Photo: Atilgan Ozdil/Anadolu Agency/Getty Images
October 8, 2021
Richard Branson once said, "If you want to be a millionaire, start with a billion dollars and launch a new airline."
For a long time, conventional wisdom — the kind you picked up in MBA programs — said the same was true of the automotive industry. Why would anyone want to enter an industry with high fixed costs, fierce competition, supremely complex supply chains, stifling regulation and razor-thin margins? The answer, for a long time, was that nobody did.
Then Tesla broke into the automotive market and challenged this notion, but only to an extent. Despite its $779 billion market cap, Tesla only recently recorded a quarterly profit derived entirely from selling cars.
Since its founding in 2009, Rivian has set out to prove that there's room for more than one newcomer in the automotive industry (RIP Nikola). The company has a lot going for it, including over $10 billion in funding, backing from Amazon and Ford, a state-of-the-art manufacturing plant in Illinois and roughly 148,390 preorders. Rivian shipped its first batch of electric trucks in September 2021.
Even so, the road to profitability is long and winding (and did anyone see a sign for the next charging station?). Rivian posted a net loss of over $1 billion last year and is on track to nearly double that in 2021. In its S-1, Rivian said it expects to spend another $8 billion through the end of 2023. It also warned investors that it will likely "continue to incur operating and net losses in the future while we grow."
Rivian released its S-1 on Oct. 1, 2021. It aims to sell its shares on Nasdaq and is reportedly seeking a valuation around $80 billion. The company is believed to be targeting an IPO date around Nov. 25.
What Does Rivian Do?
Rivian was founded in 2009 by RJ Scaringe, who had just completed his Ph.D. program at MIT's Sloan Automotive Laboratory. The company initially set out to build an electric sports car, but in early 2012 switched focus to electric SUVs and trucks. Scaringe explained at the time that electric sports cars wouldn't allow Rivian to "deliver the level of change we felt we had the potential to drive." Rivian moved its headquarters from Michigan to California in 2020. It began production in its first factory in Normal, Illinois this summer and has reportedly kicked off the search for its second factory location.
Rivian is targeting two audiences with its vehicles: consumers with "adventure and active lifestyles" and enterprises seeking to electrify their fleets.
In the consumer space, Rivian has the R1T, a two-row passenger pickup truck, as well as the R1S, a three-row SUV. At the end of September, 48,390 customers in the U.S. and Canada had put down $1,000 refundable deposits for the R1T and R1S. Rivian began making deliveries for the R1T in September and said it hopes to start delivering the R1S in December 2021.
On the enterprise side, Rivian hopes to launch the RCV (Rivian Commercial Vehicle), an electric delivery vehicle that it designed in collaboration with Amazon. Amazon ordered 100,000 RCVs, which was the largest single order of EVs ever. In the S-1, however, Rivian discloses that its agreement with Amazon "may be terminated by either party with or without cause, subject to compliance with certain termination provisions."
Rivian's ambitions don't stop with becoming an EV OEM, though. It wants to create an entire "vertically integrated ecosystem." That includes designing and manufacturing vehicle components such as the electronics, battery and chassis. The company said it designed its vehicle platforms "for applications beyond the launch versions of R1T, R1S, and EDV," which could involve becoming an automotive supplier. The Rivian ecosystem also entails having an entire software suite — including autonomous systems — continuously updated through the Rivian Cloud. The company has already started building out an electric charging station network, with 145 Rivian Waypoints charging sites currently spread across 30 states. Rivian thinks it will eventually be able to launch "autonomous mobility as a service" and "energy as a service."
In Rivian's version of the future, all of these services will cost a pretty penny. Rivian defines LTR (lifetime revenue potential of services) as "the revenue we can generate from a vehicle throughout its lifetime if the owner(s) were to use and subscribe to all the additional services and accessory products that we offer." For consumer vehicles, Rivian estimates an LTR of $67,900. That includes $15,500 from software, $8,700 for insurance and charging services and $3,500 for vehicle servicing. Oh, and it also assumes that you'll only drive the vehicle for 10 years.
Rivian is burning through money quickly and, until September 2021, had no revenue to show for it.
- Rivian recorded a net loss of $1 billion in 2020, which was more than double the net loss of $426 million recorded in 2019. It's on track to roughly double losses again in 2021, with $994 million in net losses for the first six months of the year.
- Research and development costs are the biggest culprit: Rivian recorded $301 million in R&D costs for 2019 and $766 million in 2020. For the first six months of 2021 it recorded $683 million, up from $292 million in the first half of 2020. R&D includes engineering, design, payroll and IT expenses.
- Rivian's headcount has exploded in recent years, too. The company employed 6,274 people at the end of June 2021, nearly triple what it had just one year prior.
Rivian finally began generating revenue with the launch of the R1T in September 2021. However, the company warns investors it "will continue to incur operating and net losses in the future while we grow."
- Perhaps of greater concern, Rivian expects "cumulative spending on capital expenditures to be approximately $8 billion through the end of 2023 to support our continued commercialization and growth objectives as we strategically invest in infrastructure, including additional manufacturing capacity, battery cell production, service operations, charging networks, experience spaces, and software development."
- Yet the company also mentions that it expects to have enough cash, cash equivalents, amounts available for borrowing and proceeds from the IPO "to meet our operating expenses, working capital, and capital expenditure needs for at least the next 12 months."
- The key word here is "at least," so Rivian could just be giving a conservative estimate. Still, that may be cold comfort for those with billions invested in the company.
What Could Go Wrong?
Rivian faces three significant risks: over-reliance on Amazon, the complexity of automotive supply chains and potential for stunted adoption of EV trucks and SUVs in the U.S.
Rivian has a lot riding on its Amazon partnership, but Amazon has relatively little at stake and can reduce its exposure to Rivian if necessary.
- "Amazon" appears 81 times in the Rivian S-1, which is more than twice as often as you'll find "truck" or "trucks" mentioned.
- Amazon funneled more than $1.3 billion into Rivian over the course of its series A, D, E and F funding rounds. It also agreed to purchase 100,000 delivery vehicles, which represents double the total preorders Rivian received on the consumer side.
- However, Amazon structured its preorder contract such that it can pull out at any time. Rivian could as well, though it wouldn't really make sense for the company to do so.
- Rivian writes of this risk (with EDV referring to its collective agreements with Amazon): "If we fail to adequately perform under the EDV Agreement, if fewer EDVs are purchased than we anticipate, or if either party terminates the EDV Agreement for any reason, our business, prospects, financial condition, results of operations, and cash flows could be materially and adversely affected."
Supply chains are a mess right now, and building an automotive supply chain from the ground up is already an extremely difficult task. These challenges could limit Rivian's output or result in increased production costs.
- Its S-1 calls attention to the battery supply in particular. The raw materials that go into batteries such as lithium, nickel and cobalt might be in short supply. It also cites the risk of recalls or manufacturing defects from battery cell manufacturers.
- As with so many automakers, Rivian is also exposed to risks relating to the global shortage of semiconductors. The company writes: "Many of the key semiconductor chips used in our vehicles come from limited or single sources of supply, and therefore a disruption with any one manufacturer or supplier in our supply chain would have an adverse effect on our ability to effectively manufacture and timely deliver our vehicle."
- And in general, automotive supply chains are supremely complex. Rivian writes: "Our products contain thousands of parts that we purchase from hundreds of mostly single- or limited-source suppliers, for which no immediate or readily available alternative supplier exists."
Finally, Rivian still has to prove that there's a market for EV trucks in the U.S. This will be particularly difficult for an unproven manufacturer.
- Some stereotypes are true: Americans do love trucks. In fact, Rivian says trucks and SUVs accounted for over 70% of new vehicle sales in the U.S. Truck and SUV sales also made up a disproportionate share of profits for incumbent automotive companies.
- EV trucks make up virtually 0% of this market. Rivian beat many of the biggest potential EV truck and SUV competitors — including GM, Tesla and Ford — to market with its shipment of the R1T in September.
- So Rivian is essentially entering uncharted territory when it comes to consumer adoption of these trucks. Sure, it can point to preorder demand, but those preorders are entirely refundable. The company writes: "Currently, there is no historical basis for making judgments on the demand for our vehicles or our ability to develop, manufacture, and deliver vehicles, or our results of operations in the future. If we overestimate our requirements, our suppliers may have excess inventory, which indirectly would increase our costs."
- The inconvenience of charging EVs has historically been a major adoption barrier. Coupled with the fact that Rivian is targeting an "adventurous" demographic (which tends to entail going places far from Whole Foods' parking lots), customers might have a hard time justifying the switch from gas to electric. Rivian writes: "While the prevalence of charging stations generally has been increasing, charging station locations are significantly less widespread than gas stations. Some potential customers may choose not to purchase our vehicles because of the lack of a more widespread charging infrastructure."
Who Gets Rich
Rivian didn't disclose its entire ownership structure, so it isn't possible to know exactly how much investors own in the company. We do know, however, the five entities that own more than 5% of the company and the aggregate amount invested by each entity in the series A-F funding rounds:
- Amazon purchased $1.3 billion worth of shares.
- T. Rowe Price purchased $2.2 billion worth of shares, though most came from later investment rounds when it costs more to buy into the company.
- Ford purchased $820 million worth of shares.
- Manheim Investments (a subsidiary of Cox Enterprises) purchased $350 million worth of shares.
- Global Oryx Company purchased $160 million worth of shares.
What People Are Saying
- "A lot to still prove out here for sure, but the Rivian team is world class, and @RJScaringe is one of the greatest entrepreneurs I've ever met. Now, RJ, where are our vans?!" —Jeff Bezos tweeted on Oct. 6.
- "We intend to focus on high impact climate initiatives and preserving bio-diverse land, as these natural landscapes and seascapes are powerful carbon sinks, pulling carbon dioxide from the atmosphere and storing carbon in soil, grasses, shrubs, trees, coral reefs, sea grasses, and ocean floor sediments. We believe that these preservation efforts will help create a forcing function that helps drive the world to shift to more sustainable consumption behaviors and preserve the planet and its atmosphere for the many generations that will follow us." —Rivian wrote in its S-1.