Building the Electrification of the Automotive Industry

An Overview

Sure, everyone's heard of Tesla over the last few years. It's kind of hard not to hear about a company whose stock and CEO's twitter feed can't stay out of the news cycle for more than 24 hours. But, before the fundraising floodgates opened at the beginning of 2020, could you have honestly told me that besides Tesla you had heard of the recently completed or announced SPAC targets, such as Proterra, Arrival, ChargePoint, FREYR, Romeo Power, Innoviz, XL Fleet, Canoo, Hyzon, Luminar, Quantumscape, Fisker, Lordstown, Hyliion, Nikola, Velodyne, EVgo, Electric Last Mile Solutions, EVBox, AEye, REE Automotive, Microvast, Motiv Power, or Lucid? Or in the public and private markets, those who experienced dramatic valuation rises, like Rivian, Kandi, SES Battery, Acrimoto, Nio, Bollinger, Hercules, CATL, LG Energy Solutions, BYD, GreenPower, Solid Power, Workhorse, Xpeng, SK Innovation, Akasol, Byton, Northvolt, Zero, PlugPower, or Blink?

Maybe by now you've heard of the dramatic government mandates (2020 buzzword) from around the globe that helped spark such an investment rush. Mandates that are setting goals and deadlines for carbon reduction and net-zero emissions from major automotive markets like China, the US, Europe and Japan.

If you hadn't known that, I'm sure by now you've seen the massive headfirst dives into the EV space by established OEM's. What were once only seen as compliance cars with a few dedicated assembly lines have now become the focus for the future of companies like General Motors, Ford, Volkswagen, and many others.

In just a short amount of time, billions of dollars have been raised, millions of press releases have been given, thousands of jobs have been created, and hundreds of companies have made their way onto the scene. With all this going on in the background I'm sure you wouldn't be surprised to learn that EV sales have risen dramatically and the cost of producing them has dropped substantially...

...However, would you be surprised to learn that as of the end of 2020, EV's share of new car sales globally sat around only 5%, and in the US that number sits below 2%?

Seeing how small those numbers are may come as a shock to some, and arguing points for non-EV-believers, but the fact of the matter is EV's are coming. This time is actually different. The prior false starts of the industry are long gone and there has never been this much support from the investment community, governments, and consumers. For the most part the demand is growing organically, although some forced demand may come in to speed everything up in the form of incentives or restrictions, but the reality is mass-adoption of electric vehicles is more attainable than it has ever been before.

So, if the demand argument is finally nullified and demand has arrived, where are the EV's?

Well, for someone like me who currently resides in the corporate real estate development and construction industry, talking about the future of the automotive sector may seem a little over my skis (fair assessment). But, I believe I'm uniquely qualified to point out what's being glossed over amidst the constant barrage of SPAC listings, investment announcements, earth temperature readings, tweets, rebrands, refreshes, car unveilings, CNBC interviews, technology breakthroughs, etc...

It's that in order for all the above to happen; for new companies to make their mark on the industry, for established companies to continue making money for their investors, and for governments to finally make a dent in the climate issue. The entire EV ecosystem needs to scale and scale dramatically. And I'm not talking about their valuations or their social media followings, I'm talking about their capital expenditures and their real estate assets.

I'm sure I'm not breaking any news here, but you cannot have mass adoption of something you cannot mass produce...

Matt Levine of Bloomberg's Money Talk said in a recent post, "When a lot of people want to buy a thing, manufacturing that thing is a good business to be in". I don't think truer words have ever been spoken before. However, I would also add that being able to manufacture that thing to meet demand would be quite an important detail.

"When a lot of people want to buy a thing, manufacturing that thing is a good business to be in"

This is the epitome of the EV space right now. The talked about issue is always the worry over demand, but the real issue is how we're going to grow supply to meet the demand.

While the hype around this newish tech may be justified, people forget that car companies are not Facebook or Google. You aren't selling people's personal data or ads to your platform (not yet at least). You're selling a physical and tangible asset. Remember the old Paul Simon song Cars are Cars? Well, cars are still cars. Cars are built using a network of suppliers, supplier's suppliers, and supplier's supplier's suppliers. The automotive industry is an extremely asset-heavy and capital-intensive industry. Hundreds of companies and thousands of people go into every single part of every single car.

The mass-produced EV industry is a brand-new beast. These are cars, parts, and pieces that have never been mass-produced before (The Hummer EV, for example, while a low production car is using a completely different platform then any other GM truck, which requires a completely different set of suppliers). The current automotive industry, the ICE industry, is an established entity. It's established because it's been around for over 100 years at a mass-production scale. That V8 in your 2021 Mercedes is basically the same technology as the straight-8 in that 1938 Packard in the cover photo of this article. What's really changed in your car is the heated & cooled seats, touch screens, LED lights, Bluetooth, and maybe some lighter bodywork for aero purposes. All comfort items really. These longstanding OEM's have been able to use the same facilities to produce the same tech from the same suppliers, making marginal improvements year after year. There's a reason why only a handful of companies have made it since the beginnings of the automotive industry. It's those who own the real estate, that own the production capacity, that own the capital, that own the market.

This newest rise of the EV is acting as a shock to the system - like a lukewarm tequila shot - if you're not ready for it, it's gonna hurt, and even if you are, it's not gonna be comfortable. This is an entirely brand-new platform. The car may look the same, but almost everything under the exterior architecture is different. I don't think people really appreciate how much things change when you switch the direct propulsion system of every car on Earth.

Therefore, developing and building the electrification of the automotive industry should be the focus of any and all companies within the sector. It takes buildings to build parts and to build cars.

Whether that's growing your startup from a garage with a handful of engineers making prototypes to full-blown production of a mass-produced product, or an established company growing what was once a small drop in the bucket of your business into your only hope at surviving. The need for space is now more paramount for these companies than anything, and building buildings take time.

In 2020, there was roughly 15 million light vehicles sold in the US alone. As I stated above, the current EV market share was less than 2% (1.8% to be exact). So, doing some quick math, 2% of 15,000,000 is 300,000 vehicles. Now, let's say mass-adoption is somewhere around the 30% range (that's fair). We would need to produce 4,200,000 more EV's per year in order to reach that mark. That is a 1,400% increase in production, and that's just to get a third of the way there. Demand, organic or forced, is coming, and governments have enacted some pretty stringent timelines that we are already fast approaching. This is literally building an entire industry from scratch (niche to national is what I was going to say... has a nice ring to it).

To break it down further, let's talk about the most important part of these cars, the battery (yes there are other forms of EV's, but it's easier to focus strictly on BEVs). If you think the current chip-shortage is wreaking havoc on the auto industry, just wait until the OEMs have the production capacity to build 4 million EV chassis and bodies per year, but the battery suppliers only have the production capacity to power 2 million cars.

That's quite the gap.

These battery manufacturers went from building a handful of batteries for a handful of startups to building massive buildings called Gigafactories to service growing companies. Such as what Tesla and Panasonic did in their Nevada manufacturing JV. But then when a company, such as Tesla, needs more batteries than any of their suppliers can produce, they go ahead and build their own battery factories to stay in front of demand (in Texas perhaps).

As Elon Musk recently said (emphasis is mine):

"The reason Tesla is doing its own cell production is in order to accelerate the growth. It is not to make less use of our cell suppliers. In fact, I want to be really clear... Tesla wants to increase purchases from cell suppliers...whether it be CATL or Panasonic or LG...we will take as many batteries as they can produce...we urge them to increase their production and we will buy as much as they can send to us."

To back up a little, let's put the above paragraph in better context within the entire automotive industry as a whole.

Tesla is undoubtedly the world's most popular electric vehicle company, it's not an argument at this point in time. In fact, they owned almost 80% of the EV market in the US in 2020 (79% to be exact). Your next logical thought is probably, 'of course they have trouble sourcing batteries. Any company who owns that much of a market would have an issue filling orders'. You may have a good point there, but while Tesla owns 80% of the US EV market, they only make up 0.65% of the entire US light vehicle market... They only just reached the 500,000 cars produced per year mark in 2020... which was a big deal.

An established OEM on the other hand, such as General Motors, made 6,829,000 vehicles worldwide in 2020... Good enough for an measly 8.7% global market share and 17.1% US market share... That is scale*.

So, battery suppliers are currently having trouble producing enough capacity to fill the sub 2 percent piece of the current automotive market in the US, and yet we are supposedly going full-electric within the next 15 years... Mix that with recent supply chain issues, national security concerns, shipping costs, tariffs, building back American manufacturing, unionized labor, and America's general desire to not lose at building automobiles. There is going to be quite a need to build buildings, especially considering we're already behind other nations.

Also, obviously, this will have other downstream and upstream affects on even more suppliers. Millions more batteries mean millions more battery packs, battery management systems, battery enclosures, electric-drive motors, raw materials, anodes, cathodes, wiring, charging stations**, and yes, even more semiconductors.

That is the current gap, what I would call the EV gap. From 2% to 30% to 100% is no small task. That is why scale and scaling is so important to the future of this industry. The money has been raised, the products have been developed, now it's time to produce.

This an extremely opportune time for some companies to increase production capacity and gain market share. It's also an extremely scary time for those treading water and not focusing on growth.

As Elon Musk put it time and time again:

"Prototypes are easy, but achieving volume production of a new technology is insanely hard."

Now, this is not to say companies aren't already making moves... GM has made partnerships with their own battery suppliers and are announcing major manufacturing facilities across the country to help quell this gap. Projects like Factory Zero, LG Energy Solutions in Ohio, LG Energy Solutions in Kentucky, and SES Battery. Others, such as VW, have announced major investments overseas, including 6 planned battery production facilities in Europe. Ford is maneuvering their way into the battery space as Jim Farley has made his supply concerns known. SK Innovations is currently building their $2 billion facility in Georgia (after some minor legal delays). Mercedes continues to invest in their battery and EV facilities in South Carolina, and then there's startups like Lion Electric and Quantumscape who have announced major manufacturing facilities in the near-term.

It doesn't matter if it's Gigafactories for LG, battery component manufacturing plants for Magna, assembly plants for Lucid, or microfactories for Arrival. These companies need to start investing in physical assets for their growth immediately. Be that office space for your fast growing company, manufacturing space for assembly and production, R&D space for continued technological breakthroughs, or logistics space for logistics stuff.

Established OEM's, like GM, will always have the upper hand because of the millions of square feet of infrastructure they already have in place. A company like Rivian has a unique opportunity to take a former plant back to full-production glory and make a splash fast. Others are farming out production to contract manufacturers to better accelerate their sales. However, even more are starting behind the eight ball and need to move fast to make money for their investors. That 100% growth in production may be a nice headline for PR purposes, but once people realize that production grew from 1 to 2 items per year, that $10 billion SPAC valuation is going to start smelling a little fishy (but I'll trust Hindenburg to smoke that out).

You can really break everything down into a fractal view if you want: The current EV space, in it's own way, is similar to the early days of Tesla: It's able to raise a shitload money at a moments notice for arguably no reason at all - A lot of people then become highly critical of the valuations (although since the time of writing their has been a pullback) - These companies need to focus strictly on growth and increasing production capacity to make it against the big boys. It took Tesla 17 years to get to 0.65% market share for reference.

Additionally, the current chip mayhem could be a glimpse into the potential struggles for battery suppliers. There is a major production bottleneck from a lot of big suppliers that are new(er) to the automotive space and haven't mass produced these items before at this scale. Also, the automotive companies aren't the biggest clients anymore, they may take a backseat to companies like Apple. It's a changing world and a changing industry.

Scale, and the ability to scale quickly and successfully, is what's going to define who makes it, if this tech retains staying power, and if EV's finally take over the world. It's a boom time and I'm excited to see how everything plays out.

*To really put GM's scale within the auto industry into perspective; they were fighting with Trump against the California Air Resources board (CARB) and their emissions regulations in November of 2020. Then, once the writing was on the wall with a new incoming administration, they went head first into their EV program and announced $30+ billion dollars of investment and a goal to be fully electric by 2040. Oh also, people forget, but they seemingly picked an EV company out of a hat and announced billions in investment in Nikola without doing literally any due diligence whatsoever (Because that's what everyone was doing at the time). None of the above hurt the company in the slightest. That's scale.

**This piece doesn't even touch on the need for charging stations and charging station infrastructure. Charging Stations are often a point of contention between supporters and those opposed because of their availability, but what's often overlooked is the fact that even these items have never been mass-produced and now need to be mass-produced as well. They are as physical an item as an automobile, with their own suppliers and suppliers suppliers.