Because the chain involved is long, the internal resources and structure restructuring of the OEM are more complicated, and the cost of spinning off and listing is higher.
Author丨Zitze
Editor丨Tian Kusana
Produced 丨Automobiles full media
In the past two years, we have witnessed too many spin-offs and listings in the automotive industry.
Going back a few years, merging and simplifying businesses and even companies, seems even more eye-catching. At the latest, in 2018, mergers were no longer popular, and spin-offs began to take hold.
What happened in 2018 and 2019? Whether in China or globally, the fuel vehicle business began to peak and fell into a five-year recession. The intermediate outbreak only worsened but did not change the trend.
At the same time, the new energy that has been stored for a long time has rapidly expanded its scale with the help of the gradual maturity of battery technology + the east wind of Sino-US and European subsidy policies.
The rise of new energy market demand not only shapes new businesses, but also provides clear and visible investment channels from the capital level.
1
Suppliers are dismantled first
From 2018 to today, the general trend is that suppliers are dismantled first, and then it is the turn of vehicle manufacturers, and there are still suppliers still considering spin-offs. But the law of value transmission in the supply chain tells us that new business, no matter who leads it, the division of technology and resources always starts upstream.
In 2017, Delphi spun off its automotive electronics, passive safety, and autonomous driving businesses to form Aptiv, whose original traditional business is still called Delphi. Please note that the new energy business has little weight in this spin-off. At the time, Delphi believed that "autonomous driving" was more popular with investors.
Google thought of this earlier, and in 2016 it spun off its self-driving business from Google's "X Lab" to form Waymo. It's just that at the time, it was mostly done by force. Because autonomous driving did not meet expectations and failed to create business value, the loss of senior talent was too great.
In fact, the vast majority (if not all) of the startups that have done autonomous driving since then have the shadow of Google.
In October 2018, Honeywell spun off Garrett, which covers the transportation system business, mainly turbocharged power, electrification, and connected business, and achieved IPO that year.
In fact, Honeywell is "one dismantling three", and its security business is also spun out, with a very strange name, called "Resideo". However, it was not until 2021 that Yushide was listed. The investment market's attitude towards the two is clearly different.
In 2021, Continental AG spun off its electric and hybrid businesses into Vitesco Technologies, which went public in September of that year. This is a very typical new energy business spin-off model, which will be cited by many peers in the future.
The list could be long: Autoliv, Johnson Controls, and operating ones such as BorgWarner, ZF, Mobis.
Among the Tier 1 suppliers, the giants are involved, but Bosch, the number one supplier in the industry, has remained unchanged, showing a unique operational approach. Bosch's chip and electrification businesses, if they follow the same standards, can be spun off more companies. However, Bosch's attitude towards new businesses is often to set up new business units and refuse to give them independence.
2
Mainstream and non-mainstream spin-offs
By 2021, OEMs gradually appeared.
From the perspective of whether to spin off the new business, Volkswagen's spin-off Porsche successfully conducted an IPO at the end of September 2022, raising up to 19.5 billion euros, the largest fundraising in Europe in a decade.
But this is just outlier, or non-mainstream. The reason is that Porsche is a brand of Volkswagen, not a new business. Porsche itself is a brand independent of Volkswagen, and the capital combination of the two parties has not changed this.
Volkswagen is also said to want to evaluate the possibility of a Lamborghini break-up, which is a normal reaction to taste the sweetness. In 2021, Daimler split trucks and passenger cars into two "completely independent" companies, which is also like a financial operation to do a large valuation, because it does not involve new business parts.
A more mainstream thing is to spin off new businesses.
General Motors executives had a public disagreement over whether to break up Cruise, leading to the ouster of former GM president and Cruise CEO Dan Ammann.
Ford's investment in Argo AI remained independent from the beginning, and Ford was pulling Volkswagen to invest together, and did not directly incorporate Cruise as a subsidiary like General Motors. This shows that Ford is still aware of the risks of such investments. Now that Argo AI is out of business, it can be counted as the pot of former CEO Mark Fields.
Ford itself announced in March 2022 that it would split into two separate businesses: fuel vehicles and electric vehicles, namely Ford Blue and Ford Model e (which Tesla wants to trademark). According to the official statement, the former is responsible for "profitable growth of the business", and the latter is clearly the focus of development, not only for electric products, but also for software, intelligent network technology and service development.
Renault is also operating an electric vehicle business spin-off in 2023, and has also made some equity transactions with Nissan on new businesses, while Geely, which was previously more vocal, is out. Renault will definitely seek to go public in this business, but the reaction of the investment market to this is unclear.
The electric vehicle business under the OEM faces different from the demand and product matrix of fuel vehicles, and even procurement, supply chain and key components have to be rebuilt. The new business rhythm is different, and the internal operating logic is also starting to become different.
Volkswagen, Ford, Daimler, these multinational car companies that have gone far in electrification, began to regard old assets as "profit levers". Simply put, the profits come from fuel vehicles. Well, until the electric car business starts making money, it's impossible to do a real spin-off. The so-called "independent business" is just another term for resource tilt.
As long as the EV business can't be "weaned," radical transformation is impossible. Separate listings and internal restructurings will pose great challenges and waste to human resources. Gradually transitioning to the electric business is a common choice for multinational OEMs.
Therefore, it is foreseeable that even if the electric vehicle business is spun off and listed, the parent company will still retain absolute control. Neither war investment nor investors in the secondary market can "say anything" about the operation of the new company.
3
There are also three dismantling methods in China
The domestic spin-off trend is even more in full swing.
Since the implementation of the "Domestic Listing Pilot for Subsidiaries of Listed Companies Spun Off" at the end of 2019, more than 90 companies have attempted to split A. ChiNext, Science and Technology Innovation Board, and Main Board have all successfully listed subsidiaries, with a total of more than 30 subsidiaries, and the success rate is still very high.
Specific to the automotive industry, a typical dismantling method is for large factories to incubate new energy brands, first operate independently, and then launch multiple waves of financing, and then formally spin off to seek IPO.
"Autobots" has been explained in the article ""State-owned Enterprise Incubation Brands" in 2022", and only new brands such as Aion, Avita, Lantu, Zhiji, and Extreme Fox are listed here. Among them, the first four have completed one or more rounds of financing, all on the way to IPO, and Aion may be the first to go; The extreme fox itself is a brand of the listed company BAIC Blue Valley.
A similar but slightly different example is polar kryptonite. Extreme Krypton went to the United States to list, similar to the new forces. At the end of 2022, Geely announced that it had filed an IPO application with the SEC (US Securities and Exchange Commission). It is expected that after the completion of the spin-off, Zeekr will continue to retain operational control as Geely's "non-wholly-owned subsidiary", the parent company.
The third is an overseas backdoor listing, in which Polestar was spun off from Volvo and completed its listing in the United States in July 2022 through a special-purpose acquisition company (SPAC).
4
The underlying logic of the split
With so many spin-offs in the auto industry in recent years, what is the underlying logic, or why has it exploded in recent years?
The most superficial reason, of course, is to find money. Whether it is a supplier or an OEM, what will happen if they have a new business with high growth, high valuation, losing money and needing continuous investment? Of course, find partners or capital to share risks.
If this logic is followed, joint ventures are one way and IPOs are another. Moreover, these two paths are not mutually exclusive, and you can first enter into a joint venture and then seek an IPO.
However, whether it can be spun off, large manufacturers often have to find professional consulting institutions or investment banks to do consulting. The latter two can only be assessed from the perspective of financial reasonableness, and the business evaluation can only be carried out by the operator itself. Ultimately, the criterion is business independence, and only then financial return and investment value redemption are considered. If there is no independence, nothing goes wrong.
If you spin out the business of "relying on the parent company to develop better", you will not get a better result except for getting a pile of cash. In the end, the value of the investment will be devalued or lost. If considered only from a financial point of view, the gains may outweigh the losses when measured in the medium-term strategy.
The criterion for business independence seems simple, and the parent company clearly knows whether the new business can survive independently if it leaves the mother blood transfusion. If external capital can be considered to solve the cash flow problem within a certain period of time, then this problem becomes complicated and requires more predictable judgment. That is, at some point in the future, whether it can survive independently.
At present, losing money is not the point, market competitiveness is. If it has an advantage over the competition, then the new company is likely to be acquired by competitors, after all, it is much easier to buy from the open market than to buy privately by agreement.
This is equivalent to passing a knife to a competitor. Veoneer, which was spun off from Autoliv in 2018, focuses on electronic devices and autonomous driving vision and radar suites (with front-end software), and its sales and net profit have declined for three consecutive years, and was acquired by Qualcomm in 2021.
Therefore, it is not accurate to claim that the new company will not affect the financial affairs of the parent company after the split. Losing a new business is far more damaging to a company's operations than a financial loss.
5
Spin-off comes at a cost
Some public opinion believes that new businesses need to compress the decision-making level and improve efficiency. This is also a statement that is taken for granted.
Because the new company that was spun off must also add a bunch of back-office service departments, and can not continue to use the similar structure of the parent company and resource reconstruction. This is a typical "friction cost" of unbundling, which is obviously not an "efficiency gainer".
As for the reporting level, it can be compressed at any time, which is not a reason at all. If necessary, the parent company can elevate the new business to the group level with a single document, requiring its business leaders to report directly to the top management. This makes the action smaller and can be done without unbundling.
We have seen the consequences of blind spin-offs and just going public with money.
As for smaller technology companies, at most, they divide different businesses into different technology brands or even register them into different company names. Pony.ai, for example, built its truck business as a "Pony.com Card" and registered two companies for it.
The Zhitu Technology established by FAW Jiefang and the Momo Zhixing established by Great Wall are both new business brands, and there is still a distance from the real independent operation. Especially at present, such a company, in fact, only faces one large customer, that is, its parent company, and it is difficult to pass the listing review according to regulatory rules.
If it has been split, how to deal with the relationship between the old and new business lines has become the next issue to be considered. For two independent operating entities, there is only a weak capital connection such as shareholder cross-shareholding, and the two may be strangers, and even because the technology is from the same origin and familiar with each other, they may fall into homomorphic competition.
In a common form, the new business is carved out, and the old business refuses to stick to the designated one-acre and three-point land, which may immediately derive a "new new business" to fight with the carved business.
This is not a problem when the parent company has enough control. However, if there are more foreign shareholders and the equity is dispersed, this kind of thing often happens.
The logic of suppliers and OEMs spinning off new businesses and seeking to go public is similar from a financial perspective. However, from an operational point of view, because of the long chain involved, the internal resources and structural restructuring of OEMs are more complicated, and the cost of spin-off is higher. This is also the reason why OEMs do not have as many spin-offs as suppliers.
The capital market's wave of spin-offs of the global auto industry is gradually moving from a brain to distinguishing the health of the internal business and the operating status to determine the degree of its valuation. Simply put, primary market capital is becoming more cautious. What ultimately determines the prospects of the new company is not the spin-off or the listing, but the product market.
There is no doubt about that. Do not make a means operation (listing) the ultimate goal, this only makes people suspect that the purpose is impur.
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