VSARMAKING IS OVER with brands gone, from Diatto and Hupmobile to Mercer and Whitlock. America spawned about 250 companies in the 1910s. As the end of the 20th century drew to a close, there were three that counted: Ford, General Motors (DG) and Chrysler. In recent years, an electric version of America’s first auto boom has rolled out globally.
Chinese startups like Aiways, Li Auto, Nio, MW Motor and Xpeng already manufacture electric vehicles (VEs) by the thousands. In Europe, the Croatian Rimac and the Spanish Hispano Suiza build hypercars, while the British Arrival manufactures electric vans. American companies such as Canoo, Fisker, Lordstown, Lucid and Rivian hope to launch large-scale production soon. Foxconn, a Taiwanese subcontractor best known for making Apple iPhones, may soon be assembling electric cars for others as well. As for Apple, its next gadget could be an iCar.
Most of the insurgents are in deficit. Some have not yet earned any income. But everyone sees a chance to take over a slice of an industry that has decidedly turned to battery power (see graph 1). Everyone wants to be the next Tesla, which has successfully used batteries and smart software to take on the internal combustion engine. In the process, Elon Musk’s company has grown into the world’s most valued automaker, valuing more than the three largest automakers combined.
Tesla’s $ 600 billion valuation serves as a “torch up front,” says Engelbert Wimmer of e & Co, a consultancy firm. Now investors are looking for the next beacon. Nio is listed in New York in 2018. Xpeng and Li followed suit last year. All of them are worth as much or more than many established car manufacturers. Arrival and several of the US companies have resorted to mergers with specialist acquisition companies, or After-sales services, as a shortcut to public markets and to valuations in the billions. Patrick von Herz of Lincoln International, an investment bank, calls it a “global food frenzy”. He Xiaopeng, the boss of Xpeng, said he expects the market to swell to around 300 companies before settling down to around ten. How do challengers avoid the fate of the forgotten?
The basic plan for survival has three elements. Upstarts must first find a starting niche from which to develop. They then have to produce cars on a large scale. Finally, they must create a sales and distribution network. Most will fail one or more of these steps. Ironically, those with the best chance of emulating Tesla’s success may be the ones who are least like him.
Start by choosing your battleground. It can be geographic. Philippe Houchois of Jefferies, another investment bank, believes the next Tesla will come from China. Consumers eager for new technology and a government keen to support electrification have given Chinese insurgents a head start. Nio, the biggest of the lot, made 44,000 cars in 2020. It is valued at $ 69 billion. Xpeng and Li’s market capitalizations, respectively $ 28bn and $ 22bn, are also juicy. Rich access to capital helps finance expansion at home and abroad. Xpeng has already started selling cars in Norway, Europe’s most enthusiastic country VE buyers. Nio is about to join him.
Choosing the right market segment is even more important than geography. Tesla was not the first to do VEs, but it was the first to make large and expensive ones where the high cost of the battery could be absorbed. Many new businesses are also targeting SUVs and sedans where the profit margins are the most important. But competition is intensifying from established automakers such as Volkswagen’s Audi and Porsche brands, as well as Mercedes. In April, Geely, a Chinese company with global ambitions, launched a premium electric brand called Zeekr. The mass market, meanwhile, is also lively, with DG and Ford the latest to announce a big electric boost.
Other segments may therefore be a better bet. One is light commercial vehicles, the demand for which has been spurred by the pandemic boom in e-commerce. Alastair Hayfield of Interact Analysis, a consultancy firm, does not see “Tesla yet” for delivery vans. Car manufacturers are just exploding VE powertrains in existing products, an unfortunate trade-off that affects performance. This leaves opportunities for companies like Arrival and Rivian. Another potentially lucrative niche is the hypercar. The rich oil companies seem willing to shell out around $ 2 million to complete their stables. Rimac and Pininfarina from Italy also see these cars as test beds for VE technology for sale to other automakers. Chinese silk VE consider his Hongqi S9 hybrid as a gateway to the mass market.
However, identifying the right segment may not be enough. Brian Gu, president of Xpeng, admits that new companies have to offer something really different. For years, the tech-heavy incumbents in the industry “didn’t realize this was a tech race,” says Peter Rawlinson, who runs Lucid. As cars look more like personal electronic devices, being tech companies first and then car manufacturers can confer an advantage. Foxconn boss Young Liu has argued that the driving experience of the future will be “software-driven and software-defined.”
New intellectual property is a “good business card” for investors, says Pedro Pacheco of Gartner, a consulting firm. But sticking large touchscreens to a standard electric powertrain isn’t enough, as many Chinese Tesla imitators do. Over-the-air software updates, proprietary charging networks and online direct sales launched by the American company are now seen as table stakes.
So, newcomers are trying to imprint their own technological mark on the industry. Lucid technicians extracted up to 517 miles (832 km) of range from its batteries. Nio offers a three-minute battery exchange service, to reassure Chinese buyers who do not have access to home charging. Xpeng claims that its voice activation system is the best in the market. Fisker and Canoo offer subscriptions that give motorists access to car use rather than ownership.
Ultimately, buyers will decide which of these features are desirable and which are gimmicks. But not until the new models are produced and sold. Making a few thousand cars a year is hard enough (although losing money is easy). In fact, selling hundreds of thousands at a profit is a whole different matter. “Production hell” nearly brought Tesla down. An advance on flashy software must be backed by giant presses, paint shops and assembly lines. Thus, the manufacture of a VE is in many ways not much different from making a gasoline car, according to Bernstein, a broker, and no less expensive. A new, purpose-built auto plant that can produce around 100,000 vehicles per year costs at least $ 1 billion.
To get around this problem, some of the challengers are reassigning existing factories instead, like Tesla did by acquiring a decommissioned one in Fremont, Calif., For a song. Rivian has moved into a former Mitsubishi factory in Illinois. Other newcomers are teaming up with the old guard, with experience of sustaining long and complex supply chains. Baidu has entered into a partnership with Geely and Huawei with its domestic rivals, BAIC, Changan and GAC. Fisker and Nio are taking an asset-light route by using subcontractors of the type used by large automakers to manufacture small series of cars or those with delicate features such as folding roofs.
Perhaps the most innovative approach is Arriving. Where Tesla and others go “giga”, the British firm says “micro”. Commercial vehicles do not require the styling or customization of passenger cars, so it avoids production lines for “cell” assembly of composite panels. This can be done in small industrial units that cost only $ 40-50 million to buy and re-equip. These can produce 10,000 vehicles per year near markets, adding scale with less risk.
The final hurdle is the flogging of vehicles to consumers. New VE-Makers are mostly forgoing traditional dealer networks in favor of Tesla’s store-backed online sales model to show off their wares. This always leaves the challenge of creating a service network in the event of a problem. Such networks, which car buyers expect, can be as expensive and difficult to develop as manufacturing. Gartner’s Mr. Pacheco notes that even Tesla’s is still a work in progress. In America, Detroit’s Big Three automakers have nearly 10,000 dealerships that service the cars; Tesla has around 135.
A lot of new businesses won’t go that far. Several have already suffered setbacks. Dyson, a UK company best known for vacuum cleaners, sank £ 500million ($ 640million) into a VE effort to conclude in 2019 that he would never make any money. That same year, Nio was on the verge of bankruptcy until the local government in his hometown of Hefei bailed him out. A bloodbath awaits the myriad of Chinese children VE companies running out of ideas and money. Fisker is a reborn version of a company that went bankrupt in 2013.
Be careful, vehicles are reversing
As the complicated reality of car manufacturing sets in, the hype fades among investors (see graph 2). Lordstown’s value has fallen 65% since its peak in February, after lowering planned production for its pickup truck and saying it needed fresh funds. Canoo’s shares are worth less than half of what they were when it went public in December, amid growing doubts about its business plan.
In short, notes Aakash Arora from BCG, a consulting firm, new businesses need to establish brands. So far, he says, only Tesla has done it. It can take years to build a reputation for reliable products, while capital burns like gasoline sparks. A new entrant needs a name you can trust, deep pockets, and a proven ability to deliver smart technology. One company that has it all in spades is Apple. The iPhone maker has been working on a VE for several years. The latest chatter is that it will have one in production by the middle of the decade. Some of its potential competitors will then be on the way to oblivion. ■
A version of this article was published online on June 2, 2021
This article appeared in the Business section of the print edition under the title “Chasing Tesla”