(Bloomberg Opinion) — When finance types talk about internal combustion engines, they often just use the abbreviation ICE. It’s an appropriate name: Investors have a frosty view of car companies that depend on petrol or diesel to power their vehicles.
Volkswagen AG, the world’s biggest auto maker by sales, has a market value of 73 billion euros ($87 billion), or about 6.5 times the earnings it generated last year. By contrast, Tesla Inc.’s all-electric lineup has propelled it to an astonishing $352 billion valuation even though its profits are tiny. Budding Teslas such as Rivian Automotive Inc. and Nikola Corp. have achieved multi-billion dollar valuations before even delivering their first electric vehicles.
The traditional industry giants of Germany and Detroit, such as Volkswagen and General Motors Co., must be hugely frustrated by the market’s favoring of Elon Musk and his upstart peers. Tesla has impressive software and battery technology, but others know how to build a decent electric vehicle now. Established carmakers are spending tens of billions of dollars on doing exactly this; they just aren’t very good at getting credit for it. Some environmentally focused investors refuse to ignore the fact that the incumbents still make lots of gas-guzzling SUVs.
So perhaps the answer is for automakers to spin off their electric-vehicle activities to try to get the market to ascribe them Tesla-like valuations. It’s an approach that’s worked for utilities, which are gradually freeing their renewable-energy assets from the shackles of their legacy hydrocarbon businesses.
GM and Volkswagen have both made massive bets on electric cars. Their battery technology is increasingly competitive and they’ve sought partners to build their own battery-cell plants, as Tesla has done with Panasonic.
Their new vehicles are pretty eye-catching too. In the autumn, 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 vehicle built on its new “MEB” vehicle platform, which will be used as the base for its other mass-market electric models.(2)
Volkswagen is licensing the platform to other carmakers, including Ford Motor Co., so it could become a money spinner. The German company will probably pass Tesla and become the world’s largest producer of electric vehicles in 2022, when it should sell more than a million battery-powered cars, according to Deutsche Bank analyst Tim Rokossa.
You can see why Rokossa and his American colleagues are urging GM and Volkswagen to separate their electric vehicle activities. This would help unlock value and maybe let the companies raise capital more easily. GM has already separated its Cruise autonomous-driving unit, helping it to raise billions of dollars from investors including SoftBank’s Vision Fund. Why not do similar with GM’s Ultium battery system and the GM vehicles that use it?
Other industries upended by the energy transition are thinking along similar lines. German utility RWE AG’s shares have soared since it completed an asset swap with rival Eon SE that left it much more focused on generating clean electricity.(1) This week RWE took advantage of 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 investor call, although Volkswagen was more circumspect. In part, this reluctance is partly down to Europe’s environmental regulations. The legacy Volkswagen business needs to include electric vehicles to keep the average emissions of its fleet within European guidelines.
Carmakers are also naturally wary of hiving off all of their most promising technology, such as electric batteries, for fear that investors might mark down the remaining ICE business as a “bad bank” — albeit a profitable one. How wise is it to chase Tesla’s nosebleed valuation anyway? It can’t be justified by any normal metric.
Volkswagen’s complicated governance is another barrier to change. Minority shareholders’ take a backseat to the Porsche and Piech families, the State of Lower Saxony and the trade unions. I’ve written before about how the company’s luxury brands — Porsche, Lamborghini and Bugatti — might be worth as much as 100 billion euros if listed separately and valued like rival Ferrari NV. The people who call the shots at Volkswagen haven’t embraced the idea. A full separation of VW’s MEB business is probably unrealistic but even separate financial disclosure might help the valuation, says Rokossa.
Still, there is something enticing about an electric spinoff, which might be good for shareholders and workers. Tesla has been able to raise more than $15 billion from supportive investors over the past decade, and it could probably raise another $5 billion tomorrow if it wanted. Volkswagen, meanwhile, must fund its electric investments — estimated at 30 billion euros over five years — mostly from its own cash flows, meaning there’s less money left over to pay employees.
Perhaps if Tesla did weaponize its share price by raising another enormous chunk of cheap capital, that might convince rivals to think more creatively.
(1) Audi and Porsche developed a separate electric platform for the luxury segment, called PPE.
(2) Though RWE does still operate coal plants.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Chris Bryant is a Bloomberg Opinion columnist covering industrial companies. He previously worked for the Financial Times.
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