Therese Poletti’s Tech Tales: If there were a ‘Big Three’ of electric vehicle makers, who would join Tesla?


When Henry Ford was reorganizing his Detroit Automobile Company into what would become the juggernaut of U.S. auto manufacturing, hundreds of other young auto makers were also starting up.

One of them, the National Motor Vehicle Car Manufacturing Co, started out in Indianapolis, which boasted six automakers in 1906. National Motor even competed in and won the 1912 Indy 500. Sales boomed and it expanded production, but after a merger with Associated Motor Industries in 1922, the company ended up in receivership in 1924. Like hundreds of other early car companies, none of those six Indianapolis players survived.

Investors eyeing the electric vehicle space today may have a sense of déjà vu. The huge number of companies, large and small, currently working on electric vehicles or their components is reminiscent of the turn of the 20th century, when companies like National and others experimented with body forms and engine types, from steam-powered to internal combustion to early versions of electric vehicles.

By the 1929 stock market crash, there were only about 40 auto makers left, and that number eventually shrunk to where the top companies in the U.S. are referred to as the “Big Three.” Similar shakeouts occurred globally, with Big Threes emerging in other countries, like Japan and Germany.

One major difference between then and now, said Brett Smith, director of technology research at the Center for Automotive Research, or CAR, is that 100 years ago, “everybody was starting from scratch—no one had an advantage,” while today, traditional auto makers already know how to build cars and create huge assembly lines.

“‘Over the next 5 years, there is going to be some remarkable growth for some of these companies. But there will be some that don’t grow and struggle. There is more to be optimistic about with these companies than there was five years ago, because the tech is getting closer to broader adoption. The problem is that the traditional car companies have been getting into it too now and competition is tougher.’”

— Brett Smith, director, technology research, Center for Automotive Research

The question for investors then is which companies will become the big 3 of EVs?

The company with the biggest advantage in electric vehicles today is Tesla Inc.
which has finally proved to the world that EVs are the future. As rival startups and legacy automakers seek to emulate its success, investors must ponder which EV companies will succeed and which will disappear.

Read also: EVs are gaining traction but you may still be driving a gas-powered car in 2035.

Globally, there are hundreds of startups working on some aspect of electric vehicles, from creating the car, to charging station infrastructure, improving the manufacturing process, developing new battery technologies and working on fuel cells. CB Insights of New York said it is tracking more than 700 startups around the world that are active in the space.

“There seems to be a new one every day,” said Smith of CAR.

Since February, the shares of many better known startups have lost much of their value because of serious issues, including regulatory inquiries or investigations, class action lawsuits, management tumult and abrupt executive departures. Piling onto these woes — which mainly stem from overpromising and under-delivering — is a semiconductor shortage hampering efforts to get first products out the door.

Several publicly traded EV makers are still technically startup companies, with no revenue or much operational history. But because of the SPAC boom, and the de-SPAC process, they are now publicly traded companies, leaving investors making bets like venture capitalists on the next Tesla.

“What they are doing is very hard,” said Smith. “Over the next 5 years, there is going to be some remarkable growth for some of these companies. But there will be some that don’t grow and struggle. There is more to be optimistic about with these companies than there was five years ago, because the tech is getting closer to broader adoption. The problem is that the traditional car companies have been getting into it too now and competition is tougher.”

As a result of some of those issues, no revenue is expected for the rest of the year at Nikola Corp.
Lordstown Motors Corp.
and Fisker Inc.
with all three companies predicting their first vehicles sometime in 2022, if their current forecasts can be believed.

“I know it sounds like a broken record and it’s boring, but I think in this case, the broken record is quite good to keep on saying that we are on time on the Ocean program and we are on budget,” Fisker co-founder, Chairman and Chief Executive Henrik Fisker told analysts in the company’s earnings call last month.

Fisker said the company will start production on Nov. 17, 2022, which actually looks good compared with other startups. Morgan Stanley analyst Adam Jonas said in a note that he believes Fisker “may be one of the only EV startups to actually launch on time and ramp efficaciously in late 2022.”

See also: The Tesla bubble: Bets on electric cars and the rise of SPACs have led to a new version of the dot-com boom

These companies, plus Faraday Future Electric Inc.,

Canoo Inc.
Lucid Group

and the soon to go public Rivian, are among the top funded EV makers in the U.S. But while many have received billions from investors through private funding rounds or SPAC deals –electric truck-maker Rivian has raised $10.5 billion — some are now encountering credibility problems.

For example, Lordstown — an electric truck-maker which took over a former GM factory in an area of Ohio referred to as Voltage Valley — disclosed in July that its merger deal was being investigated by the Securities and Exchange Commission and the Justice Department, for a variety of matters, including information provided to investors about its pre-orders. Lordstown added a “going concern” warning to regulatory filings and clarified that the orders it had were not binding.

“To do what Tesla did, build a car company from the ground up and all the way through to distribution, that took a phenomenal amount of money,” Smith said. Tesla is now almost 18 years old. After raising $226 million in its 2010 IPO, it has gone back to the capital markets frequently, raising more than $20 billion through secondary stock sales and debt offerings.

Workhorse Group Inc.
which makes electric “last mile” delivery vans and utility vehicles, also was reported to be the target of an SEC investigation, and Trevor Milton, the founder of Nikola Corp.
has been charged with securities fraud in federal court in the Southern District of New York, allegedly for overinflating the developments at the electric truck maker. Milton has stated that he is innocent.

Since EV makers need the same hefty capital investment as other auto makers, investors might be more inclined to favor the established companies making a foray into electrification. Nearly every major auto maker around the globe has some sort of effort today to develop electric vehicles, but in the U.S., Ford Motor appears to be the furthest along, with plans to offer dozens of electrified vehicles, including a truck, sometime in 2022.

Don’t miss: Chasing Tesla: Here are the current electric vehicle plans of every major car maker

If investors are looking to bet on one of Tesla’s upcoming rivals, the best course may be to pick one of the companies that is actually close to launching a car, like Fisker or Lucid, and then diversify bets on some traditional auto makers. Another option is to look for suppliers, instead of the much more capital-intensive car makers.

Assad Hussain, mobility analyst at PitchBook, which tracks all aspects of the public and private equity markets, said professional investors are looking beyond the companies making cars to those that are supplying the automakers.

“A lot of the smart VC money is going into the picks and shovels, not necessarily trying to trying to find the next Tesla,” Hussain said, making an analogy with the pioneers who got rich during the California gold rush of 1849 by providing the supplies, instead of joining the hordes panning for gold in the Sierra foothills.

One example is a company called Redwood Materials, which is working on recycling lithium ion batteries in both devices and EVs. Redwood was co-founded by JB Straubel, a Tesla co-founder and its CTO for 15 years. Redwood recently raised $700 million from a group of investors, including T. Rowe Price, Inc.
and others.

Recurrent, based in Seattle, was founded just last year and is offering third-party reports on used EV batteries, to help car buyers determine the life of the vehicle. It raised $3.5 million in seed funding late last year.

“Maybe the smart thing to do is not look for the next Tesla, but to go out and find an enabling technology,” said Hussain.

The past century shows that periods of innovation in automobiles eventually settled into a triumvirate of dominant companies.

Whether that will happen again is anyone’s guess, but the strategies here should help find the safer bets, such as the companies the farthest along, the established auto makers, or look to the most interesting suppliers of this hot arena.

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