My 1980 Volkswagen Rabbit died a hero’s death in the mall parking lot, a quarter of a million miles on the odometer, eating its own diesel engine under a titanic soot cloud. It was a catastrophic throttle condition called a runaway, I later learned, and had nothing to do with my having popped in a Hall & Oates cassette.
That car, my first, was ahead of its time, covering 50 miles on a gallon of fuel. Plus, a door handle broke every other month, fostering my social network of area junk men more than a decade before
I thought of my beige beauty this past week after investment bank UBS published a financial teardown of a VW electric hatchback called ID.3.
(ticker: VOW.Germany) says the new model marks “the third major chapter of strategic importance in the history of our brand,” behind the Beetle and Golf, aka the Rabbit at times. The profit analysis has implications for investors across the car industry.
Volkswagen suffered what you might call a reputation runaway six years ago, when it was caught cheating on emissions tests for diesel vehicles. To atone, it’s all-in on electric. On Friday, the company said that by 2030, electric vehicles would make up 70% of its sales in Europe—double its previous target—plus 50% each in the U.S. and China. There will be $19 billion spent through 2025, and 20 new models, including the ID.4 crossover and ID.5 sedan this year.
So can a large, committed, legacy car maker building an all-electric platform from scratch hope to catch up with
(TSLA)? The answer is probably, maybe.
Today, manufacturing costs for a regular Golf are around $5,000 lower than for VW’s new electric vehicles, estimates UBS analyst Patrick Hummel, after picking though the latter’s
(051910.Korea) battery cells and other innards. But at the rate battery costs are falling, cost parity will be reached by 2025. “We think it’s a strong package that underpins the idea that leading legacy [manufacturers] can build competitive EVs in a cost-efficient manner,” Hummel wrote. But Tesla is still $1,000 to $2,000 cheaper on each battery pack, thanks to building them itself at scale.
If Tesla is the
(AAPL) of the new car world, there is still room for VW and others to be like
(005930.Korea), according to Hummel. Among suppliers of electric powertrains and such, he is bullish on
(6594.Japan); among battery makers, he likes LG Chem and
Contemporary Amperex Technology
(300750.China). For semiconductors, he recommends
(IFX.Germany). That last one is up 267% since I first wrote favorably about it in Barron’s six years ago
Consider two other points. Software, not batteries, will be the real battleground for car makers in the years ahead, predicts Hummel. There, Tesla reigns for now, and the others have yet to inspire confidence. There is more at stake than sleek dashboards. Software will be key to autonomy and over-the-air downloads of new, lucrative features. By 2030, software could double the lifetime revenue of cars, lifting operating margins for winning car makers from single to double digits.
Also, Hummel sees electric vehicles reaching more or less total market share by 2040, with fuel-burners becoming like landline telephones—leapfrogged altogether in emerging markets. And there are even more extreme forecasts out there.
Last week, I briefly mentioned a chat with Cathie Wood, whose
exchange-traded fund (ARKK) leapt 152% last year and is now at the center of a market debate over whether stocks like Tesla are rolling over or have more upside. (You can hear that conversation in this week’s Barron’s Streetwise podcast.) Wood predicts a plunge in battery costs, with mainstream sedans in 2025 costing thousands of dollars less in electric versions than gasoline ones. She expects 82% compounded EV growth through then. If she’s right, legacy car makers that aren’t yet moving at Volkswagen speed on electric had better step on the gas. (For more on Wood, see our profile here.)
We last heard from
(VIAC) CEO Bob Bakish in this space in mid-May, when his shares had begun to climb back from their pandemic low. They have quadrupled since then. I caught up with Bakish this past week.
Can his new Paramount+ streaming service thrive in a crowded field? Bakish says it is differentiated, with loads of live sports, movies, TV shows including major children’s franchises, and breaking news. He calls his free, ad-supported Pluto TV service an “entry point” for the new streaming ecosystem, which includes Showtime.
And Pluto is doing well on its own. “When we said at the beginning of 2019 that it would be a $1 billion business in the not-too-distant future, for sure, I thought people thought we were smoking something,” Bakish says. “But the reality is it’s going to be a billion-dollar business very soon, and then it’s going to keep going.”
Will movie theaters survive? Bakish plans to send films to theaters for shorter than traditional stays, based on his reading of box office degradation. “After 30 days and certainly after 45, most theatrical titles really aren’t doing any revenue,” he says. But he thinks the new approach can keep all constituents happy: “We know talent likes their films in the theater.”
ViacomCBS shares have now returned 88% since Bakish took over the combined company in December 2019, versus 24% for the S&P 500 index. He says his favorite part of the job is using assets to solve complicated problems and create value—shifting to unified advertising and distribution teams, for example, and getting his studio heads on board with streaming. “The proof is in the pudding,” he says, “in terms of taking a skeptical Wall Street market and turning them into, at least at this point, partial believers.”
Write to Jack Hough at [email protected]