Why The Autotech Industry Is Having a Rude Awakening

Arrival, the formerly mega-hyped British-based maker of next-generation vehicles, has been delisted from the Nasdaq stock exchange, making it yet another EV SPAC company to suffer a spectacular fall from grace since the blank check boom of 2020-2021.

Manufacturers of all stripes are also coming up against market headwinds and the formidable juggernaut that is the Chinese EV industry, which as Elon Musk recently noted could “pretty much demolish most other car companies in the world”.

With all this going on, it’s a good moment to pause and take stock of recent events, and the challenges facing both EV startups and OEMs going forwards. Let’s start with…

The dramatic story of Arrival’s rise and fall is emblematic of the wider problems afflicting the EV SPAC firms that went public during the pandemic.

Special purpose acquisition companies, or SPACs, are shell companies without commercial operations, formed specifically to raise funds through an IPO for the ultimate purpose of acquiring or merging with a target company. This allows the target company to go public without having to undergo the close regulatory scrutiny that comes with the traditional IPO process. Investors often have no idea what target money they’ll be funding, which is why SPACs are dubbed blank check companies.

While SPACs have been around since the 90s, they hit the headlines more recently thanks to a wave of plucky EV startups taking this streamlined pathway to public trading. One was Arrival, the company which boasted that it would make EV production “radically more efficient” through the use of regional microfactories rather than a sprawling gigafactory. Valued at $13 billion after going public through an SPAC merger in 2021, it soon forged deals to create state-of-the-art vans and ride-hail vehicles for UPS and Uber.

But Arrival never lived up to lofty expectations. There were multiple rounds of layoffs, production and expansion plans were abandoned, and Securities and Exchange Commission filing requirements weren’t met. All the while, the company burnt through money and even attempted another SPAC merger in a Hail Mary bid to raise more cash. Now valued at around $20 million, the company has yet to deliver a single commercial production vehicle to potential partners.

Arrival’s fate will have confirmed the view of many industry commentators that SPACs allow companies to generate unwarranted masses of money from retail investors by dazzling them with bold concepts and ambitious goals (or, to put it more bluntly, “hype”), unencumbered by IPO checks and balances.

The fast and relatively fuss-free nature of SPACs, coupled with an intense desire among investors to get in on the ground floor of “the next Tesla”, has led to numerous other automotive firms experiencing precipitous ups and downs. A recent example is Polestar, the Swedish EV firm which raised $890 million through an SPAC merger in 2022 but which has since missed delivery targets and suffered a plummeting stock price.

Official probes have even been carried out into the dealings of some EV SPACs. Take the example of now-defunct Ohio-based EV firm Lordstown Motors, which went public via SPAC in 2020 before it had delivered a single vehicle, and which was later rocked by the accusation from a US investment research firm that it’s “an electric vehicle SPAC with no revenue and no sellable product, which we believe has misled investors on both its demand and production capabilities.”

Another EV SPAC graduate of 2020, Arizona-based Nikola Corporation, hit headlines for the worst possible reasons in 2021 when its founder Trevor Milton was charged with making false statements about the company, with the prosecution attorney saying that “when Nikola announced that its stock would become publicly listed, Milton became increasingly preoccupied with keeping Nikola’s stock price high.” (He was eventually jailed for four years.)

SPACs aside, the wider automotive industry is facing a technology-related reckoning right now. It was recently confirmed that the Tesla Model Y was the world’s best-selling vehicle in 2023, beating out Toyota’s RAV4 and Corolla (in second and third place respectively). This is the first time an EV has reigned supreme over internal combustion engine rivals, a milestone that suggests the ICE age is well and truly over.

But simply rolling out their own EVs won’t be enough to prevent OEMs from going obsolete – they’re going to have to embrace a wide spectrum of autotech innovations to stay relevant and sell cars. Even EV-native firms like Tesla are feeling the heat from Chinese giants like BYD which are currently making rapid headway in the West.

As Philip Nothard, strategy director at autotech solutions firm Cox Automotive has said, Chinese brands are pricing more aggressively “than the European and American incumbent OEMs such as BMW, Stellantis, Mercedes Benz, Ford, and Tesla”, and this is partly because more advanced battery technology and better supply chains allows them to slash their overheads.

Moreover, to quote Nothard again, “they are substantially better equipped with full infotainment and ADAS systems. In contrast, the European and American OEMs are falling short in providing this as standard equipment for their vehicles.”

Research firms like JATO Dynamics have underscored how vital it is for Western OEMs to accelerate the implementation of new technologies if they are to compete with rivals from the East. As Felipe Munoz, global analyst at JATO Dynamics, has said: “Western OEMs must shift their focus towards the research and development of new technologies and production processes designed specifically for a fully electrified future.”

Of course, the strategic acquisition of autotech companies – for example, those developing cutting-edge ADAS, EV charging and “over-the-air” software solutions – can provide a parallel pathway alongside internal R&D. It will be interesting to see how M&A activity in 2024 reflects the need for vehicle manufacturers to keep up with the pace of change and remain competitive.

If there’s one great takeaway from both the SPACs debacle and the challenge from China, it’s that Western EV makers, whether startups or legacy OEMs, cannot simply rely on injections of venture capital or brand prestige to prosper in the current marketplace. Diligent onboarding of talent, savvy investment in new technologies and careful strategic acquisitions will all be essential ingredients for success.

As Hampleton Partners MD Michel Annink says, “The automotive and mobility industries are being disrupted and many players are struggling to keep up with the speed required to adapt. OEMs (and their suppliers) who aren’t pivoting to electrification, software-centricity and new business models fast enough are likely facing their ‘Nokia-moment’ soon.”

Hampleton Partners is a go-to partner for defining and executing your software and hardware solutions M&A strategy, so drop Michel a line to find out more about how we can help you plan your next moves.