President Trump’s threats of a trade war are becoming a useful corporate scapegoat. Volvo’s stalled initial public offering was no doubt hindered by American tariffs, as the company claims, but its mooted valuation was also far too high.
The carmaker, known for its boxy family vehicles, was supposed to offer shares in Sweden and Hong Kong this autumn. Its Chinese owner, the automotive manufacturing company Geely, whose portfolio includes Lotus and Proton, sought a $30 billion valuation, according to the Financial Times.
That’s now on pause. Volvo boss Hakan Samuelsson said on Monday that “conditions right now are not optimal,” and called trade discussions between the United States, China and Europe “really difficult to predict.” He is correct. The introduction of American and Chinese tariffs has hit groups like BMW and Daimler, which ship American-made cars to China. Their shares are down 6 percent and 23 percent, respectively, so far this year. Mr. Trump has also threatened Europe with tariffs of up to 25 percent on vehicle imports.
But Volvo, which sells over half of its cars in Europe, is far less at risk than its more internationally-successful peers. It is already shifting production to avoid extra costs, Reuters reported. Besides, Mr. Trump’s threats of European levies may yet prove to be empty.
The bigger problem is Volvo’s valuation. Geely’s desired price was equivalent to 27 times the Swedish automaker’s earnings, which totaled $1.1 billion last year. That is more than quadruple the multiples at which BMW and Daimler trade.
Granted, Volvo invests heavily in self-driving technology and says all cars launched after 2019 will either be electric or hybrid. That puts it ahead of peers when it comes to moving on from the internal combustion engine.
Investors are nonetheless skeptical that old-school auto groups can get a return on these electric-vehicle investments. Valuations were falling well before Mr. Trump moved into the White House. Toyota took years to turn a profit on its popular Prius hybrid model.
Raising capital at a high valuation to fund an even more aggressive push into electric vehicles was always going to be difficult. Mr. Trump deserves only part of the blame.
Liam Proud is a columnist for Reuters Breakingviews. For more independent commentary and analysis, visit breakingviews.com.