When a new automaker grows, expect huge losses. Building millions of vehicles requires investing billions of dollars in equipment and people. Whole factories have to be reequipped from scratch. created supply chains. It takes engineers time and money to design vehicles and everything they need from scratch, from powertrains to suspension to brakes. And these engineers need a human resources department.
Tesla was the first company to do this to establish itself as an American automobile for the mass market company since Chrysler in the 1920s and now Rivian wants to follow suit. It’s the US startup that’s widely regarded as the best company given its deep pockets, world-class investors — including Amazon and Ford — and engineering talent. Amazon owns around 18% of Rivian as of November 2021 and has ordered 100,000 delivery vehicles from the company. Ford invested $500 million in Rivian in 2019, and its executives previously sat on Rivian’s board of directors.
And on that note, $1.7 billion isn’t such a big deal when a new automaker has $15.5 billion in cash and a popular product, some pundits say. (Rivian has a backlog of nearly 100,000 orders.)
“It’s a measure of nothing,” James P. Womack, fellow of the MIT Mobility Initiative and author of A much-cited book on automobile manufacturing, The Machine That Changed the World, spoke of Rivian’s losses. “If they had gone full throttle at their Georgia plant, they could have lost even more money.”
Rivian has plans for a $5 billion facility in Georgia that it says can produce 400,000 vehicles a year. but for now, it’s all building in a former Mitsubishi factory in Normal, Illinois.
“For Rivian, so far so good, and too soon to tell,” Womack said of his future. “But I don’t see any red flags.” RJ Scaringe, CEO of Rivian, was a student of Womack at MIT in 2009, just prior to founding Rivian. Womack said they still speak to each other from time to time, but he’s not an investor in the company.
However, not everything went smoothly. The company changed its production manager in May and laid off 6% of its workforce last month, citing inflation, high interest rates and rising commodity prices as factors. It has also been forced to raise prices on its offerings recently.
According to Richard Langlois, a Connecticut professor who has studied the economic history of technology, large losses are not uncommon when adopting a new technology.
“Sometimes you can expect huge losses in scaling,” Langlois told CNN Business. “Even though [Henry] Ford scaled slowly enough that it never lost money.”
Tesla, for example, lost $717.5 million in the second quarter of 2018 as it ramped up production of the Model 3. After the losses, $2.2 billion in cash remained.
Tesla later raised additional funds, an option Rivian will also have if its cash stash dwindles. Rivian ranks Amazon as an investor that had its own long string of losses before turning a profit.
Investors didn’t react negatively to the loss of Rivian. The stock rose slightly on Friday after the news.
“We believe Rivian is in a great position to capture the massive influx of current and future electric vehicle demand,” Wedbush analyst Daniel Ives wrote in a statement on Friday. Pointing out Rivian, he reiterated that it’s on track to meet its goal of producing 25,000 vehicles this year as evidence that it’s starting to bend a curve. While 25,000 vehicles produced in a year is far fewer than Rivian’s competition — Tesla, for example, produced 930,422 cars in 2021 — that’s significant growth given that Rivian only produced 1,015 vehicles in 2021.
Building a car company is a monumental task as it requires hiring new employees, creating a new management system and developing a new product in a new location.
“You’re doing this with a bunch of strangers from different traditions of industrial management and different technological skills,” Womack said. “It’s kind of amazing that anyone can do it.”
Womack said that at this stage, it’s best to evaluate Rivian based on its products and how they make consumers feel. The Rivian R1T Pickup and R1S SUV have both received popular reviews, including the R1T being named MotorTrend Truck of the Year.
If Rivian can keep up its momentum, it looks like it has as good a chance as any of Tesla’s American rivals.