How Elliott Missed Out on This Apple Car Spike

(Bloomberg Opinion) -- Activist Paul Singer’s Elliott Management Corp. must be kicking itself: Hyundai Motor Co. might end up making cars or at least parts for a future-forward vehicle with none other than Apple Inc. That sent the stock up as much as 24% on Friday, the biggest intraday gain in over two decades.

For investors, regardless of any agreement’s details, just the hype of talks of a partnership between the quintessential technology firm and the traditional automaker seems to have validated the South Korean conglomerate’s business. That assessment couldn’t be further from reality.

Much like other auto companies, Hyundai has struggled to push ahead with a transformation to electric and autonomous vehicles. In 2018, it unveiled a $7 billion plan to push ahead with development for fuel-cell models – even further on the horizon than nascent battery power — without addressing dismal earnings at the time. The company continued to set ambitious sales targets as the auto market was set to shrink or at least plateau. I wrote that it seemed unrealistic.Hyundai has also had its share of production quality issues, with recalls, civil penalties in the U.S., and cars with engine problems. In the quarter ended September last year, the company posted an operating loss of 313.8 billion Korean won ($277.8 million) and apologized to shareholders and investors “for having repeated quality cost issues over three quarters since 2018.” It has had some luck with sport utility vehicles.

Elliott took on the conglomerate in April 2018 with a stake worth approximately $1 billion across group companies, including Hyundai Motor and sister Kia Motors Corp. The fund’s requests included returning more than 12 trillion won in cash to shareholders and establishing an efficient holding company structure. There was much contention around the numbers Hyundai was using to value the businesses and future cash flows.Elliott pointed out that Hyundai Motor had a poor investment record and a history of putting money into non-core projects. The company barely budged. With victory seeming too far away, Elliott sold out with a $430 million loss, according to local media reports in January last year. On the eve of a shareholder proposal that was slapped down, the activist said that several investors that had “suffered years of underperformance” also wanted change.

By the time Elliott walked away, the stock had dropped almost 20%.(1) It’s up over 80% since then.

Tough luck. Who would have known that Hyundai, of all the automakers to partner with, would make the cut for Apple’s list of suitors. Sure, discussions are in early stages, but going by reports in South Korean media, the deal would cover production, electric vehicles and battery technology. There are far more competent players out there: Think of the German firms for production, and South Korean battery makers like LG Chem Ltd. and Samsung SDI Co. And as reports about the Apple Car resurfaced a couple of weeks ago, much speculation has swirled around contract manufacturers.To be fair, this week Hyundai Motor’s chairman, Chung Eiu-Sun, emphasized that 2021 will be a crucial inflection point “in which we kick-start our great transformation into a new growth engine.” He talked about electrification, hydrogen technology, unmanned aircraft for cargo — you name it.

Still, going by the patents that Apple has had approved for a potential vehicle, it’s difficult to understand how – and where – Hyundai could contribute, at least more than any other carmaker. It’s even harder to see why Apple is in discussions.

(1) Assumes Elliott departure as of January 23, 2020, based on media reports.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Anjani Trivedi is a Bloomberg Opinion columnist covering industrial companies in Asia. She previously worked for the Wall Street Journal.