The J.P. Morgan Japan auto team conducted a xEV survey covering Europe, the US, and China. The growth scenario for battery electric vehicles (BEVs) is driven by demand from Europe and China. In the US, BEV uptake faces hurdles from pricing and driving range. Moreover, the potential for hybrid electric vehicles (HEVs) seemed greater than expected, with high latent demand globally (centered on mild HEVs in Europe, mild/strong HEVs in China, and strong HEVs in the US). Strengthening of fuel-economy regulations in the US, where the acceptance of BEVs is low, will likely boost HEVs. We prefer Toyota Industries (6201) and Denso (6902) within Japan OEMs and auto parts.

 Subsidies have worked in Europe, “end ICE” sentiment has taken hold: The BEV market is rapidly growing in Europe, where our survey confirmed that consumers have the strongest “end ICE” sentiment of phasing out internal combustion engines. That said, price sensitivity for buying BEVs is also high, confirming that the current subsidy programs of Western Europe have been effective. Although we think some caution is warranted on the potential for recoil in BEV demand when subsidy programs end, we expect Europe to be the driver of global BEV/PHEV demand for the time being.

 China’s willingness to spend on xEVs unexpectedly high, HEV preference also strong: The Chinese market stands out for the highest price tolerance for xEVs among the three markets. This suggests potential not only for low-price BEVs, but also for growth in demand for high-end BEVs in the future.

Moreover, user preference for HEVs was unexpectedly high. Once official decisions are made on China’s modifications to its NEV regulations (indirect support for HEVs) and the HEV ratio (50%) in the 2035 road map of China’s Society of Automotive Engineers (SAE), growth could be triggered in demand for HEVs as well as BEVs.

 Regulatory changes in North America poised to be HEV driver: North American acceptance of BEVs was lower than we expected, and BEVs seem to face high hurdles to demand growth. Meanwhile, recognition of HEVs has made reasonable headway, owing in part to the relatively high market share of Japanese OEMs. As the Biden administration launches, we think tightening of GHG regulations (EPA) and CAFE fuel-economy regulations (NHTSA) will be unavoidable. HEV demand currently seems highly likely to grow as a result.

 Opportunity to invest in Japanese auto parts companies: Though the survey confirmed that the European and Chinese markets will be the drivers of the BEV market, the potential of HEVs in the US and Chinese markets seemed higher than expected. Conditions seem particularly suitable for growth in demand for strong HEVs (a specialty of Japanese OEMs) in the US, where Japanese OEMs have high market share and where environmental regulations will likely be tightened going forward. Denso has already made progress on increasing sales of inverters to US brands, and our focus is on further business opportunities going forward. Our core recommendations for the electrification scenario are Toyota Industries (6201) and Denso (6902).