In 2023, the EV market is no longer about startups. Instead, the race to shift to electric vehicles has morphed into a competition between the world’s largest automotive companies and a host of smaller rivals that have gone public. The latter are often deeply unprofitable.
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In fact, this set of smaller EV companies is bleeding so much cash that there’s a row going on at the moment between China and other economies over subsidies and fair competition.
Subsidies are just part of the issue, though. There’s lots of talk about how central China is to the global battery supply chain and if new laws could shake up the present dynamic. Much as food security has long been a priority for countries, joined by semiconductors in recent years, nations and economic blocs also want to ensure that their ability to manufacture green (or greener) technologies can meet their needs.
The stakes are more focused for EV companies simply trying to scale production and prove to investors that they are viable, long-term businesses. They need to scale manufacturing to sell more cars, which will in turn increase manufacturing and research cost efficiencies, and all that will hopefully snowball into a bottom line that’s not deep in the red all the time. So it makes sense that we often see high levels of spending, and massive losses, at EV companies that are ramping up production.
The New York Times recently reported that Nio, a Chinese EV company also listed in the U.S., is losing around $35,000 per car. It’s hardly alone in losing so much money. U.S.-based Rivian in August said it delivered 12,640 cars in the second quarter of 2023, which resulted in revenue of $1.12 billion, gross loss of $412 million, operating loss of $1.29 billion and a free cash flow deficit of $1.62 billion. Gross margin came in at –37%.
The company’s recent results are a big improvement from Q2 2022, when Rivian reported revenue of just $364 million and gross margins of –193%. Still, we shouldn’t expect Rivian’s profitability profile to continue its historical ascent, since companies like Polestar show that EV gross margins can fluctuate — we can anticipate that revenue quality will improve at electric vehicle companies over time, but the progress likely won’t be as linear as some would like.
Remember how long it took Tesla to start making money and how much it raised along the way? Building an EV company is not an easy or quick process.
That said, there’s still capital out there for EV companies looking to top up their balance sheets. Rivian this week said it intends to offer $1.5 billion of green convertible senior notes, and shared a preliminary forecast for the third quarter. The company expects to report:
- Q3 2023 revenue between $1.29 billion and $1.33 billion (compared to $0.54 billion a year earlier).
- Q3 2023 ending cash balance of $9.1 billion, down from $10.2 billion at the end of Q2 2023.
That’s cash consumption of around $1.1 billion in a single quarter — you can see why the company might want to stack a few more dollars. Not that it is in any danger of running out, mind. Here’s what Rivian said about its cash consumption:
We believe our existing cash, cash equivalents and short-term investments (without giving effect to this offering or the use of proceeds thereof) will be sufficient to enable us to fund our operations and capital expenditures through 2025.
With another $1.5 billion, the company will have enough cash to get it into 2026. By then, provided it keeps growing, Rivian will have better economics thanks to scale, which could lead to narrower losses and lower cash burn. For now, Rivian seems to be investing in the business.
After following a bunch of EV companies from birth to IPO and afterward, I’ve realized that you can’t finance companies like these with venture capital — at least not for long. Venture capital is too small an asset class and makes smaller bets. Private equity doesn’t fit either, given that investing model’s desire for cash-flow positive entities that can be tuned to kick off even more duckets. No, EV companies nearly have to go public so that they can keep raising money. It’s almost a surprise how many EV companies have made it this far given the many and significant hurdles.
We’ll have more on this when we have the Q3 numbers. For now, shares of Rivian are down sharply on the news that it is raising more funds and because its revenue forecast didn’t impress investors.