Will the budget-friendly R2 be the savior of "Tesla killer" Rivian?

Rivian released its first quarter financial report for 2024 after the US stock market closed on May 8, 2024. Let's look at the key information:

1) Gross margin lower than expected, but temporary impact under control: This quarter, the gross margin declined. Excluding the impact of inventory value and contract losses, the gross margin decreased from -47% in the previous quarter to -50% in the first quarter. This was mainly due to a decrease in per-vehicle revenue, as well as some one-time costs of $171 million incurred due to changing suppliers before the production halt and accelerated depreciation before factory upgrades. This one-time cost affected nearly $12,600 per vehicle cost. Excluding the impact of one-time costs, the actual gross margin for this quarter was -36%, which was in line with market expectations.

2) Increase in sales and management expenses, while R&D expenses are somewhat controlled: It is a fact that Rivian's demand has slowed down. In the first quarter, both sales personnel and marketing expenses increased, requiring more efforts on the sales side to boost sales volume. R&D expenses decreased this quarter due to a reduction in R&D personnel and a decrease in R&D design expenses related to the R1 upgrade.

3) Moving R2 to the existing Normal factory reduces capital expenditures and extends financing time: Rivian expects that moving R2 to the existing Normal factory can save nearly $2.25 billion in capital expenditures. This will reduce this year's capital expenditures from $1.7 billion to $1.2 billion, allowing cash flow to support production of R2 starting in the first half of 2026, buying time for financing in 2026.

4) Production guidance for 2024 remains unchanged, with plans to achieve positive gross margin still set for the fourth quarter: Despite not seeing effective recovery in demand, Rivian has maintained its production guidance of 57,000 vehicles for 2024. It also stated that the second quarter production halt plan was completed smoothly, and the plan to achieve positive gross margin is still set for the fourth quarter.

Dolphin's overall view:

Overall, Rivian delivered a mediocre performance in the first quarter. Revenue exceeded market expectations due to stable delivery volume, but the improvement in gross margin was still below expectations.

In the first quarter, Rivian's actual gross margin (excluding LCNRV impact) was -50%, a slight decrease compared to the -47% actual gross margin in the previous quarter.

The main reasons for the decline in gross margin this quarter were: 1) a decrease in per-vehicle revenue, following Rivian's price reduction on the R1 last quarter and the introduction of a low-priced standard battery pack version, resulting in a $2,700 decrease in per-vehicle revenue; 2) on the cost side, some suppliers were changed before the production halt, and accelerated depreciation before factory upgrades resulted in one-time costs of $171 million, affecting nearly $12,600 per vehicle cost. Excluding the impact of one-time costs, the actual gross margin for this quarter was -36%, which was in line with market expectations.

What the market is most concerned about is whether the significant cost reduction can be achieved after the suspension in the second quarter, in order to achieve the first quarter gross margin positive plan previously expected by the management, and the impact of transferring R2 to the existing normal factory production on Rivian.

Currently, the suspension plan has been completed, and most of the contribution to the positive gross margin by the management comes from the reduction in variable costs, achieved through introducing engineering design changes, renegotiating procurement agreements with suppliers, while fixed costs will benefit from the reduction in depreciation expenses in the first quarter of this year (accelerated depreciation), the ramp-up in production, and the reversal of LCNRV impact. Based on the unit economic situation of this quarter, Dolphin estimates that with a 20% decrease in variable costs under unchanged unit price (previously achieved a 35% cost reduction for EDV updates), the gross margin on the financial statement side will turn positive. With a 30% decrease in variable costs, the real gross margin side (excluding LCNRV reversal marketing) can achieve positivity. However, the continued slowdown in demand may increase the risk of further decline in car prices, thereby delaying the time for the gross margin to turn positive.

As for Rivian's R2, a similar strategy to Tesla's model is adopted, producing R2 in the existing normal factory, which on one hand saves capital expenditure, protects cash flow, and is expected to achieve a $2.25 billion capital expenditure savings (reducing capital expenditure to $1.2 billion/$1.5 billion in 24/25), enabling cash flow to support R2's SOP in the first half of 26, reducing Rivian's short-term financial risk. On the other hand, it accelerates the launch of R2 (production moved up to the first half of 26).

However, Rivian's decision to transfer R2 to the Normal factory production, expanding the Normal factory capacity from the existing 150,000 to 215,000 vehicles, with R2's maximum capacity being 155,000 vehicles, is lower than Dolphin's original expectations for a low-priced high-volume vehicle. The total capacity of 215,000 vehicles also cannot achieve break-even on net profit and operating cash flow, meaning Rivian cannot sustain itself solely through the existing Normal factory.

Dolphin is more inclined to believe that due to funding shortages, Rivian can only place the R2 model in Normal factory production at this stage, and the construction of the Georgia factory is not canceled but postponed (Dolphin estimates postponed to 2028-2029). Once the gross margin of the R1 platform turns positive smoothly and R2 is successfully launched with good sales, Rivian can obtain new financing in 26 to support the construction of the Georgia factory, thereby achieving a significant ramp-up in production capacity and completing its own blood-making plan. However, the realization of this story has many prerequisites.

With a P/S multiple of nearly 2.5 times in 24, Dolphin believes that the growth expectations of R2 have already been factored in. The current valuation is still relatively high when the gross margin of R1 has not yet turned positive, R2 has not been successfully launched, and demand has not seen effective stimulation. Blindly chasing high valuations should be avoidedI. Gross Margin in the First Quarter Falls Short of Expectations

In this quarter, Rivian's gross margin improved compared to the previous quarter, increasing by 2.3% from -46.1% to -43.8% this quarter, but still lower than the market's expectation of -35.9%.

Excluding the impairment impact of LCNRV, Rivian's actual gross margin this quarter is -50%, a decrease of 3% from -47% in the previous quarter. However, after adjusting for one-time impacts such as changes in supplier contracts and accelerated depreciation of the Normal factory, the adjusted actual gross margin is -36%, basically in line with market expectations.

From the perspective of per vehicle economics (excluding the impact of LCNRV),

a) Average Vehicle Price: Decreased by $2700 on a Quarter-over-Quarter Basis

The average vehicle price in the first quarter was $88,600, $2700 lower than the fourth quarter of last year (excluding the impact of regulatory credits). The reason for the quarter-over-quarter decline is due to slowing demand, Rivian's price reduction on the R1 starting last quarter, and the introduction of a lower-priced standard battery pack version to stimulate demand.

b) Per Vehicle Cost: Saved $2500 on a Quarter-over-Quarter Basis

The per vehicle cost in the first quarter was $132,700, an increase of $2500 per vehicle compared to the previous quarter, mainly due to:

1. Increase in per vehicle depreciation cost: Due to a slight decrease in sales volume this quarter compared to the previous quarter, and accelerated depreciation of the Normal factory by Rivian before shutdown, the per vehicle depreciation cost increased from $14,000 in the fourth quarter of last year to $15,500 this quarter, an increase of $1500 on a quarter-over-quarter basis.
2. Savings in per vehicle variable costs: The per vehicle variable costs decreased from $121,000 in the fourth quarter of last year to $117,000 this quarter, a decrease of $4000 on a quarter-over-quarter basis. This is mainly due to the recovery in sales volume of EDV (commercial vehicles) with higher margins this quarter. However, due to temporary impacts from contract changes with suppliers before shutdown still included in variable costs, the actual improvement in variable costs may be greater.

This quarter, costs increased by $171 million due to changes in supplier contracts and accelerated depreciation of the Normal factory. Excluding this temporary factor, the actual per vehicle cost this quarter is $120,000, showing continued improvement on a quarter-over-quarter basis.

c) Per Vehicle Gross Profit:

With a decrease of $2700 in average vehicle price and savings of $2500 in per vehicle cost, for every vehicle sold in the first quarter, there is a gross loss of $44,000. The loss is basically in line with the fourth quarter of last year. The actual gross margin (excluding the impact of LCNRV) decreased to -50% this quarter. However, after excluding the aforementioned temporary factors, the actual gross margin for this quarter improved to -36% on a quarter-over-quarter basis, basically in line with market expectations

2. Production pressure in the second quarter due to shutdown, but easing inventory backlog under slowing demand

Consistent with the original management plan, Rivian will introduce new technological architecture to the R1 platform during a shutdown of several weeks in the second quarter, while renegotiating contracts with suppliers, resulting in a significant decrease in BOM. This will contribute to a positive gross margin in the fourth quarter of this year, which is also the most concerning point for investors in Rivian in 2024, but it will cause temporary production pressure in the second quarter.

Fortunately, about 3-4k vehicles have already been produced in the first quarter but are missing some parts, which were not reflected in the first quarter production figures and will be included in the second quarter production statistics to smooth out the impact of the shutdown.

The slowing demand is already a established fact. Dolphin Jun's analysis in the previous quarter's financial report also mentioned that Rivian has opened a leasing plan for the previously strong-demand R1S, while reducing the price of R1 by $3700 and introducing a low-price standard range model ahead of schedule. Rivian also mentioned in the last quarter's financial report meeting a significant decrease in the number of orders in hand.

This quarter, Rivian continues to shift R1 production from 3 shifts to 2 shifts, and the maximum production capacity of the R1 platform has also decreased from the previous planned 85,000 units to the current 56,000 units. Demand has not yet effectively recovered.

Currently, due to slowing demand and the impact of 3-4k inventory vehicles, the inventory amount continues to rise. Dolphin Jun estimates that Rivian's inventory vehicles currently amount to approximately 10-11k units, meaning that even if Rivian does not produce at all, the inventory vehicles can support sales for more than 2 months. The shutdown in the second quarter can also partially alleviate the inventory backlog issue.

However, due to slowing demand, Rivian is expected to gradually resume production after the shutdown to provide time for demand replenishment, but it is expected to drag down the third quarter and even the full-year production target of 57,000 units. Rivian may face the risk of further price reductions.

3. Will the gross margin turn positive as planned in the fourth quarter of this year?

Investors' biggest concern this year is still the extent of cost reduction from the shutdown in the second quarter and whether the plan to achieve a positive gross margin in the fourth quarter will be successful. Dolphin Jun has made a preliminary calculation based on the economic situation per vehicle this quarter:

1) Unit price is expected to remain unchanged, but there is a continued downside risk:

In the previous quarter, Rivian shifted the factor of increasing the unit price in the plan to turn the gross margin positive to the increase in gross margin brought by a slightly better non-automotive sales revenue (car services, peripherals, software, etc.). However, service revenue is unlikely to increase significantly, the path to monetizing software is still long, and local car companies' new energy transformation is not expected to bring much revenue increment from automotive points.

Although the shutdown in the second quarter will help alleviate the current inventory backlog issue, Rivian may still face the risk of further price reductions this year as demand has not seen effective recovery. Additionally, the opening reservation for R2 may also cannibalize demand for R12) Reduction of Fixed Costs per Vehicle:

Rivian has reduced the maximum production capacity of the R1 from the previous plan of 85,000 units to the current 56,000 units, increasing the capacity utilization rate of the R1 platform by 30% (reducing personnel costs and production fixed costs). Additionally, due to accelerated depreciation of production equipment before the shutdown in the second quarter and the scale effect brought by the recovery of production and sales in the fourth quarter, it is expected that the fixed cost per vehicle in the fourth quarter will decrease from $16,000 in this quarter to $12,000 in the fourth quarter.

3) Reduction of Variable Costs per Vehicle:

Rivian attributes the main factor for turning the gross profit margin positive to the improvement in variable costs.

a) In-house Development + Component Reduction: Rivian currently develops its own electronic controls and electric drives, purchases battery cells from Samsung, and can assemble modules and packs on its own.

In terms of the three electric components, Rivian's new in-house Enduro motor can reduce costs, and most importantly, the second-generation in-house electronic architecture for electronic control units (ECUs) reduces the number of ECUs by 60% and shortens wiring harnesses by 25%, applying this technology to the R1 platform.

c) Renegotiation of core supplier procurement contracts: Previous contracts were signed when the R1 platform was just launched, with high procurement costs due to uncertainties in R1 production volume increases. Now, potential sales volume potential of the R2 platform can bring procurement premiums.

d) Natural cost reduction of battery materials

Previously, the EDV model achieved a 35% reduction in variable costs by changing raw materials before the factory shutdown.

Excluding the temporary impact of supplier contract changes this quarter, if the R1 platform can achieve a 20% reduction in variable costs (decreasing from the actual $105,000 per vehicle this quarter to $84,000 in the fourth quarter), the gross profit margin on the financial statements can turn positive (without excluding the positive impact of LCNRV reversal on the gross profit margin). When the R1 platform can achieve a 30% reduction in variable costs (decreasing from the actual $105,000 per vehicle this quarter to $73,000 in the fourth quarter), the actual gross profit margin can turn positive (excluding the impact of LCNRV reversal).

It can be seen that with the risk of maintaining the same unit price or even further decline, the reduction in fixed costs is limited for Rivian, and most factors rely on the reduction of variable costs.

IV. Research and Development Expenses Decreased, but Sales Expenses Increased

1) Research and Development Expenses: Based on this quarter's situation, Rivian's research and development expenses reached $460 million, lower than the market's expected $500 million.

The decrease in research and development expenses this quarter is mainly due to a decrease in research and design expenses related to the upgrade of the R1, as well as a reduction in the number of research and development personnel due to a 10% workforce reduction by Rivian in the previous quarter.

In terms of research and development investment, Rivian needs to bring about cost reductions and alleviate supply chain issues through electrification vertical integration and next-generation technology platforms, while significantly reducing costs, which is also the current focus of Rivian's layoutIn terms of autonomous driving layout, Rivian, although developing the Driver+ system in-house, is only at Level 2 in terms of intelligence. There is still a huge gap compared to Tesla's closed loop system based on self-developed algorithm chips and a supercomputing center.

2) Sales and Administrative Expenses: This quarter's sales and administrative expenses were $496 million, higher than the market's expectation of $450 million. Sales and administrative expenses also increased by $500 million compared to the previous quarter.

The increase in sales and administrative expenses is mainly due to an increase in sales personnel and marketing expenses. This corresponds to Rivian's slowing demand, requiring increased marketing efforts on the sales side to boost sales volume.

This quarter, Rivian achieved an operating loss of $1.48 billion, with an operating loss rate of -123%. The operating loss rate expanded compared to the previous quarter, mainly due to a decrease in gross profit margin and a slight increase in operating expense ratio.

V. Can R2 Become Rivian's Savior?

For R2, Rivian has adopted a strategy similar to Tesla's Model 2, producing R2 in the existing Normal factory. On one hand, this saves capital expenditure, protects cash flow, and is expected to achieve approximately $2.25 billion in capital expenditure savings compared to producing in the Georgia factory (Rivian's guidance reduces capital expenditure to $1.2-1.5 billion in 2024-2025). This eases the huge pressure of raising funds in 2025, improves Rivian's short-term risk situation, and reduces the risks of R2 launch and production ramp-up. On the other hand, it accelerates the launch time of R2 (production scheduled for the first half of 2026).

Rivian currently has approximately $7.8 billion in cash on hand. With the significant reduction in capital expenditure in 2024-2025, Rivian's cash flow is expected to support the start of R2 production in the first half of 2026, easing cash flow pressure in 2025 and providing more time to raise funds.

By moving R2 to the existing Normal factory for production, Rivian will expand the Normal factory's capacity from the current 150,000 to 215,000 vehicles. R2's maximum capacity is 155,000 vehicles. When R1 demand is under pressure, it relieves the sales pressure of R1 and EDV.

However, the maximum capacity of 155,000 vehicles for R2, for a low-priced high-volume vehicle, is lower than Dolphin's original expectations. Rivian's defensive measures to reduce cash consumption have significantly lowered future sales prospects.

With a total capacity of 215,000 vehicles, Rivian is unable to achieve break-even in net profit and operating cash flow solely through the existing Normal factory, meaning Rivian cannot sustain itself financiallyDolphin Jun is more inclined to believe that due to funding shortages, Rivian can only produce the R2 model at the Normal factory at this stage. The construction of the Georgia factory is not canceled but postponed (Dolphin Jun predicts a delay until 2028-2029, with corresponding increase in capital expenditure for 2027-2028). Once the gross margin of the R1 platform turns positive smoothly and the R2 is successfully launched into production, Rivian can start a new round of financing in 2026 to support the construction of the Georgia factory and the SOP of R3, thereby significantly increasing production capacity and completing its self-sufficiency plan. However, the realization of this story is subject to many conditions.

The main competitor of R2 at present is still the Tesla Model Y. Although they have different appearances, their configurations and endurance are similar, and their prices are around $45,000. The biggest challenge for R2 remains how to achieve a positive gross margin. Currently, with Tesla achieving annual sales of 1.8 million units and having extreme cost reduction and supplier negotiation capabilities, the gross margin of its automotive business has already decreased to 15%. For Rivian, there is still a long way to go in reducing costs.

With a P/S multiple of nearly 2.5 times for 2024, Dolphin Jun believes that the growth expectations for R2 have already been factored in. The current valuation is still relatively high as the gross margin of R1 has not yet turned positive, R2 has not been successfully launched, and demand has not seen effective stimulation. Blindly chasing high valuations should be avoided.

Dolphin Jun's in-depth research and analysis on Rivian include:

Financial Reports

February 22, 2024 Financial Report Review "Under Pressure from Gross Margin and Sales Volume, Can the 'Tesla Killer' Rivian Survive?"

February 22, 2024 Conference Call "Order Volume Has Significantly Decreased, But Still Maintains the 24Q4 Gross Margin Positive Plan"2023 年 11 月 8 日财报点评"Rivian Again Exceeds Expectations, Can the 'Tesla Killer' Cross the Life and Death Line?"

2023 年 11 月 8 日电话会"Rivian: Continuing Efforts to Turn Positive Gross Margin in 24 Years (3Q Conference Call Summary)"

In-depth Analysis

2023 年 12 月 6 日深度"Rivian: Cybertruck Sentenced to Death? Disability in Heaven is the Fatal Blow"

2023 年 12 月 4 日深度"Rivian (Part 1): 'Wounded Before Fighting', Is the Tesla Killer Becoming the Killed?"

2022 年 7 月 7 日深度"'Amateur' or 'Superman'? The Dilemma of Rivian, the Tesla Killer"

2022 年 3 月 8 日深度"The Pickup Truck of 'Little Superman': Rivian's Ambition"

Risk Disclosure and Statement in this Article: Dolphin Research Disclaimer and General Disclosure