chance to make history and, at times, piles of money.

Elon Musk's wealth skyrocketing thanks to a

surge in Tesla shares.

So I present to you the Cybertruck.

But in this race to seize the moment, many contenders

are sputtering.

Several high profile companies have failed, gone

bankrupt or fought struggle after struggle.

Even established players in other industries with

automotive dreams have thrown in the towel.

In recent years, more than 30 companies have filed for

or are at risk of bankruptcy.

The total addressable EV market is huge.

Tesla, which controlled more than 50% of it in the

US in 2023, sold more than 650,000 vehicles in the

country and raked in more than $82 billion in vehicle

sales and leasing revenue worldwide.

And EVs made up just 8% of US new car sales that year.

They're expected to be 46% by 2030.

That's nearly 8 million vehicles.

But the business is not for the faint of heart.

It takes billions and billions.

Hopefuls have routinely underestimated those capital

costs. A company has to put together a complex supply

chain, build factories, design the vehicles, comply

with regulations and get them to customers through a

distribution and service network.

So why is it so difficult to start an EV company and

why are so many failing?

To be sure, despite talks of sales slowdowns,

forecasts are still charting a boom in EV

adoption around the world, from 2.4% of new cars sold

in 2019 to 61% by 2035.

Startups, by definition, love vast addressable

markets. This is venture capital pitch.

You know, slide number one.

And by the way, it's not only light duty vehicles, it

is also busses, trucks, motorcycles.

And in the, you know, even more distant future

aircraft.

Ev investment commitments have doubled in value in

just two years, reaching $616 billion through 2027.

Enthusiasm like this is what allowed for the

creation and success of Tesla, basically the first

major EV automaker outside of Asia.

The growth of the market is partly supported by

favorable government policies. Countries eager to

decarbonize offer a range of incentives, subsidies,

and other perks to help defray the cost of getting

started. Since 2021, Tesla has pulled in more than $5

billion in zero emission vehicle credits.

Those are credits other automakers have to buy from

Tesla or other EV, or plug in makers every time they

want to sell a fuel burning vehicle.

In some states.

You know, China's had this fastest growth in electric

vehicles of of anywhere.

And that's also supported with a lot of of of

government policies.

So, you know, some of the places where there's a

proliferation of new companies, it's been pushed,

you could say with help from the government, some of

it is the entrepreneurs wanting to grab the

opportunity of this change in the dominant design to

electric.

But this time of tremendous growth and opportunity has

also coincided with several high profile failures.

Apple, one of the largest companies in the world by

market value, folded its car project, known within

the company as Titan.

Dyson, the privately held British firm best known for

bagless vacuum cleaners, ditched its electric car

plans after it decided it couldn't make money off

them.

I mean, those are two businesses coming from super

high profitability, super high return on capital.

I kind of agree with them.

If you're going to come into automotive, you better

come with some serious innovation.

Indifference.

Bringing a car to market requires a mix of

engineering and design talent and ability to

execute, actually securing manufacturing space and

suppliers, confronting stringent and complex

regulations, and actually bringing something new to

the table.

Even if you start with an advantage, you have the

clean sheet of paper opportunities that startups

have. You have to learn all these really hard things

that the big automakers do.

You know, you have to learn to to design, and you have

to learn to build a supply chain.

You have to learn to manufacture. You have to

learn to sell and just and deal with repair and

maintenance and after sales service and all that.

But above all, it takes capital.

Just look at the capital returns, not the stock

prices. The the actual returns on capital, they're

not very attractive.

This is a highly capital, intense competitive

industry.

Returns on invested capital for established automakers

like Ford and GM are in the mid single to low double

digits for 11 of its 15 years as a public company.

Tesla's returns on invested capital were negative.

Plain and simple.

Companies just run out of money.

Fisker experienced an old fashioned cash crunch.

Some of that was inherent in the capital intensity of

becoming an an automaker, but some of it was also due

to mistakes that that the company made.

Running out of capital is the biggest problem an

automaker has. That might seem obvious.

It is, of course, the problem every business

faces, but the capital costs of starting an

automaker are massive.

Yes, you're two ish billion to get to your first

vehicle.

Not everybody has $2 billion to play with.

And frankly, even if 2 billion is available, that's

not a guarantee of success.

That's really just the beginning.

You need to be like a shark where you're always moving

or you die if you stand still.

So there needs to be an ability to to raise the next

2 billion and the next 2 billion after that.

Take Rivian and Lucid.

Both of them have eviscerated $10 billion.

So interesting to see these other small startups who

raise 1 billion or 2 billion.

And they think that's enough.

It's not even close.

This was a problem faced by a lot of the startups that

went public using special purpose acquisition

companies, or SPACs.

A Spac is a public shell company that merges with a

private business, in this case an EV firm.

And through that merger, the private company becomes

a public one.

There is no venture capital firm on the planet that will

write billion dollar checks to to an EV startup.

So to raise that kind of money, the only realistic

scenario is to become a public company.

For EV startups, a SPACE came with a few advantages

over the traditional IPO.

For example, you could go public using projected

revenue rather than actual revenue.

The SPAC promise, at least, was that these companies

could turn to markets for the funding they'd need to

grow.

It hasn't really been the story.

It's not like retail investors dumped a bunch of

money into Tesla. This is like Daimler and others that

put money in when it was needed, and then debt and

other things. You know, the companies that are

pre-revenue, you know, typically shouldn't be

public companies.

It's very hard for a company that's pre-revenue

to stay ahead of the bow wave and, and have people

interested in, in investing and putting billions of

dollars more into a startup.

So what are all those billions of dollars going to

to start budget?

About 500 million to 1 billion to build a plant and

tool it, then about 200 million and half a billion

on top of that in supplier tooling, and another 250 to

500,000,000in product development costs.

There are certain fixed costs associated with

building and running a factory and tooling it.

Once you have built and tooled a factory, you have

to produce a certain number of vehicles in order to

absorb those fixed costs.

The person selling the parts will say, well, look, I've

got this big fixed cost.

I spent $50 million to be able to make you 200,000

vehicles. You're only asking for 20,000 vehicles.

I need my money and then say, well, sorry, we don't

have any, like. Okay, well, sorry, you don't get parts.

Then you need about 100 to $200 million a year just to

keep everything running while you were waiting to

launch vehicles. Once you launch, you have to put more

growth capital into the business to fund the second

vehicle and possibly the second plant to build that

vehicle. Companies choose different approaches.

Vertical integration is basically doing everything

yourself, or at least as much as possible.

Another way to do things is to outsource some or most of

the work. Some start with what is called a donor

vehicle, basically a repurposed vehicle or a set

of components from an existing manufacturer, like

a chassis or powertrain.

Lordstown started with a donor body on its endurance

pickup truck. Elms started with a Chinese van.

This can save you the trouble of having to build

something from scratch, but it can come with downsides,

like the degree to which you can change the vehicle

and customize it is somewhat limited.

There is also the asset light approach favored by

companies like Fisker use outsiders like suppliers or

contract manufacturers to make the vehicles you

design. It might look like a company is saving a lot of

money by paying an experienced outside firm to

make the car in a factory already built, but costs add

up. Alixpartners Mark Wakefield says bringing a

vehicle model from design to rolling reality can take

anywhere from 2 to 4 times the number of hours

expected.

You never design it once, and it's right.

Electric vehicles escape the burden of emissions

regulations, but there is still a host of other rules

they have to comply with, perhaps most notably the

Federal Motor Vehicle Safety Standards, or Fmvss

for short.

The barriers to entry on things like Fmvss are

aggressive, are tough, and they're tough because these

are things that can kill people and kill people

immediately.

But a car also has to be refined enough to

comfortably drive.

And there's all these complex interdependencies

around vibration and around, you know, things

that matter to drivers.

Macduffie is referring to a concept called noise,

vibration, and harshness.

A carmaker has to ensure all of the components in a

car are fitted together perfectly.

If not, you get intolerable levels of all three.

Every automaker that's ever succeeded is doing

constantly doing a lot of this fine tuning.

Tesla probably does a little less of it, and some

people will complain about that.

You know, the fit and finish isn't as good.

The gaps aren't so clean, things look a little shoddy,

and so far people haven't cared because they they love

the power. They love the big screen, they love the

software.

Like there has to be a reason to buy this vehicle.

And a lot of the startups were trying to be first

mover, so there wasn't a tremendous amount of

innovation that a consumer actually feels more

stylistically different.

Some of them had challenges because the delays they had

in getting to market.

By that time, there was other vehicles actually in

the market too, that were very similar, and now they

weren't the they weren't the first mover and the only

game in town.

This is a huge source of tension.

Perhaps the fundamental problem any EV startup or

any auto startup will face.