Combustion engines are the toxic assets of automakers
LONDON (Reuters Breakingviews) – Internal combustion engines could be the toxic powerhouses of the electric vehicle revolution. Volkswagen, Ford Motor and other industry veterans are rapidly turning to battery-powered vehicles as demand for automobiles that burn fossil fuels is dying. After the 2008 financial crisis, banks cleaned up by transferring failed loans to so-called bad banks. Automakers could do something similar.
The creation of failing banks has helped lenders limit their exposure to bad assets and present a healthier image to shareholders. Car manufacturers’ combustion engine divisions aren’t quite as toxic: for one thing, they’re still profitable. But their days are numbered. In Europe, more than three-quarters of new cars will be electric by 2030, according to Jefferies analysts. Splitting up gas-guzzling divisions could limit exposure to shrinking assets and highlight the value of Tesla-like electric businesses.
Take Volkswagen. Let’s assume electric vehicles account for a fifth of the German automaker’s sales by 2025, generating revenue of 55 billion euros, according to calculations based on data from Refinitiv. Put that on a conservative multiple of 3 times – around a third of the equivalent valuation of the Elon Musk Group at the start of December – and the company would be worth around 160 billion euros today. That’s about the same as VW’s total value, including debt.
Automakers could unlock more value by teaming up. Suppose two rivals pool their fossil fuel units and sell part of the pool to a financial investor. The new entity could cut costs, helping it maintain profitability even as combustion engine sales decline. And by retaining only a minority stake, the manufacturers would no longer have to fully consolidate the historical activity in their accounts.
Volvo Cars provides a prototype. The $24 billion Swedish automaker, recently listed in Stockholm, has transferred its fossil fuel business to a new group controlled by Chinese parent Zhejiang Geely, allowing it to deconsolidate the business while locking in a supply of engines for hybrid models.
To imitate this arrangement will not be easy. Major automakers are less eager to explore risky spinoffs, which could mean high costs and loss of control over what remains a key part of their product. Yet as the green revolution gathers pace, automakers will need to consider increasingly drastic repairs. They could do worse than follow the example of the banking sector.
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– Electric vehicles will account for 35% of all cars sold by 2030, and some 47% by 2035, according to forecasts by Jefferies analysts. In Europe, the penetration of battery-powered vehicles will reach 77% by 2030.
(Editing by Peter Thal Larsen and Oliver Taslic)
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