The Carnage Has Just Begun

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Shortly after it started trading a year ago, Electric Last Mile Solutions had a market cap of $1.4 billion. The company said it had more than 45,000 preorders for its first urban delivery vehicle and planned to build up to 100,000 vehicles every year at GM's former Hummer H2 factory in Mishawaka, Indiana.

But it’s funny how reality has a way of setting in. ELMS soon discovered that it could not attract additional funding to bring its $28,000 Class 1 electric delivery van to market.

Last week, ELMS filed for bankruptcy under Chapter 7, meaning liquidation. Soon, the company will be no more.

My prediction: ELMS is just the first of many failed EV startups to come. The carnage has just begun.

Canoo, an Arkansas-based EV startup that went public via SPAC,?declared in a regulatory filing that “there is substantial doubt about the company’s ability to continue as a going concern.” Leave it to say, investors are none too thrilled.

Oklahoma has agreed to give Canoo $15 million over the next four years from the state’s Quick Action Closing Fund if the company meets hiring targets and other goals.

While Canoo has said it plans to create?700 new jobs in Tulsa as part of its long-term plans, the company will only have to create 85 high-paying jobs in the city by 2024 and maintain 179 jobs there through July 2027 to collect one $5 million chunk of the Quick Action money.?

Canoo CEO Tony Aquila has said the company has secured a combined $400 million in incentives from Oklahoma and Arkansas to bring its vehicles to market.?Canoo also has a?no-bid contract?to provide up to 1,000 vehicles to Oklahoma state agencies over five years.

Canoo has signed a 10-year,?$17-million?lease for the massive, 270,000 square feet near the Bentonville, Arkansas, airport. The company says it will start manufacturing vehicles in Arkansas by the end of this year, but that date could slip into early 2023,?Reuters?reported in May.

Canoo has also promised to eventually build vehicles in Pryor at Mid-America Industrial Park, but plans to open the Oklahoma factory could also now be delayed until 2024.??

My take: Canoo is a figment of the imagination that both Arkansas and Oklahoma have bought into. No manufacturing will happen or it if does, it will be in small numbers and it will not last. Chapter 7 bankruptcy --liquidation -- looms large.

Ohio-based Lordstown Motors, another SPAC startup, continues to teeter on the edge of insolvency. Company officials said the automaker likely needs to secure more funding and boost its market value?to stay in business for another year, even after selling its factory for $230 million to Foxconn, the?Wall Street Journal?reported last month.

Five years after unveiling its signature electric vehicle, the FF 91, California-based Faraday Future still hasn’t put a commercially sold vehicle on the road. The company has reported just 400 preorders?for the FF 91.

What does all this mean? With the exception of trailblazer Tesla, which I do not consider a startup, all the EV startups -- and I mean all -- will fail, to become footnotes in automotive history.

The reason is simple: Legacy automakers -- Ford, GM, Stellantis,?Volkswagen, BMW, Mercedes, Toyota, Honda, Nissan, Hyundai, and Kia -- are spending billions upon billions on EV investments, far more money than any startup can ever realize.

Despite being backed by substantial investors, I include Rivian and Lucid as future casualties. Ford has literally stolen much of Rivian's thunder by offering the F-150 Lightning?at $40,000. viewed by many industry observers as game changer for EVs.

Meanwhile, money-losing Rivian continues to stumble out of the gate with a slow production ramp-up.?The company has already reduced production this year due to supply chain issues. Last quarter,?Rivian produced 2,553 electric vehicles and delivered 1,227 of them.

Right now, Rivian is in a race to continue increasing production to satisfy demand while trying to improve its gross margin to produce the EVs profitably and stop hemorrhaging money.

Rivian's situation is largely mirrored by that of Lucid, something not lost to Tesla CEO Elon Musk, who said both EV startups are trending toward bankruptcy.

"Unless something changes significantly with Rivian and Lucid, they will both go bankrupt. They are tracking toward bankruptcy."

Musk added:

"I hope they can do something, but unless they can cut their cost dramatically, they are in deep trouble and will end up in the car cemetery like every other with the exception of Tesla and Ford."

Betting on Horses That Will Not Finish the Race

When states pledge incentives packages to iffy deals that do not come to fruition, taxpayers, business people and, yes, even economic developers might think or say aloud, "what the hell were they thinking?"

The reputation of economic development generally suffers, no matter if there are some financial safeguards in place.

The state of Indiana, for example, offered ELMS up to $10 million in conditional tax credits and up to $200,000 in conditional training grants based on the company’s job creation plans. The state also offered up to $2.8 million in conditional tax credits from the Hoosier Business Investment (HBI) tax credit program based on the company’s planned capital investment.

I fear that recent incentive packages awarded by other state economic development groups in Arkansas, Oklahoma, Ohio, and Georgia to EV startups, will come back to bite them. For each, it will be their mini versions of Foxconn, the most egregious example of a promised big project that substantially went awry. Wisconsin is still living that one down.

There Will Be Blood

Yes, I know the well-worn defense, that these are "performance-based" incentives, and that a company gains no monetary reward until it meets certain investment and hiring thresholds. And certainly, that does afford some protection.

But there will be blood -- taxpayer money invariably will be spent -- and there will always be tarnished reputations to live down when betting on a horse that will not finish the race

And that is exactly what is going to play out with these electric vehicle startups.

None of them -- as in zero, zilch, nada -- are going to play out in the long-term as survivors in an industry where all the legacy automakers are spending tens of billions each on future EV production.

This leads me to ask, did any of the aforementioned states really think this through?

And if their defense is based on clawback provisions, well, good luck with that. The phrase "squeezing blood from a turnip" comes to mind.?Another cliche saying: "The chickens will home to roost." The inevitable will take place, and invariably, the blame game will start.

The Need for Responsible Economic Development

Of course, it doesn't have to be that way. Responsible economic development should be just that, responsible.?I have no problems with calculated incentives provided to proven companies in which a return on investment can be demonstrated.

But this is different. These states are awarding incentives, sometimes the largest in their respective histories, to companies with no proven track records. No history of production. Wall Street is finally getting wise.

In short, these are speculative ventures where states have gambled taxpayer dollars on untested companies that promise big returns but will never have the means to follow through.

No doubt, this version of state-sponsored casino gambling will undermine confidence in the profession of economic development. And a?growing number of elected officials and policymakers will say, in effect, a pox on all your houses, and legitimate projects will suffer as a result.

Dean Barber is the principal of Dallas-based BBA, offering objective insight to economic development organizations and companies.?Our?national network of esteemed consultants ?finds practical and tactical solutions that work.?Need a speaker? Email Dean at [email protected]