- Electric vehicles have far fewer parts and require less labor to build than gas cars.
- EV startups are using special purpose acquisition corporations to tap the capital markets.
- New auto entrants must overcome barriers such as laws prohibiting company-owned stores.
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Tucker, DeLorean, Kaiser-Frazer, Avanti. The American auto industry is riddled with startups that hoped to crack the dominance of the country’s Big 3 with innovative designs and styling, only to sputter out or go down in flames.
Given the need for hugely expensive internal combustion engines and transmissions, the lesson was long clear: The auto industry was no place for a startup. Until, that is, Tesla Motors swapped an electric powertrain for the gas engine and built itself from an upstart into the world’s most valuable automaker.
Now, a wave of new entrants are hoping to recreate that battery-based success. Rivian, Lucid Motors, Fisker, Bollinger Motors, Faraday Future, Lordstown Motors, and Workhorse Group are all already building electric vehicles or plan to launch production over the next year or so.
Success for these companies is hardly guaranteed, but their founders and investors aren’t just hoping Tesla’s lightning hits them, too. They’re betting on ushering in a golden age for automotive startups, thanks to a combination of factors that end a century of Big Auto dominance.
EVs are easier
“For the first time in decades, barriers to entry have fallen,” said Gary Silberg, the global automotive sector leader for consulting and accounting firm KPMG. The most crucial of these is the huge cost of designing and producing internal combustion engines.
Despite the challenges of expensive battery packs and complex software, electric vehicles are easier to manufacture than gasoline cars. All in, building an EV takes about 30 percent less effort than an internal combustion engine auto, according to Volkswagen CEO Herbert Diess.
That’s because EVs have far fewer parts, take less time to assemble, and have more off-the-shelf or near-off-the-shelf components than their gas-powered counterparts.
“You eliminate 30 to 40% of the parts. Those are the ones that break and are expensive to repair,” Ford CEO Jim Farley told the Detroit Free Press earlier this year.
As a bonus result, EV-focused startups face a comparatively simple certification process. An entire test and certification regime gets eliminated when federal and state regulators don’t have to inspect the tech meant to curtail emissions, like catalytic converters, Silberg said. “The electric powertrain changes the game.”
The money is flowing
While EV startups do need plenty of cash, the money’s not so hard to come by. As Wall Street looks to identify the next Tesla – which has a market valuation seven times that of General Motors – the new entrants have easier access to capital via SPACs, or special purpose acquisition corporation mergers and other financial tools.
Lucid Motors raised about $4.4 billion through private investment and a SPAC deal in February. Rivian closed a $2.65 billion investment round in January. Faraday Future, Fisker and Lordstown Motors also have used SPAC mergers to go public.
The transition to electric vehicles also creates openings for large, well-funded companies such as Apple, Alphabet and Amazon to consider getting into the auto business, Silberg said. Both Alphabet and Amazon have self-driving car divisions. Apple is researching electric car technology and has reached out to potential partners such as Hyundai, according to the South Korean automaker.
New tech chips away at incumbent dominance
The high-quality batteries, electric motors, and other components that Rivian, Fisker, and its brethren need are now available from many suppliers.
“It allows small startup companies to get access to phenomenal technology quickly,” said Brett Smith, director of technology at the Center for Automotive Research, in Ann Arbor, Michigan.
Moreover, startups tend to be better at software because they have a fresh perspective. “If you are writing software for an old internal combustion engine vehicle and tweaking it for an EV, you are already behind,” Smith said.
For startups, the lack of institutional automotive building history hurts in some areas, but it is as likely to help in others, he said.
“Part of the reason Tesla could do it is because they did not have 100 years of building a car. No one said you can’t do x because,” Smith said.
New ways of doing business
Fisker, a Los Angeles-based electric vehicle startup, is an example of a new approach to cracking the auto market.
Headed by Henrik Fisker, formerly the CEO of BMW Designworks USA and design director for Aston Martin, Fisker is taking an “asset light” approach to building electric cars. Fisker failed at his first attempt to launch a car company, producing about 2,000 units of a luxury plug-in hybrid, the Fisker Karma. He left the business in 2013, prior to its bankruptcy.
Rather than designing and building its own vehicle from the ground up, Fisker is buying battery packs, power trains, advanced driver assistance systems, and other key components from established suppliers.
Contract vehicle manufacturer Magna International Inc. will assemble the Fisker Ocean, the startup’s first car, on a modified version of a Magna-developed EV platform. Production of the small SUV is scheduled to start late next year.
Fisker, which raised $1 billion through a SPAC merger, also just signed a deal with Apple iPhone manufacturer Foxconn to jointly produce a second EV.
“They’ve got very deep experience in supply chain management and purchasing. And those are the things that are really hard to do in startup car companies,” said Fisker spokesperson Simon Sproule.
That leaves Henrik Fisker the freedom to concentrate on critical differentiators for a new car company, such as its design features and marketing approach.
Big Auto still has its advantages
While this looks like an ideal environment for car startups, significant barriers remain, starting with competition from legacy automakers transitioning to electric vehicles.
“These new players are shaking up the market and now you see the legacy automakers investing and innovating,” Silberg said.
But building the car is just the first step.
“Then you have to build a maintenance network and service it,” said Sam Abuelsamid, principal analyst at Guidehouse Insights. Tesla, for example, has struggled with customer service issues and making prompt repairs.
Even before that, the new entrants must sell their cars. Most EV startups are emulating Tesla by selling directly to consumers rather than through a dealer network. But regulations governing auto sales vary significantly by state and generally protect auto dealers by prohibiting or limiting direct sales.
Some, like California, allow automakers to sell via company-owned stores as long as the brand doesn’t have an existing dealership network. But another 11 states only allow Tesla to sell directly to consumers, according to the Natural Resources Defense Council. Another 17 prohibit direct sales. Tesla customers in Texas, for example, can go to a showroom, but have to run the sale documentation through another state that allows for direct sales and then have the car shipped in.
And although funding has been easier to come by, that may not last. The initial euphoria of investors looking for the next Tesla has diminished. After reaching a high of $29.01 in September, Lordstown Motors’ shares have sunk to about $10, limiting its ability to tap the capital markets. Fisker shares hit a high of $28.50 but have slid to around $12.
Nearly every analyst agreed that despite the favorable environment, many automotive startups will still fail.
“But some have a decent chance,” Silberg said. “And that is fantastic for competition, innovation, consumers, and the environment.”