Automakers are not telling us enough about their EV plans

Secrecy over electric-vehicle projects could delay the industry’s shift (Photo: Bloomberg) — Secrecy over electric-vehicle projects could delay the industry’s shift **(Photo: Bloomberg)**

4 min read . Updated: 17 Mar 2021, 10:55 PM ISTAnjani Trivedi, Bloomberg

Investor pressure should make these companies reveal a lot more

How is it that auto companies spend so much money and there is such vague disclosure on where it’s going? Or how their ambitious projects are progressing? Investors should be pushing accounting standards boards and companies to give them more. With the onset of electric cars and autonomous vehicles, companies are increasing their focus on technology and technical know-how over the traditional nuts and bolts of putting vehicles together. But it’s hard to see this in their financial statements.

These firms splash out on research and development, but there are few details about how this money is being allocated as it finds a home in intangible assets, or other undetermined line items. Several other associated costs like information technology and employee training get buried.

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Part of the problem is that investors aren’t asking for more. Instead, they turn elsewhere for alternative information. For instance, they crowd up the US Patent Office website to see what companies have been up to over the last 18 months.

In the US and elsewhere, companies sometimes provide numbers they don’t necessarily have to disclose, but that may give investors something more to work with, like adjusted earnings before interest and taxes, or free cash flow. Sifting through management discussion and analysis can also offer some clues.

None of it is really scientific—it’s mostly an art.

In the past, companies operating in industries where technology was changing swiftly and there was value-creation through intangibles have been pressured to disclose more. It’s why extensive disclosure is the norm in the pharma and biotech sectors. But in the auto industry, despite the enormous pronouncements over the last few years, no one’s asking hard questions. Earnings calls are still peppered with inquiries about targets and aspirations, and broad electrification strategies. But analysts seem content with vague answers.

In General Motors’ fourth-quarter earnings call in February, an analyst asked, “I’m just trying to understand strategically, over the next 10 years, 15 years, is GM ready to shrink or is GM going to be aggressive?" In response, chief executive officer Mary T. Barra said, “I think we’re going to be aggressive because I think we’ve got the technology, we’ve got the talent, we have the manufacturing capability."

There’s a growing sense of complacency around these large, old-school firms. With auto companies’ financial statements, investors now tend to ignore topline information like earnings and margins. Instead they turn to cash flows. As Arndt Ellinghorst, an analyst covering the sector from Sanford Bernstein, points out, there are “factual differences in accounted costs" across companies. “Cash earnings are very different from P&L [profit and loss] earnings." Varying capitalization, and depreciation and amortization schedules “have created multi-billion distortions between companies’ cash and accounting earnings." The latter, he says, tends to create the “illusion of profits."