Electric Vehicle Industry Consolidation May Be Looming

“Pioneers in the field with a dependable market of buyers and well-heeled investors persevered, while those on less solid economic footing yielded to changing conditions.”

The first chapter of Richard Klein’s 2019 book “The Evolution of Local Dealerships: The Backbone of the U.S. Automobile Industry” speaks of the 1920s as “a pivotal decade” in the growth of the U.S. auto manufacturing sector. A century later, history looks set to repeat itself when it comes to electric vehicles.

EV startups have raised billions in capital, unveiled dozens of glossy prototypes and, in some cases, even booked revenues from actual sales. Along the way, though, their growing pains– including at Tesla Inc., although one could argue its deepest scaling woes are behind it – have become quite commonplace and entirely unsurprising. Be it because of supply chain problems mostly outside their control, self-inflicted quality and recall problems or more traditional troubles that come with scaling an intricate manufacturing operation, a hatful of aspirants have had to dial back their ambitions. Throw in a slowing economy and financing costs that have risen sharply since the spring and experts say a culling of the herd is quite a bit closer than it appeared it might be just a few months ago.

“There’s a huge similarity to a century ago. We’re going to see a lot more consolidation,” said Michelle Krebs, executive analyst at Cox Automotive. “And we’re not just looking at little guys being snapped up by big guys.”

The challenges of building an auto company are daunting enough when supported by a strong economy and low interest rates. But, said Edward Jones analyst Jeff Windau, a looming downturn, more expensive parts and higher interest rates “are going to be a very real challenge” for smaller pure-play EV companies.

“Things have really tightened,” Windau said. “A lot of people are trying to do their own thing. There are probably markets for all of those things but it’s really early on.”

Hiccups and headaches

And because it’s early, ambitious entrepreneurs and their leadership teams are chewing up massive amounts of capital—often at high prices—as they try to hit their near-term goals. They’re also having to face financial and operational reality. Some examples:

The leaders of Rivian Automotive Inc., perhaps the company not named Tesla that’s furthest along the road to real scale, in August said they had lowered their 2022 capital spending plans to $2 billion from $2.6 billion as they switched to “a more focused product road map” while sticking to their production targets for the year. The company this summer also began laying off more than 800 workers, or about 6% of its workforce.
Also in August, executives of commercial EV manufacturer Arrival slashed their 2022 delivery estimate to 20 units from their previous range of 400 to 600. The team also said it had frozen its bus building program to focus on delivery vans for UPS, which is both a customer of and investor in the company. CEO Denis Sverdlov said Arrival, which is looking to stand out from the pack by building robot-heavy microfactories, will spend less than $60 million on capex in the second half of this year (versus nearly $200 million in the first half) and run Arrival “in a downscaled manner through at least 2023.”
Citing “extraordinary supply chain and logistics challenges,” Lucid Group Inc. CEO Peter Rawlinson in early August slashed his team’s 2022 production target for the second time. Having started the year forecasting 20,000 vehicle deliveries, Rawlinson said California-based Lucid now expects to finish 2022 having made between 6,000 and 7,000 luxury sedans. The company was able to affirm that lower target in mid-October, saying it had more than tripled output in the third quarter versus Q2.
Truck maker Nikola Corp., which in 2021 twice lowered its production guidance, last month recalled all 93 Tre units it has delivered to customers because a design flaw hadn’t allowed cab manufacturing partner Iveco to properly tighten seat belt assemblies.
Lordstown Motors Corp. nearly had the lights go out in May, when it needed a deadline extension to finalize details of contract manufacturing and joint product development agreements with the parent of contract manufacturer Foxconn. The delays meant the maker of the Endurance pickup truck has needed to hold off on investing in hard tooling equipment, a move that would help its lower its bill of materials.
Even as they celebrated a big contract win from Walmart Inc. (and have since added orders from fleet leasing company Zeeba and rental venture Kingbee), executives with Canoo Inc. in late August had to reiterate their warnings from earlier this year that there are substantial doubts about the company’s ability to continue as a going concern. In early October, the company also had to make several changes to an agreement with investment banks to raise money by selling its shares at market prices.

These startups and others looking to make their own vehicles also regularly face procurement challenges greater than their established competitors. Suppliers allocating their volumes to OEMs based on prior years’ production don’t have much to send to up-and-comers, particularly in a constrained environment like today’s. They also have the ability to charge startup customers more given the latter’s higher risk profiles.

Hence the choice by some emerging EV players to turn to contract manufacturing. Perhaps best known among them in the United States is California-based Fisker, which first contracted with Canada-headquartered Magna International Inc. to produce its Ocean model and this spring linked up with Foxconn after the latter completed its deal with Lordstown Motors—which included the purchase of the massive former GM plant the latter had bought but never grown into—to make its Pear vehicle.

Such a model caps the amount of money needed to begin producing cars but Cox Automotive’s Krebs said she’s skeptical of the financial math of such partnerships and Seth Goldstein, an equities strategist at investment research firm Morningstar, said companies such as Fisker can promise relatively more stable profits but at the cost of staying relatively small.

Other coopetition and partnership arrangements are being tested. Colorado-based Lightning eMotors Inc. today specializes in repowering existing commercial vehicles, particularly work trucks and shuttle buses, or outfitting chassis delivered by OEMs or fleets. But the company also has rolled out a Class 5 and 6 EV chassis for others to build on and President and CEO Tim Reeser in May said his team wants to be a hub for partnerships in market segments on which the biggest names aren’t as focused.

“We see a lot of opportunity in the market for JVs, for consolidation, for capital efficiency and we purposely built what we've built in a modular way,” Reeser said. “So we have a lot of flexibility, can partner with a lot of different people and really extend out in a capital-efficient way.”

The end game’s beginning

That efficiency will be vital as EV companies look set for an extended period of consolidation and shakeout like the one combustion engine car manufacturers went through roughly a century ago. For those looking to last, it’s about staying in the game as long as possible and keeping available financial options. It’s also about scoring some notable wins and finding ways to stand out: Rivian’s delivery vans customized for Amazon, for instance, drew rave reviews when they were rolled out this summer.

But analysts said the majority of contenders are fighting an uphill battle to become more than bit players or to survive altogether. (One early casualty is Electric Last Mile Solutions Inc., which filed in June to liquidate its assets after failing to secure financing to continue operations. Mullen Automotive received court approval Oct. 13 for its plan to pay $55 million for some ELMS assets and take on $37 million in liabilities.) Edward Jones’ Windau said he expects higher interest rates will start to show their effects by the middle of the next year.

“Most of these companies have a [cash] runway of 12 to 18 months,” he said. “I think 2023 will be difficult for some of these companies, especially in the second half.”

Morningstar’s Goldstein said the headwinds facing many young EV companies could push some of them into each other’s arms. A GM-type EV holding company producing sedans, pickups and certain commercial vehicles could solve a number of the financial, procurement and production problems that come with small scale, he said. Windau is a bit more skeptical about the prospects of such a coming together because he said it’s likely M&A conversations would be among once-ambitious management teams looking to salvage what they can from their distressed companies. Not a great recipe for success.

Still, mergers could be one of the few ways for challengers to square up to the immense muscle ranged against them. The Big Three of GM, Ford and Stellantis have committed to spending more than $120 billion combined on EVs and related technologies just over the next handful of years. The general consensus is that the world’s largest auto makers have decided to plow their own furrows with EVs—even though Ford invested in Rivian—and thus can over time take advantage of their buying power and production capacity. Morningstar’s Goldstein said that trend will become particularly evident as they shift production from the secondary lines of today to higher-volume primary lines in the future.

“At the end of the day, this is just about putting parts together and making millions of cars,” he said.

That’s a both relatively simple and fiendishly complex proposition—and one history has shown is often reserved for a relatively small number of players. With the economy slowing and the Federal Reserve looking to slow it further, the next few quarters could decide which EV ventures won’t make the first round of cuts.

“In a normal environment, these companies might have a different outlook,” Windau said. “But now you have parts constraints and economic and interest rate constraints. All of a sudden, you’re looking at a very different environment.”