California EV start-up Rivian has set a target of "modest" gross profit in the final quarter of this year, as management laid out an ambitious cost-reduction strategy to analysts on the company's Q1 earnings call.
The automaker has emerged on the other side of a factory retooling shutdown now in a position to rapidly push its manufacturing costs down. And, with year-end guidance pointing to relatively flat delivery volumes, the OEM appears to be pinning its hopes for profitability on drastically improved margins.
Rivian has its work cut out, however, to reduce cost of goods sold (COGS) from the current levels of over $120,000 per R1 unit to a point at which an approximately $40,000 R3 EV can be sold at a positive gross margin, which the firm expects by 2026.
"It means that to get any sort of a decent gross margin, you need to probably get COGS per unit in the high-$30,000 range," says Barclays automotive analyst Dan Levy. "We are talking about almost $100,000 — or a little less — of improvement in cost of goods sold per unit."
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At the current COGS levels, Rivian says it is losing $39,000 per vehicle it sells, with around $9,000 of this per-unit loss related to depreciation of manufacturing tools. And while the company has not guided to a specific positive gross margin goal for the end of 2024, it appears that the OEM still needs to slash R1 COGS by approximately half.
CFO Claire McDonough also says that a primary driver towards R1 production line gross margin improvement is leveraging some of the economies of scale and new sourcing strategies inherent in preparing for its future R2 ramp.
"We also expect to see commodity tailwinds in the second half of 2024, as well as the added benefit from R2 sourcing on our ongoing commercial cost downs," the CFO says.
CEO RJ Scaringe adds that Rivian has therefore seen a "significant portion of the bill of materials change over to these new suppliers and updated part designs".
The recent retooling upgrade to the automaker's Normal, IL facility will also allow production lines to run 30pc more quickly, McDonough says. As such, the company has reduced the plant to two daily shifts, which the CFO says will enable a c. 56,000 unit annual capacity for the R1 line. The firm is targeting 215,000 total annual units across its portfolio after the launch of the R2.
The importance of improved cost structure for Rivian is reinforced by automaker's guidance for year-end 2024 not involving a significant increase in delivery volumes, instead preferring stable volumes at improved margins. As with the firm's 2023 production guidance, however, this projection of flat delivery volumes could be another case of under-promising in order to over-deliver.
"Our anticipation is not a significant increase in overall volumes associated with Q4'24 relative to Q4 '23 and equally a similar price point from an average selling price perspective," McDonough says. "So the revenue per unit driver is really driven by non-vehicle revenue streams, predominantly with the sale of regulatory credits."
McDonough cites increased demand for the firm's regulatory credits as a result of larger OEMs pulling back on EV production targets. Although not directly involved in Rivian's EV assembly, the firm is counting credit sales towards automotive gross margins, providing an in-principle cost-free revenue to count against its COGS.
But credit sales are potentially a lumpy and irregular revenue source. McDonough notes that the firm's "first quarter results did not include any meaningful regulatory credit sales".
But while management is forthcoming about its renewed cost-down push, there is little to show in terms of production or delivery growth. The automaker produced 13,980 vehicles and delivered 13,588 vehicles in Q1, both down sequentially.
Ciaran has written about finance, politics and culture. He is passionate about e-mobility and what it means for our way of life.
Ciaran has a Masters in Ancient Philosophy from Oxford University.
