The week of November 25, 2024: Rivian’s billions, antitrust, climate policy, DEI, and much, much more.
The week of November 25, 2024: Rivian’s billions, antitrust, climate policy, DEI, and much, much more.
Life has not been easy of late on electric vehicle (EV) street. Northvolt, the Swedish company that was meant to be Europe’s EV battery champion, taking on companies such as China’s BYD and CATL, as well as Panasonic, LG, and Samsung, has been under increasingly severe financial pressure, hit by lost orders, technical woes, (alleged) mismanagement, and the European EV market’s irresponsible refusal to develop according to the timetable set by net zero’s central planners. Among the reasons for Northvolt’s troubles, the Financial Times reported, was “trying to do too much, too fast,” one hallmark of central planning since the early five-year plans (another, contradictorily, is almost total inertia). According to the Financial Times, the company has (over its lifetime) raised $15 billion financing “from the likes of Volkswagen, Goldman Sachs, Siemens and JPMorgan as well as subsidies from Canada and Germany.” ESG! ESG!
In early 2023, Cicero (now part of S&P Global, one of “sustainability’s” countless rent seekers) rated Northvolt “deep green.” Among Northvolt’s strengths were said to be its focus on recycling and a strong awareness of physical climate risks at its sites, and “a rigorous approach to environmental and social risks in its supply chain.” Cicero rated Northvolt’s governance “deep green,” its highest rating (“correspond[ing] to the long-term vision of a low-carbon and climate resilient future”) while its basic operations were approaching the same status, although some work needed to be done.
So much green, and so little red, yet Northvolt filed for Chapter 11 bankruptcy on November 21. Doing so will unlock some financing and enable the company to keep going. The company’s chairman talked bravely about how “this decisive step will allow Northvolt to continue its mission to establish a homegrown, European industrial base for battery production.” The company hopes to raise fresh funds next year. The company’s German and Canadian subsidiaries will continue to operate as normal as they have separate financing including subsidies — a constant in most EV stories, it seems — from taxpayers in both countries of almost $4 billion.
As the following (incomplete) round-up shows, Northvolt is not the only company in the (Western) EV sector to be delivering bad news.
Mackinac Center, November 20:
The year-to-date losses on Ford’s EV business (what the company calls “Ford Model e”) totaled $3.7 billion. Profits from Ford’s “Model Blue” division, which sells traditional internal combustion vehicles, also happened to be $3.7 billion.
This past quarter, Ford reported losses of $1.2 billion on its EV business.
Real Clear Energy, November 25:
[J]ust this week, Ford announced it was cutting 4,000 jobs, mostly in Germany and the United Kingdom – a 14% cut in its European workforce. Ford cited weak BEV demand, poor government support for the BEV shift, and competition from subsidized Chinese automakers.
Auto rental giant Hertz just expanded its BEV selloff, with used Tesla Model 3s now available for under $20,000. Hertz hopes to sell off 30,000 BEVs as it withdraws from the BEV market, but the 89% increase in BEV depreciation costs (about $537 per vehicle per month) has impacted its bottom line.
Motor 1, November 26:
Porsche has realized people still want gas cars, admitting recently the EV adoption isn’t going as planned. Indeed, sales of the fully electric Taycan sedan/wagon duo are down by a whopping 50% globally through the third quarter of 2024. Automotive News Europe now quotes the company’s Chief Financial Officer saying the new plan is to “react in our product cycle” by continuing investments in combustion engines. Lutz Meschke said Porsche will be pouring money into gas engines for the Cayenne and Panamera. As already announced, the V-8 is sticking around for the long haul as it will live to see the 2030s, at least in the SUV.
BBC, November 27:
The owner of Vauxhall has announced plans to close its van-making factory in Luton, putting about 1,100 jobs at risk. Stellantis, which also owns brands including Citroen, Peugeot and Fiat, said it would combine its electric van production at its other UK plant in Ellesmere Port in Cheshire. Rules imposed to speed up the transition to electric vehicles (EV) in the UK partly drove the decision, the firm said.
Bloomberg, November 29:
Canada’s electric truck and bus manufacturer Lion Electric Co. is up against a deadline this weekend to find new investors amid a cash crunch and an EV market that’s in turmoil.
Bloomberg, December 1:
Stellantis NV Chief Executive Officer Carlos Tavares is stepping down after profit slumped and US sales weakened at the maker of Jeep SUVs and Fiat cars, according to people familiar with the situation.
To his credit, Tavares was early to warn of the dangers that EVs (“a technology chosen by politicians, not by industry”), could represent to the auto sector. To his discredit he then went along anyway.
Bloomberg, December 1:
Volkswagen AG workers across Germany plan to stage walkouts starting Monday after labor leaders and management failed to reach an agreement over how to slash costs at the carmaker’s namesake brand.
As I noted in late October, VW’s problems are not solely the product of the disruption caused by the planned transition to EVs, but like many European carmakers, it finds itself torn between what the regulators are demanding (more EVs), what consumers are buying (far fewer EVs than expected), and what Chinese carmakers are selling (EVs at a price low enough for buyers to overlook their flaws). It also has to contend with weak demand for its conventional cars in Europe and China.
And then there is Rivian. EV manufacturer Rivian had gone public in November 2021, an event greeted somewhat skeptically by the Wall Street Journal at the time:
We live in the age of free money and endless government subsidy, which is the only way to explain the $100 billion public stock offering by Rivian this week. The electric truck maker has delivered a mere 156 vehicles, but investors are betting government won’t let it fail.
Twelve-year-old Rivian is being hailed as the next Tesla. Yet when Tesla went public in 2010 it reported $93 million in revenue and was valued at $1.7 billion. Rivian’s sales are almost all to its own employees and it projected at most $1 million in revenue in the third quarter. On Wednesday it nonetheless raised nearly $12 billion. Shares later surged as euphoric investors rushed in, and at $120.5 billion Rivian is the fifth largest auto maker in the world by market value.
That didn’t last. The IPO had been priced at $78 per share, and the stock soared from there to reach an all-time closing high of $172.01 in the same month. Today it trades at a little over $12 (after falling below $9 earlier this year).
In early March 2024, Rivian announced that it was pausing construction of a $5 million factory in Georgia. One of three new models, the R2 SUV, would, at least initially, be manufactured in Illinois. The other two, R3 and R3X crossover vehicles, would wait for now. According to Axios, “plans to break ground on vertical construction in early 2024 had fizzled.” Vertical construction.
Less than two years before, Rivian had agreed to a $1.5 billion package of incentives with the state, the largest such deal that Georgia had ever offered. The support came with various conditions, including the requirement that 80 percent of the investment and jobs commitment be met by Dec 31, 2028. It was estimated that each of the 7,500 jobs to be created was being backed by $200,000 in taxpayer cash.
In a paper for the Cato Institute published in October, Marc Joffe noted that:
Although most of the Georgia incentive package kicks in when Rivian goes into production, state and local governments have already incurred soft and hard costs that cannot be recovered. These include a rent-free ground lease the state gave Rivian on the 1978-acre (or roughly three-square-mile) plant site and three access road construction projects the Georgia Department of Transportation (GDOT) has initiated at a total cost of over $180 million (cost data from three projects come from GDOT).
In addition, the company has received (or is slated to receive) other state-level incentives, including nearly $900 million from Illinois, where its sole (to date) manufacturing facility is located (most of that money is intended to help Rivian expand there).
In June, Volkswagen, which (as noted above) has been going through tough times, announced that it was investing $1 billion in Rivian, with up to another $4 billion to come. The rationale for VW is access to Rivian’s know-how, and the rationale for Rivian is cash, plus being able to tap into VW’s manufacturing expertise. This is Rivian’s second romance with a large automaker. An earlier involved Ford, which, unlike many involved with Rivian, sold its shares at a profit (although a long way off their peak), and moved on.
Oh yes, VW already has its own EV brand in the U.S., Scout, which launched its first two models in October. Well, when I say “launched,” these are two “production-intent concepts.” EV Street is what it is.
I don’t know if the team at Scout was prepared, but the Rivian deal came as a disappointment to staff at VW’s existing software unit, Cariad, which stands for “Car, I Am Digital” (no, I am not making this up), and was set up to deal with the growing integration of software into all types of autos, not just EVs. This is not a switch that gearhead German engineers, unlike those working in history-free companies such as Tesla and BYD, have found easy. Since launching Cariad, VW has sunk twelve billion euros into building in-house car software .
Understandably enough, the Rivian deal has raised questions among VW’s restless workforce. The Financial Times quoted Daniela Cavallo, chair of VW’s works council, wondering whether the Rivian deal would be “the next billion-euro grave.”
In early November, an undaunted VW announced that its total commitment to Rivian would rise to up to $5.8 billion.
Meanwhile, the Biden administration, anxious to get cash out of the door before the more EV-skeptic Trump administration gets into office, has, on a preliminary basis, offered Rivian a $6.6 billion loan. The money will come from the Energy Department Loans Office under a program to support new technologies (a worthy enough goal), which as The Hill points out (I wonder why), “gave funds to Tesla in 2010.” That’s true enough, the loan was for $465 million, which, even after taking account of Bidenflation, was rather less than $6.6 billion today.
Tesla repaid that loan (nine years early) in 2013, noting in a press release that:
For the first seven years since its founding in 2003, Tesla was funded entirely with private funds, led by Elon Musk. Tesla brought its Roadster sports car to market with a 30% gross margin, designed electric powertrains for Daimler (Mercedes) and had done preliminary design of the Model S all before receiving a government loan.
Let’s see if Rivian manages that.
The Rivian loan is to support the construction of the facility in Georgia, specifically to support a production run of 400,000 R2s and R3s. It’s being stressed these cars are cheaper than the R1, a luxury model. The R1 begins at around $70,000, but in its various iterations can cross into six figures.
The Rivian financing is an example of industrial policy at work. Leaving aside the question of whether the feds should be deploying capital this way (answer: it depends, and the further away the project is from pure research or defense-related, the more difficult it is to justify), such decisions can quickly get into tricky political territory, as California governor Gavin Newsom has discovered. Was his promise to reinstate California’s tax credit for purchases of EVs other (possibly) than Tesla in the event that federal tax credits were removed by a Trump administration a way of punishing MAGA Musk?
Meanwhile Musk’s DOGE copilot, Vivek Ramaswamy has tweeted:
Biden is forking over $6.6B to EV-maker Rivian to build a Georgia plant they’ve already halted. One “justification” is the 7,500 jobs it creates, but that implies a cost of $880k/job which is insane. This smells more like a political shot across the bow at @elonmusk & @Tesla .
To talk of $880,000 a job (which would, of course, be on top of the $200,000 from Georgia) is premature: After all, the loan will be repaid, won’t it? Asking for a taxpayer.
So, is this a punch thrown at Musk? If I had to guess, the administration is, as mentioned above, more interested in getting its climate money “spent” (or at least promised) in order to entrench support for its broader climate policy in states, many of them red, where the cash is being disbursed or is on the way. Thus, within the same 24-hour period as the Rivian loan was announced, over $5 billion was pledged to two other projects: one was for a transmission project to ship wind power generated in the Midwest; a second helps deploy a solar and battery system across 27 states.
Those “investments” are likely to be a gift that keeps giving. For example, should Rivian run into trouble after the $6.6 billion has been loaned and 7,500 jobs created, a constituency has been created for a bailout.
As NR’s Noah Rothman noted in a recent article:
The Biden administration hopes the incoming Trump Team will be sufficiently spooked by the prospect of lost economic activity that it will give up on its own best economic instincts. But artificially generated economic activity that cannot survive in the absence of federal support is not sustainable and hardly preferable. It’s unlikely that this last desperate gasp will intimidate Trump’s appointees into acquiescence, but it was worth a try. After all, the numbers certainly don’t speak for themselves.
Rothman also makes the vital point about what the 19th Century French economist Frédéric Bastiat described as “that which is not seen,” the opportunity cost of such investments:
When you throw taxpayer funds at products and initiatives that are otherwise unattractive to consumers, the Biden administration notes, you get more of those inefficient and unloved products. That’s hardly a revelation. But that also means that the administration is creating an inefficient allocation of capital. In the absence of those inducements, consumers would reward producers who create things people want to buy and use, providing those consumers with additional capital to invest in their already productive enterprise.
As for Rivian’s numbers, its third quarter results fell short of market expectations although the company is still hoping to report a gross profit in the final quarter, despite warning of a “more challenging consumer environment.” Rivian also has about $1.25 billion in debt falling due in 2026.
The WSJ:
Rivian lost about $4 billion on the 37,396 vehicles it has sold during the first nine months of this year. That’s $107,043 a vehicle. Ford loses only about $51,000 on each EV sold.
But unlike traditional auto makers, Rivian can’t use profits from gas-powered cars to subsidize EVs. Thus the company is rapidly burning through cash. It has suffered repeated assembly disruptions and had to recall vehicles to fix defects.
In fairness, in the third quarter, Rivian “only” lost about $39,000 per car sold.
The WSJ goes to ask what this loan is for:
The DOE loan program is supposed to help promising startups. But the Biden team is financing a struggling company with a known credit risk that is competing in a well-developed auto industry. Rivian’s debt maturing in 2026 carries an effective interest rate of 12%, but DOE is lending to it at the Treasury rate.
There’s creative destruction, and then there’s plain old destruction. Torn apart by the stresses introduced by the coercive and now struggling transition to EVs (and by what that transition has set in motion), the auto sector is accelerating towards crisis on both sides of the Atlantic. With massive bailouts on the horizon, throwing $6 billion of taxpayer funding at a relative minnow seems like an extremely poor choice. But then, when it comes to EVs, that’s hardly anything new. Writing in June about the collapse of Fisker, an early stage EV manufacturer that had received federal backing in an earlier incarnation (long story), I described how reading an article that published in 2013 that “Ford and Nissan received billions of dollars in federal loans to produce electric cars” was not reassuring.
It was not.
As I explained:
Ford’s loan went toward upgrading plants, helping advances in traditional engines, and assisting financing the Ford Focus Electric, which was on the market between 2011-18. A few thousand were sold. Nissan’s helped fund U.S. production of the first generation Leaf. There were plans for an annual production run of 150,000. Unfortunately, in its best year (2014) it could only manage 30,200.
If past is prologue…
Note: Updated to reflect (1) the fact that VW had spent 12 billion euros in building in-house car software, rather than on the software unit itself and (2) to clarify that the criticism by Vivek Ramaswamy quoted in the text only referred to the proposed Rivian loan (rather than also addressing a possible reinstatement of EV tax credits in California).
The Capital Matters week that was . . .
Healthcare
A key issue facing Congress in its postelection, “lame duck” session is whether to extend regulatory flexibilities expiring at year end that make telehealth services more accessible to Americans. A new study I authored suggests it should proceed with caution…
Tax
France, meanwhile, following the botched snap election called by Macron earlier this year, has a weak government and an increasingly pressing fiscal burden. Its debt/GDP ratio now stands at around 112 percent, “somewhat” above the 60 percent stipulated in the Maastricht Treaty. (Remember that?) Its 2024 budget deficit is forecast to be around 6 percent, compared with forecasts of around 4.4 percent at the beginning of the year. That’s double the Maastricht limit of 3 percent.
In an attempt to tackle this mess, France’s senate has now passed a law which, reports Reuters, “would make people work an extra seven hours at some point over the course of the year, for which they would not be paid salary but for which their employers would have to make additional social security contributions.”…
Climate Policy
The outgoing administration and its allies appear to have embarked on an effort to intimidate incoming Trump administration officials out of paring back federal support for the so-called “green economy.” Their logic is simple: public-sector incentives and subsidies stimulate activity, and you wouldn’t want anything to happen to that activity, would you?
We often hear about the threat to freedom posed by the “far right,” but it’s time to pay more attention to the increasingly open authoritarianism of the deep (or, sometimes, not so deep) Greens, which has extended well beyond attacks on consumer choice and the functioning of a free-market economy.
Free speech is undoubtedly in Green sights…
Student Loans
Today, the government expects to lose money on the average student loan. In total, the government’s entire student-loan portfolio lost $205 billion between 2015 and 2024, and it’s expected to continue losing money for the foreseeable future.
These are not loans. They are handouts. Policy-makers need to treat them accordingly…
Antitrust
Having more than one agency responsible for antitrust enforcement has proven tantamount to having too many cooks in the kitchen…
The pretense of knowledge is on full display in the Department of Justice’s proposed remedies for the Google trial. The government’s suggested fixes are not confined to what the ruling deemed illegal, but are much more broad. Not only is that bad law, but it’s potentially bad for consumers…
Industrial Policy
One of the many objections to industrial policy is the opportunity (unconnected with any economic rationale) that an essential part of it — handing out taxpayer cash — gives to politicians and bureaucrats to reward those that they favor and punish those that they do not. Given that opportunity, too many will take it, as Newsom is now demonstrating. It’s a useful reminder…
Labor
The National Labor Relations Board (NLRB) is responsible for guidance on labor issues, and Trump will soon decide whom to place behind the steering wheel of this agency. With all due respect to the Department of Labor, the president’s future NLRB appointees will hold far greater power over the future of private workplaces. That Trump’s pick for Department of Labor secretary appears to be a dud only underscores the importance of dismantling Biden’s NLRB…
DEI
This has the correct sequence of events. DEI was in retreat well before Donald Trump returned to the political fore, and even before his reelection to the presidency was generally regarded as a plausible outcome of the 2024 election cycle.
As I wrote at the time, the year that delivered the heaviest blows to the divisive and discriminatory ideology masquerading as best practices in human resources departments wasn’t 2024. It was 2023.
Pushback against DEI was a project first engaged by conservative Republican lawmakers in states like Florida, Texas, Ohio, and North and South Carolina, who executed the anti-DEI intellectual frameworks established by conservative thinkers and activists. The baton was then picked up by conservatives on the Supreme Court…
AI
Policy-makers need to be very cautious before proceeding with anything other than a minimalist regulatory approach to AI. While early intervention in an industry may sound good in theory, the government is likely to make the wrong regulatory calls, prevent AI from reaching its potential, and put the U.S. at a significant disadvantage in the global AI race, a race that has economic as well as geopolitical implications…
Fred Smith
Fred Smith, the great champion of capitalism who has died at the age of 83, was not your usual capitalist. To be sure, he wore an “Enjoy Capitalism!” T-shirt and enjoyed its products, such as cigars and Oreos, and at the same time he was also deeply appreciative of egalitarian values. An environmentalist, but not a big-government environmentalist, he believed strongly in the critical role of markets in protecting the natural world. A booster for the importance and rights of corporations, he was no corporatist, often reminding people that firms lobby for regulation whenever it benefits their narrow self-interest. He was, in short, a deep thinker about the nature of economic liberty, and we need more of his sort of thinking today…
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