Sun, Aug 23, 2020 page16

• Germany and Detroit already have their own Teslas

  • By Chris Bryant / Bloomberg Opinion
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  When finance types talk about internal combustion engines, they often just use the abbreviation ICE. It is an appropriate name: Investors have a frosty view of auto companies that depend on gasoline or diesel to power their vehicles.

  Volkswagen AG, the world’s biggest automaker by sales, has a market value of 73 billion euros (US$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 US$352 billion valuation, even though its profits are tiny.

  

  A prototype Volkswagen AG ID.3 electric car is displayed at the International Frankfurt Motor Show in Germany on Sept. 9 last year.

  Photo: Reuters

  Budding Teslas, such as Rivian Automotive Inc and Nikola Corp, have achieved multibillion-dollar valuations before even delivering their first electric vehicles.

  The traditional industry giants of Germany and Detroit, such as Volkswagen and General Motors Co (GM), must be hugely frustrated by the market’s favoring of Tesla chief executive 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 automakers are spending tens of billions of dollars on doing exactly this; they just are not 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 sports utility vehicles.

  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 is an approach that has worked for utilities, which are gradually freeing their renewable-energy assets from the shackles of their legacy hydrocarbon businesses.

  GM and Volkswagen have made massive bets on electric vehicles. Their battery technology is increasingly competitive and they have sought partners to build their own battery-cell plants, as Tesla has done with Panasonic Corp.

  Their new vehicles are pretty eye-catching too. In the autumn, GM is to 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 would be used as the base for its other mass-market electric models.

  Volkswagen is licensing the platform to other automakers, 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 1 million battery-powered vehicles, Deutsche Bank AG analyst Tim Rokossa has said.

  You can see why Rokossa and his US 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 Group Corp’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. This week RWE took advantage of that high valuation by raising 2 billion euros of fresh capital.

  GM on a recent investor call sounded somewhat open to the idea of a green spinoff, 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.

  Automakers 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 cannot 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 have 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 have not embraced the idea.

  A full separation of VW’s MEB business is probably unrealistic, but even separate financial disclosure might help the valuation, Rokossa said.

  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 US$15 billion from supportive investors over the past decade, and it could probably raise another US$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 is 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.

  Chris Bryant is a Bloomberg Opinion columnist covering industrial companies. He previously worked for the Financial Times.

  This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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