Background

In prior Supply Chain Matters automotive industry supply network commentaries, we have highlighted the challenges of innovative EV powered start-ups such as Tesla, Lucid Motors and Rivian Automotive.

The latter has drawn special attention from industry and general media circles because of certain parallels in addressing vehicle development and start-up challenges. Rivian is encountering a special set of challenges stemming essentially from the legacy of the auto maker that this start-up draws the most comparison to.

Founded in 2009, with the vision of becoming the next iteration of producer Tesla in technologically innovative EV design, production and distribution logistics, the company spent its initial years in designing and developing what is today the Rivian RiT electrically powered pick-up truck, and the Rivian RiS sport utility vehicle. The company has reportedly garnered upwards of 83,000 customer reservations for its two consumer focused vehicles which are currently priced more for the luxury auto enthusiast. Both models range from $67,500 to $95,000, after a recent price hike announcement.

A prior order from equity investor Amazon for 100,000 electrically powered parcel delivery vans is a further prospect for this EV maker’s growth, and prototype vans are scheduled to be produced in the coming weeks.  Ford Motor Company was also an initial equity investor in Rivian.

The company whose headquarters are in Silicon Valley, California, currently utilizes a former Mitsubishi Motors automotive assembly production facility in Normal, Illinois, which began production operations in September of this year. Executives have indicated that the Normal, Illinois facility is being geared to produce upwards of 150,000 vehicles annually, including both consumer models and the Amazon EV parcel vans.

Thus far, over $13 billion has been raised from an initial public offering, with corporate strategy aiming to focus on acquiring adequate manufacturing capacity and demonstrating capability and actual delivery of designed vehicles to the market in order to garner a mover advantage among EV market competitors.

In December 2021, the company announced plans to invest in a second U.S. production facility to be located east of Atlanta, Georgia. This facility reportedly will produce both batteries, vehicles and delivery vans and is estimated to employ 7,500 workers with the ability eventually employ 10,000 workers. According to various industry media, at its full dimensions, this would make this facility among the largest EV auto production facilities in the U.S. Plans call for breaking ground this summer, with production targeted to start in 2024.

 

Start-Up Transformation is Painful

These past few weeks, Rivian CEO RJ Scaringe has become more visible, opening up the Illinois production facility to media and supplier tours and warning that the EV industry will soon face the challenges of not enough needed semiconductor devices in the short-term, as well as a chronic EV battery supply in the not-too-distant future. With the ongoing Ukraine-Russia conflict’s impact on the supply of cobalt and nickel, key to battery production, many EV manufacturers are facing these challenges.

Rivian specifically came to light last week in a published report from Reuters, CEO steers electric truck startup Rivian through supply chain twilight zone. . The report was rather candid in perspective:

Scaringe can’t get all the semiconductors Rivian needs to accelerate the assembly lines at its factory in Normal, Illinois. Chip suppliers are skeptical of the young electric vehicle company’s capability to hit promised production numbers. They are instead allocating more chips to established customers based on the numbers of vehicles they have built in the past, Scaringe said during a tour of the plant.”

The CEO indicated to Reuters that suppliers are holding back, wondering if Rivian is leveraging semiconductor supply needs as an excuse to cover up other production problems attributed to a lack of component supply. The CEO has admitted that the company has yet to be able to maintain a full five-day production schedule because of continual component shortages or transport delays.

Regarding EV battery supply networks, Scaringe indicated to The Wall Street Journal: “Put very simply, all the world’s cell production combined represents well under 10 percent of what we will need in 10 years, meaning that 90 to 95 percent of the supply chain does not exist.”

The Journal report was quick to note that Tesla CEO Elon Musk made an observation earlier this month that lithium prices have “gone to insane levels” and that Tesla “might eventually have get into mining and refining at scale.”

Regarding Rivian’s ongoing challenges, Musk tweeted out last week: “I’d recommend they get their first plant working. It’s insanely difficult to reach volume production at affordable unit costs.” Least we be mindful that such a statement comes from a CEO who committed to have a consumer affordable EV vehicle in mass production as early as 2018 and discovered first-hand what “production hell” was really about.

Industry Takeaways

In the world of start-ups, investors expect aggressive goal setting leveraging market breakthrough technologies and compelling engineering and product features. Scale is translated to numbers, numbers of customer reservations, numbers related to vehicle performance and battery life, and numbers of media mentions. Supply network and production volume ramp-up tend to be the purview of contract manufacturers, and indeed Foxconn and others view a promising future as EV vehicle platform design and manufacturing services providers for start-ups.

However, we submit that an important takeaway from Tesla’s rocky ride to being a global wide producer was not having invested early on in experienced and talented supply chain and manufacturing leaders, those that have cut their teeth and wisdom from large-scale vehicle production environments, and who fully comprehend the importance of a resilient and agile supply network strategy.

The reality of today’s existing EV automotive landscape is that there is a perception of too many players seeking to become the most dominant in product innovation and market appeal. The difference, however, is that mainstream industry stalwarts have learned the lessons of Tesla.

Rivian rivals Ford Motor and General Motors have recently doubled down on their long-term commitments to EV powered truck production over the next five to ten years. Ford has upped its overall EV investment to $50 billion in the development and production of EV powered cars and trucks between this year and 2026. GM is investing $7 billion toward production with a goal for having one million units in production by 2025.

Global industry leaders Toyota and Volkswagen are all-in as well, with Toyota funneling $17.6 billion to produce EV vehicles in North America, and VW having plans to invest $7.1 billion and introduce over 25 new vehicle models by 2030.

Each of these industry and other existing players continue exploring and undertaking long-term development and supply agreements related to both semiconductor device and EV battery supply needs.

What the global wide semiconductor shortage has brought forward is that automotive supply networks are now of the same substance of high tech and consumer electronics supply networks. Long-term development and supply agreements are key as our deep supplier relationships. As GM’s head of operations recently stated: “we never have one answer for supply risks, we have multiple options.”

Indeed, the industry has long-term supply network challenges to address. The difference however, from the situation that existed two years ago is that established players are now willing to invest considerable sums in needs for supply network resiliency and added agility across global regions. For key suppliers, who know that they have market leverage, it’s not the flash of the most innovative start-up that gets the most attention, it is rather the industry players that can provide the most market scale and influence in short- and long-term dimensions.

Rivian will eventually come to the realization that Elon Musk’s advice may have well had substance. Establishing volume production process that generate predictable margins and consistent processes is fundamental not only to assure customers and stockholders, but also to gain the trust of the most influential industry suppliers.

Bob Ferrari

 

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