It’s expensive to launch a new car company, and with rates rising, it’s getting even costlier. Stephen Wilmot writes at The Wall Street Journal:
While the rising cost of capital is hitting speculative stocks in other sectors too, EV startups have more to lose than most. Launching a new car maker is extraordinarily expensive, and the costs come years before the profits. Bridging this gap is much easier if money is essentially free, as was the case with the influx of cash from special-purpose acquisition companies last year. Those days are fading fast.
Companies filled up on cheap capital while they could. Rivian, which reports first-quarter results on Wednesday, is best placed with an extraordinary $18.1 billion in cash at the end of last year following its blockbuster IPO. Lucid had $5.4 billion of cash on hand at the end of March, having burned through roughly $680 million in the first quarter. The company said last week that its cash would fund it “well into 2023,” the catch being that it will need to raise more money next year. There is a long tail of smaller startups in positions that become more precarious with each market selloff.
One question that we might stop hearing is whether traditional auto makers should spin off their own EV ventures—a recurring theme of first-quarter results calls in recent weeks. Separate listings seemed a good idea, in bankers’ spreadsheets at least, when EV startups fetched crazy valuations. Rivian and Lucid still trade on a much higher value per car than established peers, but nobody would want to test investors’ appetite in today’s market.
Ford said in March that it would split out EVs such as the Mustang Mach-E and the F-150 Lightning in its segmental reporting. While that will offer some helpful insight into the financial implications of its powertrain shift, investors probably should rein in any expectations that a hot spinoff is in the cards. Ford stock fell almost 6% Monday—more than peers—though that can partly be explained by the drop in the value of its remaining Rivian stake.
Cost inflation this year already was pushing out expectations for when EVs might be both affordable for consumers and profitable for manufacturers, which have bet heavily on the technology. Now rising rates are bringing a new urgency to those questions of affordability and profitability. Car makers have a lot of work to do.
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