EDITOR'S NOTE
Volvo is going public again, this Friday. Not many people know this. And not many seem to care.
How different the landscape is now than fifteen or twenty years ago, when Volvo was a leading U.S. car brand with such a devoted fan base that people would fly to Sweden to pick up their car at the delivery center. Volvo defined people's identity, and they intended to drive the cars pretty much forever. There's a reason why Jonathan Franzen featured the Volvo and its "satisfying, Swedish click" in the opening pages of his 2010 novel, Freedom, describing the key cultural marks of the 1980s and '90s.
But Volvo's U.S. sales peaked in 2004, at just shy of 140,000. By 2015, five years after the brand was sold to China's Geely by then-owner Ford, that figure had fallen to under 60,000. While sales have rebounded since, the company has never reclaimed its former status. Now, in a year marked by exciting IPOs (Coinbase! Robinhood! Affirm! Warby Parker!), Volvo's Friday offering just priced lower than expected, at just over $6 a share, or around an $18 billion valuation.
What's fascinating about this is that Volvo was leaning into its EV plans in hopes to earn a valuation closer to $25 billion and to tap into the excitement that just made Tesla a trillion-dollar company yesterday. The IPO, wrote Stephen Wilmot of The Wall Street Journal, "is a must-watch test case" to see how the market values a small but fast-evolving carmaker. Volvo "was earlier than most to embrace the shift to EVs," and its plans are "still among the most forward-thinking in the industry," he wrote.
Volvo, for instance, is selling its latest EV, the C40 Recharge, "only through its website, Tesla-style, rather than through dealerships." It has "hived off gas-engine plants into a separate minority-owned business," and "redrawn contracts with dealers to secure a direct relationship with consumers." And then there's Polestar, the flashy EV brand that Volvo owns around half of, which is reportedly going public via SPAC early next year. That alone means "a roughly $10 billion asset will sit on [Volvo's] balance sheet," per Wilmot.
All of this, and investors are unimpressed. Perhaps it's simply the Chinese ownership that continues to cast a shadow over the stock. Or perhaps the market is sending a warning that in the automotive future, smaller players won't stand much of a chance. Volvo's profitability already trailed the industry, with around a 7% operating margin compared with almost 13% for Mercedes. Tesla's is more than double Volvo's, at 14.6%, even as its average selling price dropped 6% on strong demand for the lower-priced Model 3.
To quote Morgan Stanley's Adam Jonas, who raised his price target on Tesla yesterday to $1,200, "Tesla is the most profitable mass market car company in the world right now with EBITDA margins well over 20% (ex-credits) and auto gross margins in excess of 30%. We expect the company will invest this margin into product capability and price." In other words, the more profitable you are, the more you can lower car prices relative to others and bring on more Giga factories to sell even more cars at scale. How is Volvo supposed to compete with that?
The issue with EVs right now is not so much demand as successful production at scale. It's why Polestars have already been recalled twice, GM's Chevy Bolt has had major battery issues, and Hyundai just reportedly had to cough up around $11,000 per car to recall and fix 82,000 faulty EVs. Even Elon Musk himself yesterday, after Hertz's order of 100,000 Teslas for its fleet sent shares soaring, tweeted, "Strange that moved valuation, as Tesla is very much a production ramp problem, not a demand problem."
And indeed, Tesla has been remarkably successful at ramping up deliveries amid a historic supply chain crunch. Its ambitions are much larger, though; "With our giant casting machines, we are literally trying to make full-size cars in the same way that toy cars are made," Musk tweeted earlier this year. Tesla's "Giga Press," which aims to do this, is "the largest casting machine in the world," according to Jonas. It's "the size of a small house...and needs to be transported by 24 flatbed trucks." And it's "expected to decrease parts by 370, reduce mass by 10%, and potentially increase range by 14%," Tesla has said.
All of this is part of an effort to get parts per car down from something like 10,000 in traditional cars to...perhaps just 100 or less in EVs, notes Jonas. (Tesla already wants to do away with side-view mirrors, replacing them with inside cameras, but authorities aren't there yet.) Meanwhile, also yesterday, Panasonic "showed off for the first time" the larger, next-generation 4680 batteries that analysts hope could give future Teslas 400+ miles of range.
So again, how is Volvo supposed to compete with this? We all assume the car industry will be as fragmented in the future as it has been in the past. But what if it's more like the mobile phone industry--also a battery and technology field--with just a handful of major players? Volvo's IPO on Friday may not be that buzzy. But it will very much be a tell about the future of the auto industry.
See you at 1 p.m!
Kelly
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Selasa, 26 Oktober 2021
Tesla versus Volvo
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