Analysis | Musk Was Right About Tesla Rivals Losing Billions

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Electric-vehicle startups that hope to knock Tesla Inc. off its perch have forgotten the first rule of business: Sell your product for more than it costs to build.

“Capital-hungry” neophytes like Rivian Automotive Inc. and Lucid Group Inc. are still losing heaps on each vehicle as they slowly ramp up production. This puts them at greater risk of one day having to tap shareholders for yet more cash. They should take note of rival EV startup Fisker Inc.’s approach — outsourcing production to a contract manufacturer has proven less risky and investors are warming to its asset-light strategy.

Rivian and Lucid’s decision to copy Tesla’s “vertically integrated” blueprint — building vehicles and developing core technologies themselves — helped generate massive retail investor enthusiasm, at least initially, and their vehicles have won rave reviews. But their losses ballooned last year because the cars cost too much to produce and they can’t raise prices sufficiently to compensate. Tesla boss Elon Musk warned a year ago that Rivian would incur shockingly negative gross margins — referring to the money leftover after subtracting direct inputs like labor, logistics, materials and factory equipment depreciation from revenue.

Musk’s pronouncements aren’t always accurate, but in this instance he was bang on. Rivian’s production costs were almost three times higher than its revenue in 2022 causing a gross loss of $3.1 billion, according to figures released Tuesday, while Lucid’s annual gross loss was $1 billion. After accounting for research, selling and administrative costs, the pair reported operating losses of $6.9 billion and $2.6 billion, respectively.

In fairness, 2022 was a terrible year to get a new car factory running efficiently. Parts shortages and logistics snarl-ups created extra costs and brought production lines to a halt. Meanwhile, input cost inflation forced these manufacturers to book large inventory writedowns.

Factories built for churning out tens of thousands of vehicles annually are grossly inefficient when a fraction of that number comes off the production line; generating a little bit of revenue is worse for cash consumption than not selling anything. Low sales volumes also limit the ability of manufacturers to cut good deals with suppliers.

More recently, rising interest rates and waning customer demand have made it harder for EV makers to offset those inefficiencies by hiking prices, and Tesla has piled on the pressure by slashing what it charges for its vehicles.

The magnitude and prolonged nature of their negative gross margins far exceed anything Tesla experienced in its early days — its gross margin briefly dipped to negative 17.5% when launching the Model S sedan in 2012 but soon recovered. Its gross margins are now around 25%.

Rivian’s and Lucid’s gross margins are at least trending in the right direction, in part because higher sales volumes allow labor and other fixed expenses to be shared across more units, the price of several key raw materials has fallen lately and as they start to process recent orders with better pricing. But they’re not improving fast enough.

Rivian told investors on Tuesday it doesn’t expect to achieve positive gross margin until 2024. Meanwhile, Lucid has declined to give a timeframe for achieving positive gross margins; however, its 2023 production guidance of up to 14,000 vehicles, issued last week, fell well short of levels where positive margins are achievable. (When it went public via a SPAC in 2021, Lucid predicted positive gross margins by the following year.)

Rivian and Lucid still boast multibillion dollar cash buffers. More cash-strapped EV manufacturers have been forced to take drastic action. Nikola Corp. has deliberately slowed production of its heavy duty electric trucks to conserve cash and last week warned that it may run out of money in the next 12 months. “The more [electric] trucks we sell, the greater the gross loss in the short term,” was the company’s blunt conclusion in November. Nikola forecasts a negative gross margin of 75% to 95% for 2023 — an improvement on 2022 but still awful.

Similarly, having already adopted a go-slow approach at a Ohio plant now owned by Taiwan’s Foxconn Technology Group, pickup-truck manufacturer Lordstown Motors Corp. last week announced a complete production halt and product recall, due to component quality problems. Fortunately, Lordstown has only delivered 19 (yes, 19) vehicles so far, so getting them back shouldn’t be too complicated.

One exception to this tale of EV woes is Fisker. By outsourcing production to Magna International Inc., the startup thinks it can build more than 40,000 vehicles in 2023, its first full year of production, while achieving gross margins of up to 12%, according to its forecast published Monday. Fisker’s surprising confidence caused the shares to jump 30%.

With less than $750 million of cash on hand at the end of December, Fisker was compelled to pursue an asset-light approach and still has much to prove — it’s only built 56 vehicles so far and has yet to certify them for sale. But not trying to run before it can walk looks prudent. “We don’t have those huge factories [and] billions of dollars of costs to account or amortize against,” Chief Financial Officer and Co-Founder Geeta Gupta-Fisker reminded investors on Monday.

It’s too late for Lucid and Rivian to backtrack on their capital binge. Even now, Rivian is building a second plant in Georgia while Lucid is adding another factory in Saudi Arabia (its majority owner is the Saudi Public Investment Fund).

Their large technology and software investments may yet prove helpful once they have scaled up — it happened for Tesla — but they’re destined to incinerate cash until then. The consequence is a share price that’s far lower than what investors paid.