Elon Musk warned investors in Rivian and Lucid the duo are on a glide path towards doom, and if their course is not corrected the electric vehicle startups could both end up in the cemetery of failed companies.
Tesla’s polarizing CEO has himself initiated measured cost-cutting at his company, including trimming fat in his middle management, amid a “super bad feeling” over the direction of the global economy.
“Unless something changes significantly with Rivian and Lucid, they will both go bankrupt,” he said in the second part of an interview with podcasters Tesla Owners Silicon Valley and the Kilowatts posted on Tuesday.
An essential part of the problem in Musk’s view is that the two are competing in an industry where generally speaking very little profit is made on a new car, with the bulk of earnings coming from the lucrative aftermarket business.
Much like a printer company with ink cartridges or a razor company selling replacement blades, an automaker generates a large chunk of its income from spare parts for a large fleet of existing cars on the road—something both Rivian and Lucid lack. What exactly the margins are is one of the industry’s most closely guarded secrets.
Having just launched deliveries towars the end of last year, the duo are in the unenviable position of needing to weather the current winds of stagflation before they have scaled up production at their factories in Normal, Ill., and Casa Grande, Ariz., respectively.
Bankruptcy itself does not need to spell the end of a company: Musk pointed out that General Motors and Chrysler both were insolvent and under administration in 2009 before emerging under new owners.
Rare warning
While fears are mounting over a coming recession, it is nevertheless highly unusual for a CEO to publicly warn about the risks to his or her competitors, for two key reasons.
First are reputational effects. Any criticism could be seen as motivated by the CEO’s intrinsic interests and also be panned as bad form. Moreover, executives prefer not to devote precious time during an interview to praise or badmouth rivals—when instead they could spend it explaining the benefits of their products.
Second are financial risks. Coming from someone as knowledgeable about the electric vehicle industry as Elon Musk, a warning that Rivian and Lucid may fold could scare off both potential investors and lenders that provide equity and debt capital, especially in a bear market.
Thus, by singling out specific competitors as headed for bankruptcy, the Tesla CEO opens himself up to the very real threat of litigation.
Possible threats
While both companies are effectively in their infancy, they still pose a certain threat to Musk’s far larger, battle-tested company.
Lucid earned the distinction that its Air sedan boasts the longest range on a single charge of any U.S. EPA-rated vehicle on the road at 517 miles, easily beating out Musk’s Model S.
A month after the Air was first revealed as a prototype in August 2020 to rave reviews in the media, Musk suddenly pledged to bring a new Model S Plaid with at least 520 miles. Less than a year later, he then canned that promise since there was “no need” for that much after all, and the Plaid ended up only offering a range of 348 miles.
For critics, it appeared as if the Tesla CEO was attempting to kneecap an up and coming rival by taking the media attention away with an even bolder promise, one he himself failed to live up to ulltimately.
And the critically well-received Rivian R1T pickup easily beat Tesla’s Cybertruck to market, prompting Musk to pull his models’ advertised specifications and prices last year and announce a new version with the same quad-motor powertrain layout as the R1T.
‘Doomed’
But both startups are now struggling. Lucid shares are down more than 60% from their January high, in part because of parts shortages, production setbacks, and launch delays.
And while Rivian was briefly a darling of the stock market when it raised $12 billion in the biggest IPO of 2021, its fortunes quickly soured afterwards.
Financial and strategic backer Amazon began forging deals with rivals like Stellantis for electric delivery vans; Ford pulled out of a joint project in favor of a go-it-alone plan; and chipmakers preferred to allocate their limited supply of highly prized semiconductors to other carmakers during the chip shortage.
Nowhere were Rivian’s missteps more obvious than in the disaster around its failed attempt to jack up the prices on existing reservation holders, most of whom had been waiting for delivery for well over a year. Within 48 hours, CEO R.J. Scaringe reversed course and admitted that destroying hard-earned goodwill in the blink of an eye was his biggest blunder yet.
Perhaps more troubling, while both Rivian and Lucid lack scale and even though their production is a tiny fraction the size of Tesla, their costs in some cases can be just as high. For example, Tesla posted operating expenses of $2.2 billion in the fourth quarter, barely higher than the $2.1 billion reported by Rivian during the period.
Musk didn’t pull his punches: “My advice to Rivian would be to cut costs immediately across the board dramatically or they’re doomed.”
Sign up for the Fortune Features email list so you don’t miss our biggest features, exclusive interviews, and investigations.
