Investors have bet heavily hoping to find the next Tesla, but many EV groups are struggling to make the production process work
Author of the article:
Financial Times
Peter Campbell in Bicester
An Arrival Generation 2 Electric Vehicle is pictured in this undated still image obtained on January 16, 2020. Photo by Courtesy Arrival Ltd./Handout via Reuters Just outside the English market town of Bicester, 15 miles from Oxford, lies the shell of a factory that sits at the forefront of the electric-vehicle revolution in the United Kingdom. Under a cavernous warehouse ceiling, dozens of gigantic black robotic arms sit poised over the vacant assembly bays, waiting to mass produce electric vans for Arrival Ltd., the EV maker startup.
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By autumn, this pristine hub is supposed to begin producing electric vans for United Parcel Service Inc. But already the work is behind schedule. A sister plant in the United States will not be ready in time, and so the U.K. factory will have to shoulder the bulk of this year’s production. Arrival now expects to make just 600 vans this year, less than half the number it promised analysts during 2021.
The company is not alone. A plethora of electric vehicle maker wannabes — some opening factories for the first time, and many with steep valuations — are facing their biggest challenge yet: making vehicles. From China’s Nio Inc. to the Amazon.com Inc.-backed, one-time Wall Street darling Rivian Automotive Inc., almost every one of the auto world’s feisty new entrants has stumbled at this stage.
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The industry’s shift to electric cars was always expected to lead to a deluge of new entrants, because the barriers to entry are so much lower on battery vehicles than on their engine-powered forebears. But the combination of Tesla Inc.’s helium-filled valuation and the market tolerance for lightly scrutinized reverse takeovers led to a stampede of EV businesses listing their shares.
As a result, companies with neither profit, nor in many cases even revenues, found themselves on public markets, squinting into the full glare of the world’s investment community. Canoo Inc., Lucid Group Inc., Nikola Corp., Lordstown Motors Corp., Fisker Inc., Arrival and Rivian were all among businesses that went public before shipping a single completed vehicle to a customer.
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Yet investors piled in. At least 18 automakers have listed in the past two years through a special purpose acquisition company (SPAC), according to data from PitchBook, while Rivian completed an initial public offering. SPACs, also known as “blank-cheque companies,” have become a controversial backdoor way for a business to merge with an existing listed shell company and enter the public markets with far less disclosure than required in a traditional IPO.
The logo for electric vehicle startup Rivian is seen on the hood of its new R1T all-electric truck in Mill Valley, California. Photo by Nathan Frandino/Reuters files The next 12 months will be critical in proving which, if any, were worth the risk. “These are still concept stocks,” Dan Levy, an automotive analyst at Credit Suisse Group AG, said. In addition to the pressures of igniting manufacturing, several companies including Lordstown, Canoo, Lucid and Nikola have disclosed they face or have faced federal investigations.
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There is a timeless, undentable automotive truth: making vehicles is hard. The lesson was best demonstrated by Tesla, whose decade-long struggle towards mass production saw it grapple with pitfalls galore, from getting the right parts in time to assembling cars so that they did not leak when it rained.
In its darkest hour, the company went through what its chief executive Elon Musk called “production hell”: supplies were late or missed, cars came off the production line requiring extensive additional work. At one point, the company was turning out vehicles without seats and asking dealers to bolt them on in the showrooms.
Tesla has emerged from the other side of the saga as a trillion-dollar business. Investors are now hunting for a company that can emulate its success.
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“People on Wall Street have already made the decision that we are going to (invest in) EVs, and they are looking for one, two or three companies that could be the next big success,” said Henrik Fisker, whose eponymous electric carmaker is one of the field’s latest entrants. “There is a belief that somebody or several (companies) could take an usually large chunk of the EV market, because the traditional companies won’t be ready or won’t have the product.
“(Investors) are not sure who it is,” Fisker added, “(so) they are betting on several, and seeing who will emerge.”
The ‘Musk effect’ Yet the euphoria is already beginning to wane. Shares that once valued truckmaker Rivian higher than Volkswagen Group and luxury group Lucid above Ford Motor Co. have lost more than half of their value in the past six months, a decline that set in far before the Russian invasion of Ukraine knocked all global auto stocks.
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Article content While the companies are still worth billions, and many are priced above the lowest-ranked incumbents such as Renault SA or Mazda Motor Corp., a tepid dose of realism has seeped into the previously ebullient sector.
“It’s very easy to look at what Tesla has done and say this is the formula, if you have the Tesla DNA, the Tesla mojo, you are going to succeed,” Credit Suisse’s Levy said. “But Tesla is unique in what it has done; just because Tesla did it, it’s not a guarantee that others can replicate its strategy.”
Tesla’s road to glory was also strewn with delays, with patient shareholders often building in a “Musk factor” by adding several months onto the latest timelines. The new wave of companies will enjoy far less leniency, especially since the market for electric vehicles is no longer the wide-open field that Tesla was able to dominate after established carmakers “quadrupled down on EVs,” Levy said.
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Article content “They won’t have the 10-year runway that the industry gave Tesla,” said Philippe Houchois, an auto analyst at Jefferies Group LLC in London.
Elon Musk attends the opening ceremony of the new Tesla Gigafactory for electric cars in Gruenheide, Germany, March 22, 2022. Photo by Patrick Pleul/Pool via Reuters The new entrants are already feeling the pressure. Rivian was initially seen as such a threat by America’s truckmakers that it was courted by both General Motors Co. and Ford, with the latter eventually succeeding in partnering with the group.
More recently, it suffered a backlash after raising prices on its models by up to a fifth and was forced to halve its production targets to 25,000 for this year, citing global supply chain problems.
Lucid, which is run by former Tesla and Lotus Cars Ltd. engineer Peter Rawlinson, pushed back the start of production last year by several months, saying it wants to get its first car “absolutely right.”
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Article content Mainstream carmakers from Volvo to Volkswagen have also tempered 2022 production forecasts, hemmed in by global chip shortages and disruption from the war in Ukraine. But the established industry groups have weathered such storms before, and have large, global operations that can shift and absorb such body blows.
The newer rivals are minnows by comparison, making them particularly vulnerable to global disruption.
“We all have an idea (of) what Elon’s hell looks like, and no desire to go there,” Karl-Thomas Neumann, a former VW and GM executive, said. “(Startups) wanted to disrupt, but have no idea how to disrupt manufacturing technology.”
Neumann’s career since leaving GM in 2017 has been a whistle-stop tour of the new hopefuls. He sat on the board of Evelozcity, which became Canoo, and advised blank-cheque group VecotIQ Acquisition Corp. on its merger with Nikola. Today, he is a board member at Polestar, the electric-vehicle spinoff from Volvo that plans to go public through a SPAC this year.
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Article content This nomadic experience has given Neumann a rare glimpse into the working cultures of several of the hopefuls.
Canoo’s planned last-mile electric delivery van. Photo by Jack Schroeder/Canoo “The first thing I noticed at Canoo was everything is different, nothing that I learned before counted for anything anymore,” he said. “There were so many young engineers, they were super agile, jumping here and there, and not afraid of anything. We wanted a prototype and they did it in a week.”
Newer businesses are hoping that this nimbleness will translate into being able to launch vehicles faster and make changes more rapidly. But the atmosphere inside Canoo was “very chaotic,” Neumann said, with little planning or co-ordination. “For me, it was too much.”
For Tony Aquila, Canoo chief executive since April 2021, the priority is getting the group’s first factory, which is due to open in Oklahoma later this year, started.
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Article content “We are in the final round before we go to manufacturing,” he said after Canoo cut ties with a European contract manufacturer and shifted production to the U.S. “The building, the manufacturing side, is more important to me than anything.”
Escaping ‘manufacturing hell’ Some of the new players are turning to established names for help. Fisker’s first model is being made by Magna Steyr AG & Co. in Austria, in the same factory where the contract builder makes the BMW 5 Series estate and the Mercedes-Benz G-Class.
“It’s wrong for many of these startups to think the first thing they do is build a factory,” Neuman said. “They will all go to manufacturing hell.”
But outsourcing, even to an established expert, is no guarantee of success. Nio, the first Chinese EV maker to list back in 2018, contracted local carmaker JAC Motors to run its first plant, hoping to avoid the troubles that were ensnaring Tesla at the time. But the delays were such that when Nio filed its IPO documents in 2018, it had still only produced 400 cars in the first half of that year.
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Article content It’s wrong for many of these startups to think the first thing they do is build a factory
Karl-Thomas Neumann
There are other risks attached to farming out production. Tesla benefited from its vertical integration, from making the batteries with Panasonic Corp. to producing its own software.
“There is a longer-term question, figuring out if this approach where they have less vertical integration is something that will hinder them in the future,” said Levy, who argues that contract manufacturing is not a business that can be scaled. Eventually carmakers with an ambition to reach a serious size will need to make their own vehicles.
Polestar, which is owned by Volvo Cars and Chinese group Zhejiang Geely Holding Group Co. Ltd., has learnt from its parent companies and been able to open its own factory in Chengdu, China, turning out 29,000 cars in 2021.
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Article content The company believes that the ability to make cars will endear it to investors when the business completes its planned reverse merger with SPAC Gores Guggenheim Inc. to take it on to the public markets later this year. “You compare us to other companies that have achieved quite marvellous valuations, but aren’t quite getting the cars out,” Jonathan Goodman, Polestar’s U.K. boss, said.
Follow the cash U.K.-based Arrival is built on a novel manufacturing concept that it believes will allow it to eventually scale up production: microfactories.
Rather than erecting a building to produce vehicles in their tens or hundreds of thousands, it has opted for smaller sites such as the Bicester plant, which it believes can be built and start production quickly.
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Article content Once it is mature, Arrival hopes to be able to get a new factory up and running within nine months, an impossibly ambitious target for larger, more expensive billion-dollar plants that can take several years to construct. This will, it hopes, allow it to be faster in meeting customer orders.
Companies that expect to repay investments in new factories over decades have to justify the expenditure by predicting where the market will be for a quarter of a century. “(Inevitably), they will be wrong,” Mike Ableson, a former GM executive who runs Arrival’s automotive business, said, “it’s just how far and in which direction they’ll be wrong.”
He added: “The capital required is just US$50 million for a microfactory, so the economics still work, and it lets you react to demand instead of forecasting demand (five years out).”
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Article content The first test of this approach will come when the robots in Bicester begin to hum. “We have done enough work right now with the production equipment, the robotics, (to know that) it will work,” Ableson said. “We are going to have challenges (in) getting it to work how we want it to, but the fundamental concept is there.”
As if to prove Ableson’s point about the challenges ahead, Arrival’s share price fell seven per cent on the day it announced the halving of this year’s production forecasts.
The deciding factor in which businesses survive the manufacturing gauntlet may be money. While Tesla is notable for raising billions in the years since its IPO, often using its ever-higher share price to tap the markets, some of the upstarts have also amassed formidable war chests.
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Article content Ottawa to invest at least $2 billion on mineral strategy for EV battery supply chain ‘Here for the long term’: Feds, Ontario announce more than $500 million for GM ‘One hundred and 12 hockey rinks!’ Inside the deal that could launch Canada into the auto revolution Stellantis and LG announce $5-billion EV battery plant in Ontario Rivian raised US$11.9 billion in its IPO, and has US$18 billion of cash reserves at its disposal, according to data from Sentieo. This is a similar amount to that held by Bayerische Motoren Werke AG (BMW), Ford and GM. Lucid, which listed through a SPAC rather than an IPO, has US$6.2 billion of cash available. At the other end of the spectrum, Lordstown Motors has US$244 million, and Canoo just US$225 million.
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“I don’t believe anyone has enough money, including Rivian,” Canoo chief Aqulia said. “Anybody who tells you they have enough cash is an idiot and will probably fail. You have to raise capital continuously at this phase of the game.”
The bigger question is how to raise money. Using the still-lofty share prices may work, but will further test the patience of shareholders that have in some cases already seen their money halve in value.
“If you show (investors) constant progress, fine,” Neumann said, “but if you surprise them, everything is delayed by two years, and actually you think the market is not as big as you (originally) thought, then it’s game over. The markets are not as stupid anymore.”
Additional reporting by Patrick McGee in San Francisco
The Financial Times Ltd.
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