OldCo. and NewCo.: Which Are You?
In February, Norway became the first nation to ban the internal combustion engine (ICE); by 2025, it intends to only allow the sale of electric vehicles. Over the course of the year, India, France and the United Kingdom all made similar announcements as the trend toward the adoption of zero-emission vehicles (also known as “BEVs,” battery electric vehicles) started to accelerate around the globe. Now, China is indicating it may do the same.
Since then, stock analysts have started to downgrade the long-term outlooks for some of the world’s most stable suppliers because they have significant involvement in the ICE ecosystem. As automakers confront intense pressure to completely shift vehicle propulsion from ICE to electric, analysts cannot afford to ignore the changes on the horizon. They are not suggesting that this shift will occur overnight, but they do expect it to create a significant risk to many suppliers’ earnings trajectories going forward.
As a result, from this turbulent landscape we are starting to see two breeds of business develop within the same corporation:
1. Old Company, or OldCo., business units that produce mechanical products associated with the slowly dying ICE ecosystem
2. New Company, or NewCo., organizations that are adopting new products and business models suited perfectly to future growing markets such as electric and/or autonomous vehicles.
The auto suppliers who will succeed in the midst of these market disruptions are those that understand exactly how to properly invest their precious capital and resources accordingly into OldCo. and NewCo. businesses. In many recent cases, suppliers have started to favor investment in NewCo. businesses and chosen to spin-off or divest their OldCo. organizations.
Understanding these headwinds and the competitive challenges ahead, Delphi announced a spin-off into two separate businesses in 2017 (Aptiv and Delphi Technologies), and Honeywell, Continental and Magneti Marelli all have announced similar spin-offs amidst similar strategic concerns. Even Tenneco and Federal-Mogul announced a spin-off of the powertrain business after they complete their merger later this year.
Spinning off, or divesting, these OldCo. organizations is a key strategy being put into play by several top automotive suppliers. However, this strategic move is not only limited to organizations tied to the ICE ecosystem.
Look at the spin-off from Autoliv of Veoneer. Veoneer is a NewCo. business focused on active safety systems for autonomous vehicles, while Autoliv is the OldCo. organization focused on passive safety systems like airbags and seatbelts. These businesses are on two very different growth trajectories, with limited customer and operational synergies between these two business models. But more importantly, investment in capital and engineering resources will require significant investment shift away from OldCo. Autoliv to NewCo. Veoneer.
Perhaps the most compelling reason for suppliers to separate their two businesses is the fact that these two organizations attract two very different investor profiles. NewCo. investors are looking for high growth and high returns and are willing to assume more investment risk.
OldCo. investors like those attracted to traditional automotive stocks seek stable returns and a lower risk profile. Split into two separate entities, these organizations can each attract the capital necessary to support their own corporate mandate.
As technological advancement continues to create significant disruption, suppliers are challenged with the question of how to position themselves for the new future. Ultimately, businesses that stall, wait for a resurgence of the ICE era or cling to the past, will have limited options. They will lose the advantage of time and forethought and reduce any opportunities to get out ahead of this major shift. It is crucial, therefore, that auto suppliers think strategically about what to do with the waning product sectors of their portfolios before it is too late.
The future doesn’t look so bright for companies still entrenched in the dying ICE ecosystem. Savvy auto suppliers, like those mentioned earlier, have already noted the long-term growth outlook and have begun spinning off their traditional, slow-growth businesses and shifting investment and resources to emerging NewCo. technologies.
In observing these market dynamics, traditional automotive suppliers should take note and start developing their strategy today or run the risk of quickly running out of options.
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