(Bloomberg Opinion) – When financial types talk about internal combustion engines, they often just use the acronym ICE. It’s an appropriate name: investors have a frosty view of car companies relying on gasoline or diesel to steer their cars.
Volkswagen AG, the world’s largest carmaker by sale, has a market value of 73 billion euros ($ 87 billion), or about 6.5 times the revenue it generated last year. In contrast, the all-electric setup of Tesla Inc. has it fueled a surprising valuation of $ 352 billion, although its profits are small. Budding Teslas like Rivian Automotive Inc. and Nikola Corp. have estimates of several billion dollars before they even delivered their first electric cars.
The traditional giants of the German and Detroit industries, such as Volkswagen and General Motors Co., must be very frustrated by the advantage of the market for Elon Musk and his rising peers. Tesla has impressive software and battery technology, but others now know how to build a decent electric car. Established automakers are spending tens of billions of dollars to do just that; they are just not very good at getting credit for it. Some environment-oriented investors refuse to ignore the fact that the entrants still make a lot of gas-guzzling SUVs.
That may be the answer for motorists to spin out their activities for electric cars to try to get the market to give them Tesla-like valuations. It is an approach that has worked for utilities, which are gradually freeing their renewable energy assets from the curves of their legacy hydrocarbon companies.
GM and Volkswagen have both made massive bets on electric cars. Their battery technology is becoming increasingly competitive and they have been looking for partners to build their own battery cell plants, as Tesla has done with Panasonic.
Their new cars are also pretty striking. In the fall, GM will launch an electric version of its hulking Hummer, which could give Tesla’s much-hyped Cybertruck some serious competition. Meanwhile, Volkswagen has just launched the ID.3 compact, the first car built on its new “MEB” vehicle platform, which will be used as a basis for its other mass-market electric models. (2)
Volkswagen licensed the platform to other manufacturers, including Ford Motor Co., so that it could become a money spinner. The German company is likely to overtake Tesla and become the largest electric car maker in the world by 2022, when it will have to sell more than a million battery-powered cars, according to German Bank analyst Tim Rokossa.
You can see why Rokossa and his American colleagues urged GM and Volkswagen to separate their activities from electric cars. This would help to unlock value and perhaps increase the companies capital more easily. GM has already separated its Cruise autonomous driving unit, and has helped raise billions of dollars from investors including SoftBank’s Vision Fund. Why not do the same with GM’s Ultium battery system and the GM cars that use it?
Other sectors affected by the energy transition are thinking about similar lines. The shares of German utility RWE AG have risen since it completed an asset swap with rival Eon SE which is much more focused on generating clean electricity. (1) This week, RWE benefited from that high valuation by raising 2 billion euros of fresh capital.
GM sounded somewhat open to the idea of a green spinoff on a recent call from investors, although Volkswagen was getting more attention. In part, this reluctance is partly offset by Europe’s environmental regulations. The legacy Volkswagen company must incorporate electric cars to keep the average emissions of its fleet within European guidelines.
Carmakers are also naturally apprehensive about scaring off all of their most promising technology, such as electric batteries, for fear that investors might brand the remaining ICE company as a “bad bank” – albeit a lucrative one. How wise is it to at least chase the appreciation of Tesla’s nosebleeds? It cannot be justified by any normal metric.
Volkswagen’s complicated management is another barrier to change. Minority shareholders take a backing from the Porsche and Piech families, the state of Lower Saxony and the unions. I have previously written about how the company’s luxury brands – Porsche, Lamborghini and Bugatti – can be worth as much as 100 billion euros if they are mentioned separately and valued as rival Ferrari NV. The people who mention the shots on Volkswagen have not embraced the idea. A complete separation of VW’s MEB company is likely to be unrealistic, but even separate financial disclosure could help the appreciation, Rokossa says.
However, there is something appealing about an electric spinoff, which can be good for shareholders and workers. Tesla has been able to raise more than $ 15 billion from supporting investors in recent decades, and it could probably raise another $ 5 billion tomorrow if it wanted to. Volkswagen, meanwhile, has to finance its electric investments – estimated at 30 billion euros over five years – mostly from its own cash flows, which means there is less money left to pay employees.
Perhaps if Tesla armed its share price by increasing another enormous chunk of cheap capital, competitors might be persuaded to think more creatively.
(1) Audi and Porsche developed a separate electric platform for the luxury segment, called PPE.
(2) Although RWE still serves coal plants.
This column does not necessarily reflect the opinion of the editors or Bloomberg LP and its owners.
Chris Bryant is a Bloomberg Opinion columnist who deals with industrial companies. He previously worked for the Financial Times.
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