In an Electric Vehicle

Shakeout, Who Will

Actually Stay Profitable?
Wharton’s John Paul MacDuffie warns of an upcoming shakeout in the electric
vehicle market. He says vertically integrated EV makers like Tesla and China’s BYD,
as well as legacy automakers and well-funded startups, are the most likely to
survive it.
BY KNOWLEDGE@WHARTON
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JUNE 25, 2024 05:09 EDT

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The ongoing deceleration in demand for electric vehicles is an early

warning signal of a shakeout in the nascent industry, according to
Wharton management professor John Paul MacDuffie, who is also
director of Wharton’s Program on Vehicle and Mobility Innovation.
EV leader Tesla is laying off more than a tenth of its global
workforce, and other manufacturers like Lucid and Rivian have
reported losses. Government subsidies have helped cushion those
impacts, and more support by way of higher tariffs on imported EVs is
on the way.

“What’s going on with electrification transition and the demand for

electric vehicles … is a reset that’s almost like the starting up of a new
industry,” MacDuffie said on the Wharton Business Daily radio show
that airs on SiriusXM. (Listen to the podcast.) He pointed to
predictions of a shakeout and consolidation within China’s
EV industry, and said, “I’m sure we’ll see it here [in the US], too.”

For sure, any new industry will see many casualties as it evolves.
“One out of ten is considered a decent success ratio for entrepreneurial
ventures of any kind,” especially in industries such as EVs that call for
large capital requirements, MacDuffie said.
Vertical integration is key to success

According to MacDuffie, vertically integrated EV makers like Tesla

and China’s BYD can ride out a shakeout because they control large
parts of their supply chains. Tesla, for instance, makes EV batteries
and has invested in battery storage. It also coped with the recent global
semiconductor shortage by redesigning its software to support
alternative chips, as a Forbes report pointed out. “You have more
control, you can present a more coherent product and a more coherent
brand and identity if you control the whole [manufacturing chain],”
MacDuffie said.

Among the likely EV casualties that MacDuffie pointed to is Fisker,

which appears to be on the verge of bankruptcy. But he expected
Rivian, another startup that is also facing challenges, to survive,
because it has an “appealing product that’s been well received,” which
will help it continue to draw investment.

Legacy automakers have an advantage

Established automakers with EV products have another advantage

over EV startups in that they can ride out the current demand
slowdown by shifting to hybrid vehicles, MacDuffie noted. Several
legacy automakers such as General Motors, Honda, Toyota and Ford
have taken such a portfolio approach to increase their hybrid offerings.

Established automakers have another advantage over EV startups.

“They already know how to do the design, the build, the supply chain,
and the distribution,” MacDuffie continued. They also have the
wherewithal to cross-subsidize their forays into new technology such
as EVs, he added. “They can keep selling their existing product line
and use those profits to cross-subsidize. That advantage is not
available to a startup.” Such an advantage is especially useful when
technology transitions get complicated or when demand growth slows
down, he noted.

The demand slowdown hasn’t deterred new EV startups, especially

those based on autonomous vehicle technology. MacDuffie pointed to
Amazon subsidiary Zoox, an autonomous electric vehicle firm that is
aiming for the robotaxi market. Another well-heeled EV startup
is Aurora, an autonomous trucking company with backing from both
Amazon and Toyota. “Where there’s a deep-pocketed investor that has
a stake in you continuing, then you’re more likely to make it through
this period of ferment than if you’re simply relying on the public
markets,” MacDuffie said.
Building supply chains from scratch

Unlike with consumer electronics where an Apple could tap into an

existing supply chain, the EV industry didn’t have “a bunch of
contract manufacturing capacity sitting around just waiting for a great
car design” that somebody comes up with, MacDuffie noted. The EV
industry has faced hurdles in building out that supply chain from
scratch. It has been hard for EV companies to obtain debt financing or
venture capital financing because of the long wait before they can roll
out their products and make profits, he explained.

As a consequence, companies like Tesla and Rivian have had to rely

on the public capital markets to finance those investments, but that has
made them particularly sensitive to the expectations of equity
investors, MacDuffie noted. “Investors and everyone watching the
stock market are hanging on every announcement about your sales.
Anytime you don’t meet a sales projection, the stock tanks.” Not
surprisingly, the drop in demand for EVs has hurt the stock prices of
Tesla, Rivian and Nio.

Policy support vital for EV makers

Government support has been crucial for the EV industry in these
trying times. “If there were not government subsidies and priorities to
advance the electrification transition, then I don’t think you would see
all of the world’s automakers making big strategic bets on
electrification, and you wouldn’t see as many startups either,”
MacDuffie said. “They have the confidence that this transition will
happen with so much government push behind it.”

At the same time, EV makers in the U.S. face a degree of policy

uncertainty unlike their counterparts in China which has a
“unidirectional government,” MacDuffie noted. “In the U.S., if there’s
a change in political party, and a change in who’s in the White House,
then we may see policy swings much more,” he said. “It makes
American EV companies subject to more volatility and more risk
because, what if all the subsidies are taken away all of a sudden in a
few years?”

On a recent trip to Germany, MacDuffie found that EV makers there

are confident that their policymakers are committed to supporting the
electrification of transportation; they are therefore surer of making
their investments.