For the past few decades, especially in America but increasingly everywhere, the prevailing culture in business has been the emphasis on short-term results: quarterly returns in particular, agnostic of things like long-term planning and the need for intense research and development investments to get ready for the future. There are exceptions to this, of course, especially in the tech world (though that's been less true as of late.)
But the established car industry is facing a hell of a time convincing investors they can get ready for an electric tomorrow, all while delivering those quarterly and annual financial results investors demand right now. And Volkswagen is emerging as a good case study in that trend, whether it's fair or not.
That kicks off Monday's Critical Materials tech and transportation news roundup. Also on tap today: car dealers bristle even more at selling EVs, and Tesla settles an infamous racial discrimination case.
30%: Volkswagen's Outlook Problem, Explained
I'll start this off by sharing a Wall Street Journal article published after Volkswagen's annual conference in Berlin last week, which I also attended. Here's how it starts out:
Volkswagen is the archetypal legacy automaker: flabby, slow-moving and valued as if it is going out of business.
First of all, damn. That's how you write a lede, folks. It's a little too scathing and represents a conclusion I don't agree with—which we'll get to—but it speaks to how investors view things at VW right now.
Most investors don't think very highly of so-called "legacy" automakers, which have low profit margins, intense overhead costs and had their viability tested during the Great Recession. Hence the headline on this story, "Why Volkswagen Is Priced For Failure."
Ouch, right? This, even as VW reported a $19.6 billion net profit for 2023, up 13% from 2022, alongside double-digit sales increases in Europe and North America. A bigger problem is the slowing market in China, which is why VW issued a much more cautious outlook for 2024.
But the VW Group's valuation remains quite low, even with highly profitable brands like Porsche, Bentley and Audi in its portfolio. Example:
There are more conventional signs of undervaluation, too. VW stock trades at less than four times forward earnings. Toyota, its only peer in scale and global reach, is at 10 times. Chrysler-owner Stellantis, which long traded at a discount even to VW, is now at five times after a stellar 2023.
VW’s results offered plenty of reminders why many investors stay clear of the company. Most simply, it made a net profit of €17.9 billion in 2023, equivalent to $19.6 billion. While that is roughly twice what General Motors earned, it could be much better. In rough terms, Toyota expects to make 50% more net profit for its financial year through March, even though it sold only 20% more vehicles than VW in 2023.
Here's where the "damned if you do, damned if you do" part comes in.
The company is throwing money at the problem, both at new EV partners such as XPeng and at its own Chinese operations. This has long been VW’s knee-jerk response to challenges, which doesn’t help investors gain confidence that the company will earn acceptable returns.
Its research and development and capital expenditures combined will amount to a gargantuan 14% of revenue this year at the midpoint of guidance, which it insists will be the peak. By comparison, Toyota expects to spend half as much in its current financial year.
That is because VW is a company that's committing to an all-electric future and openly saying its current internal combustion engines will be its last—something it's said for almost a decade now. It hasn't gotten the EV transition exactly right (no "legacy" company has, yet) but it's listening to consumer critiques, growing its EV market share and getting ready to face a raft of electric competitors everywhere, including from China. That's where the "gargantuan" research and development and capital expenditures come from.
Again, VW isn't alone here. Ford has the same problem, especially since it breaks out the financial results for its EV division separately and that operation is burning cash as it ramps up operations.
Pivoting to be a battery- and software-powered business is a massively costly and complex effort, but if these car companies don't, they're dead in time. So what do investors want here? Returns right now, or a future? The answer, more and more, seems to be "both," which may not be rooted in reality.
But there's also this:
Investors gravitate to “specific stories” in the embattled auto sector, such as Toyota’s hybrid leadership or the best-in-class cost discipline of Stellantis, says Federated Hermes portfolio manager Dariusz Czoch. Viewed through this lens, VW doesn’t offer much apart from a slow and complex turnaround story, variations of which investors also heard from previous CEOs.
Maybe that's part of VW's problem here—the "story" it's telling. What makes it different from every other car company out there that's working on batteries, software and better and cheaper EVs?
Toyota's hybrid story is a good one, for now, but it too is said to be scrambling to ramp up EV investments behind the scenes. In the end, the EV race is going to be a long-haul fight, and maybe investors would do well to get used to that idea.
60%: Car Dealers Are Extra Down On EVs
When you look at the narratives around the so-called "EV slowdown," a lot of that comes from the longer amounts of time the cars spend on dealership lots. But I have often wondered if this is a sign of demand, or of car dealers just being bad at their jobs. Many (but certainly not all) dealers have spent years resisting the EV transition, bristling at the costs involved with charging and not wanting to miss out on revenue from ICE repairs.
But in 2024, they're especially down on EVs, according to a Cox Automotive survey reported by Automotive News:
Dealers' sentiment around EV sales is worsening from a year ago and sinking to record lows, according to Cox Automotive's first-quarter Dealer Sentiment Index, which surveyed 546 franchised and 472 independent retailers from Jan. 30 to Feb. 13.
The survey results show that the EV "thrill is gone," said Jonathan Smoke, chief economist for Cox Automotive. "You have to hunt to find the dealer that's optimistic about the EV market growing."
To calculate the score, Cox asked: "Compared to last year, how would you describe your EV sales?" Sentiment for franchised dealers sunk to 43 from 58 a year earlier on a 100-point scale, the lowest score since the question was added in the second quarter of 2021. The score fell 7 points from the fourth-quarter score of 50. A score of 50 is neutral. Scores above that signify strength or growth, while scores below indicate weakness or decline.
Also, this:
A Honda dealer in the Midwest also pointed to dwindling demand. "The early-adopter audience is exhausted, and it's a tough sell to the general car buyer in many of our markets," the dealer said. "Prices are too high for the inconveniences presented by switching to EV."
I find this funny coming from a Honda dealer, which sells one (1) EV that is made by General Motors and is also not on sale yet. Sure, man!
But admit it: there is some truth to this. The EV market is moving past the first- and second-wave adopters. Now it needs to break into the mainstream, and that means more affordable and more normal cars everywhere, not just $60,000 SUVs. At some point, the dealers are going to have to get over themselves too, though.
90%: Tesla Settles Racial Discrimination Lawsuit
For all its many efforts to advance the EV space, Tesla has never been known as a great place to work, especially if you're a woman and/or a person of color. The Fremont factory in particular has been dogged with countless lawsuits and complaints over working conditions, racial and sexual harassment and abusive managers. (I'd point you to an episode of Vox's Land of the Giants podcast I wrote last year about this very topic, if you want to hear from those inside.)
Now, Tesla has settled one of its most infamous cases, with Black worker Owen Diaz. Here's The Guardian:
Tesla has settled with a former employee in a long-running discrimination case that drew attention to the electric vehicle maker’s treatment of people of color.
The case, which dates back to 2017, centers on allegations that Tesla didn’t take action to stop a racist culture at the factory located about 40 miles (65km) south-east of San Francisco. Diaz, a Black man, alleged he was called the N-word more than 30 times, shown racist cartoons and told to “go back to Africa” during his roughly nine-month tenure at Tesla that ended in 2016.
The same Tesla plant is in the crosshairs of a racial discrimination case brought by California regulators. Tesla has adamantly denied the allegations made in state court and lashed back by accusing regulators of abusing their authority. The US Equal Employment Opportunity Commission filed a similar complaint against Tesla in September.
Remember, two years ago, CEO Elon Musk said Tesla will "never surrender/settle an unjust case against us, even if we will probably lose.”
I also bring this up here because a rising United Auto Workers union is pondering its next targets after huge wins with the Big 2.5 in Detroit. Will the UAW use this longstanding, well-documented history of worker mistreatment as fodder for another union drive?
There's no bigger target when you think about it.
100%: How Do 'Legacy' Automakers Convince Investors They Hold The Keys To The Future?
If you're a company like Volkswagen, and you think you're trying to do the right things even if they don't always succeed at first, what story do you tell?
Contact the author: patrick.george@insideevs.com
