The fuel that each and every automaker is now after these days in the transformation from gas-powered automobiles to electric vehicles is cold hard cash.

To meet rising demand, both established automakers and startups are introducing new battery-powered models. Increasing production of a new model was already a difficult and costly process, but rising material costs and tricky regulations for federal incentives are further squeezing coffers.

Prices for the raw materials used in many electric-vehicle batteries — lithium, nickel, and cobalt — have skyrocketed in the last two years as demand has skyrocketed, and it may be several years before miners can significantly increase supply.

To make matters worse, new US regulations governing EV buyer incentives will require automakers to source more of those materials in North America over time if their vehicles are to qualify.

As a result, new cost pressures were placed on an already expensive process.

Before shipping a single new car, automakers routinely spend hundreds of millions of dollars designing and installing tooling to build new high-volume vehicles. Almost all global automakers now have cash reserves of $20 billion or more. These reserves exist to ensure that companies can continue working on their next new models even if a recession (or a pandemic) reduces their sales and profits for a few quarters.

All that money and time can be a risky bet: if the new model doesn’t resonate with customers, or if manufacturing issues delay or compromise quality, the automaker may not make enough to cover its investment.

The financial risks of developing a new electric vehicle can be existential for smaller automakers.

Consider Tesla. When the automaker began planning for the Model 3, CEO Elon Musk and his team envisioned a highly automated production line for the Model 3, complete with robots and specialized machines costing well over a billion dollars. However, some of the automation did not work as expected, so Tesla relocated some final-assembly tasks to a tent outside its factory.

Tesla learned a lot of costly lessons along the way. Musk later described the Model 3 launch as “production hell,” claiming that it nearly drove Tesla into bankruptcy.

As newer EV startups ramp up production, more investors are realizing that bringing a car from concept to production requires a significant investment. And, in the current environment, where deflated stock prices and rising interest rates have made it more difficult to raise capital than it was just a year or two ago, Wall Street is paying close attention to EV startups’ cash balances.

(Adapted from CNBC.com)

Categories: Economy & Finance, Entrepreneurship, Strategy, Sustainability, Uncategorized