[Conor Sen] Investor pressure is accelerating the arrival of electric vehicles


As the auto industry moves towards an electric future, incentives will be a big driver of the transition – not just potential tax credits to accelerate demand, but investor behavior that helps shift the priorities of automakers.

Manufacturers will try to increase spending on future electric models while keeping profits at an acceptable level for their shareholders. This will inevitably lead to a decrease in spending on their gasoline models and eventually product stagnation in this segment. Firms can hold a dominant market share, but still lack capital when considered to be in secular decline. Just look at the list of traditional retailers who have traded at struggling valuations despite large revenue bases.

Retailer Toys R Us is a good example of how secular decline affects investor behavior. Revenue stagnated as competition increased from e-commerce companies like Amazon and larger, more diverse stores like Walmart and Target. Toys R Us’s valuation fell, making the stock attractive to opportunistic investors like private equity firms. But after one of those investors took control, the focus shifted to cutting costs and leverage to milk the company for any profits that could be reaped before its decline took hold. accelerated.

By failing to invest in the future of the business, the decline happened faster than it could have otherwise. The end may have been the same in both cases, but generating profit in a declining industry tends to cause investors to behave differently than when there is more hope for the future. We’ve seen it recently with activist investors pushing oil and gas companies to focus on short-term profits rather than investing in developing new wells.

That brings us to Ford Motor, which released its results last week and provided an update on its Ford + plan which aims to bring the company into its electric future. Of the 40 to 45 billion dollars of investments planned between 2020 and 2025, a third is devoted to electric vehicles, a percentage which will probably continue to grow.

Meanwhile, Ford is aiming to achieve adjusted earnings before interest and taxes of 8% by 2023. In other words, they think they can walk and chew gum at the same time, thus increasing investment. in an electric future while offering acceptable profit margins. to investors. But how?

It starts by shifting gasoline vehicle production from low-margin sedans to higher-margin trucks and SUVs like the redesigned Ford Bronco, a shift that has been going on for some time. Sounds good for now – the billions of dollars needed to develop and produce current models have already been spent in recent years. But will automakers continue to invest billions of dollars in internal combustion engine vehicles that they expect to lose market share and sales in years to come?

That’s why it’s interesting that Ford CEO Jim Farley spoke of running the gasoline-powered company “for the money” during last week’s earnings call. Automakers are likely hoping that the billions of dollars previously invested in vehicle development will be enough to generate profits in the segment over the next several years, even as the resources devoted to these vehicles dwindle as businesses and customers focus. on electric vehicles.

Eventually, perhaps towards the end of the decade, electric vehicles will become the new center of profit as sales of older gasoline models wane. Remember how Netflix funded its new streaming business with profits from its old DVD mail business?

If Tesla’s investors are any indication, it may not be long before stocks of companies like Ford and General Motors are assessed almost entirely on their progress on electricity. We’ve seen this sort of thing happen with Disney’s stock responding more to Disney + subscriber numbers than historical activities.

Once this investor shift occurs, it will be tempting to continue to commit resources to developing electric vehicles, even if it hurts the profit side of the business. We’re already seeing signs of progress: Investors rewarded Ford’s electric plan with a two-month stock rally, and after Hertz Global Holdings saw its stock jump after announcing it would buy 100,000 cars from Tesla, the Avis Budget Group shares soared 108 percent on Tuesday to the highest level on record just on the CEO’s promise to play a big role in the adoption of electric vehicles.

This has been an exciting year, with automakers fully committed to investing large sums in electric vehicles, with ambitious targets for future production and sales. But even they might not appreciate the extent to which investors are going to push them to speed up their timelines, even if that means starving the industries that currently provide the bulk of their profits.

By Conor Sen
Conor Sen is a Bloomberg Opinion columnist and the founder of Peachtree Creek Investments. – Ed.


By Korea Herald ([email protected])


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