What Went Wrong With EV SPACs?

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EVs were hailed as the future of the automotive industry, with both investors and governments pouring billions into the sector to help with development and adoption. Despite this, makers, who went public through SPACs to much fanfare a few years prior, have failed to hit the ground running. Dozens of unprofitable startups are burning hundreds of millions in cash, struggling to deliver vehicles to consumers. So, what went wrong with EV makers who went public through SPACs? Why have they failed to live up to expectations?

EV Bubble 

A wave of deals involving special purpose acquisition companies (SPACs) swept the electric vehicle market in 2020 and 2021. EV makers, many specializing in luxury and heavy-duty niches, netted $16 billion in funding by going public through SPAC deals in 2021 alone.

Competing with the likes of Tesla and traditional car giants such as BMW and Ford, these companies raised critical funding to bring their electric prototypes to market.

However, after the SPAC bubble burst, dozens of unprofitable startups were left burning hundreds of millions in cash and running out of time to get vehicles into the hands of consumers. The initial hype around the EV market and the potential of SPACs to bring these companies to the public markets quickly turned into a cautionary tale.

The companies that went public through SPACs suddenly faced intense scrutiny from investors as questions arose about their ability to deliver on their promises of innovative and profitable electric vehicles. Many EV and EV-adjacent De-SPACs have either gone out of business or are on the verge of running out of cash. So how did things go wrong for these companies? 

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Lofty Expectations 

One of the main reasons for the underperformance of electric vehicle makers who went public through SPACs is the large gap between the projected volume of deliveries and the actual deliveries in subsequent years.

Many companies like Canoo, ELMS, Lucid, and started out as pre-revenue companies, meaning they had to use this strategy to justify lofty valuations. In addition to the delivery challenges, there have been other complications, including production and quality control issues. 

Lordstown Motors, which was looking to build out 500 vehicles in 2023, paused production entirely, citing quality control issues. The company has only produced 34 vehicles so far. Lucid has issued multiple recalls due to problems with specific parts of the cars and has significantly lowered its production targets from 22,000 vehicles in its to 14,000 vehicles.

The failure to meet production targets and deliver vehicles has led to a loss of confidence among investors, leading to a pullback in the stock, further exacerbating the company's financial woes. 

The Potential Winners 

Lucid, Rivian (not a ), Polestar, Fisker, and Lotus are among the only EV startups with valuations north of $2 billion, accounting for about 95% of all the value in EV startup stocks. These companies share some common characteristics that have caught the attention of investors. Firstly, they all have enough cash to last for a few quarters at least.

This gives them the financial runway they need to continue developing and producing their vehicles without worrying about running out of money. Secondly, they are all selling cars now, a crucial milestone for investors. The market wants to see cars on the road and the ability to achieve scale production. Finally, they have the capacity to ramp up production, which is essential for meeting demand and generating revenue.

Lotus has access to Geely's manufacturing capacity, eliminating the need to build a car plant that costs billions, with a production of 22,000 units for its all-electric SUV, the Lotus Eletre. Fisker and Polestar are in similar situations, with Magna International building Fisker's first vehicle, the Ocean SUV, and Polestar using Volvo to build its electric vehicles. Wall Street expects Fisker to deliver about 32,000 units in 2023, and Polestar will deliver about 80,000 units. Both Fisker ($800 million) and Polestar ($1 billion) had enough cash on their books to fund operations until production.

Rivian and Lucid, unlike Fisker and Polestar, have their own manufacturing facilities and are producing vehicles at high volumes. Rivian is expected to ship roughly 60,000 units in 2023, and Lucid should ship about 14-15,000 vehicles. Lucid ended the third quarter with roughly $4 billion on its books, and Rivian ended with roughly $14 billion, giving them a significant advantage over its peers.

While it's still too early to tell if any of these EV startups will be long-term winners, the market has made some bets on who has a shot. The price of admission is cash, capacity, and cars on the roads. 

Bottom Line 

EV De-SPACs have failed to live up to expectations, with many startups struggling to deliver vehicles to consumers. A large gap between the projected volume of deliveries and the actual deliveries, coupled with production challenges and quality control issues, led to a loss of confidence among investors. Despite the challenges, there are some potential winners in the market. Companies such as Lucid, Rivian, Polestar, Fisker, and Lotus have caught the attention of investors due to their financial runway, capacity to ramp up production, and ability to sell cars now.

As the EV market continues to evolve, the lesson learned from the SPAC boom and bust is clear: the market doesn't want just business plans; it wants to see cars on the road and an ability to achieve scale production. The road ahead for the EV market is sure to be bumpy, but the winners will be those companies that can deliver on their promises to consumers and investors alike.

Source: What Went Wrong With EV SPACs?