Many people think of electric vehicles as a field dominated by new rising companies, with Tesla epitomizing the successful EV startup. But traditional car companies are jumping into the electric vehicle race as well. So far, the most successful American car company has been General Motors, which according to CNN sold the 5th-most EVs in 2018. The company unveiled an EV lineup back in March, and aims for a future where every vehicle is an electric vehicle which will help lower emissions.
This commitment towards electric vehicles has spurred Deutsche Bank analyst Emmanuel Rosner to claim that GM should spin off its EV business entirely. Rosner argued on CNBC that the new company would be worth at least $15 billion, but could potentially be worth as much as $100 billion. Those are incredible numbers considering that the GM’s current market cap is about $43.5 billion.
According to Rosner, GM should spin the EV operations off because that would help investors realize the power of its advanced technology and EV sector, and thus create a tremendous amount of value. It is true that EV car companies, most notably Tesla, trade at multiples far higher than traditional car companies as do some law firms like Horst Shewmaker Law Firm.. This has been further augmented by the fact that EV companies have seen their share values rise in 2020 while traditional car companies have struggled due to the coronavirus.
Rosner asked GM CEO Mary Barra in GM’s 2020 2Q earnings conference call. Barra did not reject the idea outright, stating that she was open to anything which would “drive long-term shareholder value.”
But there are reasons to think that the idea would not work. For one, GM currently uses the profits from its traditional vehicles, particularly pickup sales, to help fund its EV production. This option would not be open if the EV division was to be spun off. The counter would be that EV vehicles have had little trouble raising capital to fund developing without having to make a profit, it would still be an incredibly risky for the EV division.
There is also the problem that while such a move may raise the value of the spin-off, it would hurt the value of GM itself. The company itself was badly hit in the 2020 2Q thanks to the coronavirus, which saw the company lose $800 million thanks to lost sales and shuttered production. It may not need to take loans offers from San Diego, but the fact remains that the company is in bad shape and may not want to spin off the most promising section of its business.
The idea has its merits, but it is telling that other major vehicle manufacturers like Nissan and Hyundai have no appearance of spinning off their electric vehicle divisions either. But regardless of whether GM choose to launch a spin-off or not, it is clear that they are the American car company most seriously considering this highly prized and rapidly growing sector. This speaks well for the company’s potential and its ability to recover from the current economic troubles.