Rivian: Is the Cybertruck doomed? Imperfect technology is the real fatal blow

In the process of investigating Rivian Automotive, Dolphin Research has a clear perception. From a distance, Rivian Automotive has a good niche market, but up close, it is still a "panda" company driven by supply, especially when most electric vehicles have entered a demand-driven and competitive bidding stage. The sales and gross profit margin for 2023 are looking good.

However, Dolphin Research has discovered a major issue when digging into the economics of car manufacturing: from the perspective of "face value," Rivian Automotive offers users a relatively cost-effective choice that can attract many orders. But from the perspective of "substance," Rivian Automotive suffers from significant losses with each car delivered.

Therefore, in this article, we will look ahead to the road to success for Rivian Automotive in the next two years and answer the question of whether it will "die before achieving success." We will address three key issues:

1) Two "45s": When the factory capacity utilization rate is 45%, the gross profit margin per vehicle is still -45%. Is the R1 platform a money-losing product or a promising gem?

2) R2: What is the real turning point for Rivian Automotive?

3) "Gold Devourer": Rivian Automotive has been incurring huge losses. How long will the market continue to support it? How much financing is needed?

To determine whether it is worth investing in Rivian Automotive, or at what price point one would be willing to invest, a thorough understanding of these three questions is necessary. Let's take a closer look:

I. 45% capacity utilization vs. -45% gross profit margin: Can the R1 platform be saved?We know that most car manufacturers will set a target range for the gross profit margin of the vehicle models produced on their car platform after stable production. For Rivian Automotive, they have set a target of 25% for the R1 platform.

This is a normal target for a car platform, where a gross profit margin of around 20% corresponds to R&D, sales, and management expenses of 10-15%, in order to achieve a positive operating profit margin. However, let's take a look at the actual situation for Rivian Automotive:

The planned annual production capacity of the Normal factory where the R1 is located is 150,000 units, which is equivalent to 37,500 units per quarter. The third quarter of this year has been a relatively ideal performance for Rivian Automotive, with production exceeding 16,000 units and a capacity utilization rate of nearly 45%.

Now let's look at the economics of a single vehicle: the average unit price of a vehicle is $86,000, but in terms of costs, the depreciation and amortization per vehicle is $11,300. After excluding the variable costs of depreciation per vehicle, the cost is still over $110,000, resulting in a difference of $21,100 between the unit price and the variable costs!

When this economics of a single vehicle is presented, the problem becomes apparent: the current unit price does not even cover the cost of a single vehicle, there is a huge gap to cover the cost:

It is an absolute value difference of $21,100, and the gap that needs to be filled by raising the price by another 30% below the $90,000 "high price" is not something that can be solved by the factory gradually ramping up to full production and diluting the depreciation through amortization.

After all, even if the sales volume doubles under full production, the corresponding depreciation cost per vehicle would only be reduced by $6,000, which is still a gap of $16,000 compared to the $21,100 gap.

3) After comparing globally, the "loss" of the R1 platform becomes even more apparent

In order to see whether the R1 platform has the potential to achieve positive operating profit or whether the loss of the R1 platform is due to pricing or cost issues, Dolphin Research has compared it with other emerging car manufacturers they have seen. The results, in Dolphin Research's opinion, are quite brutal. Let's take a look at them one by one:

Tesla has had a positive gross profit margin since its initial public offering, so it is not very meaningful as a reference. When it comes to the delivery volume of the Chinese companies Weilai, Xiaopeng, and Li Auto, which is similar to Rivian Automotive (around 15,000 units per quarter), the situation is even more dire., the gross profit margin has already reached double digits; and among the three, NIO, which has the highest delivery breakeven point for gross profit margin turning positive, is only 10,000 vehicles;

Only Leapmotor is worth learning from. When it delivered 18,000 vehicles in a quarter, its gross profit margin was still in single digits, even negative. But if you have followed Dolphin Research's analysis of Leapmotor before, you would know:

a) At that time, Leapmotor's sales volume included a lot of inflated numbers from its "Old Man Joy" model (T-platform product T03), just like Rivian Automotive, it was a pure loss-making product that couldn't even cover variable costs.

The value of this "Old Man Joy" model for Leapmotor: it was a product that could generate revenue while the company was on the verge of bankruptcy, even though it incurred losses in selling cars. Its sole purpose was to raise funds and extend its life, so as to launch new C-series vehicle platforms (C01 and C11) in the future.

b) Leapmotor's distribution channels are different from Rivian Automotive: Leapmotor relies mainly on dealerships, with some gross profit in the hands of external dealers, resulting in a low gross profit margin and a low sales expense ratio; Rivian Automotive is fully self-operated, with all gross profit accounted for internally;

c) Due to the issue of the sales proportion of the "Old Man Joy" model, Leapmotor's unit price is abnormally low, and there is obvious room for price increase, which it has indeed achieved through the new platform. However, Rivian Automotive's unit price has already reached $86,000 (while the average price of similar fuel vehicles is generally $25,000 to $50,000), and as Musk said, further increasing the price will only narrow down the user base.

Ⅱ. if it is difficult to achieve profitability at the operating profit level, is there hope for the gross profit margin to turn positive?

Although it is highly likely that the R1 platform will be a money-losing product at the operating profit level and may not achieve the company's target gross profit margin of 25%, Dolphin Research's calculations suggest that there is hope for the gross profit margin to turn positive.The company's explanation is as follows: 5% comes from the economies of scale brought by sales volume, 25% is achieved through material cost reduction, and the remaining 25% is achieved through increasing sales prices.

Based on this method, Dolphin Research made a rough estimate, which means that the unit price needs to increase to around $8,000, and it is difficult to achieve such a large increase in unit price solely through adjustments in sales structure.

The cost reduction of over $8,000 per vehicle brought by amortization means that the amortization expense needs to be reduced from $12,000 to $4,000. However, even with full production, it is difficult to dilute the amortization expense to $6,000, let alone $4,000.

Dolphin Research has made a rough estimate based on several factors:

1) Price increase: The price increase contributes approximately $3,000 (from $86,000 to $89,000), which is due to the following two factors:

a. Improvement in delivery structure: The management expects that the R1S, which has a higher average selling price (ASP) than the R1T, will account for 70% of the R1 platform in the long-term stable state (the ASP of R1S is $5,000 higher than that of R1T).

b. Increase in ASP due to the introduction of the Max Pack version: The Max Pack battery pack will require an additional $10,000 compared to the Large Pack (currently $6,000).

c. Increase in price after selling EDV to external customers in addition to Amazon.

These two actions clearly show that the company is still making efforts to increase the unit price despite the extremely unprofitable situation.

2) Economies of scale brought by increased production: The utilization rate of production capacity is expected to increase to over 60% in the fourth quarter of next year. Due to the constant value of amortization, this translates to a saving of $2,700 in amortization expense per vehicle.

a) After the closure of the factories in the second and third quarters, the production capacity of the R1 platform will be increased from 65,000 to 85,000 (currently the utilization rate is 75%, which is relatively high); the production capacity of the RCV platform will be reduced from 85,000 to 65,000.

b) Currently, the production capacity of the RCV platform is less than 20% due to the previous sales volume being tied to Amazon's orders. Now that it has been opened up, there is hope for an increase in production capacity utilization.

3) Technology + cost reduction through BOM optimization:

A significant cost reduction still needs to rely on reducing variable costs. The previous EDV model achieved a 35% reduction in variable costs through material substitution before the factory closure. This part of the cost reduction amounts to approximately $26,000 per vehicle.

a) In-house development + cost reduction: Rivian Automotive currently has in-house development of electronic control and electric drive systems, and purchases battery cells from Samsung. They are able to assemble modules and packs themselves.In terms of the three electric components, Rivian Automotive has developed a new self-developed and self-produced Enduro motor, which reduces costs. The second-generation self-developed electronic architecture reduces the number of ECUs by 60% and shortens the wiring harness by 25%. The battery has been downgraded, replacing all ternary materials with lithium iron phosphate batteries.

b) Re-signing of core supplier procurement contracts: The previous contracts were signed when the R1 platform was just launched. At that time, there was a high degree of uncertainty in the production increase of R1, resulting in higher procurement costs. Now, the potential sales volume of the R2 platform can bring about a procurement premium.

c) Natural cost reduction of battery materials: It is highly probable that the price of lithium carbonate will drop below RMB 100,000 per ton by 2024.

4）Impact of LCNRV reversal: Currently, Rivian Automotive still has a LCNRV impairment of RMB 450 million on its books, which can be reversed. The management expects that by the end of 2024, with the increase in production, the impact of LCNRV will basically disappear. Dolphin Research predicts that in the fourth quarter, under the impact of a RMB 107 million reversal of impairment (contributing a positive gross profit of $5,100 per vehicle), Rivian Automotive's gross profit margin can barely hover around the breakeven point.

After incorporating a series of cost reduction measures, technological upgrades, factory closures and transformations, capacity utilization rate improvement, and price increases, Dolphin Research has almost included all factors that can improve the economics of the vehicles. As a result, the true gross profit margin for the next year's fourth quarter is only -7%.

Under the ultimate optimistic assumption of Dolphin Research, which assumes full production and extreme BOM cost reduction, the gross profit margin of Rivian Automotive's current R1+RCV platform models is likely to be below 5%. It is clearly not feasible to cover at least 15% of operating expenses with a 5% gross profit margin under steady-state conditions. So, analyzing up to this point, it is very clear to see the problems and goals of Rivian Automotive:

1）The cost reduction level that the US new energy vehicle supply chain can provide is simply unable to make Rivian Automotive break even in terms of unit economics under the current pricing system of its products.

2）The current situation of Rivian Automotive is similar to that of Zero Run when it was not yet listed: trying to sell as many cars as possible to make the unit economics look less unfavorable.

The real goal is to use less unfavorable numbers to convince investors to continue funding it and allow it to build the next car manufacturing platform that has a real chance of making money - R2!

Therefore, Rivian Automotive must raise funds because only after raising funds can it launch the R2 platform and have a chance to solve its self-sufficiency and survival problems from the source.

III. The Life and Death Battle of the R2 Platform

For the R2 platform, Rivian Automotive has planned as follows: instead of building a new production line at the Normal factory in Illinois, it will establish a new factory in Georgia.

The initial planned capacity is 200,000 vehicles, which may be upgraded to 400,000 vehicles. The positioning of the models on this platform is C-D class SUVs priced at $40,000 to $60,000, which is relatively down-to-earth.

Moreover, the management admits that when R1 was under construction, they did not particularly consider the manufacturability of engineering and manufacturing. R2 will focus on addressing this issue.

From here, it is very clear what 2024 means for Rivian Automotive.**A year of data, grand promises, and financing.

1) We have been working hard to improve the profitability of the R1 platform, hoping to generate enough profit from bike-sharing to attract investors. However, this process has been accompanied by the widespread closure of factories in the second and third quarters, resulting in poor production and sales data for the old platform throughout 2024.

This is also the main reason why the delivery growth in 2024 is not as good as in 2023.

2) In 2024 and 2025, we need to continue investing in the new R2 vehicle manufacturing platform in order to produce models on this platform by 2026.

If Rivian Automotive can successfully navigate through 2024 and 2025, and deliver vehicles on schedule in 2026, we may finally see a "Model 3" moment similar to Tesla's.

The company's guidance on R2 is quite interesting. In a previous article by Dolphin Research titled "Tesla: How Far is Musk's Trillion-Dollar Empire Dream?", Dolphin Research concluded that while the penetration rate of electric vehicles in the United States looks promising, within a 1-2 year timeframe, the U.S. market is not the "ace" that can create surprises.

After the introduction of new subsidy policies, the current battery industry chain is still under construction. It will not be until after 2025 that we can see a competitive landscape with various electric vehicle models in the U.S. market. The timing of Rivian Automotive's R2 platform production aligns perfectly with the potential rapid growth of electric vehicle penetration in the United States in 2026.

This rhythm seems to indicate that Rivian Automotive's current challenges are actually a reflection of the incomplete state of the electric vehicle industry chain in the United States.

Let's do a simple market space calculation for R2:

Currently, Tesla's Model Y dominates nearly half of the electric SUV (C-D segment) market. The pricing of the R2 platform falls within the range of $40,000 to $60,000, which is similar to the pricing of the Model Y ($44,000 to $53,000).Dolphin Research predicts that the initial annual sales volume of R2 in 2026 will be around 30,000 units, accounting for approximately 2% of the market share of electric SUVs (C-D class). With the ramp-up of production capacity and factory upgrades, Dolphin Research expects the annual sales volume of R2 to reach nearly 300,000 units by 2030, accounting for approximately 10% of the market share of electric SUVs (C-D class).

In summary, although R2 has high hopes, even if it can be produced, it is a distant and highly uncertain prospect that will only be realized after 2026.

IV. How much more financing does Rivian Automotive need?

In addressing the issue of Rivian Automotive, a natural question arises: how much more financing does Rivian Automotive need? Especially in the current harsh financing conditions, where cheap money has all but disappeared under high interest rates.

After issuing $1.3 billion in convertible preferred bonds in March and another $1.5 billion in convertible bonds in October, Rivian Automotive saw its stock price drop by 22.88%, resulting in a market value loss of over $5 billion in a single day.

Dolphin Research estimates the extent of the funding gap as follows:

1) Operating cash burn: Rivian Automotive is still in a loss-making state and has consumed $15.3 billion in cash since the first quarter of 2021. This year, without new factory investments, the free cash flow improved slightly from -$1.6 billion in the second quarter to -$1.1 billion in the third quarter, due to improved gross margin and reduced capital expenditures (deferred to 2024).

2) With the construction of the new R2 factory, the company previously disclosed that it would need to invest over 5 billion RMB, corresponding to a quarterly capital investment of an additional 750 million USD. Dolphin Research estimates that capital expenditures in 2024 and 2025 will reach 3 billion and 2 billion USD respectively, a significant increase compared to the guidance of 1.1 billion USD in 2023.

3) Cash on hand: Rivian Automotive currently has a remaining cash balance of 9.1 billion USD, including cash and cash equivalents, as well as the 1.5 billion USD convertible bonds issued in October.

Considering the potential impact on cash flow from production stoppages in the second and third quarters of next year, Rivian Automotive may face a cash shortfall by the end of 2024 or early 2025.

Based on our projected sales volume, it is expected that Rivian Automotive will achieve positive operating cash flow only after the completion of R2 construction and the ramp-up of production, which is estimated to be in 2027. It will take at least 5 years for positive free cash flow to be generated.

Taking into account the minimum cash balance that Rivian Automotive needs to maintain, Dolphin Research estimates that there is a cash shortfall of 7.7 billion USD before achieving positive free cash flow (including a cash shortfall of 5.4 billion USD in 2025 and 2026).

Considering that Rivian Automotive still has an unused asset-backed loan facility of 1.12 billion USD, it will still need to raise approximately 7 billion USD to support the construction of the R2 platform and future growth.However, there have been recent media reports that Rivian Automotive is considering issuing taxable bonds of up to $15 billion (a bit of an ambitious plan, probably not needing that much) to support the construction of the R2 platform! The previous $1.5 billion convertible bond caused the company's stock price to drop by 15%. If they really raise so much through convertible bonds, the stock price may plummet.

V. Valuation Analysis

To be honest, Rivian Automotive is already the general that Dolphin Research has singled out from the group of dwarfs in the US new forces. However, after careful analysis, it is difficult to calculate the value of the assets due to such great uncertainty.

Dolphin Research can only make a rough estimate here:

Since Rivian Automotive is currently in the early stage of development, Dolphin Research predicts that Rivian Automotive will generate operating cash flow and positive adjusted EBITDA in 2027, and achieve breakeven (positive net profit) in 2029.

Therefore, when valuing a company in the early growth stage like Rivian Automotive, Dolphin Research uses the EV/Sales valuation method. Compared to Tesla, which was in a similar position in 2016-2017 with its high-end models, Model S/X, and was about to launch the affordable Model 3/Y, Rivian Automotive has an EV/Sales multiple of 5-10 times.

Dolphin Research gives Rivian Automotive a certain valuation discount, corresponding to a 2x EV/Sales multiple in 2025.

Considering the uncertainty of the launch of Rivian Automotive's R2 platform, a discount rate of 14.7% is applied, resulting in a target stock price of $12 for Rivian Automotive. Currently, the stock price is at $17, which, in Dolphin Research's view, does not provide enough safety cushion.

In general, after fully understanding the risks, there are several key points to consider when investing in Rivian Automotive:

1）Optimistic about the conservative outlook of the industry;

2）Recognize that investing in this company is a high-risk gamble;

3）Pay attention to the company's future financing options, such as equity, bonds, and debt, as well as the risks of dilution and suppression of equity;

4）Finally, provide yourself with a safety margin.

Longbridge Dolphin Research's in-depth research and analysis on Rivian Automotive includes:

In-depth analysis:

• December 4, 2023: Rivian Automotive (Part 1): "Injured before the battle," a Tesla killer becomes the one being killed?
• July 7, 2022: "Amateur" or "Superman"? The dilemma of Rivian Automotive, a Tesla killer
• March 8, 2022: The ambition of Rivian Automotive, the little superhero's pickup truck

Earnings Report:

• November 8, 2023: [Rivian Automotive exceeds expectations again, can the "Tesla killer" cross the line between life and death?](Earnings Report)](https://longportapp.cn/zh-CN/topics/10461231?channel=t10461231&invite-code=4NOXYT&app_id=longbridge&utm_source=longbridge_app_share)》

Phone conference on November 8, 2023: "Rivian Automotive: Continuing efforts to achieve positive gross margin for 24 years (3Q conference call summary)"

Risk disclosure and statement for this article: Dolphin Research disclaimer and general disclosure