What happens if EV makers go bust?

I want to emphasise I’m not implying that Fisker or any of the particular companies mentioned below will go bust. But I do think more business failures are inevitable in this sector, and I’m not just talking about western manufacturers. Of the more than 150 Chinese new-energy vehicle brands in the market today, only 25 or 30 will survive through to 2030, forecasts AlixPartners, an advisory firm.

After Apple Inc scrapped a years long attempt to break into the auto industry last week, Elon Musk wrote on his social media platform X that “the natural state of a car company is dead.” He should know. Tesla Inc now has a $575 billion market capitalisation, but it almost went bust several times before reporting its first annual profit in 2020.

Musk has doubts about the longevity of rivals such as Rivian Automotive Inc and Lucid Group Inc because their costs are too high, but he’s hardly an impartial observer and one should not underestimate the willingness of investors to keep throwing good money after bad. Rivian’s largest stockholder is Amazon.com Inc which isn’t short of a penny, while Lucid boss Peter Rawlinson compared the cash-bleeding startup’s financial dependency on Saudi Arabia to a “marriage” in a recent Bloomberg News interview. (Both companies have sufficient cash for at least the next 12 months, according to their annual reports.)

Volvo Car AB is cutting off funding for Polestar Automotive Holding UK Plc, but its EV offshoot was still able to tap almost $1 billion in three-year loans from international banks last week thanks to continued backing by co-owner Zhejiang Geely Holding Group Co. Meanwhile, heavily loss-making Chinese EV brand Nio Inc secured a $2.2 billion funding boost from Abu Dhabi investment vehicle CYVN Holdings LLC in December.

This is potentially useful information for customers more accustomed to checking trunk space or charging times. “Before making a big purchase consumers should ask how stable and well established is the brand and will the shareholders put their hand in their pocket if something goes wrong?” says Nick Parker, managing director at AlixPartners.

Another comfort to car buyers is that bankruptcy is often not the end of the road — debts are restructured, new money comes in or the best assets are sold. Nevertheless, there are a variety of potential headaches for customers: Vehicles may lose value, parts can be difficult to obtain and the warranty may not be fully honored.

Customer confidence in warranties is vital when selling EVs, because batteries are expensive: Nikola Corp, for example, expects a recall of more than 200 electric heavy duty trucks due to faulty batteries will cost around $66 million.

From a car buyer’s perspective, recent instances of financial distress aren’t entirely encouraging. When Henrik Fisker’s first auto company, Fisker Automotive Inc, went bust in 2013, customers who had paid more than $100,000 for a Fisker Karma were told their warranty coverage would be capped at only a few thousand dollars.

After filing for bankruptcy last year, Lordstown Motors said it was unable to honor warranty guarantees. Debtors were authorised to repurchase the roughly 35 pickup trucks (yes, just 35) sold to date for $31,000 a piece, or less than half of the original purchase price.

Phoenix Motor Inc, says it took on a “significant” amount of warranty guarantees when it acquired Proterra Inc’s electric-bus assets out of Chapter 11 bankruptcy in January. “We wanted to be able to service our customers and maintain relationships and not tell them, sorry, the warranty is not our problem,” Mark Hastings, Phoenix’s chief investment officer, said on an investor call.

However, several transit customers said they were worried that Phoenix lacks the financial resources to honor these obligations: The new owner has also warned about its ability to remain a going concern and many of the more than 1,000 buses Proterra sold are reportedly inoperable due to technical problems that precede its bankruptcy.

A new and potentially important factor for car owners to ponder is whether vehicle software would remain supported post-bankruptcy. Modern cars rely on over-the-air updates to fix bugs and improve vehicle performance; in some cases, certain functions are only available by subscription. During its recent earnings call, Fisker spoke at length about the importance of these updates, which are helping mollify customers who complained vehicles weren’t up to scratch.

For a foretaste of what might happen if these updates ceased, consider the fuss this week when Nissan announced it is withdrawing a vehicle app for older versions of its electric Leaf. Customers spoke of their disappointment
that a major selling point of the vehicle — remote control of functionality such as heating and charging —  would simply vanish.

Happily, customers don’t need to overthink these what-ifs and worst-case scenarios: They can opt to lease a vehicle instead. The risks of technological obsolescence and rapid EV depreciation are already strong arguments for renting rather than buying, as is the availability of subsidies in the US. The danger, however small, of an automaker running out of money makes leasing a no-brainer: Then, if it goes bust, just hand back the keys.

Chris Bryant is a Bloomberg Opinion columnist. Views do not represent the stand of this publication. 

Credit: Bloomberg