This article was originally published on 8 December 2023.
The electric vehicle (EV) industry, once riding high on optimism and sky-high valuations, has hit a roadblock as investors and car manufacturers reevaluate their strategies amidst a slowdown in growth. Factors ranging from rising interest rates to evolving EV technology and consumer preferences are being cited as reasons behind the shift in momentum.
Recent data indicates a significant decline in the market capitalization of prominent EV startups. At its zenith, the combined market capitalization of companies like Nikola, Fisker, Rivian Automotive, Lucid, NIO, XPeng, Polestar Automotive, Canoo, and Lordstown Motors reached approximately $470 billion between 2019 and 2021, coinciding with benchmark interest rates hovering near zero to 2%. Presently, their collective market caps have dwindled to around $59 billion, marking an 87% decrease.
This transformation comes as investors increasingly favor companies capable of generating free cash flow, a quality that many of these EV startups have struggled to demonstrate. These nine startups have collectively spent around $46 billion to develop their businesses, resulting in vehicle sales of approximately 420,000 units over the past year, translating to over $100,000 per car sold.
NIO, XPeng, and Rivian have accounted for the lion's share of these sales, contributing over 80%. It is projected that the combined revenue for these nine companies in 2024 will approximate $36 billion, with NIO, XPeng, and Rivian responsible for nearly 70% of that total.
This challenging climate isn't unique to startups; even profitable EV manufacturers like Tesla, BYD, and Li Auto have witnessed significant reductions in market capitalization. Tesla, the most prominent among them, has seen its capitalization dip from approximately $1.2 trillion to about $770 billion, despite generating substantial free cash flow.
Traditional automakers, including General Motors, Ford Motor, Stellantis, and Volkswagen, have also pivoted toward EVs, announcing substantial investments in battery plants and new electric models. Nevertheless, their combined market capitalization has decreased from a peak of approximately $425 billion to $220 billion, a nearly 50% decline.
In total, the EV sector has experienced a loss of roughly $1.4 trillion in market value over the past few years as investors recalibrate their expectations amid a perceived deceleration in growth. Both General Motors and Ford have scaled back some of their EV spending and extended their sales targets.
Despite these headwinds, the market for hybrid vehicles is flourishing. Toyota Motor, a hybrid leader, has witnessed hybrid sales surge by about 28% year-over-year through October. These sales gains have bolstered the company's stock, which has appreciated by over 35% in the past year.
Nonetheless, overall EV demand remains robust. Through the third quarter, battery electric vehicle (BEV) sales in both the U.S. and Europe have risen by approximately 50% year-over-year, with China, where BEVs account for a significant portion of new car sales, experiencing growth around 20%.
Paul Jacobson, CFO of General Motors, emphasized that the perceived slowdown in growth is not an actual decline in demand but rather a moderation in the rate of increase. He remains optimistic about continued EV demand growth in the United States as charging infrastructure improves, new models are introduced, and consumers become more accustomed to EV technology.
This sentiment is echoed by Wall Street analysts, including RBC's Tom Narayan and Bernstein's Toni Sacconaghi. They believe that while demand remains strong, expanding the range of EV models to encompass a broader spectrum of vehicle types is crucial. While midsize crossover EVs have proliferated, there is a noticeable shortage of smaller sedans, midsize trucks, and larger SUVs.
Even Tesla, which has been a trailblazer in the EV industry, is facing a growth slowdown. Wall Street expects the company to ship approximately 2.2 million units in 2024, marking a 20% to 25% increase over 2023 but significantly lower than the 50% average annual growth observed from 2020 to 2023.
Tesla's relatively stagnant product lineup since 2020, aside from the recent Cybertruck launch, has contributed to this slowdown. However, CEO Elon Musk recently indicated that the company is making progress on a smaller, more affordable vehicle, which could rejuvenate Tesla's market share.
In conclusion, while the EV industry grapples with shifting investor sentiment and a more competitive landscape, it's essential to recognize that EV technology remains vibrant. What has waned, however, are the lofty valuations bestowed upon startups that remain distant from profitability. The road ahead for the electric vehicle sector may involve consolidation, diversification, and a focus on delivering the right mix of EV models to meet evolving consumer preferences.
