A killer tornado is coming for the global EV sector in the short-term and smaller firms like Rivian (RIVN) will bear the brunt of the damage.
That’s not to say that leaders like Tesla (TSLA) have a slam dunk situation as well.
It’s been rough going of late as the already well-documented spiking inflationary pressures could be followed by even worse inflationary gut punches.
How do I know this?
China.
China’s zero covid policy has made the country incredible successful at defending the health of their population against the novel coronavirus.
The Middle Kingdom has only recorded around 4,000 deaths and they are by far the most successful country partly due to their mass lockdown policies.
However, when large swaths of the population are on the subs bench, the vaunted Chinese manufacturing sector is out of order as well.
Tesla’s Shanghai Giga factory was only supposed to shut down for 4 days, but that has been extended as Shanghai’s spread of the virus has expanded to all parts of the city.
This particular factory is Tesla’s most successful and efficient factory producing 16,000 Teslas every week.
A week’s work usually consists of 6,000 Model 3s and 10,000 Model Ys.
As it stands, Tesla’s Gigafactory in Shanghai was supposed to open this Monday, but again, that date has been pushed back yet again bringing a painstaking wait to 17 days.
That means, in total, an opportunity cost of 40,000 units of Shanghai Teslas that were unable to be completed.
Tesla will again, try to open on April 14th which would represent a full 3 weeks of delays and 48,000 cars unable to be produced.
Elon Musk was a legendary genius to build a Gigafactory in Shanghai and avoiding all US raw material import tariffs.
Romanticizing about a cheap source of labor and reduced building construction costs by 75% definitely help companies stay ahead.
In practice, life as an American corporation in an authoritarian country has its downsides.
Ironically enough, Musk was always unhappy about California’s hostile take on allowing his enterprise to run free from covid restrictions.
I wonder what his thoughts are about cooperating with the Chinese communist party, and does he believe they will cave on the covid restrictions?
Maybe California isn’t so bad for Elon.
The news comes on the heels of another EV firm Nio (NIO) announcing they would stop production because of supply chain issues.
Nio’s supplier partners in several cities including Jilin, Shanghai and Jiangsu suspended production making it impossible to finish the cars in production.
Nio also has a large part of the production process placed in Shanghai such as the testing sites and its factory.
Shanghai is home to the country's greatest number of EV-related companies, totaling 18,200.
This is a gargantuan setback for the global EV sector and this Shanghai lockdown is poised to shake out the bottom line of many of these companies who are exposed to China.
The situation is on the verge of spiraling out of control as another Chinese megacity, famous for its industrial prowess, Guangzhou is now in the early stages of initiating a full-scale zero lockdown as well.
These Chinese supply bottlenecks aren’t just a one-off for the EV players, the Eastern European military conflict has forced Rivian to reduce forecasts and lower expectations for a company that is supposed to become the new Tesla.
Large issues such as shortages of critical parts like semiconductors and other materials and equipment necessary for vehicle production have forced it to make changes to its internal processes that have only increased its expenses.
Skyrocketing bills for essential materials such as nickel, lithium, cobalt, and aluminum have hamstrung RIVN.
The price spikes have forced the EV sticker price to spike as well and an uproar ensued as RIVN even raised prices to customers who pre-booked and already paid their initial deposit.
Rivian later walked back the price hikes to the existing purchases and settled for the price hikes for future RIVN purchase.
Ripping off the first swath of customers is bad management.
In the EV world, we are closely approaching the levels of meaningful demand destruction as many consumers could start balking at extortionate pricing especially when RIVN is already struggling to ramp up production and also when RIVN has yet to prove their quality to the median EV buyer.
Ultimately, the headwinds are real for an upstart like Rivian and they have pulled back production targets of 40,000 this year to 25,000 representing a massive blow to the growth trajectory of the company.
Even the 25,000-unit forecast could get another cut to 15,000 if Chinese zero lockdowns persist, and the Eastern European military conflict unleashes another level of inflationary contagion which is highly plausible.
With Tesla producing record quarterly units, that appears as if it will represent a short-term high-water mark for the EV industry as the fracturing of global supply chains forces many of these companies to go into survival mode.
In the short term, I am highly bearish on NIO and RIVN, but TSLA has more tools at its disposal to find better solutions while having the magic of Elon Musk. Shorting TSLA never makes sense from a trading perspective, but other EV firms do.
