Financial Market

The revenge of legacy auto

Old-school carmakers have a not-so-secret weapon in their battle with electric-vehicle startups: cash flow.

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Mercedes-Benz shares rose roughly 6% in European morning trading Thursday after the inventor of the gas-engine car unveiled a plan to allocate all its excess industrial free cash flow after dividend payments to share buybacks. The amounts could be substantial: Industrial free cash flow last year was €11.3 billion, equivalent to around $12.2 billion or an extraordinary 15.5% of the company’s market value, though it said it would make slightly less this year.

Meanwhile, shares in EV newcomer Rivian were down 24% in early trading. The Californian company said after Wednesday’s close that it would make 57,000 vehicles this year—roughly the same number as last year. It said “economic and geopolitical uncertainties and pressures, most notably the impact of historically high interest rates,” informed its guidance. Lucid, too, lagged behind expectations with a production forecast of just 9,000 vehicles. Its stock opened 10% lower.

Growing output matters not just because it signals interest in the loss-making startups’ products, but also because it alone promises profitability. The only companies that have made a meaningful financial success of EVs so far, Tesla and BYD, have done so by building scale. Rivian also guided investors to expect wider losses this year than analysts had been forecasting, even as it announced more layoffs.

When money flowed freely in 2021—the year when Rivian and Lucid went public—investors fixated on the competitive advantage EV startups had in creating products with a clean sheet of paper, just as Tesla did in the 2010s. After a rapid increase in interest rates, the market has recognized the problem with a clean sheet. Building electric vehicles is hugely capital intensive, and, if the capital isn’t available in financial markets, it needs to come from existing operations.

Legacy automakers have been ramming home the point by disbursing vast amounts of cash to shareholders on top of throwing money at EVs. General Motors was the early mover with its $10 billion accelerated share repurchase in late November. Stellantis followed suit last week, and Mercedes-Benz might not be the last. Investors have taken notice: GM stock is up 37% since its announcement.

Legacy auto can afford to return cash while still investing in EVs because favorable conditions during the pandemic left their balance sheets brimming. Mercedes-Benz finished 2023 with net industrial cash of €31.7 billion—44% of its market value. The car market is back to normal, leaving little in the way of growth, but sales haven’t collapsed. If recession strikes, buyback plans will be curtailed where possible (GM, uniquely, structured its deal to be irreversible). But this isn’t currently the most likely scenario.

The other advantage of legacy auto is having a range of powertrain technologies, including today’s flavor of the month: hybrids. For political and financial reasons, governments across the world are dialing back the commitment to EVs that previously drove the shift in their favor. The potential for a Trump victory in this year’s U.S. election is just the largest of the uncertainties on the horizon for forecasters.

This realization that the auto industry’s energy transition will be slow and bumpy is among the reasons why Tesla’s stock has fallen 22% this year. But Elon Musk’s company at least has positive cash flows and a war chest accumulated during the pandemic. Rivian and Lucid have neither financially healthy EV businesses nor technological hedges—and they are the strongest of America’s struggling EV startups.

While share buybacks are forcing investors to sit up and notice legacy carmakers again, their revenge isn’t all that sweet. Competition from Tesla and BYD isn’t going away, and a mixed powertrain strategy is tough to manage and communicate. In Mercedes-Benz’s annual results conference on Thursday, Chief Executive Ola Källenius danced a fine line between the “strategic destination” of zero-emission EVs and the need for “tactical flexibility” with combustion engines.

Legacy automakers aren’t in an easy spot, but it sure beats that of EV startups.

Write to Stephen Wilmot at

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