What’s Up In EV Startups
Isadora Teich wrote this article
Electric vehicle startups are making all kinds of headlines lately.
Everyone wants to be the next Tesla, but is anyone getting close? Some say yes, and others say no. Tesla, as always, is steeped in controversy.
News just broke that the US government wants to investigate Tesla for misleading consumers about their cars’ self-driving features. Also, some claim that Tesla is a company that can only grow, while others claim the stock is overvalued and not even a worthwhile investment.
So, what are EV startups doing to take on Tesla, a household name that recently surpassed $1 billion in profit for the first time? Let’s take a look at the good, the bad, and the interesting.
A Bumpy Road So Far
Despite a lot of issues with some of the main contenders who wish to take on Tesla, money is still pouring into these companies. Some even say there has never been a better time to be an EV startup. There are really two ways that you can look at this.
Glass Half Full: Of course, in a new market and with a new product, there will be some kinks to iron out. These problems are a natural part of the innovation process.
Glass Half Empty: A lot of these companies are failing and allegedly committing crimes. EV as a whole is a trend that will go nowhere.
I think that the truth lies somewhere in the middle perhaps. There is always a mixture of success and failure in any burgeoning market, and if you focus only on one of those things you miss the complete picture. First, let’s take a look at some of the industry’s failures.
EV company Nikola enticed a lot of investors based on the promise that it would deliver electric truck technology.
Not only did it fail to do that, but Nikola founder Trevor Milton was charged with essentially tricking investors by Federal prosecutors in New York. Prosecutors say that between Fall 2019 and Fall 2020 Milton was part of a scheme to defraud investors with dishonest production and sales numbers.
From the very biggest to the very smallest EV companies, it seems that legal problems abound.
Ohio-based EV company Lordstown Motors Corp. is also being investigated by the Justice Department. Some claim that, in order to try to avoid government oversight, many of these companies are starting to merge with SPACs. SPACs are a hot type of company right now, partially because they are more loosely regulated than traditional IPOs.
The Trials of Mass Production
On paper, what makes a good business is simple. You sell something for more than it costs to manufacture or acquire. You make a profit. Everyone goes home happy.
When it comes to electric vehicles, this has proven to be incredibly difficult. For one, getting the materials you need is incredibly difficult and expensive. Functional electric vehicles often depend on minerals like cobalt and lithium. Lithium is extracted from the earth through mining, a process with horrible environmental impacts. This has led some to question how much greener electric vehicles really are than standard ones that run on gasoline.
Even Tesla Doesn’t Make Its Money Selling Cars
Getting the materials is one issue. Profitable mass production is an entire other monster. This is an issue that nearly broke Tesla. Elon Musk even said during Tesla’s July 26th earnings call, “The thing that’s remarkable is that Tesla didn’t go bankrupt in reaching volume production.”
In fact, to this day, most of Tesla’s profits do not come from selling cars. They have made billions over the last few years by selling regulatory credits to companies that cannot meet state requirements. 11 states require that automakers offer a certain amount of zero-emissions vehicles by 2025. If they can’t meet this, there is a loophole.
These companies can buy regulatory credits from another company that meets these standards, like Tesla. Gordon Johnson of GLJ Research told CNN Business: “These guys are losing money selling cars. They’re making money selling credits.”
Some Big Questions
This information may be surprising to some people and certainly raises a lot of questions about the viability of electric vehicles.
For one, if sourcing the materials for electric vehicles may have high environmental costs, are they truly a green solution?
Also, if the most famous electric vehicle company actually doesn’t make most of their money selling their cars, what hopes do smaller companies have? Are we going to end up in a situation where hundreds of electric vehicle companies sell more government credits to businesses than cars to consumers?
Ultimately, why is so much money and hype going into something that does not particularly seem to deliver yet?
Perhaps, the keyword here is “yet.”
How EV Startups Are Approaching the Mass Production Puzzle
Currently, the most hyped EV startup in the world, possibly, is Rivian.
It has started entering the news cycle as a potential rival to Tesla. This is largely because the startup has received billions in funding from companies like Amazon and Ford to create electric vans, pickups, and SUVs. Companies without such access to funding will have to find other ways to solve this problem.
Arrival has a particularly interesting take on trying to make mass production of electric vehicles profitable.
Traditionally, automakers spend about $2 billion per factory, in order to make them large enough to build a minimum of 240,000 vehicles a year. This means that if EV startups follow this model, they have to raise so much money out of the gate that they end up in a trap.
This is why electric bus and van maker Arrival is shaking things up by creating micro-factories close to their main customers. This means they require less capital to build factories and also cut down on shipping costs.
For example, Arrival is building one plant in North Carolina to make vans for UPS, their largest customer to date. They are also currently constructing factories in South Carolina and Spain. Each plant will only make about 10,000 vans annually and create about 250 jobs. This is a sharp contrast to the old days of auto when one factory might have been massive and employed an entire town.
While there are a lot of pieces of the puzzle to fit together when it comes to sourcing, creating, and selling electric vehicles, that is what startups do best. They solve problems. This is undoubtedly a complicated and flourishing market that raises a lot of questions about sustainability, business, and ethics.
What do you think? Are you for or against electric cars? Do you think they will be the standard of the future, or that they are a passing fad?
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