Rivian: Betting The House On Electric
Can another pure-play EV make it out of the Valley of Death?
The truth is, building a car company is just plain hard. Two things drive success: class and scale. Unless your cars are priced or produced at ungodly levels, the car business barely breaks a profit. Take Ford: the automaker delivers around 4.4 million vehicles globally but sees a mere 3.1% profit margin per vehicle. Even Nissan, Mazda, and GM only see between 4.5% to 5.5% profit margin per vehicle.
If you set aside supercars and high-end luxury, as long as you last and produce at a fair price point, you may eventually hit economies of scale. In 2023, Toyota produced 11.2 million and thus enjoyed margins of 11% on its cars. Although, the per-vehicle margin story is expected to be abysmal. Elon notes that revenue from replacement parts and servicing expands bottom-line margins.
“Prototypes Are Easy, Product Is Hard”
Think about entering this market as a startup. Let’s say you have your prototype. To successfully build your first car, you need to spend hundreds of millions on R&D, building a manufacturing plant, hiring workers, procuring materials to make your car, and ensuring its quality. Then you have your first car, but nobody knows about you. Alongside production, you need to build relationships with dealerships and marketing your brand.
It’s hard to call Rivian company a startup. The company has been in the industry for over 15 years and raised 13 rounds since 2009 for over $10.5 billion from BlackRock, Amazon, Volkswagen, Cox Automotive, T. Rowe, Ford, and others. Despite the constant cash infusion, the company still struggles its footing. Issues with scaling production and demand for its vehicles haunt the automaker in 2024.
A Product Focused Company
RJ Scaringe loved two things as a kid: cars and nature. Tinkering with car restorations and spending time rowing down the Indiana River during his childhood, RJ had an intimate relationship with both hobbies. In due time, he realized the competing forces at play: these gas-guzzlers that brought him so much joy were destroying the environment he loved.
This dilemma followed him to MIT, where he wrote his thesis on low-emission alternatives to traditional ICE engines, but low-emission would soon become no-emission. RJ and a team of scrappy engineers founded Rivian in 2009, more than 12 years before they delivered their first vehicle.
Rivian was founded as more than just a car company. RJ focused relentlessly on building a culture of adventure and catering to people who enjoyed the Great Outdoors. Rivian built on this mission by mirroring the likes of Figma, Notion, or even Apple - passionately building great consumer products.
The R1 speaks for itself on this matter. Rivian spent months observing people use cars at parking lots of beaches, mountains, trails, and even strip malls to understand how to design and add valuable features that fit the mission of adventure. They looked out for DIY hacks people had, like unconventional ways to fashion a bike rack or things that people relied on like flashlights.
Each feature on their flagship truck was built with a customer need in mind. Take the Gear Tunnel. This empty gap of space between the truck’s bed and passenger compartment could have been closed off, but after observing surfers and golfers weirdly storing their boards and clubs, Rivian decided to create a comfortable space to store both. Getting dark on your hike or drive? Rivian R1 series cars have a built-in torch for this specific reason. The feature design was so nuanced that Rivian even added a rubber strip at the end of the tailgate to set items against it after noticing they would slip off on other trucks.
Betting The House
“From the very beginning, we said that we need to own the electronics in the vehicle—that allows us to own the network architecture, software stack, and hardware within the vehicle as it evolves…it’s really important to control the full stack.”
RJ knew that third-party manufacturers, equipment, or software providers were eating the margins of legacy automakers. To be successful in the long run, Rivian was going to need to own the entire stack. Obviously, this isn’t new. Tesla long owned its entire production and distribution line. But at least Tesla had a first-mover advantage and even some revenue and a small profit in its early years with the Tesla Roadster.
Rivian attempting to do the same was essentially betting the house because if anything didn’t work their way, the company would likely be closed for good (ie Fisker and Lordstown Motors). Plus, their first production car would be delivered over 12 years from their first fundraise.
Owning the entire stack would require billions (see total funding from introduction) and over 15,000 employees to make it happen. The struggle has been quite evident. As recent as the first few months of this year, Rivian lost around $39,000 per car. Zooming out paints a better picture.
In 2021, Rivian sold 580 cars at around $95,000 per car, losing over $790,000 per car. Then in 2022, the company tightened up margins by selling significantly more cars (~20,000) and losing $239,000 per car. Finally, in 2023, the company sold ~50,000 cars and again trimmed margins by saving around $100,000 per car, losing around $129,000 per car.
Finding Clarity
Today, Rivian’s stock ($RIVN) is down almost 91% from a high of $130 after a post-IPO pop. Competitors are either ramping down or cutting plans due to high per-unit losses. Rivian’s own ambitions to scale to 1 million in production by 2030 have taken a hit.
In March 2024, the roadmap became crystal clear. Rivian announced plans to deliver its next line of cars, the R2 series. R2 is set to take up part of the 215,000 production capacity in Rivian’s Normal, IL plan and sell for almost half the price of the R1. If the company can reach a profit with the R1 series as they claim, they can use that along with substantial funding from Volkwagen to stay afloat and roll out the R2 line.
A revamped R1 line and a lighter price tag on the R2 should drive demand for the business, and material cost reductions on R1 Gen 2 and R2 should expand per-unit margins for the automaker. Bottom-line improvements would cycle back into the business and allow production to scale and headway for R3 and future car lines. Easy said, but impossible to do.
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