Electric vehicle manufacturers like to boast about disrupting the automotive industry by manufacturing vehicles with a heavy dose of technology and software, implying that legacy automakers are somehow out of step with modern times. But now, these brand-new manufacturers are encountering the same potholes that have long plagued their more experienced competitors -- and their business cycles, and reactions to them, are similar. As pandemic-fueled parts shortages, inflation, and rising interest rates roil the economy, no automaker, new or old, is immune from their effects.
Belt-tightening and bankruptcy
The automotive industry still needs to spend vast amounts of capital before it can offer investors any assurance of sales success. While EVs are not quite as difficult to build as vehicles powered by gasoline-fueled internal combsution engines, they still must undergo the same amount of development and testing, and the factories that build them are just as pricey. Making it to the start of production is still a huge hurdle to clear.
In July, Rivian (RIVN -2.74%) announced that it's cutting 6% of its 14,000-member workforce, despite 2022 sales projections of $1.8 billion in 2022 and $6.2 billion in 2023. Rivian Chief Executive Officer RJ Scaringe said the cost-cuts were needed to continued growth in manufacturing without having to raise additional cash. Scaringe is cutting fat among the company's white-collar employees, not at its factory in Normal, Illinois.
Last month, Tesla (TSLA -1.68%) closed its San Mateo, California office, affecting 229 employees, according to a Reuters report. Elon Musk had a "super bad feeling" about the economy, and needed to cut 10% of its salaried staff. In an email seen by Reuters, Musk told executives to "pause all hiring worldwide."Again, the axe here seems to be falling at the corporate level; Musk indicated that factory workers wouldn't be impacted, and in fact, their numbers could expand.
Another company having difficulty ramping up production is Lucid (LCID -4.47%). Despite having 30,000 orders for its Lucid Air, it has delivered only a few hundred vehicles during the first quarter of 2022. The company says it can deliver 12,000 vehicles by year's end, but its appointment of new VPs for Process Transformation and Global Logistics suggests otherwise.
Then there's Lordstown Motors (RIDE 3.70%), which warned in June 2021 that there was "substantial doubt" it would have enough money to remain in business for the next year. The company recently reshuffled top management, faces an SEC investigation for misleading investors, and has sold its former GM plant to Foxconn (FXCNF 2.14%) to build the company's Endurance pickups.
Similarly, Faraday Future Intelligent Electric (FFIE -15.58%) is pushing back the start of production to "third or fourth quarter of 2022," since it requires another $325 million to begin production of its FF91 SUV. And Fisker's (FSR -10.96%), value plummeted after announcing plans to issue another $350 million worth of shares, money the company needs to start production.
Finally, there's Canoo (GOEV 2.61%), which is so low on cash that the EV maker recently warned that it might not be able to meet its financial obligations, despite more than 17,500 preorders with a projected value of $750 million, and access to $600 million in funding.
In this regard, EV startups are no better than their traditional industry counterparts. According to news reports, Ford (F -3.35%) is planning to cut 8,000 jobs from its Ford Blue division, the part of the company responsible for producing internal combistion engine vehicles. That news comes after Ford earned $17.9 billion in 2021, with $9.1 billion coming from its stake in Rivian.
Booming EV sales
Yet demand for electric vehicles (or EVs) remain strong. According to Cox Automotive, sales of battery-powered electric vehicles increased 13% in the second quarter of 2022 from the first quarter, even though overall second-quarter new vehicle sales are down more than 20% from the second quarter of 2021.
And Tesla sales continue to dominate the EV market. The Tesla Model 3 remains Europe's most popular EV, and the company has enough production capcity to make 500,000 units there annually. However, its share in the U.S. is declining as more EVs are coming to market from established automakers. Even so, its current 66% share still dominates the segment.
Musk's fears about the economy are well-founded, despite his company's healthy production numbers. Legacy automakers are about to expected to release a host of new EVs within the next 24 months, giving neophyte start-ups true competition. That said, Millenilials are more trusting of newer manufacturers, so they're more likely to buy an EV from startups than older customers who prefer legacy brands.
What this means for investors
While automakers talk of consumer preorders in hand, it remains to be seen how many orders will lead to actual sales, and how many will evaporate once buyers defect to more extablished brands as new EV models become more immediately available.
Traditional automakers have marketing muscle, can deliver vehicles at a lower cost thanks to their economies of scale, and enjoy widespread established dealer networks. And remember, legacy automakers are financing their EV efforts through profits from internal combustion engine cars, not debt. These remain huge advantages for a start-up to compete against. The current supply constraints keeping automakers from meeting demand won't last forever -- but EV start-ups' long-term health remains an open question, with the possible exception of Tesla.
When considering a new automaker, keep in mind that electric vehicle manufacturing is still the automotive business -- a cash-intensive industry with boom-and-bust sales cycles. All of the usual investing metrics apply.