With news today that Arrival - the London based EV start up company - has secured £300m equity funding from Westwood Capital, we investigate what the business model at Arrival actually is.
When Arrival became the UK's largest tech IPO in 2021 with its $13 billion Nasdaq float, I couldn't get my head around it. Even at the height of the American trend of valuing companies based on revenues rather than the British habit of looking at profit, combined with a SPAC crazy Wall Street, it was very hard to unpick what exactly investors were buying into. Apart from a PE style buy now at X, sell later at 5x - what did they see that I did not?
Since those heady days Arrival has lost 98% of its market value, with its market capitalisation today £112m. Maybe ultimately the stock market came to the same conclusion I did, or maybe something went wrong.
Traditionally (in the UK anyway) business were valued by multiples of their EBIT or operating profits. A recent trend for tech businesses has been to value them on multiples of their income - which of course completely ignores the track record of the business in actually making a profit. So in March 2021, what was Arrivals income? Zero. In fact, the company has not reported any income what so ever. to this day. If you look through the documents from the time of the SPAC, the valuation was actually calculated as 0.4x of revenue - but the forecast revenue in 2024 of $14.1 billion. Maybe they will go from zero in 2023 to $14 billion in 2024, but I doubt it........
But it has been spending money - vast amounts of money. By the end of 2021, they had burned though over $1 billion (including the over $1m their advisors charged for the SPAC). In 2022 another $1 billion has been spent, again with zero revenue, so to date Arrival has incurred losses over $2 billion, with not a penny of income.
So turning back to the SPAC, what was the value proposition that Arrival were offering for in return for the $600m they raised? We can look back at their own words:
Four vehicle designs expected in market by 2023
$1.2 billion in orders
Unit economics enable price competitiveness and lower total cost of ownership to fossil equivalents
Game changing Microfactories enable flexible low capex production
Vertically integrated
Arrival expects industry leading profitability enabled by proprietary hardware, software and robotic platforms
Leadership team with a proven track record from a verity of industries
Linkedin named Arrival #1 startup to work for in the UK in 2020
Validated by blue chip strategic and commercial partners
For a company with zero launched products, zero revenue and zero track record, there has to be a some core of future value for investors to invest in. With Arrival clearly a lot of hype built up around the big name investors, but it all had to start somewhere, and in my view the massive order book worth $1.2 billion had to be a part of it.
When we look at that in detail though, the story starts to unravel. As noted by arrival at the time, this figure "primarily includes [an] order from UPS, that can be cancelled or modified". Yes - it was a not formal order. How could UPS commit to any order? Arrival did not have an actual product to sell, but did have "designs".
The product pipeline that Arrival was promising was an electric bus in 2021, electric van in 2022, large electric van 2022 and a small vehicle platform in 2023. So where are we on the timeline? In August 2022 Arrival decided to stop its bus and car programmes as part of an effort to slash its costs by a third having announced large job cuts the month before. At the same time it lowered its delivery plans from 400 vehicles that year to 20. Writing in March 2023, no production vehicles have been delivered to customers.
In October 2022 the company announced further large jobs cuts, and a pivot away from the UK (where the electric bus had been designed for) to the USA.
In January 2023 Arrival announced 800 global job cuts to half its workforce as part of its pivot to the USA in order to take advantage of the massive UA 'Inflation Reduction Act'. Some commentators described this as moving the the US to take advantage of sweeteners being offered by the US government. Arrival now expects its van product to start in the US in 2024.
There is one other strange strand to the Arrival story - the 'Microfactory'. Along side development of its bus and van, Arrival has heavily promoted the concept of distributed manufacturing facilities. The concept here is that rather than huge, centralised vehicle factories set up for highly efficient operation, Arrival would sell a sort of factory in a kit which could be assembled close to where the demand for the vehicles are - in warehouses or existing buildings. Arrival promise these microfactories could be operational within 6 months and could be profitable at far smaller production volumes that traditional assembly lines.
100 years of vehicle production and manufacturing progress would suggest otherwise. Practically all high volume vehicles (like an order for thousands for 10,000 vans from UPS) are manufactured in centralised, 'lean' modern factories where the large capital costs are spread over high volumes of production units. Labour is specialised as are the International supply chains. Quite why Arrival think that by distributing expensive and highly technology advanced robotic factories all around the country would be more efficient than the rest of the industry manage is a mystery, they don't seem to back this up with any research (or willing customers) that I can find.
So where does all this leave Arrival and what lessons can we take? Below are my 5 key take aways:
Arrival essentially sold a promise. That promise was that using a highly talented team, they could invent, design and bring to market vehicles that were lower cost and had better performance that any established vehicle manufacturer
The seed of the massive valuations was a non-form order from UPS, valued in the $ billions
Other big automative names invested (in quite small terms), giving the company external validation of its plans - igniting the SPAC hype
Without any IP, designs or products - the promise to invent, design and deliver to market brand new vehicles at scale within 2 years was totally unachievable
Businesses have make money. By producing healthy, sustainable profits businesses create good quality jobs and support their communities by investing in people and paying tax. As we have seen with the crazy IPOs and SPAC deals in 2021 (Podpoint down 71%, Rivian down 90%, Deliveroo down 67% and Cazoo down 99%), it is not enough to be 'disruptive'. A business needs to have a solid model to create profits at its centre - the business above all competed with incumbents, without a clear way to actually make money.
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About the Author
Simon Gallagher is the Managing Director of UK Networks Services and is an expert on electricity networks and strategies around using electrification to get us to Net Zero by 2050.
Having held senior position across the electricity industry over the last 15 years, he advises on electrification strategy, e-mobility and heavy electrical infrastructure.
Simon holds a degree in Electrical engineering from Queen's University, Belfast, an MBA from Warwick Business School, is a Chartered Engineer and is an active Fellow of the Institution of Engineering and Technology (IET).
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