Hubris Exposed: How Georgia and North Carolina Ignored Basic Facts by Investing in EV Startups.
Business News You Can Use. Subscribe for Full Access
The late Charlie Munger, vice chairman of Berkshire Hathaway, once colorfully quipped, "If you mix raisins with turds, you still have turds.”
Munger's cautionary remark, crude as it may seem, should nonetheless be taken to heart by investors everywhere -- putting your money on low-performing, unproven companies can and most often will ultimately come back to bite you.
Economic developers, those people charged with bringing and improving the financial wealth to communities and the people living there, should inherently know this. And yet they have repeatedly demonstrated otherwise.
A Double-Edged Sword
What has become a common practice in the United States is for state and local governments to award financial "incentives" to companies. They can take many forms from tax breaks, to worker training, to grants, to low-interest loans, and even free land. Make no mistake, whatever the form, this practice of incentivizing the private sector in exchange for capital investment and job creation is ultimately government subsidization, although economic developers are loathe to use that term.
But therein lies a trap. The greatest and most publicized failures in economic development have occurred when governments invest in companies that do not follow through on their promises and taxpayers are left holding the bill. It has happened too many times, most of which is never reported by the news media, and yet this practice of awarding financial incentives remains commonplace.
Promises, Promises
Such is the case of Rivian Automotive Inc. and the state of Georgia, which has indeed made headlines. I think of it as a tale of hubris and ignorance, and yet the likelihood of anyone being held accountable is small. The same holds true for North Carolina, which I will explain below.
The news that Rivian was reversing course on its plans to build a $5 billion factory in Georgia, stunned some, but I submit that it never should have given the company's financials and the fact that the automotive industry continues to struggle with a transition to electrification. The world's top automakers are planning to spend nearly $1.2 trillion through 2030 to develop and produce millions of electric vehicles, along with the batteries and raw materials to support that production, according to a Reuters analysis of public data and projections released by those companies.
Some of those on the Reuters list are EV startups, but I have said, and I will continue to say, that not a single electric vehicle startup will survive long-term. I will explain further below.
In the case of Rivian, the company secured a record-breaking $1.5 billion package of state and local incentives from Georgia in 2022 to build an expansive plant on 2,000-acre site 40 miles east of Atlanta. The company committed to generating 7,500 jobs by the end of 2028, which, of course, garnered accolades from most (not all) local legislators.
However, in a Securities and Exchange Commission filing last week, Rivian announced that it would shift the production of two future, more affordable models to its existing plant in Normal, Illinois, thereby saving $2.25 billion in the process.
Elon Musk's Warning
One thing is certain, Rivian desperately needs to save money and cut costs if it is to have any future at all, which is doubtful in my mind. Someone who knows that better than anyone, who has been through "production hell," says the same.
Elon Musk, the CEO of Tesla, notes that while there have been many automotive startups, both electric and combustion, Tesla remains the only one to have achieved high-volume production and positive cash flow in the past 100 years.
Last month, shortly after Rivian announced a disappointing quarter and outlook and said it would cut its salaried workforce by roughly 10 percent, Musk wrote on X that Rivian would go bankrupt in about six quarters on its current trajectory. “They need to cut costs massively, and the exec team needs to live in the factory or they will die,” he wrote.
Musk, having gone through “production hell” and “sleeping at the factory” himself at Tesla, should know.
The billionaire has warned about Rivian’s challenges before. In June 2022, he said his advice for the company would be “to cut costs immediately across the board dramatically or they’re doomed.”
Rivian's Struggles and Industry Challenges
Rivian's retreat from Georgia comes soon after announcing job reductions and a decision to maintain flat production levels this year. These actions have fallen short of market expectations, resulting in a 90 percent decline in the company's stock value.
Rivian's challenges in attempting to mass-produce vehicles are compounded by the difficulty it has experienced in selling its models at premium prices amidst waning demand for electric vehicles. Since starting production in the third quarter of 2021, Rivian has produced about 65,000 vehicles. Compare that to Tesla, which in 2023 produced 1,845,985 electric vehicles. Ford produced 487,840 units during the fourth quarter of 2023.
Most notably, Rivian has yet to achieve anything approaching profitability and reported losses exceeding $40,000 per vehicle delivered in the final three months of 2023. Rivian's losses in 2023 totaled $5.4 billion, down from the $6.8 billion lost during 2022. Rivian contends that it has sufficient resources to operate through 2025. The company is still sitting on $9.4 billion in liquid assets from its record initial public offering in 2021.
But a slowdown in electric vehicle demand coupled with intensified competition from Tesla and legacy automakers who have been cutting prices, along with high interest rates will ultimately spell Rivian's doom over the long term. Again, I see this true for all EV startups as they lack the financial resources, infrastructure (dealer networks and supply chains), and brand recognition necessary to succeed in a highly competitive industry dominated by established players.
The Downfall of EV Startups
The simple truth is that Tesla, the true pioneer in the industry, and the legacy automakers, now have decades of experience and established supply chains, allowing them to achieve economies of scale that no EV startup will ever be able to match, enabling the major automakers to produce vehicles more efficiently and at lower costs.
More importantly, the established automakers, Tesla being the exception, have revenue streams from their existing internal combustion engine vehicle lines, allowing them to underwrite their EV initiatives. The EV startups have no such fallback resources. They are, in essence, stuck in a do-or-die mode, which ultimately means they will not be able to survive long-term.
I submit that a modicum of research by the Georgia Department of Economic Development would have revealed this and that a determination would be made that Rivian, with no track record of profitably and with scant production, was no horse to bet on with public taxpayer's money. And yet, incredibly, state officials did. They got the big eyes -- $86 billion valuation soon after the IPO, a $5 billion plant, 7,500 direct jobs. Oh, my, what's not to like here? If they only had delved deeper, they would have determined that the emperor had no clothes.
VinFast is on a Similar Path
A similar scenario will play out in North Carolina, where that state bet on an even more inconsequential company, a Vietnamese company called VinFast, which began manufacturing operations in 2017 and pivoted to EV production in 2019.
VinFast, like Rivian, has yet to generate positive cash flows and is even a weaker sister by virtually any measure financially. And yet, somehow the the North Commerce Department saw fit to award VinFast a $1.2 billion incentive package to build a $4 billion plant in Chatham County, again on the promise of creating 7,500 jobs. Strange how both Rivian and VinFast came up with the same number of projected new jobs in a crowded and hypercompetitive U.S. auto market.
For reasons that I can only explain as someone was smoking something, VinFast's market capitalization briefly reached about $85 billion on August 15, 2023, surpassing that of General Motors and Ford. And this is from a company that has been producing and exporting two- and four-wheelers in the EV segment in its homeland since 2021, and abroad since the end of 2022. Its current market capitalization is $12.27 billion, which may be a stretch.
The company today carries about $3 billion in debt and has an annual burn rate of $3.3 billion, with cash reserves estimated to be less than $100 million. The company reported a net loss of $650.1 million in the final three months of 2023, and it delivered less than 35,000 cars for the entire year.
North Carolina has allocated $450 million for site preparation and infrastructure to support VinFast's operations in Chatham County, which include road improvements, sewer, and water infrastructure work at and around the site. It is not clear how much has been spent to date on the site about 30 miles southwest of Raleigh near the unincorporated town of Moncure.
Back in Georgia, state and local governments were projected to spend more than $125 million on the Rivian site near the community of Social Circle, which included buying the nearly 2,000-acre site. Additionally, Georgia officials paid over $32 million for "clearing and grading" the site as part of the incentive agreement with Rivian.
I can hear the defense now from certain state officials in defending the indefensible. "Well, at least we will have a ready site for another company if this project doesn't work out." Mind you, the shoe hasn't yet dropped with VinFast, but how can it not given the company's continuing losses and the current state of the EV market?
It's only a matter of time. The field will narrow. Only the legacy carmakers with all their aforementioned advantages/resources will be able to compete in the long term. In the meantime, billions will be squandered.
Lessons Learned and Moving Forward
If comparable blunders were made in the private sector, heads would roll. General Motors fired nine top executives at its self-driving vehicle subsidiary, Cruise, in December amid the safety probe, including Chief Operating Officer Gil West. Will such accountability happen in Georgia or North Carolina? Don't hold your breath.
What I find most ironic is that the economic development communities in Georgia and North Carolina are among the best in the nation. Both states have strong fundamentals for establishing manufacturing operations. But that didn't prevent them from speculating with taxpayer dollars.
U.S. Rep. Mike Collins, a Republican representing the area that included the Rivian site, joined local officials in opposing the deal in 2022, referring to it as “disastrous.” Following Rivian's announcement last week, Collins struck a sober tone, emphasizing caution in government intervention in the marketplace.
“As long as businesses create good-paying jobs in Georgia and my district, I’m in favor. But government must be cautious when picking winners and losers. The free market is a marvelous and fair device when allowed to work,” he told The Atlanta Journal-Constitution.
Amen to that Congressman.
Keep reading with a 7-day free trial
Subscribe to The Rising Tide to keep reading this post and get 7 days of free access to the full post archives.