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What's Happening in the Electric Vehicle Industry

By John Rosevear – Sep 28, 2021 at 6:49AM

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Motley Fool auto specialist John Rosevear returns to the podcast to break down electric vehicle stories.

In this episode of the Industry Focus: Energy podcast, host Nick Sciple is joined by senior auto specialist John Rosevear to discuss Lucid's (LCID -2.24%) 520-mile range vehicle, Rivian's EV truck beginning production, Ford's (F 0.36%) deal with Tesla's (TSLA -0.19%) former CTO, and more!

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This video was recorded on September 23, 2021.

Nick Sciple: Welcome to Industry Focus, I'm Nick Sciple. This week, John Rosevear returns to the show once again to update us on the latest in the EV news. John, welcome back on the podcast!

John Rosevear: Thanks for having me, Nick!

Sciple: Great to have you back on. I think every time I've had John, the past year, I've said, man, we've got a lot to talk about, today is no different. Let's lead off the bat and talk about what's going on with new start-ups, new vehicles entering the electric vehicle space. The one that's gotten a bunch of headlines in the past week or so is that Lucid is coming to market with their Lucid Air vehicle and they released a data point in the past week or so. That the Lucid Air Dream Edition R will have 520 miles of approved range. That's 100 miles more than its closest competitor. What does this mean for you, John, as someone who follows the electric vehicle industry?

Rosevear: Well, Lucid is an interesting company. The CEO, Peter Rawlinson is a Tesla veteran. He was actually Chief Engineer on the Model S back in the day. He has conceived this for a long time as Tesla 2.0, it's what you buy after the Tesla. The Lucid Air, you can auction it up to almost $170,000. It's a serious luxury car, but what it means here is that we've been hearing from them for a few years now. "This is what we're going to do." They've delivered on the range claims. All versions of the Lucid Air get over 400 miles of range on the EPA test cycle. It's a good side, it's a bullish sign. The special long-range, high-end addition gets what did you say, 520. It's a good sign for the company that they're delivering. Now, with production expected to start sometime in the next few weeks, we'll see what the actual cars are looking like, the production versions.

Sciple: You mentioned that there is a car that is yet to go into full on production, but if you look at the valuation of the company, you would think there were firing on full cylinders. Came public via SPAC in late July when I last looked at it, you're looking at around a $40 billion market cap, that's against Ford's around 50 billion. You're getting a big valuation here. When you look at the potential of this company and what do you see is the potential energy inside can it live up to this 40 billion valuation, what do you think about that?

Rosevear: It's a bit of a stretch. It depends on whether you apply traditional auto metrics or Tesla metrics. [laughs] It's a bit of a stretch. Lucid, at least for the near-term, is operating in a high-end luxury space. They're not going to be selling a million vehicles a year anytime soon, if they do 40,000 -50,0000 of the Air a couple of years out, I think there will be pretty happy. The plan is not unlike Tesla's secret master plan from years ago, to start with the high-end and move down over time as they build scale, as costs come down and so forth. But Lucid has staked out a niche. I think it's a niche where they can be profitable. I don't know if it's a 40 billion niche. I think we're going to have to wait and see how things go over the next couple of years. That said, I like the company, I like the management team, I like what they've done so far, they are being advised by some very good people, including former Ford CEO Alan Mulally. They're going about this the right way and there's a lot to like here. The valuation, it depends on your context, I think. If you're thinking of this in Tesla terms, 40 billion isn't expensive, if you're thinking of it in Legacy Auto terms, it's a lot of money.

Sciple: Yeah. This is a company that probably has a somewhat credible claim to the next Tesla branding that we see lots of companies trying to brand themselves with, because you have the folks who have historically worked at Tesla and scaled up the model. Last, trying to follow a similar model with your super high-end car. Then hopefully, we can expand into other offerings in the future. We'll see what happens there, the market thinks it's going to be a glorious future, we'll see the extent to which that plays out. We talked about Lucid's new electric vehicle coming to market and how it's shaking up the game. We have another new player that's doing the same thing. Rivian had their first truck of the R1T Electric pickup roll-off its line. That means it's going to beat Ford, GM (GM 0.87%), Tesla to-market with electric trucks. How important is this vehicle to the electric vehicle market, this is the first struck coming?

Rosevear: It is, but we should say this isn't a truck like an F-150. This is, it's a little smaller, more like the size of a Ford Ranger or a Chevy Colorado, and it's definitely upscale. The entry point on this is over $70,000. It's a lifestyle truck, it's aimed at people who want to go camping, who want to go off-road, who want to go to the cabin in the woods, who want to throw a couple of kayaks on it, that thing. It's got a lot of neat features. It's another company we're I'm really impressed with the management team and the advisors they've brought in. The CEO, RJ Scaringe is young, but he's made great decisions end-to-end. They're working with Ford who have helped them figure out mass production, they're working with Amazon, which is an early customer that invested a lot. Both of those companies are investors. If the truck looks really good, reviews have been strongly positive, how many can they sell? I don't know. What is the market for $80,000 lifestyle pickup truck, whether it's electric or not? I don't think it's huge. I do think there's a decent business here. It depends on where they go from here, I think, in terms of how big it could eventually get. But there's a lot to like about the company as it is.

Sciple: That backing, nothing to turn you off there. Those folks that know a lot about this business and their needs. There's another company exploring IPO. There's some rumors that it may come public here in the next few months. The numbers being thrown around is that they might may be targeting an eight billion dollar raise at an $80 billion valuation. Again, would be crazy when you talk about how Ford owns a stake in this business and this company is yet to deliver any vehicles at scale. Yet seeking $80 billion valuations, again, do you think same bucket as Lucid here as far as, it's a big market, but we will see how much of it they can capture.

Rosevear: Yeah, I also think this is again, I said the CEO RJ Scaringe is a smart guy. I think he is looking at the very hot valuations for EV companies generally, and it's like let's get this while we can maybe. [laughs] That's not any insight, it's just I've been watching the company for a while. I've gotten to know them a bit. I think they'd be crazy not to raise eight billion at an 80 billion valuation if the street is going to hand it to them. Sure, let's do it. Let's get some cash in the bank. We all in autos know that having a big cash reserve is great insurance against a recession. We learned the hard way during 2008, 2009 times. Nearly all of the big established automakers have big cash reserves. So they take this eight billion and just put it in the bank or something, that recession proofs the business and ensures that they can keep developing their new products and so forth, even if sales slipped during a downturn as they do in the auto business. So I think they're smart to go public here. Again, it's a lot of money for what looks right now as a niche company. It could be successful, it could be profitable, but from what we've seen from them so far, it's more of a niche player. That said, those can be good businesses, and I'm not sure it's an 80 billion business. If you're not looking through Tesla-colored glasses.

Sciple: Yeah, we'll see what happens. I would certainly in a business that's trying to scale up production in a capital-intensive industry, eight billion dollars is certainly very helpful. Part of the Tesla story is being able to have a really strong valuation to get access to capital, to be able to reach scale, and that's part of why Tesla succeeded where a lot of other automakers haven't. To the extent this valuation is high, that says something about maybe the potential returns here, but also says something about their ability to actually get there with production. Because they have a much lower cost of capital than other folks may have had historically, who tried to enter this space. We'll see what happens.

Rosevear: Of course, what we have to remember with both Lucid and Rivian is how many buyers are there, ultimately. Three years from now when Ford and GM are shipping commercial-ready electric pickups and all that, how many buyers are there, and that, to some extent, will be dependent on their product strategy over the next year or two for both of them.

Sciple: That is a perfect transition for me. John, as we're going to go into talk about some of these established players, we got some updates from Ford on their electric truck plans here in the past week or so, the first pre-production units of the F-150 Lightning rolling off the line. What should we be paying attention to here with the F-150 Lightning?

Rosevear: What I wonder with the F-150 Lightning, I mean, we saw they came out last week or the week before and said we're going to spend 250 million, add more jobs to expand capacity of our new electric truck factory even further. By even further, they mean up to 80,000 a year if I recall correctly. With 150,000 reservations so far, and seemingly, the whole business excited about this particular product, I wonder if there's still undershooting a bit. I think we might see more [laughs] expansions as they get out there a year from now. When those 150, it will depend on how well those convert, how well those reservations turn into real orders. But what Ford saw with the marquee was at a very high percentage, a surprising to them high percentage, did convert into actual orders.

If that happens with the F-150, they're going to be having the happiest problem in the auto business where they're selling all they could make and they could sell more if they could make them, but there may be an issue of ramping supply chain and so forth here. You can't build more trucks if you can't get the batteries or whatever. So they may be walking align with their suppliers and so on. But it's certainly, it's bullish for Ford, it's bullish for electric vehicles generally. I've said for a while on this program and elsewhere that I think this is the product that could be the turning point in the US for electric vehicle adoption. Because once people see these, assuming they're as good as Ford's trucks usually are, the truck will sell itself and I think it will really open the gates for a lot of people who wouldn't ever consider a Tesla, but maybe drive one of these at work and go, whoa, this is really nice, I want one.

Sciple: Certainly, the more buyer uptake that we have, the more investment we will see from these companies trying to realize that those sales and on down the line accelerating adoption. One of those things you mentioned was the need for production materials. One of the constraints on actually scaling up electric vehicles isn't just people wanting to buy them, is that's being able to make them. Having enough materials to do so, and that ties into the other news item we heard about Ford earlier this week, signed and made an investment in Redwood Materials. This is the big noteworthy point here is, this company's headed up by JB Straubel, who is the longtime CTO of Tesla. Was at Tesla really from the beginning, a big part of scaling up their battery operations, really making the company be able to achieve what it has today. What do you make of this partnership here with Ford and Redwood materials?

Rosevear: First, we should say JB Straubel is the guy who pitched Elon to get him to invest. [laughs] So he's really from the beginning, he was the battery guy from the start. He's a smart guy and he has started this business to recycle and provide recycled materials to the electric vehicle industry. Ford is putting in 50 million as part of their effort to show that they're sincere about this whole green full life-cycle thing. It's something you've got to think about if you're going to be pounding out tens of thousands, hundreds of thousands of electric vehicles. What happens when we end end-of-life? What happens to these batteries? So they are hoping that Redwood will expand. I mean, they're going to work with Redwood so that they have access to some facilities and so forth. They've put in 50 million which will fund building some of those facilities for Redwood. I mean, it says that Redwood's for real, and their recycling tech is good, I think. I don't think it says a lot for Ford, except it's another proof point for investors that they're serious about this electric vehicle thing, like really serious.

Sciple: Yeah, I think it's new for Ford and that it adds to the drumbeat of we're involved in EVs and we're involved with these exciting players, Tesla vats, and things like that. From the perspective of Redwood, again, they are working with Tesla. They're signing up with Ford. Really making some interesting partnerships. If you believe that this industry really does become where transportation is going, you could tell a story about how Redwood is really a successful business and becomes an interesting investment on its own. We'll have to see what happens there, is still very early days. He just left Tesla what, two years ago, so very early days with this company.

Rosevear: Sure.

Sciple: So moving on from Ford to GM, we've got some good news with GM, we've got some bad news with GM. We'll start with the bad news. First, we've got an ongoing recall of the Chevy Bolt EV, have told owners not the park within 50 feet of other cars due to fire risk. What's going on here?

Rosevear: This is. [laughs] It's egg on GM's face to some extent. But it looks like the problem is with battery cells, which is on their supplier LG Chem. It may have been a manufacturing issue. GM is going to do the right thing here. They're not necessarily going to do the right thing in the most polished and PR friendly way as we've seen. But they do think they have a fixed for it now and they are going to replace all the battery packs. My assumption is that LG is going to end up funding some of this that they were both on it together. Which is a reasonable outcome. If we can get owners back on the road quickly, then I think this won't matter a whole lot in the long run, but if it drags out a whole lot longer, I don't think it hurts electric vehicle adoption on America, but it's going to be something for GM to overcome.

Sciple: Yeah, it's one of these things we will see pop up more and more often. There's a long history of recalls into that traditional auto business. I don't think there will be anything different in electric vehicles, but figuring out who's responsible for what, I'm sure there's going to be some lawsuits back and forth between GM and LG trying to figure out how that works and then insurance companies trying to figure out how to underwrite total cost of life because, of course, there's going to be less maintenance and things like that to go wrong. But if the battery catches fire and the whole thing blows up, of course, that's a catastrophic loss. We're still early days in this business and some of these vehicles have just now been out on the road long enough that things that wouldn't have presented in and maybe your normal testing will start to present in the real-world, we'll see more of this type stuff.

Rosevear: Truth.

Sciple: On the other side of GM looking on the good news, you talked about all the reservations for the F-150 Lightning, we also talked about the high-end Model S challenger that Lucid is coming out with. Well, GM has a high-end Model S challenger as well. They opened up orders for the 2023 Cadillac Lyriq and sold out in 19 minutes. Some critics have said this goes to show that the big automakers are consistently underestimating demand for electric vehicles and not ramping up production. What do you make of this rapid sell-off? Is it show they're not making enough of them, or is it so there's just way too much demand they're beating down the doors?

Rosevear: There's more demand than they can fulfill. We should be clear. I don't have any idea [laughs] what the total number of vehicles is here. If it's 500, if it's 1,000, if it's 20,000, I suspect it's probably a few thousand, but I don't know that for sure. But it's the same thing we saw with Ford and their 150,000 reservations for the lightning. There's a lot of interest here in these vehicles. What's lacking is probably still the supply chain, the batteries. There's plenty of lithium in the ground, but it's not coming out as fast as we want yet. Battery manufacturing is scaling up. Everybody wants to make sure the quality delivers. Everybody wants to improve the technology. This stuff takes time to ramp up. We're creating a whole alternative supply chain for the entire auto industry around the world. It has taken time and we've already spent a few years and billions of dollars doing this. Everybody's used to seeing Tesla ramp up production. Now, that's been a big lesson for investors. Now, this is all the battery makers, all the component makers, all the motor makers, and all of the other automakers ramping up all of these pieces of the puzzle to make all of these cars. I'm encouraged by the level of demand. Because it means that when the cars appear, the buyers will appear too. It looks like right now, people are excited about these things. But I think it's a supplier bottleneck right now and that's why they're aiming to low and it's not, "Oh, GM greatly underestimated." GM might've underestimated to some extent, but it's also probably GM saying, look, this is the number of vehicles we can make in the first six months or whatever. [laughs] With our supplier agreements and what they're telling us about what they will be ready for.

Sciple: Sellouts are never a bad thing, it's just that there's always nuance to some of the stuff. You talked about, supply chains getting those ramped up. We also got some news from GM about increasing vertical integration on their EV motors and increasing efficiency. What should we be taking away from that as investors?

Rosevear: They've developed what appear to be really good new motors. That's not really a surprise. GM has a lot of smart engineering talent. They've been focused on this for several years now. The vertical integration is interesting because it goes away from where the auto industry has been in recent decades where they have a lot of suppliers who are specialists in an electric motor or a specialist in making seats or whatever. They buy that in and it saves some of the trouble of developing stuff in the house. But I think with EVs, everybody wants to own the tech so it can be a differentiator. If everybody is buying the same motors, then what's the difference? [laughs] Whereas GM can at least claim special sauce on their own proprietary motors and there probably is some special sauce and Tesla and Ford and everybody else. Also, this might be, to some extent, be a reaction of the chip shortage where they want to control the supply. If you're wondering about uncertainties in US-China relations going forward, you probably don't want to be buying everything from suppliers in Shenzhen and Shanghai and so forth. It's about having certainty and having control and so forth. Again, it's a sign that this is for real. I'm not sure we needed more signs of that from GM, but here's another one they're developing the technology in the house. I don't think this is hugely bullish or anything that investors need to jump up and down or worry about. Either way, it's another step on the past, but it's not surprising and we can see why they're doing it probably.

Sciple: Part of this drumbeat of we really care about electric vehicles. We're putting a lot of chips down on this. We're making investments. When you mentioned, maybe there's not this big differentiation in motors, but you'll see the companies talk about it. I think that's endemic in the auto industry as everything has its own special grand.

Rosevear: Of course.

Sciple: We're seeing that in [inaudible 02:50:09] all that stuff.

Rosevear: Not the Ford VA or whatever. [laughs] It's how it's always gone. As I say, when GM and Ford's bicker everything, this is 100 year rivalry and they're not going to change course on tactics because this stuff, because they've evolved techniques, engineering, manufacturing, and marketing that work. They're going to try and carry those into the electric era.

Sciple: The new auto industry, same as the old auto industry.

Rosevear: Yes. [laughs]

Sciple: You mentioned China earlier in supply chains, wanted to talk a little bit about China here. Earlier this month, the Chinese Industry and Information Technology minister Xiao Yaqing. Hopefully, I said that right, drew headlines saying China has, "Too many electric vehicle maker and that the government would encourage consolidation." This comes amid this big disruption we've seen in the tech sector in China following sudden government intervention. Should investors in Chinese EV companies have concerns around these government comments?

Rosevear: Well, the companies we look at, companies like NIO (NIO -3.69%), Xpeng (XPEV -3.28%), Li Auto, BYD. Those are the companies that stand out from the crowd because they've had some success. They're shipping vehicles, they have happy customers, their sales are rising. It's harder to see from the United States, is there are like 300 electric vehicle start-ups in China, many of which are nothing more than a shingle on a warehouse. At this point, they never got anywhere. There was a period where subsidies from national and local authorities were quite generous. A lot of people said, "We'll try and give us some subsidies." There was some level of probably scam going on, but there are a lot of sincere efforts that just never got off the ground, including some fairly large ones. To the extent they are encouraging consolidation. If I were an investor in say, NIO, what I'd be worried about is that the government is going to put pressure on me to buy up some rivals that maybe I don't need what they've got. Some, it's just traction.

That's maybe not the best use of capital or so forth. I think for the companies, again, the ones we talked about, this is going to be more bump on the road at most stuff. It may even help them to some extent from a Chinese consumer perspective. The thing to understand about the Chinese auto market is every brand of auto you've ever heard of as a Westerner is for sale in China plus a whole bunch of Chinese brands that maybe you've never heard out. By clearing the field somewhat, they can stand out more. If we go from having 300 electric vehicles in China, electric vehicle companies in China. To having eight then the consumers know what they're buying and know who's got what and they can see more clearly rather than it being overwhelming. That could be good for NIO or Xpeng.

Sciple: We'll see what happens. I think anytime we have the government getting involved in business operations, it adds a level of unpredictability to a business that's already on the very cutting edge. We'll see what happens and we'll be paying attention to that. Outside of this government macro involved events, what are you paying attention to in China as far as EVs these days?

Rosevear: Well, what I'm watching right now is Xpeng just began production of a new model. It's called the P5. It's a smaller sedan than their P7. Everybody is probably, if you have paid any attention at China electric vehicles at all, you've seen pictures of the P7. It's a really pretty sleek sedan. The P5 is more steady, more upright. Not quite as pretty, but it starts after subsidies around $25,000 which is going to be very appealing in China. They have started production. They say deliveries begin next month. What I will be interested in to see is how well this does in the near-term keeping in mind that rival Neo, which is a company that a lot of us have watched for a while. In America, a lot of Fools have been interested in it. NIO doesn't have any new models coming until next year. Their growth may level off a little bit while Xpeng still some share with their new low-cost, presumably higher volume products. I'm going to watch that over the next couple of months and see how that starts split out.

Sciple: When we see this growth of these new EV companies, you mentioned Xpeng, NIO, there's others. As someone who lives in North America, is there credible route to these vehicles being available for sale here or is there still a China only store?

Rosevear: They're looking at Europe and some extent, Norway got everybody's attention because that's the one country that has led the world in adoption of EVs. Tesla had a lot of sales there, Ford is selling every Mach-E, they can ship to Norway, [laughs] etc. NIO and Xpeng have targeted this. I think Xpeng has already delivered some cars in Norway and NIO is in the process of opening their business. They may have shipped there for shipment there. I think at some point later on, they might try to come to America if they get a beachhead in Europe and can build that into a profitable, steady business. But at the same time, what we're going to see over the next few years is the avalanche of EVs from the established automakers who already have the production capacity. Who already have the supplier relationships, who already have the customer loyalties and so forth. That makes me think that what might not be on radars yet is some consolidation coming both among legacy automakers and among these new entrants. I think we're headed for a shakeout.

Certainly, as we talked about, there's one coming in China. But elsewhere as well. Is there room for Nikola and Lucid and all of these other companies, Workhorse, Lordstown that we've talked about for the last couple of years. Not all of these companies are going to make it. It's going to be interesting to see who the acquirers are and who the acquired become. I think a shakeout is coming and it's going to be interesting to watch. That's my take.

Sciple: Yeah, that is an interesting take especially because you see some of these, as we mentioned earlier, you've got Lucid coming out at a valuation that puts it up there with Ford and GM, Rivian coming out there, which makes me think about there was like what was like the Time Warner deal in like '99 where you had was AOL Time Warner where you had an acquisition. It's like backwards from the way you would've expected from traditional media, maybe 5-10 years beforehand. Maybe we see something like that play out in electric vehicles. Who knows? The fun thing about this is we're in this brave new world where we're pretty sure of what the future looks like, but who knows, until we actually get there?

Rosevear: Yes, exactly.

Sciple: John, always enjoy having you on to talk about this and can't wait to have you on again sometime soon.

Rosevear: Thanks, Nick.

Sciple: As always, people on the program may own companies discussed on the show and The Motley Fool may have formal recommendations for or against the stocks discussed, so don't buy or sell anything based solely on what you hear. Thanks to Tim Sparks for mixing the show. For John Rosevear, I'm Nick Sciple. Thanks for listening and Fool on!

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Nick Sciple has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon, NIO Inc., and Tesla. The Motley Fool recommends the following options: long January 2022 $1,920 calls on Amazon and short January 2022 $1,940 calls on Amazon. The Motley Fool has a disclosure policy.

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