by CHRIS BRYANT (Bloomberg Opinion)
NEW electric models from Rivian Automotive Inc and Lucid Group Inc have won rave reviews, but you’ll have to be patient to drive one.
Since commencing production one year ago, the two companies have produced only around 10,000 vehicles altogether as of June 30. Compare that to Volkswagen AG, which manufactures twice that every day.
As the start-ups are discovering, high-volume auto manufacturing is far more difficult than securing customer orders — and it’s causing them to burn through billions of dollars of investors’ cash.
Their struggles echo those of Tesla Inc in 2017-2018 during the ramp-up of the Model 3 sedan, an experience Elon Musk later compared to eating glass. The hope is they’ll be able to similarly overcome the obstacles and eventually get close to Tesla’s US$889 billion (RM3,962) valuation.
Producing cars is fraught with risk and remains a fantastic way to incinerate investor capital when things go awry.
So, it’s worth looking at the approach of cash-constrained new entrants such as Arrival Ltd, Fisker Inc and Polestar Automotive. They are wise to embrace much less expensive production methods, though these approaches aren’t without their own challenges.
Even experienced automakers have struggled this year with inflation and parts shortages, but the financial pain has been most acute for those launching vehicles in their own plants for the first time.
Lucid burned around US$1.5 billion between January and June when its greenfield plant in Arizona churned out only 1,400 luxury saloons, an average of just eight per day. It expects to produce around 6,500 cars in 2022, compared to an original target of 20,000, and blamed this meagre haul on supply-chain and logistics challenges, plus the need to ensure vehicles meet quality standards.
Meanwhile, Rivian was often unable to operate a single shift without interruption in the first half of the year due to component shortages. But the Amazon.com Inc-backed company has made life harder for itself by trying to launch a pickup, SUV and commercial delivery van simultaneously.
Analysts expect Rivian to lose more than US$6.5 billion this year and cumulative losses to near US$30 billion by 2027. Although it held around US$15 billion of cash at the end of June — most of which was raised in last year’s blockbuster IPO — it’s having to cut jobs to slow the money draining from its bank account.
Large plants can, of course, achieve impressive economies of scale when operating at full tilt. Tesla’s high profit margins, for example, are benefitting from its highly efficient Shanghai plant and investments in innovative large casting machines.
Auto companies can also typically receive subsidies from local governments for building factories, adding to the allure of this approach. But there is a lot of potential downside.
If too few cars roll off a production line, a manufacturer’s fixed costs will far exceed revenues, resulting in large losses. Inventory write-downs are also required because the cost of building vehicles far exceeds what it will recoup from the customer.
Even before beginning production of its electric pick-up at a former General Motors Co plant, Lordstown Motors Corp almost ran out of cash and had to be bailed out in May by Taiwan’s Foxconn Technology Group.
No wonder some rivals think owning a big factory is too risky.
UK electric-van producer Arrival prefers so-called “micro-factories” — smaller and much cheaper to build, its facilities forgo expensive paint shops and metal stamping. Unexpected stoppages at such a small plant don’t burn as much cash, and manufacturing on several continents is less costly.
However, Arrival has had to massively scale back its once expansive production ambitions and slash 30% of the workforce to save cash. In the near term, it will focus on just one UK micro-factory, producing one model on one shift.
Hence, it will probably build just 20 vehicles this year instead of the up to 600 it originally forecast. Investors have balked, sending the shares down more than 95% since their 2020 peak.
Another alternative is an even more asset-light approach: Instead of building cars in-house, outsource the complex work of combining thousands of auto parts to an experienced contract manufacturer.
Fisker, for instance, is partnering Magna International Inc and Foxconn to produce its electric vehicles (EVs). It hopes to benefit from their economies of scale, while avoiding heavy spending on equipment and staffing. (Production is due to commence at Magna’s Austrian plant in November.)
The downside of such arrangements is the contract manufacturer claims a slice of the profits and the auto company has less control over production. Yet, of the three production methods I’ve highlighted, it’s the one most likely to reliably deliver a high volume of cars.
Polestar Automotive is another example — its EVs are built in plants belonging to financial backers Volvo Car AB and Geely Automobile Holdings Co. Despite interruptions caused by China’s Covid lockdowns, it’s on track to sell around 50,000 cars this year, or twice what Rivian aims to produce.
Although its gross margins are positive, the Swedish company made a first-half operating loss of more than half a billion dollars. So, the jury is still out on whether its manufacturing strategy is truly superior.
It makes sense why some especially cash-strapped manufacturers are hedging their bets: Canoo Inc plans to work with a contract manufacturer for its first vehicles while completing its own “mega-microfactory” in Oklahoma (a cross between a micro-factory and a regular plant). “You must learn to crawl and then walk before you run,” Tony Aquila, the executive chairman and CEO, explained last month.
Even though Tesla’s many imitators are currently struggling, their manufacturing and technology investments may eventually pay off. But they’ll have to deal with capital markets that are less tolerant of high cash-burn start-ups, meaning their access to capital is likely to be much more limited.
There’s no shame in outsourcing or starting small. An automaker that struggles to build cars doesn’t inspire confidence. — Bloomberg / Pic by Bloomberg