Can you build an electric car without losing billions?

Rivian Automotive Inc. and Lucid Group Inc. The new electric model of the K has received rave reviews, but you have to be patient to drive it.

Since commencing production a year ago, both the companies have produced only around 10,000 vehicles in total till June 30. Compare this to Volkswagen AG, which makes twice every day.

As startups are finding, high-volume auto manufacturing is far more difficult than securing customer orders — and it’s causing them to burn through billions of dollars worth of investors’ cash.

His struggles with Tesla Inc echoed during the ramp-up of the Model 3 sedan in 2017-2018, an experience Elon Musk later compared to eating a glass. The hope is that they will likewise be able to overcome hurdles and eventually get closer to Tesla’s valuation of $889 billion.

Car production is fraught with risk and remains a great way to consume investor capital when things go awry. So it’s worth looking at the outlook of cash-strapped new entrants like Arrival Ltd., Fisker Inc. and Polestar Automotive. They are wise to adopt much less expensive production methods, although these approaches are not without their challenges.

Even veteran automakers are struggling with inflation and parts shortage this year, but the financial pain is most acute for those launching vehicles at their plants for the first time.

Lucid burned about $1.5 billion between January and June when its greenfield plant in Arizona churned out only 1,400 luxury salons, an average of just 8 per day. It expects to produce about 6,500 cars in 2022, compared to the original target of 20,000, and blames this short haul on supply-chain and logistics challenges as well as the need for the vehicles to 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 difficult for itself by trying to launch pickups, SUVs and commercial delivery vans simultaneously. Analysts expect Rivian to lose more than $6.5 billion this year, and the cumulative loss to about $30 billion by 2027. Although it had about $15 billion in cash at the end of June — most of which was raised in last year’s blockbuster IPO — it is cutting jobs to slow the withdrawal of money from its bank account.

Certainly, larger plants can achieve impressive economies of scale when operating at full tilt. Tesla’s high profit margins, for example, are benefiting from investments in its highly efficient Shanghai plant and innovative large casting machines. Auto companies can also usually receive subsidies from local governments to build factories, adding to the attractiveness of this approach.

But it has the potential to drop significantly. If too few cars roll off the production line, a manufacturer’s fixed costs will far exceed revenues, resulting in large losses. Inventory writedowns are also required because the cost of manufacturing the vehicles is much higher than the cost to be received from the customer.

Even before production of its electric pick-up at a former General Motors plant could begin, Lordstown Motors Corp. had run out of cash and had to be bailed out by Taiwan’s Foxconn Technology Group in May.

No wonder some rivals think that owning a big factory is too risky. UK electric-van maker Arrival prefers so-called “micro-factories” – small and much cheaper to build, its facilities eschew expensive paint shops and metal stamping. An unexpected stop in such a small plant doesn’t cost much money, and is less expensive to build on many continents.

However, Arrival had to scale back its once huge production ambitions and cut 30% of its workforce to save cash. In the near future, it will focus on just one UK microfactory, producing one model in one shift. Therefore, it will probably only build 20 vehicles this year, up from 600 originally. Investors have sent shares down more than 95% since their 2020 peak.

Another option is an even more asset-light approach: Instead of building the cars in-house, outsource the complex task of assembling thousands of auto parts to an experienced contract manufacturer.

For example, Fisker uses Magna International Inc. to manufacture its electric vehicles. and partnering with Foxconn. It expects to benefit from its economies of scale, while avoiding huge expenditure on equipment and staffing. (Production is scheduled to begin at Magna’s Austrian plant in November.)

The downside of such an arrangement is that the contract manufacturer claims a slice of the profit and the auto company has less control over production. Yet of the three production methods I’ve highlighted, the most likely to reliably deliver high volumes of cars.

Polestar Automotive is another example – its electric vehicles are built at the plants of financial backers Volvo Cars AB and Geely Automobile Holdings Co. Despite disruptions caused by China’s Covid lockdown, it is on track to sell around 50,000 cars this year, or double Rivian’s target. produce. Although its gross margin is positive, the Swedish company reduced its first half operating loss by more than half a billion dollars. So the jury is still out on whether its manufacturing strategy is actually better. (1)

It’s understandable why some particularly cash-strapped manufacturers are hedging their bets: Canoo Inc. plans to work with a contract manufacturer for its first vehicles, while its “mega-star” in Oklahoma plans to work with a contract manufacturer. microfactory” (a cross between a microfactory and a regular plant). “You must learn to crawl and then walk before you run,” executive chairman and CEO Tony Aquila explained last month.

Even though many of Tesla’s imitators are currently struggling, their manufacturing and technology investments may eventually pay off. But they have to deal with capital markets that are less tolerant of high cash-burn startups, which means their access to capital is likely to be more limited.

There is no shame in outsourcing or starting small. An automaker that struggles to make a car doesn’t inspire confidence.