The future of electric cars may have already arrived in Norway, where 80% of new car sales were electric in 2022, and sales of internal combustion engine cars will end by mandate in 2025.

However, to experience an accurate EV mobility observatory, one must venture into the roads and suburban streets of the San Francisco Bay Area’s mid-peninsula. There, higher-end EVs are pervasive, and new EV models by legacy brands are finally picking up as well.

Around Palo Alto and in the Bay Area as a whole, the epicenter of Silicon Valley, the old reign of the humble utilitarian Toyota Prius at the beginning of the century evolved into a sea of Teslas, with a spectacular increase in the amount of Model Y and Model 3. Yet, the area doesn’t lack the most exclusive versions of Model S (Plaid included) and the “overly ambitious” (according to Elon Musk himself) Model X.

But, unlike in Norway, where the main commercial alternative to Tesla are EV models by traditional vehicle manufacturers, mainly European but also South Korean and Japanese, the Mid-Peninsula canvas has room for other EVs made by all-electric startups, which have become very popular in the area: in any given day, anybody can spot Rivian SUVs and trucks, some (if less) Lucid Air luxury sedans, and even some Swedish Polestars.

However, unlike in Northern Europe, where consumers can buy Chinese EVs, the American market has imposed difficult-to-surmount tariffs on Chinese cars.

Tesla faces competition in mature markets

EVs enter the mainstream, and Tesla’s lead in the US market gets more contested as traditional competitors offer their new all-electric models and several brands specialize in the higher-end market: with no sign of immediate delivery of the Tesla Cybertruck, Rivian, Ford, and GM have found customers for their high-end EV trucks in Silicon Valley.

In the mid-peninsula, one can spot the Rivian R1T truck, the Ford F-150 Lightning, and even the heaviest due to size and battery power, translated into weight: General Motor’s Hummer EV. Of course, none of the EV trucks in the area seem to be used for anything other than passenger transport with an outdoor edge on the weekends, although this is the case for most pickup trucks sold in the United States and Canada.

And yes, the new models contrast with the older trucks driving around the manicured streets of Palo Alto and surrounding towns, which belong to the droves of gardeners, builders, and caretakers that service the area.

The Tesla Model S faces tougher competition in the luxury sedan market from new EVs commercialized by German legacy automakers Mercedes-Benz, Audi, BMW, and Porsche. This competition has already translated to the street. Luxury sedans by non-legacy Tesla competitors, such as the Lucid Air and the Polestar 2, are less frequent, albeit they can be seen on the road (Lucid has four Bay Area locations, and Polestar opened a service center in San Jose).

The global appeal of small and mid-size electric SUVs

The all-electric small and mid-size SUV market has grown worldwide, partly due to the popularity of the relatively affordable EV SUVs mimicking the success of the Tesla Y, driven by energy costs and the US Inflation Reduction Act, which subsidizes consumers’ purchase of EVs. Analysts predict a price parity in small and medium-sized cars in North America and Europe between all-electric and combustion engine cars in the mid-2020s.

With its retro-futuristic design, the Hyundai IONIQ5 is one of the Tesla Y solid alternatives, though hardly the only solid contestant: Kia EV6, Cadillac LYRIQ, Genesis GV60, Volkswagen ID.4 (so far, this locally-produced VW is a commercial success in the US market, with 7,151 registered sales in January-February 2023), Toyota bZ4X, Volvo C40 Recharge, Ford Mustang Mach-E, Audi Q4 e-tron, Nissan Ariya, Subaru Solterra, Hyundai Kona Electric, or Lexus RZ are among the available competition in 2023.

As for the bigger SUV segment in direct competition with the Model X, a car that, according to Musk, was overengineered (“an exercise of hubris”), there are several American, Japanese, South Korean, and European commercial alternatives: BMW iX, Genesis Electrified GV70, Rivian R1S, the crossover Audi Q8 e-tron, or the Mercedes EQB, among others.

There’s a reason for the profusion of small, mid-sized, and big SUVs in the EV market. According to Reuters:

“SUVs and large cars account for nearly two-thirds of EVs in China and Europe and a greater proportion in the United States.”

China’s rise (also in EV car exports)

Competition in the EV market doesn’t come only from traditional car manufacturing powerhouses and American startups. Until recently, the automobile industry and transportation equipment were sectors that China didn’t dominate, boosting exports from traditional car-manufacturing exporters such as Japan and Germany.

An EV-driven car market will look rather differently: thanks to a wide range of affordable electric cars highly popular in emerging markets and Europe, China overtook Germany in auto exports in 2022. It could replace Japan as the biggest car exporter in 2023. The data has caveats: Tesla and Chinese-owned Volvo (and its all-electric subsidiary Polestar) export the models they produce in China to the rest of the world and hence account as Chinese car exports.

BYD wants to overtake Tesla in 2023 as the world’s top EV maker by sales if the company accomplishes its goal of doubling its capacity, selling 3.6 million vehicles globally. Yet in the first quarter, BYD sold just 260,000 EV units versus Tesla’s 420,000 cars, thanks in part to the company’s aggressive price reduction to reactivate sales.

Facing more competition from traditional manufacturers and a credit crunch that compromises how indebted companies can raise capital to cover costs, EV startups willing to compete in niche segments of the EV market will need to convince customers that they are an alternative to Tesla, to the new models by traditional companies, and —soon— to the more affordable Chinese electric cars already entering the European market under Chinese brands, with NIO, BYD, and Xpeng already solidly established in Northern Europe (Geely sells cars in Europe under Volvo, Polestar, and Lynk & Co, whereas SAIC offers cars through MG and Maxus).

Why Chinese cars aren’t sold in the US market

So far, the only Chinese cars sold in the US market did so under American or European companies producing in China, such as Volvo and Polestar (Geely-owned) and General Motors (which has established a production joint venture with SAIC), but not under Chinese companies. The EV Volvos sold in the American market are produced in Europe, though the Polestar 2 is made in Luqiao, China. Chinese car imports face headwind in trying to enter the US market. Imported cars from China to the States are subject to 27.5% import tariffs.

With theoretical commercial incentives for US automakers willing to focus on the growing subsidized EV market, several non-legacy startups are trying to survive in the current economic and supply-chain conditions, led in sales by Rivian and Lucid. Other companies have promised pickup trucks (Nikola, Lordstom Motors, Bollinger), three-wheeled hyper-efficient vehicles (Aptera, Arcimoto), cars with better autonomy (Faraday Future), or modular platforms (Canoo); however, all of them have struggled to comply with their production promises.

Controlling inflation by raising interest rates affects indebted companies with higher operating costs, especially those producing supply-chain-dependant goods and dealing with significant innovation investments they can’t write off anytime soon.

All-electric car companies trying to outcompete Tesla in specific niches are struggling to stay afloat when easy funding is running dry, and interest rates remain higher than before. Two companies delivering units in big EV markets like the San Francisco Bay Area, Rivian and Lucid, may benefit from the solvency of their main backers, Amazon (18% stake in Rivian Automotive, as well as a smaller stake by Ford) and Saudi Arabia (65% stake in Lucid Motors).

High-interest rates complicate EV startups’ operations

However, they are struggling with production shortfalls and the need to build their own production hubs from scratch. Their strategies in the coming quarters will determine their survival as no-legacy Tesla competitors or their eventual demise despite their solid niche following.

Even as US regional banks try to increase their solvency image after the Fed intervention in Silicon Valley Bank and Signature Bank, all-electric startups like Rivian and Lucid try to assure their investors to avoid the downward spiral of their publicly traded value being shortened or diluted to dangerous levels that could compromise solvency: the companies depend on convertible notes.

Convertible notes help startups who go public and need several years to report benefits to keep raising funds: rather than paying back debtors from future benefits (which may or may not come in a few quarters), convertible notes act like a bond, as debt becomes a stock when the note is due. Such a strategy can be especially risky when the economy is either in a downturn or overheated, with convertible notes acting as debt that depreciates the stock value, diluting the ownership percentage of current shareholders.

In uptrend times, all-electric automotive startups benefited from Tesla growth in sales and stock value, especially at the beginning of the Covid-19 pandemic, but their perceived relation to other Nasdaq companies played the opposite role as reopenings and inflation exposed the excessive euphoria around the tech sector, now readjusted.

Can Rivian fulfill its promise?

As of now, Rivian has a lower market capitalization than Lucid, selling more vehicles (50,000 expected in 2023 versus 12,000) and sales (4,1 billion in 2023 versus 1,3 billion, or 3x book value). Rivian’s higher exposure to risky debt could play a role in the company’s capitalization downfall; since its IPO on November 10, 2021, Rivian’s market cap has decreased from $67,2 billion (and over $90 billion at the beginning of 2022) to $12.24 billion.

Rivian stated on February 28 that its biggest problem is supply-chain dysfunctions, which “continue to be the main limiting factor of our production.” A few days later, on March 8, 2023, the company announced a new offer of senior convertible notes due 2029 at an interest rate of 4.625% per annum:

“Rivian will settle conversions by paying or delivering, as applicable, cash, shares of its Class A common stock (the “common stock”) or a combination of cash and shares of its common stock, at Rivian’s election.”

Companies such as Rivian are betting their future not only on car sales but on better times for investors in the coming years: if the company doesn’t find new investors in the near future willing to give them a good valuation, they will need to repay the notes with cash, which in turn could compromise its biggest investors.

Lucid: one-trick pony, or not even that?

For better or worse, Lucid depends on one particular investor, Saudi Arabia’s PIF (Public Investment Fund: the sovereign wealth fund of Saudi Arabia), which already controls 65% of Lucid’s shares. On one side, any hint of commitment shown by Saudi Arabia to the Newark, CA-based all-electric car company could boost its shares (in late January 2023, speculation of the Saudi investment fund buying the remaining stake of the company caused a 98% spike on its shares).

The company, trading in May 2023 at slightly $7 per share, went in late January from $12.87 to $17.81 per share, still a remote mark from an all-time-high of $55.21 per share in late 2021, then mirroring the decline of tech and EV stocks due to inflation and interest rate hikes.

But dependence on the Saudi investment could also mean less room to maneuver by the California company, which in late March announced 1,300 layoffs (or 18% of its workforce) to reduce costs, affecting most of the workforce in the company’s production facility in Casa Grande, Arizona.

Lucid has struggled to communicate that the job cuts come as productivity improvements instead of being an urgent measure to improve a stranded cash flow, in particular when reports of increasing cancellations of reservations and a slowdown in new orders add up to the main phenomenon eroding potential customers’ patience around EV startups.

Tesla: the advantage of controlling one’s own production

Battery cost and supply-chain hurdles keep hurting Tesla rivals, especially the small non-legacy startups that can’t achieve the cost reduction of high production numbers thanks to economies of scale. GM, Ford, and other big manufacturers already expect that, as they ramp up production of their EV models, battery costs will go down to about $100 per kilowatt-hour of stored energy. Until then, electric cars are not only heavier than their gas counterparts but more expensive to produce.

With their cost burden and inability to ramp up deliveries, Lucid is fighting grim news in the short term, as it posted a quarterly revenue well below estimates. (the company reported a revenue of $149.4 million vs. $209.9 million expected and a loss per share of 43 cents instead of 41 cents). Its revenue grew yearly from $57.7 million in the first quarter of 2022. According to Lucid’s finance chief Sherry House, there’s enough cash until the second quarter of 2024.

Analysts think that Tesla’s strategy to weather the recession by cutting prices and increasing volume hurts startups that don’t have room for either. “I believe that there is a challenge to the entire market right now because of macroeconomics and because of interest rates,” says Lucid CEO Peter Rawlinson. The Lucid Air luxury sedan’s price starts at $87,400.

Rivian is actively pursuing the delivery of just 50,000 cars in 2023: it’s hard to imagine the rationale of the company’s valuation when it listed after its IPO, reaching a higher valuation than Ford or Volkswagen. But falling from a market cap of $162 billion to $12.5 billion should concern less than the divergence between Rivian’s operation loss ($1.7 billion in the first quarter of 2023) and its revenue ($654 million in the same period).

Rivian transforms a town in Illinois

Despite the serious hurdles, Rivian has a plan, explains the Financial Times, tied to a town in Illinois: Normal (pop. 54,000). In 2017, Rivian bought there a former Mitsubishi plant “weeks away from demolition” for $16 million.

The company is the second largest in town, with 7,500 people directly employed, or half of its workforce. According to analyst Stephen Brown:

“What we’re witnessing now is the difficulty of scaling up production in the auto industry. It’s a very expensive proposition that requires a tremendous amount of cash in the early years, and manufacturers have to get through that before they can get to scale and start generating some profitability… It’s a race to get to the other side before the cash runs low.”

Rivian seems to be facing some of the hurdles that Tesla experienced as it pivoted from boutique sports-car manufacturer to production powerhouse to meet the early demands of its sedan Model S:

“One of Tesla’s early, high-profile manufacturing mistakes included making late changes to products that forced suppliers to change their tooling, adding costs to the process and straining all-important supply chain relationships.

“At Rivian, a late change to the headlights sent ripples down the supplier base and forced expensive tooling changes, according to two people with direct knowledge of the process.”

With last-minute changes causing hiccups and the supply-chain disruption caused by the Covid-19 pandemic, Rivian had to put up with the traditional unrealistic estimates made by startups as they try to reach economies of scale.

After solving issues with how the wiring goes inside its trucks and semiconductor shortages, the company is hiring a second shift in Normal, reaching 1,700 extra people by the middle of the year.

Beating Q1 2023 earnings’ expectations

The problems of curbing inflation and cooling down the economy are perceived as abstract until companies like Rivian face their ripple effects: the area’s unemployment rate is 3.4%, and workers have to be trained. Conversely, more manufacturing jobs in the area, which jumped from 1.9% in March 2022 to a current 10% in a matter of 12 months, has also translated into higher housing prices.

Rivian spent $6.4 billion in cash and a balance sheet of $11.6 billion. The company expects to decrease the burn rate of cash in 2023, as it expects a gross profit instead of last year’s $3.3 billion gross loss.

Rivian’s Chief financial officer Claire McDonough says the company has enough cash to fund operations through the end of 2025. Will it be able to be profitable by then? Convertible notes don’t seem to be a reasonable option anymore.

On Tuesday, May 9, Rivian posted a narrower-than-expected quarterly loss. The smaller losses and the company’s production commitment in the Normal, Illinois facility made its shares rise over 6% after hours. The company shows some resilience in 2023. Lucid, Fisker, and Nikola missed their earnings, compromising their way out of the current corporate credit crunch.

With healthy demand, a larger backlog, and with one of its cars, the RT1 EV pickup truck, ranked first in JD Power’s customer satisfaction survey, Rivian seems to vindicate a place in a market that will turn more competitive.