Call me sentimental, but while everyone was lauding Tesla’s astonishing rise to a more than US$1-trillion market value on Monday, all I could think about was how wretched the rest of the car industry must feel, and how they might respond.
In just one frenetic trading session, Tesla added $118-billion to its worth, or almost double that of Ford’s entire market capitalisation.
The trigger for this latest surge — a deal to supply 100 000 Teslas to Hertz — is a head-scratcher, as it represents “only” about $4.2-billion of revenue. And arguably it’s not even this year’s most significant car rental deal.
In July, a Volkswagen-led consortium said it would acquire Europcar Mobility Group, Europe’s largest car rental operator, for around €2.5-billion. VW plans to develop Europcar into a “mobility platform”, offering services such as car-sharing and vehicle subscriptions. Europcar already expects that in two years, more than a third of its fleet will be electric or hybrids. Investors yawned.
Tesla’s US and European rivals have tried every trick in the book to hype their technology chops and rein in Tesla’s stock market lead. Many have copied directly from Elon Musk. They’re rolling out electric models, building battery plants, investing heavily in software and making the sales process more customer-friendly. I expect they’ll continue shaking things up, but so far nothing has made much difference.
In one respect, this double-standard is totally justified: Incumbent automakers took too long to take electric vehicles seriously and Musk seized the advantage.
Yet even now that they’ve begun proselytising for the electric cause, their valuations remain relatively meagre. As has been widely noted, Tesla is worth more than the next nine most valuable listed car makers combined. This is the stock market’s way of telling the laggards to give up, which is odd considering how most of them still make plenty of money.
Inflated equity
But Tesla has also become consistently profitable, and if it wanted it could tap its inflated equity to fund plants and technology, as it’s done in the past. In contrast, rivals must fund those investments mainly from their own cash flows.
Volvo’s recent experience is instructive. On the same day Tesla breached a $1-trillion valuation, the Swedish premium manufacturer was forced to cut the size of its imminent IPO due to lacklustre investor demand.
Volvo sold almost 800 000 vehicles in the past 12 months — around the same as Tesla — and though its electric volumes are currently modest, it’s vowed that by 2025 half of its sales will be electric and by 2030 they all will be. It also owns a nearly 50% stake in Polestar, an impressive all-electric start-up. Yet Volvo is set be valued at less than $20-billion when its shares begin trading on Friday, around 50 times less than Tesla.
There’ve been times during the past year when it seemed the incumbents might regain an advantage, but any momentum they’ve enjoyed has tended to be modest or fleeting.
Ford and Daimler are among those that have discovered Tesla-esque technology events are a good way to emphasise their electric commitments and fire up their own shares. Just last week VW held an investor event to highlight the value of its Lamborghini luxury sports-car unit.
Spinoffs are another increasingly popular tool to tackle the valuation gap. Daimler is listing its heavy trucks unit, and there’s speculation VW may do the same with its highly profitable Porsche unit — I’ve argued before that this would be a no-brainer.
Even better is listing a purely electric business, ideally in the US where tech valuations tend to be more “aspirational”. Polestar’s recent “Spac” deal valued it at $20-billion, which is more than co-owner Volvo is expected to be worth. Unfortunately, it’s difficult for most car makers to carve out their electric activities because these are too bound up with their residual combustion engine units.
No wonder some have resorted to a simple name change: Germany’s luxury leader is ditching ‘Daimler AG’ for the sexier Mercedes-Benz
No wonder some have resorted to a simple name change: Germany’s luxury leader is ditching “Daimler AG” for the sexier Mercedes-Benz. And while Volkswagen was only kidding about becoming “Voltswagen”, maybe it should seriously consider the idea: The April Fool’s gimmick briefly turned it into a meme stock. VW CEO Herbert Diess has now learnt how to use social media, and a budding friendship with Musk, to his company’s advantage.
None of these efforts, though, has been enough. Musk continues to flaunt his lead: Tesla recently threw a huge party at its new plant near Berlin — the openness and frivolity made the German auto industry seem even more dour by comparison. Tesla has also coped admirably with the industry’s semiconductor shortages, and its gross margins are increasingly impressive.
Unless the company slips up, it looks like legacy producers will have to live with their stock market impediment. Copying the best elements of Tesla’s approach remains the only path to salvation. But don’t count on being rewarded much for it. — (c) 2021 Bloomberg LP
