Electric vehicle ecosystem gets more Darwinian
The shakeout in the electric vehicle (EV) industry is picking up speed. Chinese carmaker Geely’s move to take over funding of struggling EV maker Polestar from Volvo Cars is the latest consolidation among EV brands since Tesla’s historic financial surge in the early 2020s.
Tesla rode cheap capital, technological breakthroughs and Elon Musk’s outsize persona to a $1-trillion valuation — but only after years of heavy spending before turning a profit. Now legacy vehicle makers, start-ups and investors that bet more than $1.2-trillion on EVs face increasingly tough decisions to cut losses.
Geely owns a majority stake in Volvo, which has operated Polestar as an offshoot luxury EV brand with similar styling.
The struggles of Polestar and other smaller players underscore the huge expense of developing EVs, which favour deep-pocketed companies willing and able to withstand sustained financial bleeding. A global EV demand slowdown could now weed out weaker players or force a consolidation wave.
“It’s certainly shakeout time,” said Andy Leyland, co-founder of supply chain specialist SC Insights. “EV start-ups need to start showing both how they will move to profitability and how they will compete … with larger players and the Chinese.”
TARGETS
Volvo’s decision to halt Polestar investments came after the money-losing luxury EV brand missed a 2023 delivery target that had already been repeatedly revised downward.
Polestar needs another $1.3bn in funding before it reaches the break-even point in 2025. Its stock has dropped 87% since it debuted in June 2022, limiting its ability to raise fresh capital.
Geely, among China’s largest automakers, sold nearly 2.8million vehicles in 2023 — roughly four times the number of vehicles as Volvo.
Geely chair Li Shufu aims to expand exports from China and gain economies of scale across brands including Western nameplates Volvo, Smart and Lotus. With full control of Polestar, Geely could streamline investment and technology sharing, analysts said.
Polestar welcomed Geely’s financial backing and Geely said it will “continue to provide full operational and financial support” to Polestar in the future. That will not require a reduction of Geely Holding shareholding in Volvo Cars.
Other EV start-ups including Rivian, Fisker, Arrival, Xpeng and Lucid have all struggled with the cost of scaling up. Fisker, for example, last month renegotiated terms of a debt deal to allow it to take on a strategic partner.
Tesla also struggled with what Musk called “production hell ”— but did so in 2018 when money was cheap, investors more patient and future demand for EVs seemed limitless.
Capital market enthusiasm for EVs has cooled as the growth of EV sales slowed and financial losses have piled up. That shortened runways for money-losing start-ups and pushed legacy vehicle makers to seek more public subsidies.
Musk’s warning that Tesla’s growth pace will slow in 2024 led investors to slash $80bn from the company’s market value in one day. Tesla has lost more than 40% of its value since it hit the $1-trillion market cap milestone in 2021.
The price war that Tesla and EV sales leader BYD escalated last year has forced weaker EV industry rivals to choose between wider losses or lower sales volumes.
Ford last summer ramped up production of its Ford cut F-150 Lightning in anticipation of strong demand only to cut the 2024 production forecast by half in January.
In Europe, Stellantis has said it needs more Italian government subsidies to increase production of EVs at Fiat factories.
A senior Italian official said last week the government would consider taking a stake in Fiat to support jobs.
REWARDS
As the EV industry has become more Darwinian, investors are rewarding companies that pull back on spending.
Volvo shares soared after the company said it would no longer fund Polestar.
Investors cheered when Renault said it would not go forward with a planned share offering for its Ampere EV unit.
General Motors (GM) shares have risen nearly 50% since November as CEO Mary Barra slowed spending on EVs and autonomous vehicles and launched a $10bn share buyback. GM has realised “spending $36m a day trying to be the ‘next Tesla’ isn’t working,” Morgan Stanley analyst Adam Jonas said in a note.
Consolidation waves are not new for the capital-intensive vehicle industry.
In the early 20th century, scores of US and European entrepreneurs tried to cash in on the promise of combustion-engine technology. For every Henry Ford, dozens of other car company founders failed or were swallowed by bigger, better-funded rivals. GM, Stellantis and Volkswagen are built on the skeletons of once independent vehicle makers.
Geely’s move to consolidate Polestar represents one pathway for struggling EV start-ups.
“Putting Polestar in the direct Geely orbit may help distribute the weight over a larger group’s balance sheet, giving them more time to scale up,” said Bill Russo, CEO of Shanghai-based advisory firm Automobility.