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.