Why are electric cars still so expensive?  Blame the makers

Why are electric cars still so expensive? Blame the makers

Firms that spend huge amounts of money on research and development while neglecting production only frustrate consumer demand.

What is the actual cost of building an electric car? As new electric car makers spend billions of dollars in cash and hundreds of millions into research and development, the answer, it seems, is plenty. And all that money didn’t bring the world that much closer to mass adoption.

Electric vehicles are manufactured with fewer parts than regular cars, and are often sourced from other companies. Automakers don’t necessarily build the car, they often buy off-the-shelf software and expand on it. So how much added value does the company that ends up putting their branding on the product contribute? What are the likes of Li Auto Inc. spending on? and Rivian Automotive Inc. and Nio Inc. and XPeng Inc. And their peers billions of dollars, even with most of them incurring net losses?

Research and development expenditures continue to rise, yet there are relatively few vehicles to display. For New China, those expenses were up 143% in the second quarter compared to a year ago. He noted that the increases came from staff costs and “additional design and development” of new technologies. During that period, it went from spending $6,250 on research and development per vehicle sold to $12,964. Meanwhile, net losses deepened to $404.5 million from around $91 million.

XPeng, the New York-listed, China-based electric vehicle maker, boosted research and development by 47% for recruitment and employee compensation. Li Auto, in a monthly bulletin in June, said it was raising more money in the United States for next-generation car technologies, smart cabins and self-driving, as well as developing future car models. Its most recent quarterly profit showed a 134% increase in spending, while it delivered just 28,687 vehicles in the three months to June. That’s more than $8,000 in research and development per vehicle.

For the Rivian, which is far from reaching mass manufacturing anytime soon, spending is so high and production so low that the economics of each car hardly make sense.

There is limited disclosure of which stages of development or features cost the most, nor why so many R&D professionals are hired. Unlike, say, pharmaceutical companies that publish detailed presentations about drug pipelines, development stages, and clinical trials, electric vehicle makers (and even current companies) are putting together lyrics about their soon-to-be mass-produced vehicles with just thousands of cars to display, And there is no indication that they are doing much better. What is a good or competitive electric car at this point? Whether it takes 200 kilometers (124 miles) or a little more, it doesn’t change the fact that many of these models still cost close to the median annual income of an American household of about $67,000.

Investors like to justify this capital draining behavior by pointing out that “all startups burn money and lose money.” Sure, but these companies are in their early years. These companies have benefited from public debt and stock markets, subsidies and incentives – they are beyond their ability to rely on this logic. Their future depends on unit economics and how much it will cost to grow them.

Compare this to electric car makers like Tesla Inc. and BYD of Warren Buffett’s Berkshire Hathaway Inc. which has aggressively increased production in its markets over the past few years, put its weight behind suitable batteries and significantly boosted their volumes. For every dollar or yuan of capital they spend, there are products to offer – better cars and batteries. Elon Musk has reduced waiting times for its various models in China.

The issue is not just spending. People want to buy electric vehicles, but waiting times in the US and Europe can be up to 15 months or more. They don’t want – and can’t – wait for manufacturers to figure out how to run their business well or how to invest efficiently in production. Instead of spending unnecessary marketing or technology expenses on the sidelines, they should actually be boosting the car purchase price rather than telling enthusiastic buyers they had to raise it. At this point, the chances of a crash remain remote for these manufacturers.

Current levels of research and development expenditures for units of electric car makers producing show that these companies were not really ready to be public companies—particularly those that rushed to market through special purpose acquisitions, or SPACs. It is possible that they are not sure that their spending will produce results, or that they are able to make commercially viable cars on a large scale. Either way, investors and consumers shouldn’t be financing their future cars when there aren’t enough electric vehicles to start with.

As fears of an impending recession loom, profitability is more important than ever for investors. The likes of Tesla and BYD have a way forward. For others, it is not clear.

Anjani Trivedi is a columnist for Bloomberg Opinion covering industrial companies in Asia. Previously, she worked as a reporter for the Wall Street Journal.

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