Why So Many EV Companies Fail

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The EV revolution has offered entrepreneurs the chance to make history and, at times, piles of money. Elon Musk's wealth skyrocketing thanks to a surge in Tesla shares. So I present to you the Cybertruck. But in this race to seize the moment, many contenders are sputtering. Several high profile companies have failed, gone bankrupt or fought struggle after struggle. Even established players in other industries with automotive dreams have thrown in the towel. In recent years, more than 30 companies have filed for or are at risk of bankruptcy. The total addressable EV market is huge. Tesla, which controlled more than 50% of it in the US in 2023, sold more than 650,000 vehicles in the country and raked in more than $82 billion in vehicle sales and leasing revenue worldwide. And EVs made up just 8% of US new car sales that year. They're expected to be 46% by 2030. That's nearly 8 million vehicles. But the business is not for the faint of heart. It takes billions and billions. Hopefuls have routinely underestimated those capital costs. A company has to put together a complex supply chain, build factories, design the vehicles, comply with regulations and get them to customers through a distribution and service network. So why is it so difficult to start an EV company and why are so many failing? To be sure, despite talks of sales slowdowns, forecasts are still charting a boom in EV adoption around the world, from 2.4% of new cars sold in 2019 to 61% by 2035. Startups, by definition, love vast addressable markets. This is venture capital pitch. You know, slide number one. And by the way, it's not only light duty vehicles, it is also busses, trucks, motorcycles. And in the, you know, even more distant future aircraft. Ev investment commitments have doubled in value in just two years, reaching $616 billion through 2027. Enthusiasm like this is what allowed for the creation and success of Tesla, basically the first major EV automaker outside of Asia. The growth of the market is partly supported by favorable government policies. Countries eager to decarbonize offer a range of incentives, subsidies, and other perks to help defray the cost of getting started. Since 2021, Tesla has pulled in more than $5 billion in zero emission vehicle credits. Those are credits other automakers have to buy from Tesla or other EV, or plug in makers every time they want to sell a fuel burning vehicle. In some states. You know, China's had this fastest growth in electric vehicles of of anywhere. And that's also supported with a lot of of of government policies. So, you know, some of the places where there's a proliferation of new companies, it's been pushed, you could say with help from the government, some of it is the entrepreneurs wanting to grab the opportunity of this change in the dominant design to electric. But this time of tremendous growth and opportunity has also coincided with several high profile failures. Apple, one of the largest companies in the world by market value, folded its car project, known within the company as Titan. Dyson, the privately held British firm best known for bagless vacuum cleaners, ditched its electric car plans after it decided it couldn't make money off them. I mean, those are two businesses coming from super high profitability, super high return on capital. I kind of agree with them. If you're going to come into automotive, you better come with some serious innovation. Indifference. Bringing a car to market requires a mix of engineering and design talent and ability to execute, actually securing manufacturing space and suppliers, confronting stringent and complex regulations, and actually bringing something new to the table. Even if you start with an advantage, you have the clean sheet of paper opportunities that startups have. You have to learn all these really hard things that the big automakers do. You know, you have to learn to to design, and you have to learn to build a supply chain. You have to learn to manufacture. You have to learn to sell and just and deal with repair and maintenance and after sales service and all that. But above all, it takes capital. Just look at the capital returns, not the stock prices. The the actual returns on capital, they're not very attractive. This is a highly capital, intense competitive industry. Returns on invested capital for established automakers like Ford and GM are in the mid single to low double digits for 11 of its 15 years as a public company. Tesla's returns on invested capital were negative. Plain and simple. Companies just run out of money. Fisker experienced an old fashioned cash crunch. Some of that was inherent in the capital intensity of becoming an an automaker, but some of it was also due to mistakes that that the company made. Running out of capital is the biggest problem an automaker has. That might seem obvious. It is, of course, the problem every business faces, but the capital costs of starting an automaker are massive. Yes, you're two ish billion to get to your first vehicle. Not everybody has $2 billion to play with. And frankly, even if 2 billion is available, that's not a guarantee of success. That's really just the beginning. You need to be like a shark where you're always moving or you die if you stand still. So there needs to be an ability to to raise the next 2 billion and the next 2 billion after that. Take Rivian and Lucid. Both of them have eviscerated $10 billion. So interesting to see these other small startups who raise 1 billion or 2 billion. And they think that's enough. It's not even close. This was a problem faced by a lot of the startups that went public using special purpose acquisition companies, or SPACs. A Spac is a public shell company that merges with a private business, in this case an EV firm. And through that merger, the private company becomes a public one. There is no venture capital firm on the planet that will write billion dollar checks to to an EV startup. So to raise that kind of money, the only realistic scenario is to become a public company. For EV startups, a SPACE came with a few advantages over the traditional IPO. For example, you could go public using projected revenue rather than actual revenue. The SPAC promise, at least, was that these companies could turn to markets for the funding they'd need to grow. It hasn't really been the story. It's not like retail investors dumped a bunch of money into Tesla. This is like Daimler and others that put money in when it was needed, and then debt and other things. You know, the companies that are pre-revenue, you know, typically shouldn't be public companies. It's very hard for a company that's pre-revenue to stay ahead of the bow wave and, and have people interested in, in investing and putting billions of dollars more into a startup. So what are all those billions of dollars going to to start budget? About 500 million to 1 billion to build a plant and tool it, then about 200 million and half a billion on top of that in supplier tooling, and another 250 to 500,000,000in product development costs. There are certain fixed costs associated with building and running a factory and tooling it. Once you have built and tooled a factory, you have to produce a certain number of vehicles in order to absorb those fixed costs. The person selling the parts will say, well, look, I've got this big fixed cost. I spent $50 million to be able to make you 200,000 vehicles. You're only asking for 20,000 vehicles. I need my money and then say, well, sorry, we don't have any, like. Okay, well, sorry, you don't get parts. Then you need about 100 to $200 million a year just to keep everything running while you were waiting to launch vehicles. Once you launch, you have to put more growth capital into the business to fund the second vehicle and possibly the second plant to build that vehicle. Companies choose different approaches. Vertical integration is basically doing everything yourself, or at least as much as possible. Another way to do things is to outsource some or most of the work. Some start with what is called a donor vehicle, basically a repurposed vehicle or a set of components from an existing manufacturer, like a chassis or powertrain. Lordstown started with a donor body on its endurance pickup truck. Elms started with a Chinese van. This can save you the trouble of having to build something from scratch, but it can come with downsides, like the degree to which you can change the vehicle and customize it is somewhat limited. There is also the asset light approach favored by companies like Fisker use outsiders like suppliers or contract manufacturers to make the vehicles you design. It might look like a company is saving a lot of money by paying an experienced outside firm to make the car in a factory already built, but costs add up. Alixpartners Mark Wakefield says bringing a vehicle model from design to rolling reality can take anywhere from 2 to 4 times the number of hours expected. You never design it once, and it's right. Electric vehicles escape the burden of emissions regulations, but there is still a host of other rules they have to comply with, perhaps most notably the Federal Motor Vehicle Safety Standards, or Fmvss for short. The barriers to entry on things like Fmvss are aggressive, are tough, and they're tough because these are things that can kill people and kill people immediately. But a car also has to be refined enough to comfortably drive. And there's all these complex interdependencies around vibration and around, you know, things that matter to drivers. Macduffie is referring to a concept called noise, vibration, and harshness. A carmaker has to ensure all of the components in a car are fitted together perfectly. If not, you get intolerable levels of all three. Every automaker that's ever succeeded is doing constantly doing a lot of this fine tuning. Tesla probably does a little less of it, and some people will complain about that. You know, the fit and finish isn't as good. The gaps aren't so clean, things look a little shoddy, and so far people haven't cared because they they love the power. They love the big screen, they love the software. Like there has to be a reason to buy this vehicle. And a lot of the startups were trying to be first mover, so there wasn't a tremendous amount of innovation that a consumer actually feels more stylistically different. Some of them had challenges because the delays they had in getting to market. By that time, there was other vehicles actually in the market too, that were very similar, and now they weren't the they weren't the first mover and the only game in town. This is a huge source of tension. Perhaps the fundamental problem any EV startup or any auto startup will face. Got this dichotomy of you need to change stuff and be different, but there's a lot of tried and true that's in existing vehicle designs and approaches and validation methods that you take risk when you don't do those things. I mean, the less innovative you are, the lower that bill can be, but then the less innovative you are and different you are, the less reason there is for someone to actually care about your product and value you at anything. There is no exact recipe for success. Us data shows EV demand is stagnating. Tesla missed even the most bearish delivery targets for the first quarter of 2024. Shares have fallen nearly 35% since the beginning of the year. Then again, rival Rivian's first quarter deliveries were better than expected. In some ways, today looks a lot like the early days of the auto industry. At that time, there were hundreds of small companies, mostly clustered around Detroit, the center of the business. But in a very short time, a decade or so, the vast majority of those were gone and only a few survived. Those are more or less the same big three that exist today GM, Ford and the remnants of the Chrysler Corporation, which has merged with the Fiat and Peugeot Empires to form Stellantis. Some of that consolidation occurred as automakers made advances in achieving economies of scale for the manufacturing of final vehicles, but there was also a lot of vertical integration bringing suppliers inside. General Motors is known for consolidating several brands such as Chevrolet, Cadillac, Buick and the now defunct Oldsmobile and Pontiac, but it also brought a lot of outside suppliers in-house. Gm's legendary CEO, Alfred Sloan, even came into the company through a supplier acquisition and then rose through the ranks. But in the latter half of the 20th century, automakers began spinning out their supplier businesses in an effort to become leaner and focus on simply making the final product. Today, that trend appears to be reversing. Tesla and BYD are two of the most vertically integrated firms in the world. They are deciding that it's much better. You get much more control, you get much more the right pieces to fit into a total vehicle. If you do it yourself. You generally have more flexibility if you're doing it yourself. But it it does cost a horrendous amount of money up front. They might be repeating a pattern that the industry saw before, and both their market share and their ability to survive thus far suggests their chances of being around in another decade, when many of their would be rivals have bitten the dust. Even if there's flurry of and a deferment of a lot of new firms right now, history would tell us it won't last.
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Channel: CNBC
Views: 459,899
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Keywords: hybrids, plug-in, Prius, Toyota, GM, EV, Tesla, Ford, Maverick, BMW, hyundai, fuel-efficient cars, electric cars, electric vehicles, stock market, financial news, hybrid cars, electric car, ev news, Volvo, Electrification, Mercedes-Benz, Lucid, cars, car dealership, vehicles, auto, used cars, charging, Model Y, Model 3, Ioniq, Mach-e, used EV prices, used car prices, rent EV, car rental, renewable energy electric vehicles, EV chargers, elon musk, renewable energy, electric vehicle, ev tires
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Length: 14min 18sec (858 seconds)
Published: Mon Apr 15 2024
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