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(Bloomberg’s opinion) – When funders communicate on internal combustion engines, they simply use the abbreviation ICE. It’s a proper name: Investors have an icy view of automakers who rely on gasoline or diesel to force their vehicles.
Volkswagen AG, the world’s largest car manufacturer through sales, has a market of 73 billion euros ($87 billion), or about 6.5 times the profits it generated last year. By contrast, Tesla Inc.’s all-electric line has propelled it to a staggering $352 billion rating, even if its profits are minimal. Aspiring teslas, such as Rivian Automotive Inc. and Nikola Corp., have made multimillion-dollar valuations even before delivering their first electric vehicles.
Traditional industry giants in Germany and Detroit, such as Volkswagen and General Motors Co., will have to be incredibly frustrated by the market’s preference for Elon Musk and his upstart competitors. Tesla has impressive battery software and technology, but others know how to build a decent electric vehicle now. Established automakers spend tens of billions of dollars to do just that; they’re just not very smart to get credit for it. Some environmentally conscious investors refuse to forget the fact that existing operators still manufacture many energy-intensive SUVs.
So, perhaps the answer is that automakers are leaving their electric vehicle business to find that the market gives them Tesla-type ratings. This has worked for utilities, which are releasing their renewable energy assets from the chains of their former hydrocarbon activities.
Both GM and Volkswagen have made big bets on electric cars. Their battery generation is increasingly competitive and have been for partners to build their own mobile battery plants, as Tesla did with Panasonic.
Their new cars are also flashy. In the fall, GM will release an electric edition of its great Hummer, which could represent serious competition for Tesla’s Cybertruck. Meanwhile, Volkswagen has just introduced the compact ID.3, the first vehicle built on its new “MEB” vehicle platform, which will serve as the basis for its customers’ other electric models. (2)
Volkswagen licenses the platform to other automakers, adding Ford Motor Co., so it can become a silver industry. The German company is likely to outperform Tesla and the world’s largest electric car manufacturer by 2022, when it is expected to 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 business. This would help unlock the price and make it less difficult for corporations to raise capital. GM has already separated its Cruise autonomous driving unit, helping it raise billions of dollars from investors, adding SoftBank’s Vision Fund. Why not do the same with GM’s Ultium battery formula and the GM cars that use it?
Other industries disappointed by the energy transition are thinking in the same direction. The actions of the German public service RWE AG have skyrocketed since the conclusion of a change in assets with its rival Eon SE, which has left it much more focused on the generation of blank electricity. (1) This week, RWE took advantage of this maximum valuation by raising EUR 2 billion of new capital.
GM seemed somewhat open to the concept of a green split in a recent investor call, Volkswagen was more circumspect. This reluctance is partly due to European environmental regulations. The business inherited from Volkswagen will have to come with electric cars to keep the average emissions of its fleet in European guidelines.
Automakers are also naturally reluctant to get rid of all their most promising technologies, such as electric batteries, for fear that investors will call the remaining ICE business a “bad bank,” albeit profitable. How sensible is it to keep assessing Tesla’s nosebleeds anyway? It is justified by general statistics.
Volkswagen’s confused government is another impediment to change. Minority shareholders are taking over the Porsche and Piech families, the state of Lower Saxony and the unions. I have already written about how the company’s luxury brands, Porsche, Lamborghini and Bugatti, could be worth up to one hundred billion euros if indexed and valued as their rival Ferrari NV. The other people who chose Volkswagen didn’t embrace the idea. A complete separation of VW’s MEB business is probably unrealistic, however, even a separate monetary disclosure can help valuation, Rokossa said.
However, there is something eccentric about an electrical split that can be favorable to shareholders and workers. Tesla has been able to raise more than $15 billion of favorable investors over the past decade, and could probably raise another $5 billion if desired. Volkswagen, for its part, has to finance its electricity investments, estimated at 30 billion euros over five years, mainly with its own currency flow, meaning that there are fewer coins left to pay employees.
Perhaps if Tesla valued the value of its inventory by expanding a massive amount of reasonable capital, it could convince its rivals to think more creatively.
(1) Audi and Porsche have developed a separate platform for the luxury segment, called PPE.
(2) Although RWE operates coal-fired power plants.
This column necessarily reflects the perspectives of the editorial board or Bloomberg LP and its owners.
Chris Bryant is a Bloomberg opinion columnist covering commercial companies. He’s been working for the Financial Times in the past.
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