By Ichiro Suzuki After a much hyped run since the outbreak of the pandemic in early 2000, the financial markets are restoring some sanity, repricing all these car makers, EVs or otherwise. So much frenzy has been priced into the shares of EV makers, as the end of life for internal combustion engine (ICE) cars is coming into sight. The markets have incorporated their cashflow streams into the very distant future in their share prices though only modest cash is generated today. Nonetheless, after hot air is taken out, the market must be giving a picture that is somewhat closer to truth than several months ago even if no one can be sure about how much EV makers should be worth. In late May, Toyota and Ford are hitting 52 week (and all time) highs in their share prices. General Motors is almost there. Volkswagen is in good shape, too. In contrast Tesla lost a third of its peak value while Chinese EV makers are half of what they once were a few months ago. At $600 billion in equity market capitalization, Tesla remains twice as valuable as Toyota, the most valuable ICE car maker. No one has any idea what the right relationship should be between Tesla and Toyota. It seems that the market continues to assign little or no value to the legacy business of ICE vehicles that is going to be phased out gradually over the next decade. Considering such a dismal prospect, the value that the market is assigning to the likes of Toyota, Volkswagen, GM and Ford may not be too discouraging. On the other hand, current positioning among EV makers can be interpreted with greater certainty. While Tesla commands still imposing $600 billion in equity market capitalization, two smaller Chinese makers, Li Auto XPeng and are given by the market a tiny fraction of Tesla at around $20-25 billion. BYD and NIO command larger market capitalization at $70 billion and $55 billion respectively, though they are still modest compared to Tesla. Unlike Toyota, Volkswagen, GM and Ford, EV makers are not burdened with legacy assets. If XPeng and Li Auto are given only $20 billion, the market is skeptical about their future regardless of frenzy media headlines and shiny new models that their factories crank out. Their market capitalization at a fraction of Tesla implies their tiny future profits. Combined market capitalization of the four largest Chinese EV makers is identical to that of Volkswagen, the second largest ICE car maker. The market is valuing these EV makers with a cool head. In fact, at $20 billion that the market is giving Xpeng and Li Motor is the same valuation given to Nissan Motor that is suffering from mounting losses and is speculated as not being able to survive the industry’s structural change. This should worry their management. The automobile industry is going into the first seismic change in 120+ years, ever since the birth of the industry in the late 19th century. Back then, all the ambitious men started their own car company. In the U.S. the industry was a very crowded space, with over 100 car makers. At that time Bill Durant ran a leading manufacturer of horse-drawn vehicles, which was in the same position as ICE cars today. By 1900 Durant-Dort Carriage Company was the largest in the industry. Then in 1904 Durant purchased Buick, the best selling car company among many, correctly foreseeing the future of transportation. He took advantage of Durant-Dort Carriage’s strong balance sheet in the Buick acquisition. Aiming to create an automobile trust, Durant bought Oldsmobile and formed General Motors in 1908. Though Durant lost control of GM, the company went on an acquisition spree in the 1910s, with additions of Cadillac, Pontiac and Chevrolet. The automobile industry’s seismic change today is drawing new entrants as it did in the late 19th century. It is speculated that Apple enters the high end segment of EVs/ driverless cars, taking advantage of its software-writing prowess while leaving assembly to a contract manufacturer. On the other hand, Google does not appear to have a strong interest in cars, despite its success with Waymo. Sony has already unveiled its EV ’The Vision-S” at Consumer Electronics Show (CES) in Las Vegas and has impressed some. Despite it, Sony maintains that the company has no intention of entering the car market and that The Vision-S is a display of its capability. Sony’s strategy in EVs/ driverless cars is focused on being a dominant supplier of image sensors, a chip segment that the company has already been a leader. But for a possible entry of Apple into the high end segment, potential EV makers in the West are relatively restraint from going into the new car market in spite of (or because of) considerable simplicity of making EVs compared to ICE cars. Obviously they are aware what it means to be competing in a crowded market. Management teams are fully aware of their financial responsibility to shareholders. Not in China. There is little restraint among Chinese aspirants. If any market is capable of replicating the market condition that the U.S. experienced at the turn of the 20th century, it is China. The Chinese market is already loaded with companies with high aspirations in EVs, driven by Beijing's industrial policy to make the country leader in EVs. The Center for Strategic and International Studies (CSIS), Washington-based think tank, estimates that well over 100 companies have been already drawn into the industry, including cellphone maker Xiaomi. Both Beijing and local governments are heavily subsidizing EV makers. Government support of all kinds drives the industry to get started, helping it to achieve a necessary scale with greater production volume. This is a recipe for excessive competition. Producing vehicles is one thong, but winning consumers’ heart is completely another matter, Chinese EVs or else. In the domestic Chinese market, consumers flock to Chinese EVs but it doesn’t go this way in the overseas market. Chinese EVs in particular are required to be not just good but better than the EVs made by the incumbents that rule the automobile industry. Tesla has done this. Several years ago, it was already said to be cool to drive a Tesla in Silicon Valley. XPeng, NIO and others would have to give drivers as much coolness as Tesla and as much prestige as the Mercedes Benz or the Toyota Lexus, if they wish to capture a lucrative part of market. Price is a less of a factor in a purchasing decision of cars, especially in the high-end segment, than fridges. Toyota once built shoddy cars in the early 1950s and was scorned in the U.S. market. It took them two decades to win the trust of American consumers, helped by its fuel efficiency. There is no reason Chinese EV makers are not capable of doing this over a very long-term, but winning consumers’ hearts is beyond the scope of an industrial policy that has driven the Chinese EV markers to where it is today. In fact, Chinese EV/ driverless car makers are handicapped with being Chinese in marketing of such heavily software-centric products as EVs (and even more so in the case of driverless EVs). China’s EV industry is already very large and will stay larger than anywhere else. Nonetheless, the current industry structure at home and in the export market does not excite financial market participants on the industry’s future profit outlook. In the worst case, the Chinese EV market might become so much like the U.S. automobile industry at the turn of the 20th century, too many companies competing in a congested space and few exit, especially if they are SOEs or local government-sponsored. That might be what the current valuation of Chinese EV makers are telling. One day Beijing might have to step in to force top-down consolidation on the crowded and fragmented industry, maybe to form state-owned General Motors of China.
About the author: Mr. Suzuki is a retired banking executive based in Tokyo, Japan.