Arrival: A Radical Plan To Manufacture Electric Vehicles With Microfactories

Summary

• Arrival plans to ride the decarbonisation wave with its all-electric van and bus.
• The company plans to use a distributed production network of small low-cost Microfactories.
• The plan could see 1,000 buses or 10,000 vans produced per Microfactory every year closer to the locations they are used.

Photo by stellalevi/iStock via Getty Images

London-based commercial electric vehicle producer Arrival (NASDAQ:NASDAQ:ARVL) has finally gone public on NASDAQ after completing its merger with blank check company CIIG Merger Corp. The merger saw Arrival raise $660 million in gross proceeds, including a $400 million PIPE. Arrival had previously raised institutional capital from Hyundai & Kia Motors, UPS, and BlackRock. UPS (UPS) also ordered 10,000 electric vans for delivery before 2024.

Arrival enters a crowded space being pursued by a number of recent public EV companies like Electric Last Mile (NASDAQ:FIII), Canoo (NASDAQ:GOEV), and Proterra (NASDAQ:ACTC). Well established automakers like Ford (NYSE:F) with its electric Transit van, launching in 2022, and BYD (OTCPK:BYDDY) with its range of electric buses are also looking to carve out a slice of the fast-growing market for commercial EV solutions. Demand from fleet owners is being driven by increasing societal pressure for corporations to align their business operations with sustainable outcomes, government-mandated timelines on the phasing out of ICE vehicle sales, and federal support for EV sales.

The Biden administration just revealed a $2 trillion infrastructure proposal that aims to allocate $174 billion on tax incentives to encourage more rapid uptake of American-made EVs, as well as to pay for the transition of thousands of transit buses from diesel to electric.

Arrival Bus and Van (Source)

Manufacturing Vehicles With Microfactories

While the market for commercial EVs is going to become intensely competitive as new EV models get rolled out in the coming years, it is also going to grow at a material pace with sales of electric buses forecasted to grow at an 11% compound annual growth rate between 2021 and 2027.

Arrival's differentiating factor from the sea of competition is its aim for price parity with competing ICE vehicles with a lower total cost of ownership. The company aims to achieve this with its use of a distributed production network that utilises small low-cost Microfactories that can supply either 1,000 buses or 10,000 delivery vans annually. These Microfactories would be located close to urban centres and can be situated in preexisting factory space retrofitted to its new use.

Arrival says its Microfactories should cost $50 million or less and can be ready to start production in months. The company intends to use standard battery cells from LG Chem but can piggyback onto new battery technologies as these become available in the new few years.

Further, Arrival intends to use thermoplastic composites to make the body panels of its vehicles lighter and less expensive than conventional traditional steel and injection moulded EVs. It also enables its vehicles to be recyclable offering enhanced sustainability credentials.

Arrival x United States

Arrival just announced plans for a second US Microfactory in Charlotte, North Carolina. This will be in addition to its first Microfactory near Oxford, England and its second Microfactory in Rock Hill, South Carolina. At a unit level, these will employ hundreds of local workers but will also use a high degree of robotic automation. The company's British roots also provide a good base for pan-European expansion while its US-dominated board will be critical for further North American growth. The company has ambitions to build a network of Microfactories around the world to support its extremely ambitious revenue guidance.

Arrival November 2020 Investor Presentation (Source)

Arrival expects to realize revenue of $1 billion in its fiscal 2022, and expects this to rise 405% year-over-year to $5 billion in 2023. The company is forecasting material forward demand coupled with perfect execution in spite of it not having made a single car as revenue of $14 billion is guided for 2024. Elon Musk famously described the production ramp of his Model 3 electric sedan as "hell" due to the constraints of battery cells, parts construction, and the development of the assembly lines. Hence, while Arrival's distributed model for EV manufacturing could smooth some of the issues with manufacturing its vehicle at scale, the current guidance does not seem to provide any leeway for potential production issues for a start-up company.

With the company's market capitalization currently at $9.7 billion, the forward 3-year price to revenue multiple stands at 0.7x. This would seem like a cheap valuation in an industry beset by heavy premiums on guided revenue by young companies yet to bring a single car to market. However, the recent debacle with Canoo and Romeo Power who were both forced to pull their guidance provided during their SPAC mergers highlights the importance of taking such revenue forecasts with a heavy dose of scepticism.

However, the company's Microfactories will be a critical part of its story and could help Arrival better scale up to meet future global demand for electrified commercial fleets. What remains to be seen is if this market will be able to support the rush of old and new competition coming online. In what is likely to become a brutally competitive market for commercial EVs, companies like Arrival that aim to offer price parity with competing ICE models but with a lower total cost of ownership are likely to perform very well and carve out a slice of this great EV market. Arrival might be a buy on any further weakness in its stock price but only after more clarity can be attained on its guidance.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Comments

[Preserve & Prosper]

Boy, talk about speculative. A $9 billion market cap for a start-up with an unproven business model, propelled by a dream-sheet predicting insane growth from $0 in 2021 to $1 billion in 2022 then $5 billion in 2023 tripling to $14 billion in 2024. And this is in a crowded market.

I'll stay on the sidelines for this one. Or maybe even short a few shares.

[charly333]

@Preserve & Prosper they have "non-binding orders and LOIs". This is just hot air. The stock has a long way to fall. They have nice pictures but no vehicles. It's not wrong to short some. Just keep it tiny.

[EdCNY]

Interesting concept, but I'll stick with BYD Company (OTCPK:BYDDY) (OTCPK:BYDDF).
The real deal, still under everyone's radar.

[pat45]

any idea when any of the micro factories will be operational?

[gametv]

Arrival has been holding up pretty well against the carnage in SPAC and BEV companies, but I think the valuation needs to move back down to 12-13 and put in a double bottom. The valuation is pretty high for a company that hasnt produced a single vehicle through the microfactory concept yet.

I like them long-term, but just think the valuation needs to come back down here.

[charly333]

Microfactory is nonsense. They want to fool you. Don't buy this stuff.

[forty_two]

@charly333 very solid argument

[gametv]

The volatility in Arrival is pretty insane. It falls 9% one day then rebounds 4% in a few minutes on hardly any trades.

Is there any lockup on shares? I looked at the registration statement and it looks like there was no lockup period at all for shares. If that is true, it would make sense that anyone who wanted to lock in their gains would be selling and there would be immediate pressure on the shares after consummating the transaction.

[debaron]

@gametv Well that makes sense then. So theory is then that ARVL sold a ton of shares or warrants to the SPAC backers (at what price we don't know but will be below current market price). No IPO lockup so they can all sell once the new ticker is in play and *probably* those same backers go short the stock knowing there will be huge downward pressure. A double kick in teeth for us. Nice. Really f*****g nice.

[debaron]

@debaron Reminds me of what $TOPS and Kalani did several years back.

[lsmtihcom]

@debaron one of the interesting things about arrival is that the founder owns 70% of the company through some type of trust (I forget the name, but you can see it in the filings). so if he doesnt liquidate shares, then alot of the stock is tied up by just one guy, which means if the stock gets some institutional support, there will just not be alot of stock available for them to buy. but right now is the worst possible environment for ARVL - SPACs are crashing down to $10 or under, EV stocks are crashing down from a bubble, companies with sales and profits in the distant future are crashing as interest rates moved higher last quarter.

remember the valuation as a private company was $3 billion a year ago, the SPAC valuation was $5.6 billion and today we are at 7-8 billion, so it could move down here.

but none of this really dims the upside potential. ARVL is really all about execution. if they can prove that the microfactory model really works and the financial metrics they have built in their financial model are real, then the stock will skyrocket. or we could find out that there are fundamental roadblocks to the actual production process and there will be lots of downside.

i have bought a small amount and just looking to kind of average in over time.

i think that announcement that they are ahead of schedule on production is what could drive a price increase, but who knows if that happens?

[debaron]

The pretty much endless selloff in the stock since the ticker change seems suspect to me. Does anyone know if there is a PIPE scheme in place to get around an IPO lockup? This seems like it goes beyond just straight short selling...

[Semi-Tough]

@debaron I don't know, but as I mentioned elsewhere in the comments, I allow my broker to lend my ARVL shares to be shorted and we split the interest. The latest rate they are paying me is 22%, which means someone is paying them 44% to short the stock. Seems nuts to me, but the stock keeps dropping. I just keep buying more...

[gametv]

@debaron I am having trouble finding a lockup period on the vast majority of shares. It looks to me like it says that 570 million of the 600ish million shares can be sold without any lockup. Is that right?

[debaron]

@Semi-Tough Yes it's around 48% on Interactive Brokers....I should probably do the same

[pat45]

are these working prototypes?? Any sales or production dates?

[Pacifica Yield]

@pat45 Yes these are still being tested for sale later this year and in 2022.

[gametv]

I would be inclined to buy here, except the whole EV sector looks to me to have another downward flush coming. Hard to tell, but alot of the companies have been forced back down to a region of support, but I think they need to break this support to finally clear out all the excess and start over again.

[Semi-Tough]

With Arrival, the first thing you hear about usually is the microfactories, but I think the proprietary composite panels distinguishes them even more from other EV companies. Here's the link to one of their videos showing how the composite panels are made and recycled. I love that you can strip the panels off an old Arrival van, then shred and recycle them into new panels. https://youtu.be/2aIYGrrKTaI

[gametv]

I am so conflicted about where we stand with EV stock valuations right now. Tesla is going to have a good earnings report, so will that spike the price higher in the short term? or have investors finally woke up to the fact that the company is highly over-valued in the long term and the whole EV sector faces massive competition?

My guess is that all EV stocks are being valued relative to Tesla right now, so if Tesla market cap falls dramatically it wipes out billions in market cap off every EV maker. including arrival.

But at the same time, this valuation for Arrival is decent. Could it take one more downturn? absolutely. so I just cant back up the trucks on buying the stock at this time...but I want to.

[Semi-Tough]

I like Arrival a lot (and have a lot invested in them, both the warrants and the stock). What I found interesting was the 60 Minutes segment a few weeks ago on Boston Dynamics. Besides the $111M investment Hyundai made in Arrival, they also invested $1.1B in Boston Dynamics, and now have controlling interest. I wonder if there's a connection because robotics is the key to Arrival's micro-factories success. This article refers to Hyundai leveraging Arrival's micro-factories as well: electrek.co/...

It's a nice package - Arrival leverages Hyundai's expertise, Hyundai leverages Arrival's micro-factories, both leverage Boston Dynamics robotics.

[lsmtihcom]

@Semi-Tough so the question is whether Arrival is actually a play on passenger vehicles as well as industrial transport? what type of deal does Arrival have with Hyundai. I notice that Arrival has a small passenger category listing in its financial documents, but it appears that it is modelling financial projections off the truck/bus business only and that passenger cars or any partnerships on passenger cars would be incremental.

[Semi-Tough]

@lsmtihcom I would say Arrival is not a play on passenger vehicles, though the prospectus does say they will develop vehicles jointly. Here's the actual wording:

Hyundai Motor Company and Kia Motors Corporation (“HKMC”). On November 4, 2019, Arrival entered into an agreement with HKMC to jointly develop vehicles using Arrival’s technologies. Through this agreement, Arrival has access to HKMC’s engineering expertise and supply chain. This partnership will leverage the use of Arrival’s microfactories and software innovation. Arrival will benefit from HKMC’s global footprint and economies of scale with the aim to reduce the cost of components. The joint development agreement will expire on November 3, 2024. This development agreement prevents Arrival from developing EVs with other traditional OEMs until November 3, 2022.

[lsmtihcom]

@Semi-Tough You can also google an article about this partnership. Hyundai/Kia specifically talk about leveraging Arrival tech to create a new type of EV. I think that they see that with EV propulsion the need for a complex steel frame and engine compartment are gone.

What I cant figure out is how this economic relationship works. Does Arrival plan to market cars under its own label, or get contracts to build the vehicles for Hyundai/Kia or get some other profit share?

I've started to buy shares, but going to accumulate slowly, as we might not have reached bottom yet. I view this as a long-term play. At some point I expect there to be a big shake-out of market caps for EV companies, as the glut of product in the area creates fierce competition. But Arrival seems to have manufacturing tech that is far different and will give it a few year head-start.

[Addy1992]

Just wait and watch in a few weeks or a few months
You will see it over 30

[Semi-Tough]

@Addy1992 I agree. Here's something that makes me wonder to what extent shorts are driving down the price. ARVL stock is considered "hard-to-borrow", so I entered into a securities lending agreement with my broker. They lend out the shares to the shorts, charge interest, and split it with me. I figure I'm holding it for the long term, so in the short term, I'll get interest and if the shorts do drive down the price, that's just an opportunity to buy more (which I've done). So the interest rate they paid me starting out was 8% meaning a short was paying them 16%. The interest rate increased multiple times until finally last Thursday they were paying me 18.5%, meaning they were collecting 37% from someone??? Suddenly yesterday, after a few positive articles on ARVL, the broker returned all my shares. Today, it's finally trending up. :)

[Addy1992]

@Semi-Tough you know what I’m holding over 300 stocks and most of it people were selling I was buying
I’m mad lol
I always do opposite
I buy when blood 🩸 on the street

[SA-NJ52]

There were dozens of car companies at the turn of the last century. Now there are three in North America and a handful across the world.

Autos, even EVs, require a back of the house infrastructure to service and maintain these vehicles.

Perhaps if the cars could be 3-D printed, this microfactory model might make sense.

I will come back in 100 years to check this out.

@gandc

[Tommy K2035]

@gandc These are buses and vans. Try reading

[turbo_dog]

So, i guess that the question is, can the new arrivals compete with the entrenched manufacturers?

[NestEgg Research]

Nice summary! We agree that this is one of the more interesting EV names with lots of IP, much like Canoo.

[lsmtihcom]

@NestEgg Research Actually Canoo is not interesting at all. It doesnt have a plan that revolutionizes the production process. It merely has some interesting ideas on the design of a certain type of all-purpose vehicle. Canoo doesnt have a well-defined customer segment or any compelling value proposition. The fall in Canoo share prices is probably what has caused Arrival stock to tank after the SPAC closing.

I'm looking for Tesla stock to reverse lower. Shanghai Auto Show will feature alot of new Chinese EV competition and will demonstrate that Tesla is going to be in the middle of a hugely competitive situation in China by 2022.