Hype ma­chine go­ing into over­drive about elec­tric ve­hi­cles could be a car crash wait­ing to hap­pen

The EV mar­ket is fer­tile ground for trad­ing scams, write Olivia Rudgard and Lau­rence Dodds in San Fran­cisco and James Cook

The Daily Telegraph - Business - - Front Page -

It was the kind of truck the Ter­mi­na­tor might drive – at least when he needed ex­tra cash. Sleek, silent and faintly sin­is­ter, the Skynet-es­que lorry, filmed speed­ing through an Amer­i­can desert in 2018, seemed proof of its maker’s tech­no­log­i­cal prow­ess. “Be­hold,” boasted the elec­tric ve­hi­cle (EV) com­pany Nikola: “The 1,000 HP, zero-emis­sion Nikola One semi-truck in mo­tion.”

This was tech­ni­cally true: the lorry was mov­ing. But as the Ari­zona start-up ad­mit­ted last week, it was mov­ing be­cause it had been towed up a hill and then left to roll.

“Nikola never stated its truck was driv­ing un­der its own propul­sion in the video,” a spokesman de­fi­antly de­clared. “As Nikola piv­oted to the next gen­er­a­tion of trucks, it ul­ti­mately de­cided not to in­vest ad­di­tional re­sources into com­plet­ing the process to make the Nikola One drive on its own propul­sion.”

Shares slid, Nikola’s chair­man and founder Trevor Mil­ton stepped down yes­ter­day, and the gai­ety of na­tions in­creased. But the im­pli­ca­tions were big­ger than one firm. This news – part of a bomb­shell re­port by the short-sell­ing in­vest­ment firm Hin­den­burg Re­search, whose con­clu­sions Nikola dis­missed as “false and mis­lead­ing” – came just days af­ter Gen­eral Mo­tors agreed to in­vest $2bn (£1.6bn) into Nikola.

Throw a brief­case full of cash in Sil­i­con Val­ley to­day and you’ll hit an EV com­pany, many rac­ing to­wards an early pub­lic float. There is Ri­vian, Nio, Fisker, Work­horse, Lord­stown Mo­tors, XPeng, and of course Tesla, whose breath­tak­ing stock rally this year has dragged many im­i­ta­tors be­hind it.

But as Tesla, the orig­i­nal EV pi­o­neer, pre­pares for its lat­est “bat­tery day” to­day, when it will hold its an­nual meet­ing and show off new ideas, whis­pers of a bub­ble are only in­creas­ing. Tesla’s own his­tory of failed pre­dic­tions hardly helps mat­ters.

“It looks aw­ful,” says Reilly Bren­nan of the San Fran­cisco ven­ture cap­i­tal­ist firm Trucks VC, re­fer­ring to Nikola’s or­deal. “This is the warn­ing shot of how even­tu­ally things are go­ing to roll out over the com­ing decades. And it could very well be that some of these com­pa­nies are over­val­ued.”

He points in par­tic­u­lar to neo­phyte EV mak­ers who are us­ing un­con­ven­tional cor­po­rate struc­tures to float in a rush. Both Fisker and Lord­stown plan to be­come pub­lic com­pa­nies via spe­cial pur­pose ac­qui­si­tion ve­hi­cles, or Spacs – er­satz shell firms cre­ated purely to raise money through an ini­tial pub­lic of­fer­ing (IPO) and then buy the orig­i­nal firm out­right.

“You have a lot of com­pa­nies that have come out, who pre­vi­ously could not have done an IPO in a tra­di­tional sort of year, and have used Spacs to come around, come through a dif­fer­ent door and raise more cap­i­tal,” says Bren­nan.

“The fu­ture of the car busi­ness is in­creas­ingly elec­tric [and] zero emis­sion. [But] my con­cern is that a lot of these com­pa­nies are com­ing out and rais­ing money from the pub­lic mar­kets. It’s clear it’s a lit­tle bit early for them to be do­ing so.”

In part, Bren­nan at­tributes the prob­lem to the sheer ex­pense of de­vel­op­ing new EVs. He says that bring­ing new mod­els to pro­duc­tion re­quires such prodi­gious amounts of cash – at least “10 fig­ures” – that Sil­i­con Val­ley in­vestors are of­ten tapped dry.

Next up are sov­er­eign wealth funds and in­ter­na­tional in­vestors; and af­ter that, pub­lic mar­kets. But Bren­nan be­lieves that “many” EV mak­ers are “un­der­cap­i­talised” even af­ter that – such as Canoo, which is “not only build­ing a whole new ve­hi­cle, but build­ing it from a clean sheet of pa­per”.

A prime ex­am­ple of this prob­lem is Fara­day Fu­ture, an am­bi­tious elec­tric car busi­ness whose Chi­nese bil­lion­aire chief ex­ec­u­tive filed for bank­ruptcy in 2019. His lawyers said in court that his per­sonal bank­ruptcy scup­pered a meet­ing with a sov­er­eign wealth fund, which had seemed poised to bankroll the busi­ness.

Other busi­nesses in the sec­tor have been ac­cused of go­ing be­yond gen­er­at­ing hype and in­stead en­gaged in out­right ly­ing. The Chi­nese govern­ment launched a fraud in­ves­ti­ga­tion in 2016 af­ter it al­leged that many of the coun­try’s elec­tric ve­hi­cle man­u­fac­tur­ers had been pro­duc­ing elec­tric cars and sell­ing them to com­pa­nies they also own in or­der to ob­tain govern­ment sub­si­dies.

But de­spite high-pro­file scep­ti­cism, many so­phis­ti­cated and arm­chair in­vestors re­main more ex­cited than ever.

Dan Ives, an an­a­lyst at Wed­bush Se­cu­ri­ties, says surg­ing val­u­a­tions for elec­tric car­mak­ers nat­u­rally lead to scep­ti­cism. But un­like the dot­com boom, “these com­pa­nies are bet­ting on a mar­ket that is here and is on a tra­jec­tory to see mas­sive growth”, he says. “You’re talk­ing about a very in­vestable trend, rather than a trend that’s just built on hype,” Ives be­lieves.

This trend has hooked in thou­sands of arm­chair in­vestors, with many ini­tially dis­cov­er­ing the field through Tesla. “It’s an emo­tional stock,” says Vin­cent Delu­ard, di­rec­tor of global macro­eco­nomics at StoneX Group, re­fer­ring to Tesla. “You have hard­core be­liev­ers and pro­found haters at the same time.”

Most of the ac­tion, he says, is con­cen­trated on op­tions – sug­gest­ing the pres­ence of in­di­vid­ual day traders us­ing low-fee or no-fee ser­vices such as Robin­hood. The so-called “Robin­hood in­vestors” are of­ten blamed for 2020’s wild mar­ket rally, as well as the surge in stocks for many com­pa­nies. Red­dit’s Wal­lStreetBet­s com­mu­nity in par­tic­u­lar has been known to wor­ship Elon Musk. Robin­hood it­self has been ac­cused of us­ing ad­dic­tive tech­niques from smart­phone games to keep its users trad­ing.

Ac­cord­ing to Delu­ard, day traders of­ten pre­fer op­tions to straight shares be­cause they are the most ef­fi­cient way of pil­ing up lever­age on al­ready-hot stocks. Yet as they do so, the bro­kerdeal­ers they buy from are forced to hedge their own po­si­tions, of­ten by snap­ping up com­pet­ing stocks rather than bet­ting against them­selves di­rectly. The re­sult is a dan­ger­ous “feed­back loop” of volatil­ity that could am­plify any big correction.

Worse, early-stage com­pa­nies with strong fu­tur­is­tic mis­sions are more likely to have their shares locked up with own­ers or long-term bulls, cre­at­ing a “stam­pede” for oth­ers to get in.

The fi­nal im­pact of this stam­pede is yet to be seen. So far, no large Western elec­tric ve­hi­cle man­u­fac­turer has been re­vealed to be an in­vest­ment scam.

But scep­tics warn that as hype con­tin­ues to grow in the land of elec­tric cars it’s only get­ting more likely that un­scrupu­lous fraud­sters may seek to mis­lead the pub­lic. And the peo­ple who may stand to lose the most are the arm­chair in­vestors caught up in the hype ma­chine of elec­tric ve­hi­cles.

‘Nikola never stated its truck was driv­ing un­der its own propul­sion in the video’

‘Tesla is an emo­tional stock. You have hard­core be­liev­ers and pro­found haters’

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