Electric Vehicles – Unready For Reality pt. II

The financial noose tightens.

• The end of Fisker, the imminent end of several others as well as worsening financial conditions in China clearly point to the ongoing slowdown and shakeout in EVs where only the strongest are going to survive.
• The problem with EVs is relatively straightforward in that the proposition of an EV is immature and not ready for the mass market.
• This combined with EVs being more expensive than their petrol counterparts has meant that when inflation started to eat into people’s ability to pay their bills, cost became a more important consideration.
• The Chinese companies appear on the surface to have solved this problem as there are many reasonably priced and good quality EVs available for sale in many parts of the world.
• However, I have long thought that all is not as it seems as I suspect that the Chinese EV makers are not operating economically.
• They have picked up a significant amount of share in EVs but an examination of the available financial statements tells another story.
• A Bloomberg assessment of Nio and Xpeng (see here) shows that in 2023 there was a significant increase in trade creditors on their balance sheets.
• Trade creditors is the line item in current liabilities that denotes invoices that have been received from suppliers but have not been paid.
• This is typically divided by revenues and multiplied by 365 to adjust for the fact that when the business gets bigger, this line will also increase to reflect the increased amount of commerce.
• In 2023 Nio increased its trade creditors to 295 days from 197 days in 2021 while Xpeng increased to 221 days up from 179.
• Increasing trade creditor days is a classic move that any Chief Financial Officer will make when he or she needs to conserve cash when business is tight.
• Given these are two of the larger players, this is a sign that Chinese EV makers are not operating economically, and have received subsidies to help them grow share overseas.
• Fisker has had its shares delisted and appears to be in the process of shutting down its operations and I suspect that several others will follow it down this route.
• I am not convinced that anyone is going to buy Fisker out as the key asset that it was supposed to have was a software-defined vehicle but this turned out to be not nearly as good as promised.
• I remain unconvinced that the issues of cost, range, charging and technology maturity (see here) are going to be fixed any time soon and I think that for now, EV demand is going to remain soft.
• Tesla will survive comfortably as it can generate plenty of cash to survive when it has to, and I think that Lucid will also survive.
• Lucid is in a similar position to Fisker except it has valuable EV technology that gives it differentiation and its software is passable.
• Most importantly, it is majority-owned by Saudia Arabia’s sovereign wealth fund and I suspect that one day the fund will get fed up with marking its stake down day after day and buy out the shares it doesn’t already own.
• Buying Lucid on this proposition is risky as it is impossible to know where Saudia Arabia’s pain threshold is, and it is not 100% certain that it will buy out Lucid as it did decline to rescue Credit Suisse.
• The net result is the outlook for EVs remains difficult in the short-term but once the problems with EVs are solved, then there is a strong case for them to become the majority of the market over time.
• However, this is going to take a while and I think that we see many more targets rolled back by both EV makers and governments.
• Against this backdrop, the shakeout is far from over and there is more blood to be let meaning that I would stay away for now.