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 UK. 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, the EV maker start-up.
By autumn, this pristine hub is supposed to begin producing electric vans for UPS, the US parcel delivery group. But already the work is behind schedule. A sister plant in the US will not be ready in time, and so the UK 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 to the Amazon-backed, one-time Wall Street darling Rivian, almost every one of the auto world’s feisty new entrants has stumbled at this stage.
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’s helium-filled valuation and the market tolerance for lightly scrutinised 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, Lucid, Nikola, Lordstown, Fisker, Arrival and Rivian were all among businesses that went public before shipping a single completed vehicle to a customer.
Yet investors piled in. At least 18 automakers have listed in the past two years through a special purpose acquisition company, or Spac, according to data from PitchBook, while Rivian completed an initial public offering. Spacs, also known as “blank-cheque companies”, have become a controversial back door 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 next 12 months will be critical in proving which, if any, were worth the risk. “These are still concept stocks,” says Dan Levy, an automotive analyst at Credit Suisse. 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.
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.
“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,” says 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,” adds Fisker, “[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 and luxury group Lucid above Ford 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.
Rivian
Market cap: $42bn
Value at IPO: $87bn (Nov 10 2021)
Peak valuation: $153.3bn (Nov 16 2021)
Cash: $18.1bn (Dec 31 2021)
Cars produced to date: 2,425 (up to March 8 2022)
Sources for all data boxes: Refinitiv, Sentieo and company filings
While the companies are still worth billions, and many are priced above the lowest ranked incumbents such as Renault or Mazda, 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,” says Credit Suisse’s Levy. “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 on to 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”, says Levy.
“They won’t have the 10-year runway that the industry gave Tesla,” says Philippe Houchois, an auto analyst at Jefferies in London.
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 and Ford, with the latter eventually succeeding in partnering with the group.
Arrival
Market cap: $2.3bn
Value at completion date of Spac listing: $13.4bn (March, 2021)
Peak valuation: $13.4bn (March, 2021)
Cash: $905mn
Vehicles produced to date: 0
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 engineer Peter Rawlinson, pushed back the start of production last year by several months, saying it wants to get its first car “absolutely right”.
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,” says Karl-Thomas Neumann, a former VW and GM executive. “[Start-ups] 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 on its merger with Nikola. Today, he is a board member at Polestar, the electric vehicle spin-off from Volvo that plans to go public through a Spac this year.
This nomadic experience has given Neumann a rare glimpse into the working cultures of several of the hopefuls.
“The first thing I noticed at Canoo was everything is different, nothing that I learned before counted for anything any more,” he says. “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”, says Neumann, with little planning or co-ordination. “For me, it was too much,” he adds.
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.
“We are in the final round before we go to manufacturing,” he says after Canoo cut ties with a European contract manufacturer and shifted production to the US. “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 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 start-ups to think the first thing they do is build a factory,” says Neuman. “They will all go to manufacturing hell.”
Lucid
Market cap: $40bn
Value at completion date of Spac listing: $41bn (July 27 2021)
Peak valuation: $91.4bn (Nov 16 2021)
Cash: $6.2bn (Dec 31 2021)
Cars produced to date: 125 (up to Dec 31 2021)
But outsourcing, even to an established expert, is no guarantee of success. Nio, the first Chinese electric vehicle maker to list back in 2018, contracted local carmaker JAC 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.
There are other risks attached to farming out production. Tesla benefited from its vertical integration, from making the batteries with Panasonic 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,” says 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 Geely, has learnt from its parent companies and been able to open its own factory in Chengdu, China, turning out 29,000 cars in 2021.
Nio
Market cap: $34bn
Value at IPO: $31bn (Nov 2018)
Peak valuation: $98.6bn (Jan 11 2021)
Cash: $2.4bn (Dec 31 2021)
Cars produced to date: 183,853 (up to Dec 31 2021)
The company believes that the ability to make cars will endear it to investors when the business completes its planned reverse merger with Spac company Gores Guggenheim 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,” says Jonathan Goodman, Polestar’s UK boss.
Follow the cash
UK-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.
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,” says Mike Ableson, a former GM executive who runs Arrival’s automotive business, “it’s just how far and in which direction they’ll be wrong.”
Fisker
Market cap: $3.9bn
Value at completion date of Spac listing: $3bn (Oct 30 2020)
Peak valuation: $4.1bn (Feb 26 2021)
Cash: $1.2bn
Cars produced to date: 0
He adds: “The capital required is just $50mn for a microfactory, so the economics still work, and it lets you react to demand instead of forecasting demand [five years out].”
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 says. “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 7 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.
Rivian raised $11.9bn in its IPO, and has $18bn of cash reserves at its disposal, according to data from Sentieo. This is a similar amount to that held by BMW, Ford and General Motors. Lucid, which listed through a Spac rather than an IPO, has $6.2bn of cash available. At the other end of the spectrum, Lordstown Motors has $244mn, while Canoo just $225mn.
Canoo
Market cap: $1.4bn
Value at Spac: $4.6bn (Dec 20 2020)
Peak valuation: $4.6bn (Dec 20 2020)
Cash: $225mn
Cars produced to date: 0
“I don’t believe anyone has enough money, including Rivian,” says Canoo chief Aqulia. “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,” says Neumann, “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 any more.”
Additional reporting by Patrick McGee in San Francisco
Copyright The Financial Times Limited 2022
