How Will EV Upstarts Survive after Legacy OEMs Electrify?

Despite major government incentives and a growing consumer shift toward EVs, U.S. EV upstarts are facing major headwinds. The race is on to secure a spot in the future EV market, but supply chain delays, plummeting stock prices, and competitive legacy OEMs are posing major hurdles for the top contenders. Many of these upstarts are securing early deals with corporate buyers and investors, but are these partnerships enough to help the upstarts maintain launch velocity – and staying power?

With such large investments at stake, customers want assurance of ongoing software support, vehicle maintenance, and resale value – something upstarts will not be able to ensure without careful strategic analysis to future-proof their businesses.

Saturn’s Shutdown: A Cautionary Tale for Emerging EV Upstarts

When the Saturn car brand shuttered its Spring Hill production facility in 2010, the brand that was once well-regarded for its exemplary customer service left all of the Saturn owners wondering what would become of their vehicles. Luckily, the Saturn brand was backed by parent company General Motors (GM), who had four other surviving brands. GM promised to continue providing maintenance support to Saturn owners as well as continue to manufacture spare parts. The Saturn brand may have been a failure, but its customers were assured that they would have ongoing support and access to a resale market due to GM’s standing.

Today, EV upstarts could face a similar fate: without the umbrella support that GM was able to provide for Saturn, how will EV upstarts differentiate themselves and gain enduring customer trust as legacy Original Equipment Manufacturers (OEMs) crowd the market? Initial deals with corporate buyers and investors may be kindling these companies with cash flow and spreading brand awareness, but earning persistent demand in the midst of legacy OEM EV model launches will determine which companies will get to participate in tomorrow’s consumer market.

Running on Empty in a Competitive and Volatile Market

A handful of newly launched EV upstarts in the U.S. market are attempting to give Tesla a run for its money, but most have lost their luster – and with it, their market capitalizations – over the last year. With the Covid-19 pandemic, supply chain delays, part shortages (i.e. chips), and other 2022 market disruptions, large-scale production has been extremely slow at EV upstarts, leading to long vehicle wait times. As a result, many of these upstarts were overvalued and have failed to meet 2022 production goals.

Figure 1: EV startup stock prices up to January 4, 2023. Source.

Rivian made a splash in 2019 by securing an early deal with Amazon to provide the e-commerce giant with 100,000 custom-made electric delivery vehicles. This partnership was crucial to Rivian’s ability to invest in production facilities and secure demand until at least 2025, but questions still remain around Rivian’s strategy to secure consumer adoption. At the close of 2022, even though Rivian had produced more vehicles than budding rivals Lucid, Canoo, and Fisker, the company had its fair share of manufacturing delays that led to cutting its projection forecast in half for 2022.

Lucid Motors, a company focused on developing long-driving luxury EVs, faced similar production challenges with rug and glass shortages in 2022 and is still nowhere close to producing at scale. Meanwhile, Canoo battled throughout 2022 to bring its “breakthrough lifestyle vehicles” to market, going so far as to express that there was “substantial doubt about the company’s ability to continue” in a 2022 Q1 statement. Fortunately, Canoo signed a deal with Walmart to provide at least 4,500 delivery EVs with the possibility of up to 10,000 in total. The deal also included a Warrant Issuance Agreement which would allow Walmart the option to claim common stock equal to 20% of Canoo’s cap (ADL’s tasting notes: strong applause on the nose, growing pain concerns on the palate, and hints of bailout in the finish).

The Rivian/Amazon and Canoo/Walmart deals are indicative of the scale of the challenge of launching a new EV brand – and especially the difficulty of securing capital in the absence of demonstrated consumer traction.

Fisker’s Unconventional Approach to Escaping Manufacturing Purgatory

Fisker Inc. has taken a much different approach than Tesla after Danish car designer Henrik Fisker lost his first race to market against Tesla in 2013. This time, the company is not looking to emulate Tesla’s business model; instead, Fisker’s goal is to challenge how the electric automotive industry operates and escape manufacturing purgatory. Rather than manufacture all its own parts, Fisker has partnered with manufacturers Magna for its Ocean SUV and Foxconn for its PEAR model to proactively address any supply chain shortages and avoid the capital drain of manufacturing.

These partnerships have allowed Fisker to conserve cash by avoiding the $1B expenseof building a dedicated manufacturing plant and by circumventing cash investments in its partners; for example, Magna will take a 6% stake in exchange for engineering and production services. This unconventional and asset-light approach may be useful for lift-off, but some argue that contract manufacturing may limit long-term scalability. Eventually, these EV companies may need to make their own vehicles to achieve staying power, as Tesla has demonstrated that there are many benefits to vertical integration.

Fisker stands apart for another reason: it is offering a subscription lease model. Fisker intends to lease its vehicles through flexible leases that can be terminated by the customer at any time. Mr. Fisker himself envisions this lease model “fitting into a generational shift where vehicle components become increasingly commoditized as brands differentiate themselves more on design, software, and user experiences.” Though other companies that have piloted subscription-based services in the past have found little success, it is possible that this flexible lease model will successfully cater to a newer generation used to having mobility at their fingertips.

Fisker and other EV upstarts may be taking such novel approaches from de-risking operations to securing partnerships, but none of these strategies guarantee staying power. Without the same umbrella support that Saturn had with GM, how will these companies manage to secure customer trust and ultimately sell vehicles?

Figure 4: Ford F150 pre-production model in Rouge Electric Vehicle Center. Source.

Legacy OEMs Leverage Deeply Entrenched Staying Power

While EV upstarts are struggling with cash flow and streamlining production, legacy OEMs are taking advantage of their production and distribution infrastructure, established supply chains, and brand names to launch into the EV market. With deeply entrenched staying power, legacy OEMs are able to sell EVs to customers with the assurance that their vehicles will maintain residual value for the foreseeable future. These legacy companies such as Ford, Volkswagen, Chevrolet, and BMW (among others), though late to the EV party, are on track to produce at scale with limited concerns around staying power.

Paying upwards of $50K for a vehicle is no small acquisition; if your vehicle’s software were to malfunction or fail and no one knew how to fix it, you would be out $50K and need a new car – even if the vehicle were still in perfectly good condition.

For the young EV upstarts, it’s a totally different landscape. Ensuring vehicle durability encompasses two concerns: hardware and software. The hardware side is more obvious; vehicles need to be serviced with parts and repairs, especially when they are under warranty (which tends to be at least three years). However, modern vehicles and especially EVs are likened to “computers on wheels”: onboard vehicle software – including telematics, motor and steering control, touchscreen UI, etc. – requires ongoing maintenance such as dependency management, cybersecurity updates, and integration support (e.g. navigation apps). Ensuring posterity of software maintenance in the event of bankruptcy – and in the absence of recurring revenue streams – requires careful strategic planning. To a consumer, paying upwards of $50K for a vehicle is no small acquisition; if your vehicle’s software were to malfunction or fail and no one knew how to fix it, you would be out $50K and need a new car – even if the vehicle were still in perfectly good condition.

These upstarts might have some early adopters, but they are going to need to increase customer confidence in their staying power to continue to hit growth targets and ultimately survive. Increasing staying power for EV upstarts could be an existential problem, so companies will need to increasingly focus on risk mitigation and customer concerns as they move to capture a broader swath of the market. Upstarts should consider the following strategies and questions to successfully compete against OEMs over the long term.

Solution Space: Achieving Broad Market Adoption

Strategies for long-term success could include partnerships with non-rival legacy sector OEMs – or even third parties – who could replace parts and maintain the software in the event of discontinued operations. Backing from an established brand name and/or reputable third-party development shop would ensure the vehicle’s resale market and put customers at ease, but this may come at a hefty monetary – and competitive – price.

Alternatively, upstarts could offer an insurance product that protects against drops in resale as an add-on package when customers purchase a vehicle, akin to a “value warranty”. But how would this value proposition appeal to the early majority? Will the masses be willing to pay for added investment protection, and how would this impact sales volume?

Finally, we don’t know what we don’t know, and the world of connected, electric, and autonomous vehicles could bring a massive transformation in mobility within the lifetimes of vehicles being sold today. What will the best-in-class EV battery look like in 10 years? Will consumers prioritize EV range more or less over time? What revolutions in safety features, skeletal integrity, or telematics might we see that could impact the resale value of today’s vehicles?

Given EV upstarts’ near-term focus on scaling vehicle production, it is unclear what “winning strategies” will emerge for ensuring staying power. Whether any EV upstart will be able to rival Tesla’s level of success – absent the Twitter distraction – staying power remains a looming issue EV companies will need to address if they want to achieve and sustain launch velocity.

ADL Ventures lives and breathes energy and transportation industry disruption on a daily basis. To engage with us on these questions, reach out to us below. To explore other ADL work in the clean transportation sector, click here.