What happened
Shares of Luxembourg-based electric vehicle maker Arrival (ARVL 40.00%) plunged more than 35% today as of noon ET, following its third-quarter earnings release this morning.
The electric vehicle maker is coming on hard times, as funding has dried up in this market environment, while the company still needs more cash to fund the initial production ramp. With the stock at such a low level, management can't raise the cash it thought it could just a few months ago without severely diluting shareholders.
In response, Arrival is now cutting certain products and focusing on its highest-profit opportunities in order to extend its runway before running out of cash; however, even that new strategy comes with trade-offs, including delaying revenue into 2024.
So what
In the release, Arrival recorded at whopping $310 million loss, including a $232 million impairment charge. Arrival also burned through $180 million of cash, leaving it with just $330 million as of the end of the quarter. Unfortunately, the cash burn will continue, as it plans to spend another $130 million to $170 million in the fourth quarter, which includes an extra $35 million for severance and $40 million for other restructuring costs.
The reason behind these sudden moves is that management is slimming down its U.K. operations to concentrate on U.S. commercial electric vehicles that qualify for huge incentives under the Inflation Reduction Act (IRA) passed this summer.
While that sounds great, the big problem is that Arrival may not even have the cash to make large-scale U.S. manufacturing a reality, as the capital markets have essentially closed as interest rates have risen while recession fears loom.
In the release, Arrival said that its current $330 million cash pile was "not sufficient" to cover 12 months of operations. In response, Arrival is downsizing its existing U.K. microfactory, where it produced its first electric van prototype in September, instead directing its resources to its Charlotte microfactory in the U.S. to produce higher-margin vehicles that qualify for IRA incentives. However, even that new strategy will require extra funding.
So what
Arrival came to the market in 2021 through a special purpose acquisition company (SPAC) merger with lots of promise. Arrival's novel approach to electric vehicle assembly was to establish smaller "microfactories" in existing warehouses with proprietary robotic technology. The approach was thought to be a cheaper, less labor-intensive way to build EVs than building massive assembly factories from scratch.
In manufacturing, a concept is great, but it's really all about execution. Arrival was initially supposed to produce 400 vehicles this year, but management lowered that target to 20 this summer amid supply chain difficulties and execution problems. Now, with the change in strategy, management now says revenues and margins will be pushed to 2024, not 2023 as initially projected -- and even that may be in question if the company can't raise additional capital.
The lesson for other EV makers here is that while the growth of the electric vehicle market is enticing and several new EV companies have cool-looking prototypes, manufacturing is both hard and capital intensive. In this age of higher interest rates and lower stock prices, any company that may have to raise more money to continue its build-out will be in a tough spot.
Young EV companies are learning the hard way why there are only a handful of major carmakers these days, despite the massive growth of the auto market since the invention of the automobile in the early 20th century: There is only room for a few large-scale players in such a capital-intensive enterprise.
