A U.K. Upstart Says Microfactories Are The Profitable Way To Build Electric Vehicles

A U.K. Upstart Says Microfactories Are The Profitable Way To Build Electric Vehicles

“The rule of this game of big factories is broken,” Denis Sverdlov says in a late evening Zoom call from his London home. “If you do things exactly the same as others do it’s quite strange to expect better results.” So Arrival, his electric vehicle startup, is trying a new approach with its futuristic delivery vans and buses. 

Sprawling, multibillion-dollar auto plants, whether they build Fords or Teslas, are too costly and inflexible for fast-changing markets and the shift to electricity, according to Sverdlov. “We took a different approach to every element of this – what type of materials we’re using, how we designed the vehicles, how we assemble them,” he says, wearing a crisp white shirt with Arrival’s asterisk logo and trademark shaved head. An urgent incoming email and his young son wandering by in the background don’t derail the detailed explanation.

Sverdlov, who founded Arrival in 2015 with a $26 million (£20 million) investment from his London-based venture firm Kinetik, is taking a very different approach to making affordable, profitable electric vehicles. (He created the VC after the $1.2 billion sale of Russian phonemaker Yota in 2012 that he cofounded and ran). His idea runs counter to Elon Musk’s obsession with gigantism–namely, multibillion-dollar Tesla Gigafactories and terawatt-hour-level battery plants cranking out enough vehicles to supply the planet. Sverdlov’s building $50 million (€45 million) microfactories close to customers that don’t need pricey stamping presses, paint and welding shops and assembly lines. Each one will crank out 10,000 vans or 1,000 buses a year. The first two–in Bicester, England, and Rock Hill, South Carolina–open next year. More will be added as demand from fleet customers grows. “It’s almost like the model of McDonald’s,” he says. “You get as many as needed to fulfill demand.”

Arrival also plans to sell zero-emission vans at prices close to the $40,000 cost of gasoline- or diesel-fueled commercial models. It’s an audacious goal since electric trucks are at least 50% more expensive. To do that, Arrival claims its vehicles are lighter due to aggressive weight-saving from an aluminum chassis and body panels made of proprietary composites. Lighter means smaller, cheaper batteries–the main expense for EVs. Battery vehicles already offer lower fuel and maintenance costs so a manufacturer that can sell them at price parity could see substantial demand in the U.S., which buys 10 million light commercial vehicles annually. 

Pressure to cut transportation’s carbon emissions, led by tough rules in the EU, California and Japan, is fueling global competition for vehicles powered by batteries and hydrogen. Replacing carbon-fueled vehicles with electric models is also a huge revenue opportunity that could total $22 trillion over the next few decades, Morgan Stanley equity analyst Adam Jonas estimates. Tesla leads in electric vehicle output owing to a massive San Francisco Bay Area plant but aims to boost capacity by expanding production at the $2 billion Shanghai Gigafactory, speeding construction of its $4 billion Giga Berlin and breaking ground for the $1 billion Gigafactory in Austin, Texas. Likewise, global auto giants such as Volkswagen, General Motors and Ford are overhauling big plants to crank out hundreds of thousands of electric vehicles a year. 

Musk sees mass-scale production as the way for Tesla to grab a huge chunk of that business. He’s “following the Henry Ford model of vertical integration,” says manufacturing analyst Laurie Harbour, CEO of Michigan-based consultancy Harbour Resources. “He doesn’t want anyone to have control of decision making or holding him hostage on his product.”

Tesla focuses on consumer sales, but commercial and transit fleets are more attractive to Arrival because they can easily install centralized charging and fuel stations. “Look for fleets to migrate off of (internal combustion engine) technology the fastest,” says Jonas.

Arrival’s add-capacity-as-needed approach is at odds with Tesla and industry rivals, but Sverdlov has found powerful allies for his idea–even though revenue generation won’t start until 2022. The company raised $118 million from investment heavyweight BlackRock this month and $110 million from Hyundai Motor and Kia in January. Its valuation stands at $3.5 billion, according to PitchBook. DHL, the U.K.’s Royal Mail and UPS are testing its electric vans. UPS is also a minority investor and ordered 10,000 Arrival vans potentially worth $500 million of future revenue and has options for 10,000 more. The logistics giant is working closely with Arrival’s engineers to tailor them to daily delivery runs. 

“There are a lot of startups with EV ideas. Unfortunately, we’ve not seen a lot of that materialize in terms of products that come to the market,” says Luke Wake, UPS’s international director of automotive engineering and advanced technology. “What helps set Arrival apart is the way that they were well funded to actually turn some of these ideas and visions into a reality.” 

UPS is testing prototype Arrival vans with massive wrap-around front windshields and shifts to an upgraded version with sliding doors late this year. The vans, like Arrival’s electric transit bus with an interior resembling a modern subway car, sport clean, geometric styling that emphasizes these are 21st-century vehicles. Van range per charge is over 180 miles (300 kilometers) and Arrival’s buses go up to 300 miles.

Arrival’s goal is to be cash flow-positive by 2023, with profit growth in the years to follow. 

“Survival Mode”

Like Musk, Sverdlov, 42, is an unlikely transportation disruptor. Born in Georgia in 1978, he grew up during Russia’s rocky transition to capitalism from Soviet-era communism. As a teenager his interest wasn’t sports or music but computer coding. “This was the starting point for my interest in technology.” He says he doesn’t remember much about that time, though it was a period of “survival mode.” “We were trained to find a way to survive. I think it’s an important skill for the type of business we do now.” 

Coding was his passion but he got a degree in finance at St. Petersburg State University of Engineering and Economics. In 2000, when he was 22 and still in college, he blended both with his first company to provide IT services on a contract basis. He helped write and install software for “finance, logistics, supply chain and manufacturing” companies. “That was a really important part of my life, seeing how different types of businesses operate.”

His startup merged with St. Petersburg-based IT company Korus and around 2006 he started researching WiMAX, the emerging standard for cellular communications. Everything about it intrigued him and in May 2007 he cofounded Yota. It grew quickly as a cellular provider and in 2012 Yota was the first Russian company to launch LTE. Yota developed its own handsets and Sverdlov became an inventor during his tenure, receiving multiple European patents for phone features. 

The early years of the smartphone era also got him thinking about vehicles. “I felt strong frustration about the cars of the day because we know what is possible with technology,” he said. “Cars felt like they’re 20 years behind that.”

But it would be a few more years before he pursued that interest. Russian cellular provider MegaFon bought Yota for $1.2 billion in 2012. Sverdlov won’t discuss what he earned from the sale. His cellular industry experience led to a job as Russia’s Deputy Minister of Communications, where he worked to upgrade technical standards for the telecom industry. There were struggles he doesn’t elaborate on but “it was a good opportunity just to come in to fix things.” 

There were “tense relations” with some companies during his 11-month stint, Russia’s Interfax news agency said after he stepped down in 2013. “At closed meetings, he has often had to wrangle with companies on many issues,” Interfax said, without elaborating.

He relocated to London and raised $500 million to create venture firm Kinetik to invest in high-tech startups. Charge, the original name for Arrival, was its first investment in 2015. 

Weight Advantage

Five years later, Arrival is close to delivering on ideas Sverdlov began formulating at Yota. “Arrival today is not just a company which makes electric vehicles,” he says. “We’re a technology company which creates systems, which then create vehicles.”

Holding down weight is also key to its strategy. “Our composite material is significantly lighter than the traditional steel that’s used in the industry,” says President Avinash Rugoobur, a former General Motors executive who also worked for GM’s San Francisco-based self-driving unit Cruise. He won’t say how much lighter but the advantage “shows up on the van where you have a four-ton vehicle. In our case, our payload is about double what any other electric vehicle can do in that segment because of how light the vehicle is.”

Its buses have an edge too. Arrival says they weigh in at 35,250 pounds when loaded with passengers. If so, that’s 6,750 pounds lighter than a similar-size Proterra Catalyst electric bus packed with commuters. Arrival hasn’t announced pricing, but diesel buses go for $500,000, natural gas versions cost about $600,000 and electric models sell for $800,000 or more, according to the Los Angeles County Metropolitan Transportation Authority.

‘Old Plants’

Tesla’s Fremont, California, factory is a cavernous 5.3-million-square-foot space that can make 500,000 vehicles a year. The former Toyota-General Motors plant has massive stamping presses turning steel and aluminum sheets into body panels and chassis components, armies of robot welders, paint shops, assembly lines and over 10,000 human workers. Amazon-backed electric truck startup Rivian is getting ready to start production at a massive plant in Normal, Illinois, that used to churn out gasoline-powered Mitsubishis and Chryslers. 

Those factories were built to make huge numbers of vehicles but are expensive to operate, says Mike Ableson, Arrival’s North American CEO, a former GM former vice president for EVs and global strategy. “As soon as you buy one of those old auto plants, you’ve locked yourself into a very substantial fixed-cost asset,” he says. “Some of the accepted beliefs around the benefits of scale are really driven by capital spending. If you spent hundreds of millions or a couple of billion dollars on an assembly plant to amortize that cost you’ve got to do hundreds of thousands of vehicles there per year.”

Microfactories

Sverdlov’s ideas about electric vehicles inspired by the consumer electronics and aerospace industries intrigued auto veteran Ableson.  

“Denis, coming from a different industry in a different background, really spent some time thinking about how we could change the economics around manufacturing,” he says. “It’s easy as a startup to get all wound up about the product and designing really cool products. Your method of manufacture is perhaps a little less sexy as a topic. I would argue it has an even bigger impact on the business.”

Instead of needing hundreds of acres of land, 200,000-square-foot Arrival microfactories can be set up in a standard warehouse space in an industrial park. They can be operational in six months, compared to about two years for large-scale plants. Arrival’s vehicles have a flat, easy-to-build skateboard undercarriage that contains the axles, battery and electric motors. Automated carriers transport sections to different workstations instead of assembly lines. Rather than stamping metal for the chassis, Arrival connects extruded aluminum parts–formed by injecting metal into dyes. It also reduced the number of chassis components needed for easier assembly. Composite body panels are joined with high-tech adhesives, as they are in the aerospace industry, instead of welding. Vehicles are colored with dyes and exterior wraps, so multimillion-dollar paint shops aren’t needed. Standard auto plants employ thousands of assembly workers. Arrival microfactories need about 200. 

This adds up to millions of dollars of savings. Combine that with easy-to-build designs and Sverdlov says microfactories can be profitable at far lower volumes. A microfactory only has to make 20 vehicles per shift (40/day) and 10,000 a year to be profitable–versus about 60 per hour at traditional auto plants. “You can build vehicles in New York with the unit economics of China,” Sverdlov says. 

An attractive but unproven until vehicles are shipping. A general advantage for EV makers is fewer components versus gasoline-powered autos, says Harbour, who hasn’t reviewed Arrival’s system. “The electric vehicle guys have a much simpler product. Very limited complexities in comparison to GM that’s got 80 models, God knows how many trim levels and needing to bring so many different parts and components into their facility.” 

Along with Arrival, Sverdlov also helped create autonomous motorsports competition Roborace, backed by Michelin and Nvidia, to help perfect self-driving vehicle software. There are no plans for Arrival vehicles to drive themselves, but they’re designed to accommodate the sensors and computing power needed for that when the technology is ready, says Rugoobur.

Electric vehicles have been on the market for a decade, but remain niche because they cost too much. Sverdlov says Arrival will change this. “It’s possible to make a product that’s green. It gives all the necessary benefits, but you don’t need to pay more.”

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