December 6, 2021

Why Electric-Vehicle Stocks Are Stuck in Reverse

It has been a disappointing few months for those hoping that electric vehicles will shake up the established order of auto brands. That doesn’t mean the giants of the internal combustion engine can afford to relax.

In recent months, the shares of companies that have been making cars for decades have overtaken those of startups hoping to take their place. On average, the 17 largest non-Chinese incumbents are up roughly 11% over three months on an equal-weighted basis, led by a 36% gain for

Volkswagen’s

preference shares. Over the same period, the shares of 19 EV specialists have fallen 15%, including a 12% decline for Tesla. That is despite a bounce in the past two weeks, including some big gains Wednesday.

The outperformance of old-school auto stocks partly tracks a wider stock-market rotation toward “value” shares seen as beneficiaries of inflation and higher interest rates, and away from more speculative ventures that previously did very well. Mathematically, rising interest rates shift the focus of typical valuation models toward profits in the near future—Detroit’s strong suit.

Over one year, many EV makers or would-be makers still have made spectacular gains: Tesla’s value has almost quadrupled. Many but not all:

Canoo,

a Californian startup that went public late in 2020 via a special-purpose acquisition vehicle, is still trading below the SPAC’s $10 launch price, having surprised investors with sweeping changes to its business plan.

The outperformance of incumbents also makes sense in light of dynamics specific to vehicle production. The value of scale—a big feature of the 20th century auto industry that once looked vulnerable in the transition to EVs—is reasserting itself.

Take the race to secure affordable EV batteries. In May,

Ford

became the latest big car maker to form a cell-production partnership with a supplier. These multibillion-dollar investments are about gaining more control over what might become a scarce resource as EVs take off, and getting a better handle on battery costs. If the bets pay off, they will entrench the position of the big incumbents that can afford them—

Toyota,

Volkswagen and

General Motors

—as well as Tesla, whose pioneering role in the EV revolution and outsize market value put it in a unique position.

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This helps explain why shares in smaller, established car makers such as

Nissan,

Renault and

Tata Motors,

which owns Jaguar Land Rover, also have struggled in recent months, despite the value rotation. Their profits aren’t wildly speculative like those of Canoo, but they are still threatened by the daunting cost of EV programs.

It wasn’t supposed to be like this. Many had hoped the relative simplicity of EVs, which require many fewer parts than traditional cars, would give a whole host of new players the chance to break into what had become a tightly controlled market.

Traditional car-making centers in Detroit and Germany still need to take that promise of new competition seriously. As new technology encourages consumers to experiment, the top end of the Chinese market has been galvanized by novel brands such as NIO and Xpeng. A few of the U.S. luxury EV startups have a chance of succeeding, too, though it is hard to gauge which ones before their vehicles are on the roads.

Still, the classic Silicon Valley disruption story isn’t playing out in the auto industry as once expected. With their big batteries, EVs are shaping up to be an industrial product that benefits from the kind of industrial scale 20th century manufacturers are good at. This advantage may not persist as other, software-based automotive technologies take off—in-vehicle internet and ultimately automated driving. But these are probably questions for another year.

Startups Waymo, Cruise, TuSimple and Aurora are betting their autonomous vehicles will make driving a thing of the past.

Write to Stephen Wilmot at stephen.wilmot@wsj.com

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