Rivian, one of the hottest IPO in years, valued at over $100bn, far above the valuation of Ford, GM and other major auto manufacturers. It beggars belief that such a valuation is given to a car that takes a backward step from the standard set by Tesla. Perhaps, much of the Rivian’s valuation is implied by its association with Amazon and Ford. Their investment gives an aura of power and promise of future growth.
How can we tell if valuation is right? We do that by comparing products, technologies and market leadership.
The story of Rivian is, in broad terms, similar to Tesla’s: a founder driven by the desire to preserve the natural beauty of the planet and build a clean electric vehicle to replace the polluting internal combustion engine (ICE) cars. Rivian was also founded in California. The founder, RJ Scaringe, who has a PhD in mechanical engineering at MIT, is obsessed by protecting the natural environment.
The media stretched these similarities, building a narrative describing a competition of equals. While everyone recognises that Tesla is far ahead in terms of production, many point out that Rivian is the first electric car manufacturer in electric pickup trucks and related SUVs. Tesla is yet to begin the production of the Cybertruck.
There is an overwhelming sense of imminent radical expansion of the EV market. Rivian is considered the most credible new competitor of Tesla, a comparison that places Rivian on the same trajectory of success. The market enthusiasm is erasing the time necessary to manufacture at scale and quality, arriving instantaneously at the conclusion that Rivian will do what Tesla did, and voila: $100bn valuation.
I doubt the comparison is right. Rivian’s product pipeline is not anywhere like Tesla’s.
More importantly, I also believe that it is time to acknowledge that Tesla’s EVs are in a different product category, and Rivian is not in that space. The difference should be reflected by the labels we stick on those products, so that when we compare vehicles we do it within the boundaries of the same category.
Rivian and Tesla are in different product categories, and that makes the Rivian’s valuation excessive, to say the least.
Rivian is now what Nokia used to be before Apple produced the iPhone. In a curious evolution, Rivian actually went back technology-wise from Tesla (using the phone analogy, Nokia would have launched their phones after Apple released the first version of iPhone). The expectation of an EV production boom caused by new entrants, as well as the anticipated switch to EV manufacturing by the traditional incumbents, ignored the Tesla’s transformational advances in computing. It is as if we assume that a manufacturer passes the revolution test if it makes electric cars. All the other details are features, fancy additions. It feels like a gold rush: EVs are a sure way to make a company look innovative and planet friendly, investment grade attractive, rich.
The Difference Between Phones and Smartphones, EVs and SmartEVs
When Nokia made the first GSM mobile phones, everyone got excited. The market received this products so well, in a few years Nokia grew from zero to global dominance, seemingly in an unassailable position.
Then Apple’s iPhone showed up and people started compare the two as mobile phones, looking at price, calculating margins, demand, markets, and share prices. Gradually the OS started to be noticed, and with each new app published on AppStore the media began to see the widening gap between the two. Nokia put together in a rush its own OS, but it was too late, to slow and the business virtually vanished in an accelerated march into oblivion.
It is important to recognise what category products belong to. Nokia was a phone, a digital phone with nifty features compared to the old phone, but it was nevertheless a phone. The iPhone was a smart phone, a social communication device, not just telecommunication gadget. It took a while to make that difference.
As a rule of thumb, if a product’s innovation facilitates the distribution of other products and services of a different nature, the product brings a new category to the market. It is a new platform.
Teslas are not just cars, they are advanced automotive robots, thinking AI computing systems, a different kind of product. Yes, they are also cars, but in the domain of their definition they are so much more, that calling them cars is inaccurate. It is time to resolutely clarify that difference.
Standard electric vehicles, the likes of Rivian R1T and R1S, will not stimulate the creation of new industries. The smart EVs on the other hand will, in the same way the iPhone, the first smart phone did. $100b valuation for Rivian will only become justifiable, if the next generation are smart EVs. That will be incredible difficult because it is a bit late, in the same way Nokia responded too late to Apple’s threat. Even Microsoft couldn’t catch Apple once they realised how far they fell behind. Rivian is not that much different to what Ford was fifty years ago. Read the car’s selling point by its own innovator:
Isn’t this a description completely transposable to the Ford make 1950? What is the difference then? It has an electric motor, and very attractive touch screens and information displays. They don’t pollute. Isn’t that a story that the public of 1990s could relate to when new generations of cars were boasting about the addition of “powerful” computers on board, more efficient petrol engines, less polluting, more nature friendly, less toxic. I was once walking on the side of the road where a movie production company was filming a scene from the 70s and it needed ten cars or so to drive up and down the road to re-create the urban feel of the time. I was stunned by the smell of exhaust fumes. I appreciated in an instant how much better the cars were in the present (that was around 2005, I think). All in all, we are talking about cars. They have similar functions, but different qualities. Rivian is just vastly better than a Ford made in 1950, still a car, just electric.
Tesla is more like robot (see here a detailed explanation of why that is the case). Its computing platform spurs the emergence of new industries: robotaxis, new type of insurance and security services, adds, or brings back, a new social group of autonomous passengers (old people, people with disabilities), new entertainment services, life style, etc.
Below there is a short version of its cars’ modern capabilities compared to Rivian’s (note the $10,000 that is the margin Rivian doesn’t have and it should have at a valuation of $100b) :
It would be more appropriate if we compare Rivian, for example, with a Volvo XC40 electric. Its features are clearly superior, but they are similar as they refer to the ability of the vehicle to “read” the environment, avoid collisions, recognise road lanes, detect cars nearby, etc.
Rivian has a far superior detection system (not yet proven in production), but it lacks the computing capability and the functions that a Tesla car possesses.While Rivian has two information displays, the underlying operating system is vastly inferior to Tesla’s. Rivian’s video display can show maps, GPS positioning, car status and access to music controls. In a demonstration of what Tesla’s system is capable of, the new self-driving software version displays a level of traffic information detail never seen before. Tesla SmartEV is a robot that thinks, an AI machine. Rivian EV isn’t.
Rivian mentions a feature called Highway Assist, which will be made available later, limited to a few selected highways. There is a long, long way to catching up with Tesla.
The same distinction should be made when we try to compare vehicles produced by Ford, or GM, Volkswagen or Daimler-Benz. We cannot make a proper valuation of an electric vehicle company if we do not differentiate between an EV and a SmartEV.
The automobile industry is splitting into two: the traditional industry where the platform concept is represented by the powertrain and engine design and the modern industry where the platform concept is represented by the AI operating system and neuromorphic hardware design. I should add that the technology used for generating electric power may become a point of differentiation in the near future.
Rivian attempts to lead in the EV category as a truck and sports SUV manufacturer (this is where the enthusiastic valuation is coming from), but that market is about to get flooded by a wave of competitors from all around the world.
Tesla is the first SmartEV manufacturer, founded entirely on an AI computing platform, an absolute leader in the category it created. An EV maker, however modern looking, is still trapped in the traditional industry.I believe that any vehicle manufacturer that ignores this distinction and doesn’t create or adapt a complete AI computing platform is destined to become destitute. As it stands, Rivian’s valuation does not reflect the EV destitution risk.