With Fisker's Demise, EV Startups Should Take a Cue From China's Example.

The Chinese ambition of mass-producing cars must replace the Californian fantasy of making them without factories. Latest electric-vehicle startup Fisker is struggling financially. After issuing a “going concern” warning last month, it announced last week that it had won $150 million in punitive terms. Investment talks with a “large automaker” continue.

Los Angeles-based Fisker's “asset-light” automotive business may fail if this narrative ends. The company's proposition to investors was that outsourcing production would save billions in capital investment and speed up profitability.

It was tempting given the strong profit margins of other U.S. firms that went that route in recent decades. Since Nike pioneered the approach with shoes, items have become more complicated, leading to Apple's stratospheric rise with its designed-in-California, made-in-China smartphones. Why not cars?

Car profitability may be more dependent on factories running near full tilt than on design or operating systems like Nike or Apple. Production is so important to a company's success that it can't be outsourced on reasonable terms. “You need your plants humming and it's hard to do that in an arm's length environment,” says AlixPartners automotive managing director Mark Wakefield.

Third-party vehicle manufacturers offer additional production capacity or low-volume specialist items at a high variable cost, not bulk outsourcing. Nor do they operate in low-cost areas: Magna International of Canada is making Fisker's first Ocean SUV in Austria and shipping it to the U.S. No wonder the startup is broke.

Polestar Automotive, another listed business that outsources production, was also struggling before a funding round last month. The most important lesson is that EV initiatives require time, regardless of factory ownership. Startups use time like money without revenue. Wakefield believes that reaching cash flow in rather than out will cost $10 billion.

Polestar has easier access to cash and manufacturing than Fisker because it is part of Geely's empire. An existing automaker may also acquire Fisker. If outsourcing production doesn't solve the auto industry's capital-intensity problem, what does? One Chinese response is speed.

Chinese EV firms may launch vehicles in two years, 30% faster than Western equivalents. Reducing the number of years a project drains cash instead of creating it lowers the bill.

Rivian spent $5.9 billion last year. NIO led the Chinese peer group with $1.5 billion. Other China-specific variables include lower labor costs, more government support, and fewer quality regulations. Western EV startups and incumbents can learn from Chinese innovation's speed and cost advantage. Carmakers must lower expenses to reduce the industry's renowned capital requirements. Expecting others to take them is futile.

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