologies including video tape recorders and high-speed trains. Today, the region accounts for more than two fifths of the world’s research and development, and dominates sectors that underpin the modern global economy, including advanced semiconductors and industrial automation.

    Innovative Asian companies have captured strong positions in key environmental technologies. A look at the global electric vehicle (EV) market illustrates how, with supportive public policy and pre-eminence in related sectors such as batteries, they have developed commanding niches within technologies that are poised to accelerate the transition to a more sustainable global economy.

    Policy tailwinds behind environmental solutions

    We believe a growing focus on technological leadership and climate action among the region’s governments combines to support Asian companies whose products can address environmental challenges, not least in the EV space.

    Heightened geopolitical tensions have driven a push for more technological independence across major Asian economies. This has catalysed support for indigenous innovation.

    Semionductors, upon which many advanced technologies heavily depend, have been a focal point of trade squabbles and state funding. South Korea, which dominates global production of memory chips, has for instance introduced tax incentives and subsidies to help its industry compete in the higher-value non-memory chip space.

    National high-tech ambitions extend far beyond semiconductors, including to technologies that hold the key to environmental solutions. The Chinese government is backing a range of sectors deemed strategically important, including renewable energy equipment and EVs. Five of the largest 11 recipients of state subsidies in 2021, which totalled roughly USD 31 billion, were EV manufacturers or battery makers.

    National climate targets and local air quality concerns meanwhile are driving broad policy support for EVs and other environmental solutions. China has pledged that its CO2 emissions will peak before 2030. India – home to seven of the world’s 10 most polluting cities in 2022 – aims to reduce its emissions intensity to 45% of 2005 levels by 2030.

    The decarbonisation of personal road transport, which accounts for roughly 11% of global man-made CO2 emissions, is key to achieving both climate targets and cleaner air. In its roadmap for reaching net zero by 2050, the IEA estimates that 60% of global new car sales should be electric by 2030.

    Driving innovation in electric vehicles

    The emergence of an Asian EV ecosystem has been a product of leadership in associated technologies, government policy and corporate innovation.

    First, pre-eminence in critical electric car components has been an advantage. Lithium-ion batteries, which are widely used in consumer electronics, can contribute up to 40% of the cost of making an EV.  Asia accounted for 90% of global lithium-ion battery manufacturing in 2021, led by Chinese companies including CATL and BYD (which is also a large electric vehicle maker). Leadership in semiconductors also helps: the latest EVs each contain a few thousand chips.

    Second, active government intervention in China over the past two decades has fostered the creation of the world’s largest EV market. As well as subsidies and tax breaks for battery and EV companies, policies such as license plate rationing have encouraged people to buy EVs.

    Roughly half of the 6.6 million EVs sold worldwide in 2021 hit the road in China. This is not only a function of market size: as illustrated below, EVs’ share of new cars in China (16%) is more than double that of any other major Asian economy and is comparable with France and the UK (19%).

    Looking ahead, bans on internal combustion engines by 2035 stand to accelerate EV adoption this decade in China, as well in as key markets including South Korea and Japan. More than half of Chinese new car sales are forecast to be electric by the end of the decade.

    Third, the fast-growing EV ecosystem has fostered innovation. One example is a Shenzhen automation specialist that has applied its technology to enhance the energy efficiency of EV drivetrains. It is now one of the largest third-party providers of motors and motor control systems to China’s EV makers.

    Innovation in the EV space is not limited to China or the advanced car-making economies of South Korea and Japan. A new generation of mobility-focused software companies is emerging in India,  where local information technology talent and expertise has been cultivated, at least partly, by its world-beating technology outsourcing industry.

    One example is an Indian provider of technologies that go into the world’s largest carmakers’ vehicles. As well as supplying components for EV powertrains, it specialises in advanced software that can support varying degrees of autonomous driving.

    A focus on innovative niches

    As in other industries that are key to the transition to a sustainable global economy, we believe that the most compelling opportunities within the EV sector lie in specialist technologies that, for instance, make vehicles more efficient and enable developments such as autonomous driving.

    Asia boasts a large and growing number of companies that command niches in fast-growing areas of the new economy, whose focus on technological innovation and leadership creates high barriers to entry to competitors that can help protect profit margins.

    Although China’s gradual decoupling from the global economy poses risks for companies and investors, the concerns may be overdone. The critical mass of its domestic market should continue to afford Chinese technology leaders opportunities for growth.

    For companies in Malaysia, Vietnam and Indonesia, we believe the relocation of Western supply chains and the substitution of China-made goods could offset the possible loss of access to the Chinese market.

    With policy support for tackling air pollution and mitigating climate change, we believe long-term opportunities will continue to be fostered for innovative companies in the region whose products and services help solve ever more pressing environmental challenges.

    This article has been written by Oscar Yang and Paul Peng of Impax Asset Management. Impax is a specialist asset manager, investing in the opportunities arising from the transition to a more sustainable economy. Impax is a delegated manager of BNP Paribas Asset Management. 


    Please note that articles may contain technical language. For this reason, they may not be suitable for readers without professional investment experience. Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. This document does not constitute investment advice. The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns. Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions). Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.
    Environmental, social and governance (ESG) investment risk: The lack of common or harmonised definitions and labels integrating ESG and sustainability criteria at EU level may result in different approaches by managers when setting ESG objectives. This also means that it may be difficult to compare strategies integrating ESG and sustainability criteria to the extent that the selection and weightings applied to select investments may be based on metrics that may share the same name but have different underlying meanings. In evaluating a security based on the ESG and sustainability criteria, the Investment Manager may also use data sources provided by external ESG research providers. Given the evolving nature of ESG, these data sources may for the time being be incomplete, inaccurate or unavailable. Applying responsible business conduct standards in the investment process may lead to the exclusion of securities of certain issuers. Consequently, (the Sub-Fund's) performance may at times be better or worse than the performance of relatable funds that do not apply such standards.

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