Rivian Automotive, Inc. (RIVN) Earnings Call Transcript & Summary

Yes, yes. Can you talk a little bit about kind of the other components beyond the product choice you think that are needed to really get electrification going?

So I think by far and away, the biggest is choice, which we've talked about already. A second, which has been a point of a lot of discussion recently is charging and charging infrastructure. And to date, to recently, I should say, Tesla's charging network has been a significant differentiator for them and for the right reasons, it's an outstanding network. If you were to look at the metrics to measure the quality of the efficacy of network by, I'd say the most important metric is uptime, meaning when you show up to the charger, does it work? Tesla's network runs at about 99% uptime and it's in stark contrast to the other networks that are available where uptimes, depending on the network, could be anywhere from 50% to 65%, which it sounds like that's not that bad, like 1 out of 2 chargers works. But if you're a customer and you show up with that charger, you have to plug in and if it doesn't work, to move cars or wait for an hour because it's only half the charge work, it is super frustrating. And so recognizing that a few years ago, we started to develop our own -- we developed entirely in-house our own charging infrastructure. So we built DC fast-charging hardware. We actually build it in the same plant that we build our vehicles and we start to deploy our network. It's really robust hardware, the uptime for our network today, which is about 4% of the size of Tesla's network. So we're just getting started building. We call it the Rivian venture network. We have about 500 dispensers today. The uptime is 98.5%. So it's very nearly the same as Tesla. But while we were building that out, what's happened is Tesla has opened the network up. So we're one of a couple of manufacturers who are now actively on that network. There's a shortage of adapters between Tesla's NACS charger and the CCS connector, but those are shipping now, which is great. And then over time, we're going to be switching to the NACS connector along with moving our network, our charging network over to that. But with the fact that our customers can access Tesla's network, Tesla customers can access our network, which is really important for our network because our network can achieve profitability much faster as we have a large car park that can access it, this is an area we think has to change. And over the next 2 years, we're working on this to both grow our network and, of course, being part of Tesla's network allows us to limit that as a purchase consideration, at least there's a point of differentiation between us and Tesla. But I think generally, people have to have a lot more awareness around this. We have to put out there that these networks are out there, are available and perhaps, most importantly, if you don't drive an EV, you don't realize this, but you actually don't really use these networks that often. Like so for our customers, 95% of their charging is happening at their home. Less than half of our customers have ever used the DC fast chargers. So like there's not the once-a-year road trip, which today drives a lot of your purchase decisions is more in a lot of customers' heads than it is in real every day use. And so the necessity of that network is to say, you can do the road trip, but what's really important is your home charging solution needs to be [indiscernible].

If you think 10 years down the road, do you think the auto industry will still be running charging networks? I get -- I think it's very apparent why you, others need to invest in the networks now to get adoption up. Once we're at a higher adoption rate, is that something where you think you're going to earn money? Or is that kind of more service you need to provide at this point in time to get it going?

That is a good question. So if you ask me a question 5 years ago, I'd have said emphatically that charging networks will emerge and be funded independent of car companies. Investors will pour money into building this new infrastructure. And strong infrastructure providers will start to build those networks out. That hasn't happened. So it's been a very under-invested in space. The companies that do exist, haven't done it well. And amazingly, Tesla is the dominant provider of charging today. But amazingly, we find ourselves with our RAN network in our early stages of starting to deploy this, one of the largest networks outside of Tesla. And so when I say that, I say it with a smile because it's remarkable that how quickly we've become a bigger network. And if you look at high-speed charging, so above 150 kilowatts and certainly, as you look at charging at 900 volts, our charging networks built are on 900 volts or up to 900-volt architecture, like there is a real world where this is a really tight duopoly, maybe these 3 or 4 players, but there's not any evidence to date that third-party networks will be built as robust as they need to be. And it is a business that you can drive a lot of profitability from over time. So I'd say, in some ways, it's to be seen, but none of the data today supports the networks. It supports the thesis that the networks outside of car companies are going to be really strong.

All right. So we talked about kind of product availability and breadth. We talked about charging. Can you talk a little bit about policy? Some of the countries where we've seen the highest EV adoption, we've had very strong policy support. Now the U.S. has moved to some policy support. But if you were kind of to give a message, say, what do you think policymakers should or could do differently here?

This is a big question and there's changes happening here that are really hard to predict. So depending on who wins White House has some big implications, but in all directions. So we've got international trade, which is a massive consideration, in particular the role that China plays outside of China. That's a large question, and we've seen trade policy and tariff policy. Certainly, maybe the singular item for which the right and the left, Republicans and Democrats are aligned in the United States, which is an anti-China perspective today. And so strong tariffs being in place to protect non-Chinese manufacturers in the United States is likely to continue, both at the vehicle level and at the battery level, stronger at the vehicle level. And so that's something we have to consider. But the other is just the tailwinds, call it the carrots and the sticks around electrification. So the carrot, of course, being consumer-facing tax credits or manufacturer-facing credits, and the sticks being fines. And so we see this through all lenses. We see this the affected as consumers. We also see the environment for buying credits, greenhouse gas emission credits, zero-emission vehicle credits become incredibly robust in the last maybe 6 to 9 months, which is reflective of a few things. It's reflective of some of the pullback we've seen from incumbent manufacturers on investing in EVs or a pullback in their confidence in their EV programs. But it also is reflective of a view that some of these credits are going to remain. And regardless of who wins the White House, the bureaucracy and inefficiencies of our political system are going to preserve a lot of the policies that are in place, whether we like it or not, which is sort of a wild thing when you think for once our beneficial government is going to be helpful to at least create some stability. But our view is that all -- what happens over the next few years is secondary to the fact that it's the end state is crystal clear. The end state is 100% of vehicles will be electric. The entire automotive industry will be electric. And Pulse is going to be driving that more aggressively and more deterministically in a number of places. So throughout Europe, most countries -- I shouldn't say most countries, all of Europe is committed to all new vehicle sales being electric, 100% electric by 2035. In the United States, a number of states have followed the California Resource Board requirement that is the same, which is all new vehicles sold will need to be electric by 2035. And just to restate like how remarkable that is, in 2035 in California and 14 other states that have followed that standard, you will not be able to buy a hybrid or non-EV vehicle, which is like that's not -- 2035 isn't decades away. That's a decade away. That's maybe 1.5 product development cycles away in the context of an incumbent OEM. And so will carve -- will California change its policy? Will Europe change their policy? Will India change its policy? I think you may -- on the margin, you may see a few adjustments to this but it's pretty clear that the policy requirements to fully electrify are absolutely going to be there. And we could debate around the election, whether that moves by a few years or not, but that's the end state. And so when that happens, we have to mirror that -- match that with product variety and product choice that allows this to be a transition that's exciting and possible for customers. If that were to be in place today, it would be really hard as there are so few choices in the EV space. If you want a mini van, you can't get an electric mini van, doesn't exist. If you want to midsized SUV, like a proper SUV, it doesn't -- there's crossovers, but there's no real SUV. There's no like SUV like SUV, if you will, in the $45,000 our price point. If you want a hatchback, there's no hatchback. So there's just like a very limited set of EVs compared to the ICE world. And so we have a decade as an industry to create a really compelling, super exciting set of products that will match the policy requirements to electrify.

You just talked a little bit about international trade. And maybe let's look at the kind of import and export side of that for a moment. Would you rather prefer kind of having more access to low-cost parts from China or other parts of the world? Or would you rather have the U.S. kind of build up trade barriers and force the domestic agenda on that?

I think from the view of -- if we take the perspective of the last question, actually say this, I think the most important thing would be most viable for the industry, not just Rivian, is stability around some of these things because the lead times are very long. And the instability of policy means that all of us, Rivian, and I'm sure other manufacturers like build really complex strategies that have a bunch of different statements. If this happens, what we do and our supply chain strategies are highly conditioned around a variety of potential outcomes. That being said, a pure free trade environment would certainly allow us to offer lower-priced vehicles because it'd be able to access certain components and certain raw materials at a lower price, specifically batteries. And the cost of a Chinese battery is today not slightly lower, it's massively lower than a non-Chinese battery. And by and large, today, that's not -- we haven't really seen those in the U.S. because of tariffs. So at the battery level, there's a 25% tariff that exists, which, in addition to logistics costs, makes it very difficult to rationally build a strategy around that. Now for Europe and for rest of the world, certainly before the U.S., it's more difficult. I think the big question that's out there is at the vehicle level, having vehicles come in. Now there's -- for those that aren't following us super closely, there's a 100% tariff that's just been put in place on vehicles from China to the United States. So it makes it extremely unlikely that we're going to see any significant penetration of Chinese vehicles into the U.S. Batteries, we'll see some. But with the tariffs, they are, it does make the Chinese batteries more difficult to make their way in.

And maybe thinking a little bit about the domestic supply chain, you just made the decision to concentrate kind of the next couple of steps where in Normal at your existing facility and kind of push Georgia probably a little bit out. But what's your time line on the expansion plan in Georgia? Is that still in your strategy going forward?

Just for the benefits of clarity. So we have a production facility when we say Normal, that's the name of the city that our plant is in. So we have a plant in Illinois in a city called Normal. And so that facility has a capacity of 215 -- will have a capacity of 215,000 units between our R1 products. We also make commercial bands were the largest customer being Amazon, and now R2, R3 product lines. We have a second large greenfield facility that we've been developing in Georgia, and that would be the next phase of growth for R2. And so the decision we took recently was to launch our R2 product out of our Normal facility, both to minimize the amount of capital spend through the launch of R2, but second to also make sure we have fully 100-plus percent utilized facility in Normal where we have fungibility between R1, R2 and what we call RCV or Rivian Commercial Van platform. And so that decision was really around ensuring that businesses path to profitability as quick as possible, but also ensuring the path to launch R2 as quick as possible. We want to get that product in market, like I wish we could be selling it today because there's so much excitement for it and so much interest in that vehicle.

And maybe then turning to the export side. You're in a fairly small EV market in terms of numbers here in the U.S. China is probably off limits with the 100% EV tax, that leaves Europe. Are you thinking about that market?

Just R2 and R3 have been architected from you started years ago from the very basic level to fit the European market really well. In terms of trade, scale in Europe ultimately requires production in Europe. There's a 10% export tariff from the U.S. to Europe. There's a smaller tariff from Europe into the U.S., but it makes exporting vehicles something that you certainly can do and it's great to start the market, but to really scale those markets will ultimately need to be producing them locally. And so that's not something that we've talked about or even made any commitments to in terms of production in Europe. But long term, the R2 platform and the production infrastructure being designed to support that platform is contemplated to have multiple plants. So we envision that platform being produced in not just our Normal, Illinois plant or our plant in Georgia, but ultimately in plants in Europe as well.

You've seen a couple of manufacturers. I'm going to say, loan out their EV platforms. You've seen the MEB platform from Volkswagen getting around quite a bit. Is that something that's possible with the platform that's underlying R2 and R3?

Yes, it absolutely is. I think one of the things we're seeing as well is the opportunity -- one of the things we took an approach that's different than existing incumbent OEMs is we've really emphasized vertical integration of electronics and software. So typically, the way the electronics architecture set up in the vehicles you have a collection of small computers, what you'll hear refer to as ECUs that are running domains. So they run body control, they run powertrain, that run chassis, and they're sourced from Tier 1 suppliers. And as a result, you purchased essentially a function, you purchase body control, you purchase seat control, you purchase powertrain control, chassis control. And you end up with this assemblage of 30, 40 ECUs across the vehicle, really complex. And so with the launch of R1 years ago, we've been leaning into that. So it's like in the, I don't know, 2015 onwards, we were developing our own ECU topology. So we have a computer design team. We have a base software team. And so it's become a really -- it's our largest technical team by far within the company is electronics and software. And so it's a real core strength. And what that does in the short term, it means there is a lot of R&D spend to build up all these things that Tier 1s do. What it means the long term is the ability to consolidate very easily where we don't have to go negotiate between suppliers to get functions consolidated to a single controller that operates in a zone of the vehicle, but rather we can decide and be the sole arbiter of what software goes on what computer. And the many thousands of dollars of savings that are possible with that is really significant, but it's also a platform that we see as highly valuable for applications outside of our own use case because we've solved something that's very hard to solve through the Tier 1 supply base. So I think there's a long way of saying, I think there's platform opportunities where you think about the easy to visualize stuff, battery, drive units, but there's even more compelling and differentiated opportunities for our network architecture and our software stack, which to date, outside of China, there's only one other company that has a zonal completely vertically integrated architecture for that being Tesla. So there's 2 companies have done it, us being one of them and we think that's really valuable.

I'll just remind everybody, if you want to ask a question, there is a QR code somewhere on your agenda, where you can find kind of the link to put in questions to the tool and they'll pop up here. But I'd like to talk about one large topic maybe towards the end. You just mentioned the speed, you'd wish R2 or R3 were coming sooner. What have you learned about the pace of innovation in this sector, in the automotive sector kind of since you started Rivian?

Yes, I mean the thing that makes vehicle is so unique is the lead times and everything is really long. So like a headlight lead time to develop a tool a headlight is 24 months. And so what it means is products have a multiyear productions lifetime. So you launch something it saves in production for a few years and then you make adjustments to it over time. But customers want to see the product get better and better at a much higher pace. And so this is the value of, come back to a previous point I made, of just owning the electronics and software stack because it allows you to do more thorough and robust over-the-air updates where the product and the feature set get better over time. And embedded or implicit in that belief is the necessity of building some headroom into the electronics in the vehicle. And so that means your perception stack needs to be strong enough. Your compute stack needs to be strong enough such that the vehicle gets better month-over-month. And so since we've launched, we've had 30 over-the-air updates. These -- some of them -- they're not -- there's not big headlines around new features. There's always some new features, but we have launched in a number of these big new feature sets. And so what we're -- what we think of in terms of innovation here, especially with the updates that are just going in on the hardware side with the vehicle that we're launching very shortly, is the headroom provided at the platform level allows for autonomous and self-driving capabilities to continually grow. You buy a vehicle, it's that same vehicle 1 year after purchase is a lot better than the thing you bought. The features and capabilities of it from a digital point of view continue to get better over time. And it starts to map more closely to what we've become familiarized with through the technology we hold in our hands, the things that are pocket or in our backpack from a consumer electronics point of view. And that, we think, starts to become a very -- it's a dominant product feature that customers will start to look at, which is how much better does my car get over time, and that starts to link to the brand and how our customers view the brand. And so the days of you buy a vehicle and 5 years later, it's the same vehicle, we think those days are just starting to fade into the distant background. But you have to architect the vehicle to really accomplish it in a meaningful way.

Why have Chinese OEMs been so much faster in rolling out new products?

Well, I think there's -- the Chinese OEMs, much like us, the benefits of starting with a clean sheet. So if you're building a new company or building a new architecture, you wouldn't design it with the same topology of dependencies. If you look at the way our tiered supply base is developed, it's one that's highly tiered because of the amount of components in the vehicle. So -- and like in an R1T, there's a few thousand sourced items that we buy from suppliers, but there's tens of thousands of individual discrete components. So take a headlight, we buy a headlight as a part, but there's 91 components in 1 of those headlights. And in those components we even subcomponents, you have like Tier 1, Tier 2, Tier 3. But the role that Tier 1s play in the supply chain around electronics is somewhat surprising, and it actually ironically goes back to fuel injection. It goes back to the move from carbureted engines to fuel injective engines. And at that time, the belief was that the value proposition and the thing that the OEMs really owned was the engine and the body and it said all these electronic stuff, we'll just push to these suppliers. And what wasn't realized 50 years ago was that began this process whereby electronics and software push to suppliers and the manufacturers were assemblers of the body and builders of the engine. And fast forward to today, it's really a broken to apologize. So if you were to design this and say, the most important thing from a customer is software and to do great software, you need to do great electronics and design computers yourself. You would never push those things to supply base, but that's how the supply base has been built. So I think in contrast, China has grown up at a time when the idea of the vehicle being a connected device was absolutely front of mind. And they've built capabilities embedded within their organizations that are a lot more like how we've architected Rivian or I'd say how Tesla's architectured themselves to be vertically integrated around software and electronics.

Maybe before we -- before you head off, can you talk a little about the commercial vehicle business? You just mentioned your customer, Amazon, but how do you view that space in Rivian's future in more general terms? Or what's the opportunity here? And how focused are you on that right now?

Yes. So just to give full context here, we have, in addition to our consumer products, we have a commercial van business. And we launched that business through a deep partnership with the largest shareholder, Amazon, where they committed to electrify a significant portion of their fleet with 100,000 vehicle order of our vans. To date, we've delivered about 20% of that. And of that initial order, and we continue to be building towards that, and we've witnessed, and I think the world is not starting to see this on the road. So hopefully, you've had some packages delivered with one of those vans. But the process of electrifying a fleet at that scale is not simple. There's things like -- we've talked about charging infrastructure requires real thought at this scale and across fulfillment centers or distribution centers that weren't contemplated to have 10 megawatts of charging capability. So there's real work that has to go into that. But what we initiated about a year ago is looking at customers outside of Amazon. And so the nature of a commercial customer versus consumer customers are not emotional, not buying an electric van because you think it accelerates differently or because it's more fun the buyers and the users of the vehicles are not the same people. So there's a buyer of vehicles making a highly strategic TCO-driven decision and then there's the users, which are employees. And so what we found is the need to run pilots to demonstrate in real-world terms, what are the cost advantages to running electric fleet? What are the operational steps necessary to at scale convert your fleet? And so we're now running a number of those pilots. And we, this year, we won't see a lot of significant volume associated with those pilots, but it's really the next year, 2025, that we'll start to see more volume. And here again, policy does make a difference. So in Europe, I think the first space to electrify will be commercial because of congestion taxes and emission limitations for operating commercial vehicles within the confines of a city. We're going to see pieces of that as well in the United States. And I think the space that we'll see the highest penetration in terms of market share of EVs will actually be the commercial van space, particularly for last-mile delivery where it's from a technical point of view, the -- like a very easy problem to solve. The vehicle starts and ends to stay at the same place. It drives well under 100 miles in a day. It's a perfect application for EVs. But as I noted before, a lot of the companies that run these fleets are not always at the leading edge of progressive thinking when it comes to sustainability or electrification. So there's a journey that they're going through as well. And so we've had the benefit of working with the largest fleet operator in the world with Amazon and learning with them through that process, what it's like to electrify a large-scale fleet. Now we're taking those learnings and applying it with other partners.

Before I close out, I'd be remiss if I didn't ask you about the full year and kind of guidance where you think you're going to end up, I think, was minus 2.7 on EBITDA. What are the building blocks you're building into that guidance till the end of the year?

Yes. So this is a critical year for us because we've gone from our Gen 1 product to these big updates with that a big inflection on our cost structure. We've seen -- it's not to say we haven't made progress quarter-over-quarter with taking our gross margin, improving our gross margin where today it has been. We've had a negative gross margin to date. But flipping that to not only a positive gross margin, but demonstrating very clearly the trajectory towards healthy positive gross margins as we look into 2025 is really important. So Q3, Q4 will represent pivotal quarters for us. We have -- as is always the case, I think there's a lot of asymmetry where we have a really clear line of sight to what's happening. We have a lot of confidence we tried to project around and demonstrate around our path to profitability. And as investors, you guys have to work off of the things you've seen in the past and what we've done. And going through this inflection around our cost structure and the way we've architected our vehicles and our supply chain. We look forward and we see things with a lot of optimism around our cost structure and around our overall profitability. And that sets us up really well for 2025 and then, of course, the introduction of R2, which learning from everything that we did in R1, will have a much faster path to profitability.

Yes. If we do anything in next year, and I hope we'll welcome you back to SEC. But if we welcome you back next year, next to kind of the inflection in the second half, what do you think will be the biggest challenge you would want investors to measure you by in the next 12 months?

We effectively everything I just said that we do want to look at the progress we make between -- on cost structure and positive gross margin. I think at that point, a lot of the discussion should be shifting to R2 and looking at that point will be a little more than half a year away from R2 making its way into customers' hands. And so that represents -- was R1 represents a demonstration of the brand and a handshake with the world for that, and we need to show the path to profitability with R1 and the fact that, that supports a baseline element of the business. R2 is really what drives scale. It goes from an addressable market that's relatively limited when you're selling $90,000 vehicles to a much, much, much bigger market when we're selling $45,000 vehicles. And that's for us the major inflection for the business and the relevance of Rivian as a brand to consumers and relevance of Rivian in terms of driving well above, say, we're 5% market share. We'd like to be many times that, that is enabled by R2, of course.

Excellent. RJ, thanks very much for coming.

Yes, thank you.

Thanks for being here.