"Raising electricity with oil" is temporary, is it only a matter of time before Ford divests the electric vehicle business?

Compilation / Ma Xiaolei

Editor/ Qian Yaguang

Design / Zhao Haoran

Source/CNBC, by Tim Mullaney

Is it only reasonable to obey the will of capital completely?

Ford divided the electric vehicle and fuel vehicle business into two independent operating divisions, did not heed the investors' advice to separate the electric vehicle business as a subsidiary, and then went public to absorb money.

Tesla, Rivian, Lucid and other electric vehicle startups have ridiculously high stock prices, and the ability to absorb gold is obvious to all. Such examples are in front of us, and no one is not red-eyed. For traditional car companies that are being forced and trying to transform, it seems that only an independent IPO of the electric vehicle business is a reasonable choice.

The truth is, however, that Ford did restructure its business, meeting only half of Wall Street's demands, but analysts gave full recognition to the decision.

DataTrek co-founder Nick Colas, a former Wall Street auto banker, has been saying that car companies are not the only way to divest themselves from going public to the satisfaction of investors, and that he sees Ford's internal split as an interesting restructuring.

"This practice is not common among automotive companies and comes with production risks," he said. However, the division of responsibilities is clearer, which is a good thing in the long run. ”

Nourish electricity with oil

Ford management revealed that although the Mustang Mach-E sold well, the electric vehicle business was far from entering a golden age. Ford opted for a more conservative approach, bundling more promising emerging businesses with traditional, better-profitable businesses for a little longer.

Most of the $50 billion in investment in the electric vehicle division Ford Model E and other technology businesses came from Ford's fuel vehicle division, Ford Blue.

Ford Blue's cash flow of $40 billion over the past two years means model e can be fed entirely on its own without having to resort to bonds or the stock market.

While Ford has the second-highest sales of electric vehicles in the world, sales will grow faster when the F-150 Lightning pickup trucks begin to be delivered. But as of 16:00 EDT on March 7, Ford shares had a price-to-earnings ratio of 3.8 percent and Tesla's 171.8 percent.

Starting next year, different Divisions of Ford will report revenue separately, allowing Wall Street to assess the growth of the electric vehicle business and independently value it. This has helped ease the downturn in Ford's stock price in recent years.

"I'm not short of money"

Is Ford's strategy feasible? For now, it is feasible.

"We liked ford's spin-off, it was headwinds." Garrett Nelson, an analyst at CFRA Research, said.

Ford also stressed that maintaining the linkage between the two divisions will bring operational and financial advantages.

On the day of the press conference, Ford CEO Jim Farley detailed how the company could fund strategic growth without an IPO after the division split.

Other executives provided more details of the spin-off plan, such as sharing costs between the tram and tanker businesses, cutting costs in the traditional fuel vehicle division, and the possibility that working together to improve profitability could be more efficient than operating independently.

"If you spin off the electric vehicle business, you're risking this balance between the two businesses." Farley said, "Then there is no point, balance is key, and we are not short of money." ”

At the heart of the plan is a $3 billion reduction in annual costs by 2026. One of the key cuts is Ford's advertising costs. Statista estimates that Ford spent $1.8 billion on advertising in the U.S. alone in 2020.

In addition, the $4 billion annual warranty fee is also a major target for cost reduction. Kumar Galhotra, president of Ford Blue, said he would improve the quality of Ford's cars to reduce this part of the cost.

Nielsen said the company would cut costs in markets outside the U.S., and he mentioned loss-making businesses in parts of Europe and Asia.

New electric vehicles led to new sales growth, especially the F-150 Lightning. Ford said it had received 250,000 bookings and was working to increase production before shipments this year.

Ford said it expects a third of its car sales to be electric, or about 2 million, by 2026.

It is sooner or later that it will be stripped away

But analysts believe it's only a matter of time before the eviction is spun off.

Dan Ives, an analyst at Wedbush, said: "This state of affairs at the moment may just be a stopgap measure for Ford to take a better stance to separate the eviction business, and it is expected to completely divest the Ford Model e around 2024." ”

The key to this step is the growing sales of the Mustang Mach-E, which will sell more than 27,000 units in 2021, about half of the fuel version. Secondly, Ford's electric F-150 will meet market expectations after delivery. Finally, we must fulfill the promise of electric E-Transit commercial vehicles for small businesses, and as the company grows, more and more models are added.

"In 12 to 18 months, if the F-150 is successful, the capitalists will want Ford to raise money and double down." "When the F-150 starts reporting sales, it can reflect the needs of the electric vehicle business, and we can value it," Ives said. This is the first step in the divestiture of the electric vehicle business. ”

The fundamental problems Facing Ford are not unique to the auto industry. In the energy sector, traditional carbon-intensive businesses are under threat from renewables, and incumbents are under attack from environmental activists who are also considering divesting their businesses.

When Shell was attacked by activists, the CEO countered that "investors do not understand the importance of the current cash generation model for future renewable energy investments." "In the past year, leading companies such as GENERAL ELECTRIC and Johnson & Johnson have undergone restructuring.

Emilie Feldman, a professor of management at the Wharton School at the University of Pennsylvania, specializes in corporate restructuring and divestitures.

"Today, Ford's traditional auto and electric vehicle businesses still have the value of consolidation, whether because of cash flow or the interdependence of other businesses," she said. However, at some point in the future, perhaps at a time when electric vehicle technology has further developed, this balance may be upset. ”

Throughout the history of the market, there are many examples of divestitures that have ended up being more valuable than consolidated values.

"This happens from time to time across industries and at every time, whether it's companies with old and new technology businesses, companies with mature businesses, or companies with commodities businesses and end products businesses," Feldman said. I suspect the same thing will eventually happen to Ford and GM, as well as Shell and other energy companies with both green and gray energy businesses. ”

Morgan Stanley analyst Adam Jonas said, "I will be watching closely to see if automakers like GM and Volkswagen will follow Ford's lead in making similar decisions." Jonas, who does not recommend Ford stock, believes that "the cost of capital is very high to invest the cash flow of the existing business into the high-risk electric vehicle business." ”

And, Colas argues, Ford is not in the same situation as other automakers. The Ford family spared no effort to keep the fuel vehicle business, and Ford has not experienced bankruptcy and restructuring, and every step in its century-old history has been relatively stable.

When to peel off?

When the value of the divestiture is greater than the spin-off, when is the most appropriate action? The answer is that Ford's divestiture of the electric vehicle business may not happen as expected.

Ford can now fund electric vehicles, relying heavily on the popularity of the U.S. pickup market. About 726,000 F-150s were sold in the United States last year.

For years to come, Ford will continue to have this advantage, and the cash generated from the traditional automotive business is enough to support Ford to achieve all its goals.

But if there is a cyclical recession, the situation is different.

"Once the cash flow is gone, you still have $5 billion a year to invest in electric vehicles that you need to do," Kolas said. But your car sales have fallen by 4 million units, where do you get that $5 billion? ”

Combined with years of experience as an auto banker, Coras's take on the auto industry is: "The more a car company is in a bad financial position, the easier it is to make the right choice." Other times they want to maintain the status quo and are reluctant to make changes. ”

Even if Ford divests the electric car in the future, it will not necessarily reach Tesla's valuation height, because in the next 8 years, most of the company's profits will still stay on the sale of fuel version F150.

But the current environment is poised for Ford to divest electric vehicles when there is a real shortage of money in the future. In the next recession, there is an independent valuation of the electric vehicle business, and the stock price can at least be guaranteed. "Leave the choice in your own hands and you won't be so passive." "There's always a market left for ford evictions," Kolas said. ”

Ford's decision reveals a kind of inertial thinking that companies have formed around spin-offs and spin-offs.

"Everybody knew we were going to divest assets eventually, but the cash flow was too useful at the moment to be accessible to interdependent, so we chose to stick with our existing business," Feldman said. ”

"That logic may be correct for Ford today." "But that mindset also explains a lot of why some companies stay on certain businesses for so long, and everyone knows they need to be divested," she said. ”