EV Disruptors Face Industry Speed Bumps That Legacy Automakers Have Faced For Years.

Electric vehicle startups that promised to disrupt the automotive industry by relying heavily on software and technology are now scrambling to cut costs amid the type of industry slowdown that has plagued Detroit automakers for years. Startups like Rivian Automotive Inc and Arrival SA will need to tighten their belts and, in some cases, reinvent themselves to remain a player in an increasingly competitive market as incumbent automakers introduce their own EVs, according to industry officials and analysts. In many cases, they are collaborating with larger, well-funded corporations to ensure their survival and access to capital.

Those who fail to control their spending or find the right partners may end up like Electric Last Mile Solutions, an electric delivery van startup that filed for Chapter 7 bankruptcy protection last month. Officials in the industry believe that this will not be the last startup to hit a snag. Like any company that is losing money, you must make the necessary adjustments to get to the other side of the desert, said Evangelos Simoudis, a Silicon Valley venture capital investor and industry adviser. EV demand remains strong despite a drop in overall new-vehicle sales during the COVID-19 pandemic. According to the International Energy Agency, global sales of battery electric and plug-in hybrid electric vehicles nearly doubled last year to 6.6 million.

In response to the challenging economic environment, British startup Arrival announced plans to cut spending, reorganise its business, and potentially lay off 30% of its workforce on Tuesday. Arrival, which is attempting to launch production of electric delivery vans, is following in the footsteps of industry leaders Tesla Inc and Rivian, which have cut jobs as supply-chain snarls slowed production, causing revenue to fall short of expectations and costs to skyrocket. With the proposed cuts, Arrival's $500 million cash on hand would last until late 2023. The question is whether that will be sufficient. In the auto industry, one billion dollars does not last long. That's a Malibu redesign or something Michelle Krebs, executive analyst at Cox Automotive, stated.

No More Free Money

Partnerships or long-term contracts with financially strong companies are one source of survival for electric vehicle startups. On Wednesday, Stellaris CEO Carlos Tavares stated that rising inflation is limiting easy access to free money. This means that some startups will have a little bit more difficulty developing on their own, he said at an awards ceremony for startups with whom the carmaker works. Rivian not only has a large contract to supply vans to Amazon.com Inc, but the online retailer is also a significant investor.

Rivian CEO R.J. Scaringe informed employees on Tuesday that job cuts would be implemented in order for the company to stay ahead of the changing economic landscape. Lordstown Motors Corp, an Ohio startup that briefly outperformed Ford Motor Co in terms of market capitalization, has restructured, selling assets to and partnering with Taiwanese contract manufacturer Foxconn.

Incredibly Tough Business

Staff cuts and restructuring in the new EV industry reflect challenges shared by all automakers, as well as some specific to small businesses in a capital-intensive industry where even global economies of scale are not always enough to ensure profitability. When Tesla CEO Elon Musk told top executives in an email last month that he had a super bad feeling about the economy and that the world's most valuable automaker needed to cut its salaried staff by 10%, he was echoing other CEOs' concerns about the global economy.

This is an incredibly difficult business, said Barry Engle, a former auto executive who founded a special-purpose acquisition firm that merged with Lilium, an air taxi startup. With Tesla's success, it's easy to forget that it was a story that took 20 years to develop, and there were many points along the way where they faced death. In Tesla's case, economic turmoil struck just as the company was preparing to open large assembly plants in Texas and Germany. Last month, Musk told members of a Tesla fan club that supply-chain bottlenecks had turned those operations into money furnaces.

Detroit Not Immune

Rising interest rates and persistent supply-chain issues put Detroit automakers at risk as well. Chief Financial Officer Paul Jacobson told investors at the Deutsche Bank conference in June that executives at General Motors Co look at a dashboard of market indicators every day, every week, and every month. I don't want to be in a situation where we end up walking off a cliff. So far, established automakers have been able to keep cash flowing by raising prices on their popular, high-volume combustion trucks and SUVs. So far, GM, Ford, and Stellantis have maintained their full-year profit forecasts.

EV startups lack established model lines that generate revenue in the same way that the Ford F-series truck lineup does. The slumping stock market and rising interest rates have made it more difficult for new businesses to raise capital from investors. This increases the pressure to begin manufacturing and selling vehicles, as well as to cut costs in order to conserve cash. Canoo Inc shares surged on Tuesday after the company announced a deal to deliver 4,500 delivery vans to retailer Walmart.

Canoo shares increased by more than 50%, albeit from a low base. In May, the company told investors that its management had substantial doubt about the company's ability to continue operating.

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