The role of risk capital in the electric vehicle industry

What is the general impression that you get, when thinking about the automobile industry? 

THE VEHICLE INDUSTRY IS THE BUSINESS OF BIG

Since the heady days of Detroit of the early-to-mid 1900s, the automobile industry brings visions of large capital outlays & public issues (IPOs), mammoth consortium-based loans & banking facilities, miles of assembly lines, multiple product models & variants, millions of customers, organized labor & unions, serious CSR & extension services to creating cities, etc. All of these seem to be the signatures of this business, viz. everything big with no space for small. This is the bespoke industry of organized business in its truest form, whereas risk capital is usually associated with start-up funding of some nerdy application and does not seem to be the appropriate usage or fitment to this industry. This article hence embarks on a journey to discover whether this statement is still true and what is the current relationship between risk capital & the latest variant of the automobile industry viz. electric vehicles.

Around four decades ago, when the iconic Ambassador car served us well & where almost every truck had the OK TATA written somewhere near the tail lights an engineering graduate joining a vehicle OEM soon found himself frequently working at the shop floor as there was not much work, losing interest & trying to work his/her way through to do a Masters in USA followed by a job. Probably his batchmates mostly did or aspired to do that. Not many paid heeds to this flight of young energetic intellectual capital as they were probably just rookies and expendable.

The story had a somewhat twist with the launch of the Maruti 800 on December 14, 1983 which soon stamped its presence as the aspirational car in the minds of the Indian customer. However not much changed with the existing cars. For a smart young Indian engineer, the oppurtunities increased manifold during the next decade, however US Masters still remained the dream. Setting up their own vehicle manufacturing company was probably unthinkable if not a taboo thought. 

ELECTRIC VEHICLE STARTUPS

The mindset was somewhat different for a Chinese young technocrat, Wang Chuanfu who had studied battery technology had built a successful rechargeable mobile battery business and in 1995 was buying out an existing car manufacturing company. A year later the company became Build-Your-Dreams (BYD) and now the largest electric vehicle manufacturer. This success, seems to be attributed to three or four reasons. Firstly, in 1995 the vision to anticipate battery powered vehicles was an exceptional foresight, which the company finally entered into 13-14 years later. Just prior to that in 2008, Warren Buffet invested $ 230 million in BYD as private equity, somewhat of a first for a Hong Kong listed entity in vehicle manufacturing. In hindsight the reason why BYD succeeded in electric buses was that they had a critical technology capability, viz. re-chargeable battery manufacturing technology, had risk capital and foresight of a mission driven techno-entrepreneur to anticipate electric vehicles in advance and work towards developing capabilities for a decade before the first roll out. Surprisingly, vehicle manufacturing capability does not seem to be part of the core reason. It definitely shows that innovation in manufacturing is a poor cousin to product innovation based on disruptive technologies. Within nine years of its first battery electric bus, BYD rolled out on January 18, 2019 its 50,000th e-Bus, and the beauty is that all other manufacturers are not remotely close

 Source: Internet

BYD demonstrated that disruptive innovation had entered the automobile industry along with its business drivers including risk capital. This story gets repeated elsewhere too. Take the case of Revian a US start-up, again started by a techno-entrepreneur Robert Scaringe who incidentally was born around the time Maruti 800 launched its first car thirty-six years ago. Revian has developed a skateboard chassis . The company has yet to start production of SUVs & Pick-up trucks but has already received an order from Amazon for 100,000 electric delivery vans, in the range of $ 3-4 billion to be supplied over a period of 10 years along with an equity investment of $ 700 m. Although a electric van supply order by form, this should most definitely be considered as part of the Risk capital that Amazon has put in . 

The Technology Platform – Rivian skateboard chassis. Source: Internet

THE CHANGING FORM OF RISK CAPITAL

Risk Capital as normally understood is venture capital, private equity in unlisted companies or large preferential allotments. These are from private sources or what may be put as traditional private sources. Again the concept of strategic PE has widened. Amazon put in $ 700 million in Rivian & placed a decade long order. Also Ford has put in $500 million and intends to develop a new vehicle using Rivian’s flexible skateboard platform.

Also when a public body as the government or a municipality gives grants or subsidies to industry with the intention to encourage a new product or a service, this could be allocating public money as risk capital. An article ‘Beijing gave its biggest electric-vehicle maker $1 billion in help toward a single year of sales.’ https://qz.com/1579568/how-much-financial-help-does-china-give-ev-maker-byd/ shows that risk capital is coming in the form of subsidies.

CONCLUSION

Over a period, both public & private Risk capital have been used to launch the electric vehicle industry. Disruptive innovation has entered the vehicle industry since the early 2000s in the form of Electric Vehicles (EV) and along with it has come its business drivers including mission-driven techno entrepreneurs who are establishing competencies in disruptive technology backed by Risk capital.

China has been promoting EVs for over a decade and is now phasing out subsidies on electric vehicles, while India is starting off on subsidies through the Faster Adaption & Manufacturing of (hybrid) Electric Vehicle scheme. Currently the scheme under FAME -II is operational. India has a late-mover advantage of studying & learning from an Asian precedence.

The Indian CV manufacturers also have the advantage of already developed know how to work on, while developing the Indian market for eBus. As EV technology & market experience is readily available, the Indian Commercial Vehicle (CV) manufacturers are collaborating with global EV companies, just as they do for fossil based CVs. As such, activities & operations here are very much the same as currently in the automobile industry.

However there are lots of new ground to cover as discovering an e-mobility technology that is more suitable in the Indian context e.g. hydrogen fuel cell technologies, developing the EV charging stations & infrastructure,etc. Renewable energy for these become part of the EV eco system. Specific e-mobility applications for different industries will be the next step e.g. Infraprime logistics is attempting to do through its electric truck venture. Railways is another big area. This segment of the Automobile industry would require the tech start-up mindset and culture if things are to move well. Being an existing Commercial Vehicle (CV) manufacturer here where druptive innovation is being applied is no more a big advantage unless they are willing to work as provider of Risk capital & other resources to mission driven techno-entrepreneurs.

This research note is exploring the form and role of Risk capital on e-mobility. Pls send your suggestions & comments to Deepak Wadhawan FCA,CPA,CIA on [email protected]