Tech: Tesla challengers use SPACs to play catch-up
What do Canoo, Fisker Inc, Rivian Automotive Inc, Arrival, Lucid Motors Inc, Karma Automotive, Hyliion Inc, Lordstown Motors Corp and Nikola Corp have in common? They are all electric vehicle, or EV, start-ups that have yet to produce a single vehicle but have already raised, or are in the process of raising, billions of dollars through reverse mergers with blank-cheque special purpose acquisition companies, or SPACs. Throw in upcoming SPAC reverse mergers like EV battery maker Quantum Scape and EV charging network operator ChargePoint Inc. and you get plenty of pure-play EV firms whetting the appetites of investors who want to hitch a ride on the next Tesla Inc.
Investors’ infatuation with the EV pioneer Tesla is the stuff of legend. Co-founded in 2003 by Martin Eberhard and Marc Tarpenning, Tesla took off when the duo pitched their idea to Elon Musk, a serial entrepreneur who agreed to invest US$6.5 million in its Series A round. The rest is history. Defying his critics and brushes with bankruptcy, Musk went about making Tesla a player that others must catch up with.
Tesla listed in late June 2010 at US$17 a share for a valuation of US$1.7 billion. If you had held on to the stock from its IPO day 10 years ago to end-August when it peaked, you would have gained a whopping 12,400%! A US$10,000 investment in Tesla 10 years ago would be worth over US$1.34 million ($1.84 million) at the peak three weeks ago. A recent 16% pullback in the stock has not changed the Tesla story.
Little wonder, then, that every EV maker aspires to be the next Tesla. There are now more than a dozen EV start-ups in the US alone and nearly 500 companies have registered to manufacture EVs in China. Making EVs is no child’s play. Sponsors need to raise billions before they can bring their vehicles to market. In the US, the boom in SPACs has been a godsend to EV start-ups. By late September, the total value of listed pure-play EV makers had touched US$600 billion, exceeding the entire US$580 billion of the traditional global auto industry despite making up only a fraction of new vehicle sales.
The total market for battery EVs as well as plug-in hybrid EVs is forecast to grow from US$95.4 billion in 2019 to US$430 billion in 2025. Last year, just 2.4% of passenger cars sold globally were electric. By 2025, over 13% of cars are expected to be EVs. By 2030, less than 56% of all new vehicles sold are expected to run solely on petrol. The biggest driver of EV growth is China, where spurred on by subsidies and regulation, 25% of all car sales could be electric by 2025 compared with just 5% last year. Europe is tightening its own regulation on emissions as are many of US states like California unleashing a new boom in EVs. Fuelling the EV boom is the sharp decline in battery costs. Last week, Musk said that Tesla was set to reduce price per kilowatt-hour or kWh, the unit of energy used to measure the capacity of its battery packs, from US$1,100/ kWh in 2010 to US$150/kWh currently to under US$100/kWh within three years.
To be sure, EV start-ups tapping SPACs for desperately needed funds and listing status brought two distinct fads — electric cars and an innovative Wall Street deal structure — together and turned into an even bigger fad. Their proponents say EV firms need to go public through SPAC reverse merger because they are experimental, have no revenues or established businesses and as such, a traditional IPO does not make sense. Their detractors say emerging biotech firms are in the same boat but still make breakthroughs.
Nikola scam
One EV maker wannabe somehow got through. Founded in 2014, Nikola planned to build Class 8 trucks using hydrogen fuel cell technology. Founder Trevor Milton bought the orig- inal design from a designer in Croatia only to build a shell of a fuel cell truck without a fuel cell that could actually propel it. Two weeks ago, he was forced to step down after it was revealed that he had made hugely inflated claims and misled investors about its technology. In June, Nikola merged with an SPAC for a US$3.3-billion valuation. It shares soared 650% after the reverse merger, giving it a market valuation of US$34 billion only to plunge 78% when shortseller Hindenburg Research published a scathing report calling it an “intricate fraud built on dozens of lies”. Earlier this month, it struck a deal with General Motors (GM), giving the US auto giant US$2 billion worth of shares in exchange for parts and components to help build Nikola trucks. The US Securities and Exchange Commission is now investigating Nikola and Milton.
Texas-based Hyliion, a firm that is building heavy-duty trucks, listed through a SPAC reverse merger this week. It was founded and is run by 28-year-old Thomas Healy. Next up for listing is Rivian, an EV van start-up has already raised over US$6 billion from investors, including Amazon.com which invested US$700 million early last year and Ford Motor Co which chipped in US$500 million. Rivian also has a growing order book. Amazon alone has placed an initial order of 100,000 EV delivery vans. As the e-commerce behemoth grows, it needs hundreds of thousands of vans and Rivian is its partner of choice.
Another high-profile player is Lucid Motors, a start-up based in Newark, California, not far from Tesla’s Fremont plant. Founded in 2007, it is now led by CEO Peter Rawlinson, who was the chief engineer for Model S, Tesla’s sedan. Lucid raised over US$1 billion in development capital from Saudi Arabia’s Public Investment Fund two years ago. Earlier this year, it unveiled its first car, Lucid Air, an upmarket luxury sedan meant to compete with upscale luxury cars that will go on sale next year. It recently revealed its luxury SUV, the Lucid Gravity, which will also go on sale next year.
Lucid’s two models beat Tesla’s comparable top-of-the-range models with a 10% better efficiency rate because they have impressively light motors, says Pierre Ferragu, New Street Research’s tech analyst in New York. But, he notes, anyone can make a great electric luxury car if they are charging US$169,000 for it. The maiden Lucid Air model is 80% more expensive than the closest Tesla model. At that price point, it is unlikely to sell more than tens of thousands of cars each year, he reckons. “The future of Lucid is a fiasco,” Ferragu says.
In mid-August, EV van start-up Canoo announced that it would list at a valuation of US$ 2.4 billion by merging with Hennessy Capital Acquisition Co IV, a so-called blankcheque SPAC. The reverse merger will allow Canoo to raise enough money to help bring its first vehicle, a Volkswagen microbus-lookalike van first unveiled last year, to the market next year. Founded in 2017 by executives from BMW and Faraday Future who quickly raised US$1billion from VC firms, Canoo recently signed a co-development deal with South Korea’s Hyundai Motor Co for an electric platform based on its skateboard design for future Hyundai and Kia EVs.
Subscription model
Canoo’s real differentiator, however, is not its electric microbuses. It is actually its flexible vehicle ownership business model. Unlike a traditional automaker that sells you a new vehicle outright, Canoo sells its vehicles through subscription, by bundling total vehicle ownership costs including financing, maintenance as well as service, charging and insurance. A monthly subscription will appeal to a generation of consumers who look at outright car ownership as onerous than be tied down to a high ticket purchase that will be burdensome for years.
Hyundai and its affiliate Kia Motors Corp are also investors in another EV start-up, UKbased Arrival, which was valued at US$3.3 billion at its last funding round. Founded in 2015, the British EV firm has raised money from the VC arm of the parcel delivery firm United Parcel Service (UPS). Arrival makes electric delivery vans and earlier this year, UPS placed an order for 10,000 EV vans from the start-up. UPS, FedEx Corp and Amazon are moving to EV delivery vans because of their better operating economics. EV vans’ benefits include reduced emissions, lower fuel costs and up to 20% lower maintenance costs given fewer moving parts to service. The vans also require fewer specialised tools and machines as well as less labour to make, and have longer warranty lifetimes and steadily declining battery costs.
Another recent reverse takeover of an EV maker by an SPAC is that of Fisker. Founded by Danish-American auto designer Henrik Fisker, the eponymous start-up announced in July that it was merging with Spartan Energy Acquisition Corp, an affiliate of private equity giant Apollo Global Management Inc, at a US$2.9 billion valuation. Fisker is developing EMotion, an electric sedan, and the Fisker Ocean, an electric SUV. Unlike most EV firms that focus on vertical integration, Fisker plans to outsource its manufacturing to Canada’s Magna Automotive, just like Apple outsources its iPhone production to Hon Hai Precision Industry Co, and offer a subscription-based service for its cars like Canoo.
An offshoot of Fisker is Karma Automotive, another California-based EV maker now controlled by China’s Wanxiang Group. Karma was formed five years ago by Wanxiang with assets purchased from Fisker for US$149.2 million in a bankruptcy auction. It makes Karma Revero, a luxury hybrid sports sedan.
A year ago, US President Donald Trump picked a fight with GM over its plant in Lordstown, Ohio. Founded last year, Lordstown Motors operates out of the same former GM plant that has since been reconfigured. Lordstown focuses on commercial trucks. Four months ago, Lordstown reached a deal to merge with an SPAC called DiamondPeak Holdings at a valuation of US$1.6 billion. Its main differentiation is its unique four-hub electric motor system, which is essentially a larger version of the hub motors found in electric scooters. While that helps reduce the number of moving parts to just the four wheels and potentially yields greater efficiency and reduced manufacturing costs, it can also mean high repair bills associated with damaged wheels.
Over the next 12 months, investors should expect to see more EV-related SPAC mergers to meet burgeoning demand. There is plenty of money to fund even some of the marginal players. Eventually, there will be consolidation in the EV space and more deals involving traditional automakers and EV start-ups. In the post-Covid era, car-ownership is benefiting from an aversion to shared transport. Yet increased utilisation of working from home could decrease usage of cars and potentially the need for families to have a second car. Overall, de-urbanisation will continue to charge up demand for EVs. That should be positive for listed EV players.