Why Are Electric Vehicles Still So Expensive? Blame the Makers | Tech News

Why Are Electric Vehicles Still So Expensive? Blame the Makers

Companies that spend crazy amounts of money on R&D while neglecting production are just frustrating consumer demand.

| Updated on: Sep 21 2022, 17:54 IST
Electric car
How much does it actually cost to build an electric car? (REUTERS)

How much does it actually cost to build an electric car? As new EV makers burn through billions of dollars of cash and pour hundreds of millions more into research and development, the answer, it seems, is a lot. And all that money hasn't moved the world much closer to mass adoption.

EVs are built with fewer parts than regular cars, and they're often sourced from other companies. Vehicle makers don't necessarily build the car, either, often buying off-the-shelf software and expanding on it. So how much value-add does the firm that ends up putting its brand on the product really contribute? What do the likes of Li Auto Inc., Rivian Automotive Inc., Nio Inc., XPeng Inc. and their peers spend billions of dollars on, even as most of them run net losses?

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Research and development outlay continues to surge, and yet there are relatively few vehicles to show for it. For China's Nio, this expense rose 143% in the second quarter compared to a year ago. The increases, it noted, came from personnel and “incremental design and development” costs for new technologies. Over that period, it went from spending $6,250 of R&D per vehicle sold to $12,964. Meanwhile, net losses deepened to $404.5 million from around $91 million.

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Its fellow EV manufacturer, the New York-listed, China-headquartered XPeng, boosted R&D by 47% for hiring and employee compensation. Li Auto, in a June prospectus, said it was raising more money in the US for next-generation vehicle technologies, smart cabins and autonomous driving, along with developing future car models. Its latest quarterly earnings showed a 134% increase in expenditure, while it delivered just 28,687 cars in the three months through June. That's over $8,000 of R&D per car.

For Rivian, which is even further away from getting to large-scale manufacturing anytime soon, expenditure is so high and production is so low that the per-car economics barely make sense.

There's limited disclosure on the stages of development or the features that are costing so much, nor on why so many R&D specialists are being hired. Unlike, say, pharmaceutical companies that release detailed presentations about their drug pipelines, development phases and clinical trials, EV makers (and even incumbents) wax lyrical about their soon-to-be mass produced vehicles with only thousands of cars to show for it, and no sign that what they do make is that much better. What even is a good or competitive electric vehicle at this point? Whether it takes you 200 kilometers (124 miles) or slightly more, it doesn't change the fact that many of these models still cost close to the median US household annual income of around $67,000.

Investors like to justify this capital-draining behavior by noting that “all startups burn cash and lose money.” Sure, but those are firms in their early years. These companies have tapped public debt and equity markets, subsidies and incentives — they're well past being able to lean on this logic. Their future depends on the unit economics and how much it costs for them to grow.

Compare this to EV makers like Tesla Inc. and Warren Buffett's Berkshire Hathaway Inc.'s BYD Co. that have ramped up production aggressively in their markets over the past few years, put their weight behind the right batteries and boosted their volumes significantly. For each dollar or yuan of capital they spend, there are products to show — better cars and batteries. Elon Musk's firm has cut waiting times for its various models in China.

The issue isn't just the spending. People want to buy EVs, but waiting times in the US and Europe can be as long as 15 months or more. They don't want to — and can't — wait until manufacturers figure out how to run their businesses well or how to efficiently invest in production. Instead of splashing out on marketing expenses or extraneous on-the-margin technology, they should really be cementing the purchase price of cars rather than telling eager buyers they've had to raise them. At this point, prospects of breaking even remain distant for these manufacturers.

The current levels of research and development expenditure relative to EV makers' units produced show these firms weren't really ready to be public companies — especially those that rushed to the market through special purpose acquisition companies, or SPACs. It's possible they just aren't sure their spending will yield results, or that they can make commercially viable cars at scale. Either way, investors and consumers shouldn't be funding their futuristic vehicles when there aren't enough EVs to begin with.

As fears of an imminent recession loom, profitability is more important than ever for investors. The likes of Tesla and BYD have a path forward. For the others, it's unclear.

Anjani Trivedi is a Bloomberg Opinion columnist covering industrial companies in Asia. Previously, she was a reporter for the Wall Street Journal.

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First Published Date: 21 Sep, 14:59 IST