Investors in electric vehicle (EV) start-ups are accustomed to tracking production and deliveries to follow their growth and to better understand industry demand. Rivian (RIVN 3.15%) disappointed its shareholders when it announced that its production and deliveries would be flat year over year in 2024, but that doesn't mean there isn't something critical for investors to watch.
Rivian's biggest feat in 2024 -- if it can achieve what it hopes to -- will be becoming gross profit positive. Here's a look at the driving forces behind its previous gross profit improvement of roughly $81,000 per unit, and the next three driving forces that could enable the company to squeeze out a gross profit late this year.
Drastic improvements
During the fourth quarter of 2022, Rivian's gross loss per unit checked in at a staggering $124,162. Figures such as that don't inspire confidence in investors, and management knew it needed to make some dramatic improvements.
Fortunately, for investors and Rivian, by Q4 2023, the company was able to reduce its gross loss per unit by about $81,000, to $43,372.
Roughly 45% of that improvement was generated by reducing fixed and semi-fixed costs. That was driven in large part by the company's 75% year-over-year increase in production during the fourth quarter. Rivian also realized a reduction in write-downs and losses on firm purchase commitments throughout the year.
Another 40% of that improvement came from cutting variable costs, particularly material costs for its R1 vehicles and its commercial vans. More specifically, Rivian achieved over 35% savings in material costs after it began using the in-house developed Enduro drive unit and LFP battery back during the first quarter of 2023. Introducing the Enduro drive unit also removed a supply bottleneck from the company's production.
The last 15% of improvement came from increasing revenue per unit, as the company delivered vehicles with a higher mix of new variants and options, leading to higher average price tags.
Reaching positive gross profit
While that $81,000 reduction in the gross loss per vehicle was huge, the company still has much further to go if it's to reach a gross profit. Management expects to achieve positive gross profit during the fourth quarter of 2024 thanks to three key forces.
The biggest improvement for the company throughout 2024 will be on the variable cost front. In fact, management expects 50% of its gross profit/loss improvement this year to be driven by R1 engineering design changes, reductions in raw material costs, and negotiating better deals with suppliers.
Another 35% of gross profit improvement this year should be driven through fixed and semi-fixed costs. Management believes it will significantly reduce costs and improve production efficiency with the changes it will make to its manufacturing process during its planned second-quarter shutdown of its Illinois factory. Its production line rate is expected to increase by 30%. Most interesting, perhaps, is that instead of losses from firm purchase commitments, the company expects this to actually turn into a tailwind for gross profit during 2024.
Last but not least, management expects 15% of this year's gross profit improvement to come from non-vehicle revenue. More specifically, with over 71,000 Rivian vehicles out in the wild, there are opportunities for the young EV maker to generate revenue from service, accessories, insurance, and software services.
What it all means
Ultimately, while it's of huge interest to investors that the company believes it can achieve positive gross profitability in 2024, even without production and sales growth, the story is bigger than that. This is about Rivian improving its operations and supplier pricing to pave the way for its R2 and R3 vehicles.
By the time those vehicles are ready to launch at prices more suitable for mainstream consumers, Rivian needs its operations to be finely tuned and ready to scale, and it will need to drastically improve gross profits even further to offset those lower prices.
If Rivian can execute throughout 2024 the way it expects, it will be in much better shape to convince investors it can achieve its long-term vision and become a big player in the EV industry.
