What's behind the car industry's rush to split EV and ICE businesses

News that the Volkswagen Group is pulling the levers to spin off the highly profitable Porsche company makes it the most high-profile example in recent months of a growing trend to divide up automotive groups. Why manufacturers and their suppliers are doing this boils down to two reasons: unlocking value and better preparing themselves for the shift to electric away from internal combustion engines. The decision to list 25% of Porsche on the stock market is a good illustration of the first reason. Porsche has consistently been the Volkswagen Group’s most profitable arm in recent years, and therefore a separate listing could value it at as much as €90 billion (£75bn) – not far off the €116bn (£97bn) value of the entire Volkswagen Group, as per its current share price. The Volkswagen Group would then pocket up to €11bn (£9bn) – a nice buffer against future disruption. For Autocar Business webinars and podcasts, visit Autocar Business Insight “Volkswagen is using the IPO [initial public offering] to effectively raise capital,” noted investment bank Jefferies. The split will also give more freedom to Porsche, which has long chafed at having to share platforms, even with Audi. The second reason was cited by Ford when it announced last Wednesday that it was splitting its car business into two separate divisions, one for EVs and one for ICE cars. The idea is that the EV division – Ford Model E – will harness the strengths more associated with start-up companies, while the ICE division – Ford Blue – will attack costs to better extract profit from dwindling ICE sales. Ford CEO Jim Farley said: “The reality is our legacy organisation has been holding us back. We had to change. “The customers are different. We think the goto-market is going to have to be different. The product development process and the kinds of products we develop are different. The procurement supply chains are all different. The talent is different.” Splitting a company is a complex process, but dividing it can offer investors a much clearer idea of the strengths, weaknesses and future direction of each part. For example, ICE cars are making a lot of money for manufacturers right now but have no long-term future, while the reverse is true of EVs. However, investors often look deep into the future to value a company, meaning that, despite posting multiple billions of profit (as many are doing after a bumper year), car companies with ‘legacy’ operations aren’t valued anywhere close to Tesla, which has no historical ICE business. Manufacturers are having to think again on parts sourcing for EVs. The long-understood playbook of building engine blocks and buying in most other parts no longer works if you’re having to reach deep into the supply chain to secure your share of precious semiconductors, battery materials and software expertise to build the new generation of smart EVs. Now the mantra is ‘vertically integrate your core business and divest what’s not’. Mercedes-Benz had that thought when it looked at its truck division, which it spun off in December. “Trucks and cars address different requirements,” said Ola Källenius, CEO of the new Mercedes-Benz Cars and Vans entity, in the October meeting agreeing to the split. “They have different technological solutions and groups – on the customer and on the investor side.” Mercedes’ €9.2bn (£7.7bn) gain from the sell-off was also a pretty useful chunk to invest in its own electrification shift. The Volkswagen Group has done the same with Bugatti, which was once its crown jewel but had become a distraction. It was moved over to Croatian EV newcomer Rimac, which came pre-vetted, thanks to Porsche’s investment in it. What investors don’t want to see is a load of legacy business holding back company value. Volvo responded last year ahead of its own IPO by hiving off its engine division into a firm run together with owner Geely called Aurobay – which will cease to have Volvo as a customer when the Swedish brand is all-electric by 2030. Aurobay “aims to be a leading player in the supply of high-quality, low-emissions, cost-efficient powertrain solutions”, according to Volvo. Meanwhile, Renault Group CEO Luca de Meo has said that his company could split its EV powertrain activities from its ICE ones, with the legacy business moved out of Europe. The thinking employed by the likes of Mercedes (which has a new ICE partnership with Geely), Renault and Volkswagen (which has turned over development of future ICE platform tech to sibling firm Skoda) is that the world is splitting into two tiers. Namely, EVs in the main markets of China, Europe and (eventually) the US, and ICE cars in developing markets – at least for another couple of decades. This was one possible reason why the Volkswagen Group, a clear leader in EV technology and roll-out among the legacy companies, wouldn’t sign the pledge at last year’s United Nations Climate Change Conference (COP26) to stop selling ICE cars by 2040. Meanwhile, General Motors and Ford, two manufacturers that have been dialling back in emerging markets, did sign it. Could the Volkswagen Group also split off Skoda? It would avoid future public relations black marks like that at COP26. The move mirrors one that’s playing out within the automotive supplier industry Mega-supplier Continental is going about it two ways. Last year, it spun off its ICE business into a firm called Vitesco – a move that was warmly welcomed by the Fitch ratings agency, which noted the powertrain side was “underperforming” compared with the rest of the business. Vitesco is now moving into EVs itself with electric motors and associated drivetrain technology, but the ICE side, now described as “non-core”, still accounts for €2bn (£1.7bn) of annual company revenue. On the other side, German media reported in February that Continental is considering a flotation of its Autonomous Mobility division. The hope being, presumably, that investors would value it on potential future earnings, rather than its current revenue. Other top-tier suppliers distancing themselves from ICE technology include Germany’s BASF, which last year announced that it was spinning off its exhaust gas cleaning catalyst division to focus more on the profitable and in-demand business of cathode battery materials, one of very few companies in Europe to offer that. The message is that EV technology is the future; everything else is expendable. Will spin-offs be slowed by stock market slump? The incredible stock market valuations of the past two years for EV start-ups, some with zero revenue, have sunk dramatically downwards. In November last year, Rivian was the world’s fifth most-valuable car company, above Daimler, while Lucid was seventh, above General Motors. The value of Tesla was more than a trillion dollars – four times that of Toyota, the world’s leading car company by revenue, in second place. Now Rivian has sunk to 11th, Lucid is 14th and Tesla’s share price is down more than $300 billion. Volvo, meanwhile, was valued at a conservative $18bn (£13bn) when it listed in October and is now ranked 23rd among global car companies on valuations, behind Tata. However, that hasn’t stopped it from going ahead with the listing of its Polestar division via a Spac (special acquisition company) that, when it completes, could have it valued at $20bn (£15bn). Volvo parent firm Geely wants to also list the Chinese ‘lifestyle’ EV division of Lotus, Lotus Technology, and is busy tempting potential investors with behind-the-curtains peeks at its £100k debut SUV. The attraction of the stock market to raise money for car makers hasn’t dimmed quite yet – at least not for those that believe they can demonstrate a solid foundation for future growth.