(Bloomberg Opinion) — In the world of cars, investors seem to love news of partnerships, synergies and cost-savings as expensive tech upends long-held rules of the road. They may need a reality check.
Auto companies across the globe are looking for their next green partner, even if they have their own grand plans for electric vehicles. But cautionary tales are emerging of why the best way into this brave new world – compelled by a regulatory push and sky-high Tesla Inc.-like valuations – may be to seize the wheel on their own.
A quick check of how some hyped-up partnerships have fared couldn’t make things clearer.
General Motors Co., which has made an aggressive push into electric vehicles, decided it was time to take an 11% equity stake worth about $2 billion in upstart Nikola Corp. Going by the risks in Nikola’s prospectus, this was a tie-up too far. Per the release, GM is giving “the in-kind services and access to General Motors’ global safety-tested and validated parts and components” — basically, most of the things Nikola needs to make trucks.
Investors seemed to love the idea. Think: Traditional car company shows it has accessories for the future – electric and hydrogen. GM’s share price rose as much as 8% on the day. Nikola’s surged almost 40%. The Phoenix-based company would save $4 billion on battery and powertrain costs, the core of its business. GM would receive that much in benefits, between the equity value, electric vehicle credits, contract manufacturing, and supply of batteries and fuel cells.It doesn’t look like there’s that much value in it now, with Nikola under investigation and its executive chairman resigning. The stock has dropped almost 80% from its June peak, when it went public via a special purpose acquisition company. In fact, GM – like other car companies – is the one that likely needs the cost savings. Investors should wonder why. Sure, the Detroit giant was keeping promises. GM has said it has allocated $20 billion to electric cars and autonomous vehicles from this year to 2025. Chairman and Chief Executive Officer Mary Barra has laid out green ambitions in clear terms: “We want to put everyone in an EV, and we believe we have what it takes to do it.” It isn’t clear what additional value Nikola would have brought. Besides, of course, the innovation hype. Barra has said GM conducted “appropriate diligence” before entering the deal. Carmakers have been setting unrealistic targets for a while. In 2017, Volkswagen AG put out a plan to make higher-density batteries in three years, according to HSBC Holdings Plc analysts. Part of the program was to bring the cost down to $120 per kilowatt hour. Today, the price remains well above $140 per kilowatt hour, and the density is still lower.
Even if banding together theoretically lowers costs, what happens to competitive advantage? Bottom lines? Cheaper batteries are great, but carmakers count on high margins from expensive cars. The facts are that the pressure to make better, safer batteries is rising, and they’re in short supply.
Consider the volatile relationship between Tesla and Panasonic Corp. The latter (and its stock price) has had a rocky ride with Elon Musk’s whims. For all the hope the partnership has generated, the Japanese consumer products icon hasn’t made much money from it. After a few ups and downs, the companies penned a new three-year agreement in June in which Tesla buys a certain number of batteries and makes future investments. But, here’s the thing: Tesla is looking elsewhere, too.On Tuesday, Musk tweeted that he would also purchase batteries from several best-in-class manufacturers, like South Korea’s LG Chem Ltd. and China’s Contemporary Amperex Technology Co., the world’s largest producer. Tesla has been looking for ways to jump-start its own battery manufacturing, reflected in the acquisition of Maxwell Technologies Inc. The biggest takeaway from Tesla’s much-watched battery day was Musk’s promise of a (much cheaper) $25,000 electric car and what that would do to reduce the price of its most important component.
A number of other ventures exist in various forms: Volkswagen with NorthVolt AB, and with Guoxuan High-Tech Co.; Geely Automobile Holdings Ltd. and LG Chem; Daimler AG and Farasis Energy Gan Zhou Co., LG Chem and GM. The list goes on. It’s unclear whether any will produce what the market needs anytime soon: an affordable and safe electric car with efficient batteries (ignoring all the other costs of ownership, such as charging infrastructure and resale price).
What additional value, then, is there from partnerships? For whatever thoughts car companies may have of going it alone, battery makers are increasingly taking pole position. Some are beginning to break even. The top six account for more than 80% of the market and are pushing for pricing power. Whoever produces cars needs batteries. It’s still simpler for automakers to outsource them than go it alone. If partnerships are done right – with capital, manufacturing prowess and real, tangible results – they can succeed. Toyota Motor Corp. has been working with Panasonic for years. It recently set up a joint-venture company that could work well enough to seem boring.
For now, investors shouldn’t be wowed by glitzy tie-ups and promises. Keeping an eye on where the real returns are — like actual cars on the road and batteries that take us further, and the companies making them — may serve better.
(An earlier version misidentified Nikola Executive Chairman Trevor Milton as CEO and incorrectly stated that GM had sunk $2 billion into an 11% equity stake in the company. )
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Anjani Trivedi is a Bloomberg Opinion columnist covering industrial companies in Asia. She previously worked for the Wall Street Journal.
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