BY NEIL UNMACK

Internal combustion engines may be the toxic assets of the electric-vehicle revolution. Volkswagen, Ford Motor and other industry veterans are rapidly shifting to battery- powered rides, while demand for automobiles that burn fossil fuels is dying. After the 2008 financial crisis, banks cleaned themselves up by shifting dud loans into so-called bad banks. Carmakers could do something similar.

Setting up bad banks helped lenders limit their exposure to questionable assets and present a healthier image to shareholders. Carmakers’ combustion engine divisions aren’t quite as toxic: for one, they’re still profitable. But their days are numbered. In Europe, over three-quarters of new cars will be electric by 2030, according to Jefferies analysts. Spinning off gas-guzzling divisions could limit exposure to shrinking assets and highlight the value of Tesla-like electric businesses.

Take Volkswagen. Assume electric vehicles bring in a fifth of the German carmaker’s sales by 2025, producing revenue of 55 billion euros, according to calculations based on Refinitiv data. Put that on a conservative multiple of 3 times – roughly a third of Elon Musk’s group’s equivalent valuation in early December – and the business would be worth around 160 billion euros today. That’s about the same as VW’s entire worth, including debt.

Carmakers could unlock further value by teaming up. Assume two rivals pool their fossil-fuel units and sell a chunk of the combination to a financial investor. The new entity could cut costs, helping it to maintain profitability even as sales of combustion engines shrink. And by retaining only a minority stake the carmakers would no longer have to fully consolidate the legacy business in their accounts.

Volvo Cars provides a prototype. The $24 billion Swedish carmaker, which recently listed in Stockholm, has transferred its fossil-fuel operations to a new group controlled by Chinese parent Zhejiang Geely, allowing it to deconsolidate the business while locking in a supply of engines for hybrid models.

Mimicking that arrangement won’t be easy. Bigger carmakers face less pressure to explore risky spinoffs, which could involve high costs and a loss of control over what remains a key part of their product. Still, as the green revolution accelerates, automakers will have to consider ever more radical repairs. They could do worse than following the banking industry’s lead.

First published December 2021

BY LIAM PROUD

Germany is turning over a new leaf. Its new chancellor, Olaf Scholz, wants a greener and more digital economy, and so do corporate titans like Volkswagen and Siemens. Their combined efforts will launch a complete revamp of Europe’s biggest economy.

Failure to do so would spell decline for German companies and jobs losses for their workers, but the task is a mammoth one. The country is more dependent on making things and shipping them abroad than other major European economies. Exports of goods account for more than a third of its GDP, twice the proportion for France or Britain. Meanwhile German manufacturing contributes 18% to economic output, twice as much as is the case for the other two major European industrial nations. The reliance on fossil fuel-intensive heavy industry partly explains why Germany’s carbon emissions per head of population were 87% above the comparable figure for France and 59% above Britain’s in 2018.

Vast public and private investment will be required to retool such an economy. Take cleaning up the car industry. VW’s capital expenditure bill will surpass 20 billion euros in 2022, according to the Refinitiv median estimate, compared with an annual average of 13 billion euros between 2018 and 2020. Building a local plant to produce battery cells could cost at least the same again, which means Chief Executive Herbert Diess will probably need the government’s help. Scholz will have to find a way of squaring that with his own restrictive budget pledges.

Germany’s digital infrastructure could also use a jolt. Fewer than one in 10 households are connected to full- fibre broadband, but state-backed Deutsche Telekom can help fix that. And the country needs to attract tech-savvy workers from overseas as its population ages. Scholz

can help by relaxing rules for work permits for skilled labour while large companies like Siemens do their bit by retraining existing employees.

The desire to deliver all this will have to be strong to overcome some short-term hurdles. A global supply chain crisis is pushing up producer prices. Meanwhile, Scholz’s plan to increase the minimum wage to 12 euros per hour and labour shortages will push up wage costs. All this will eat into companies’ profit margins. But there won’t be any long-term gains without some short-term pain.

First published December 2021

BY KATRINA HAMLIN

Chinese electric-car maker Nio will burnish its brand with an expedition to Europe. William Li’s roughly $60 billion marque can deploy extravagant marketing and services to win foreign fans. Though it may take years to snag significant share, in 2022 even modest overseas sales will lift its stock.

Li first outlined his plans for foreign conquest in March. Six months later, he’d set up shop in Norway, where battery-powered cars already outsell traditional gas guzzlers. Li wants to move into tougher terrain, entering a further five European countries in the year ahead.

The grand tour won’t come cheap. Nio is following a roadmap devised for China, where it built its brand from scratch. That means opening flashy “Nio Houses” – exclusive, conspicuous clubs-cum-showrooms at prestigious addresses. Renting such premises in cities like Berlin could cost as much as 2 million euros a year, estate agents estimate. Fiddly after-sales services like on-demand battery delivery will also jack up costs.

But cracking Europe is critical for Nio and rivals like Xpeng and WM Motor. In 2020, when consumers spent $120 billion on electric cars, according to the International Energy Agency, the region accounted for almost half of vehicles sold. Meanwhile, the domestic market is becoming increasingly crowded as hundreds of local startups vie with titans such as Volkswagen and Tesla eyeing a piece of the People’s Republic. In response, larger Chinese brands are driving in the opposite direction. Long term, Nio reckons half its sales will come from outside China.

But cracking Europe is critical for Nio and rivals like Xpeng and WM Motor. In 2020, when consumers spent $120 billion on electric cars, according to the International Energy Agency, the region accounted for almost half of vehicles sold. Meanwhile, the domestic market is becoming increasingly crowded as hundreds of local startups vie with titans such as Volkswagen and Tesla eyeing a piece of the People’s Republic. In response, larger Chinese brands are driving in the opposite direction. Long term, Nio reckons half its sales will come from outside China.

Tesla’s early days in China provide an interesting lesson. In 2015, a year after arriving, it reported $300 million of Chinese revenue. Though that was barely 8% of Tesla’s top line, it laid the foundations for Musk’s marque to become the world bestseller. Nio can sell 11,000 units in Europe to achieve a similar outcome from its first foreign forays, assuming the top line is similar to Refinitiv’s forecasts for 2022. Such early success would put Nio far ahead of most rival Chinese companies, too.

Hype around Nio’s domestic prospects has already boosted its valuation tenfold in the three years since its $7 billion New York listing. Even a modest overseas road trip will push the shares into overdrive.

First published January 2022

BY YAWEN CHEN

Xi Jinping isn’t going anywhere, but there will be a new Chinese corporate leader. Rapidly changing policy initiatives and investor attitudes threaten the reign of distiller Kweichow Moutai as the biggest mainland-listed company by market capitalisation. Look for battery maker Contemporary Amperex Technology, or CATL, to epitomise the economic transition by charging into the top spot.

Moutai overtook state-controlled Industrial and Commercial Bank of China in early 2020. Even after a slide in the baijiu producer’s stock price in 2021, its equity was worth some $420 billion as of mid-December, more than enough to retain the crown and a weighty spot among domestic and international indexes.  

The lofty position, obtained by selling booze for lavish state and business dinners, hardly squares with Xi’s common prosperity drive and a cooling economy. Moutai also has been curiously allocating capital to government projects.

In the meantime, $240 billion CATL is trending in the other direction. Xi’s push for a greener economy prompted a target for electric vehicles to account for a fifth of Chinese car sales by 2025. The goal could be reached as early as 2022, suggesting explosive demand.

Boss Robin Zeng is adeptly navigating the situation. CATL’s revenue more than doubled in the first three quarters of 2021 from the previous year. With little debt and some $7 billion of additional equity being raised, the company should be able to keep expanding production and developing fresh technology.

CATL is already richly valued at 80 times its $3 billion of expected 2022 earnings per Refinitiv. And yet smaller rivals such as BYD and Gotion High Tech fetch over 100 times, as do electric-car makers such as Tesla, to which CATL is a major supplier. If some of that extra exuberance rubs off and CATL grows its bottom line a little more than the anticipated 70%, it could easily be worth more than $300 billion.

On the flip side, Moutai’s mounting challenges stand to disappoint growth expectations and hurt its 44 times forward valuation multiple. Even a 20% dip would still leave a healthy premium to peers Diageo and Pernod Ricard. By the end of 2022, it’ll be time to toast CATL as China’s new equity leader. 

First published January 2022

BY KAREN KWOK

Elon Musk successfully forced Volkswagen to embrace the electric vehicle big time. In 2022, Brazil’s $15 billion meat giant JBS and $31 billion U.S. rival Tyson Foods could end up trailing Tesla’s alternative protein equivalents, Beyond Meat and Impossible Foods. Yet just as VW aims to overtake Tesla’s production by 2025, there’s a way for incumbents to win.

Making meat the old-fashioned way emits over 40% of annual global methane production and wastes too much land, water and time. To make the food system more sustainable, technologies that imitate meat are flourishing. The $4 billion Beyond Meat and Impossible Foods, which may seek a public listing in 2022, have both launched plant-based burgers at major restaurant chains such as McDonald’s.

Doing nothing is unwise. Big traditional producers face more costs: carbon taxes could cost beef companies up to 55% of current average EBITDA by 2050, according to research group FAIRR. And more governments are subsidising the alternative protein sector, which Credit Suisse estimates could reach $555 billion of sales by 2050 and account for 25% of the global meat market, up from 5% in 2030. Meanwhile, apart from plant-based meat, there are funding gaps in technologies that create slaughter-free meat grown from animal cells. This so- called “lab-grown” cultivated meat could reach $25 billion of sales by 2030, according to McKinsey. 

As yet, traditional players are only getting involved in a piecemeal fashion. JBS has recently bought a Spanish cultivated meat startup, while $3 billion Asia-based Thai Union has backed insect-protein firms. But no one has yet committed to serious top-line targets. Aside from Toronto-listed $3 billion player Maple Leaf Foods, 51 traditional meat and fish producers have yet to disclose their alternative protein sales, according to FAIRR. Chinese meat producers like $40 billion Muyuan Foods have zero exposure.

That may change in 2022. Valid targets include hot startups in cultivated meat, fermentation or even insect protein. Temasek-backed Eat Just was last valued at $1.2 billion and has regulatory approval to sell cultivated chicken in Singapore. DSM-owned Meatable and Leonardo DiCaprio-endorsed Mosa Meat and Aleph Farms could be in the mix. Meanwhile, upstarts with considerable scale like UK-based Meatless Farm, which supplies pea protein to Pret A Manger and over 20 countries, are good alternatives. So is France’s Ynsect, which sells buffalo mealworm protein that’s mixed in faux meat. Big Meat, in other words, has multiple ways to beef up.

First published December 2021