American "Xiaopeng" Lucid Motor's Middle East Adventure

Author: Guo Fangjie, Dolphin Research Fellow

Lucid, also known as "the American Xiaopeng" has always been proud of its powerful three-electric system, with rare rivals in terms of endurance, acceleration, and top speed.

In mid-August of this year, Lucid released another luxury car: the Sapphire Edition under the Lucid Air model, with a three-motor powertrain that produces a horsepower of over 1,200 (882 kW), which is 200 more than the Tesla Model S Plaid.

The Lucid Air Sapphire Edition has upgraded its battery system with stronger cooling capabilities. It accelerates from 0 to 60 miles in less than 2 seconds and from 0 to 100 in less than 4 seconds, with a top speed of over 200 miles per hour.

Although Lucid's car is fast enough, the company itself has developed too slowly!

I. "Flat Delivery"

On August 4th, 2022, the "strongest" electric car Lucid announced the second-quarter delivery results: 679 cars. Its first quarter sales volume was 360 cars, and a total of only 1,039 cars were delivered in the first half of the year.

These sales figures can be described as dismal. By comparison, the Tesla, which Lucid used to showcase its own products, delivered over 250,000 vehicles in the second quarter.

We have also paid attention to Rivian, the American new energy vehicle company that is in a similar predicament: its second-quarter deliveries exceeded 4,400 vehicles. For Chinese new energy vehicle startups, Polestar's second-quarter deliveries exceeded 25,000 vehicles. We have also paid attention to Rivian: "Amateur" or"Superman"? Rivian, Tesla's Killer, Faces Challenges."

In addition to the new energy vehicle space, Porsche's electric Taycan also has a relatively good delivery performance. A total of 18,900 Taycans were delivered in the first half of 2022, while the Taycan and Lucid are in the same price range and are currently Lucid's most obvious competitor in the luxury electric vehicle market.

Lucid Motors' quarterly delivery numbers are particularly striking when placed alongside those of its peers. The annual production capacity of Lucid's AMP-1 factory in Arizona is 34,000 cars, and with the first half of the year's results, the capacity utilization rate is less than 5%.

Lucid Motors claims that issues with the supply chain and logistics present a huge challenge to delivery, and in addition to the chip and other parts supply chain problems commonly seen in the industry, Lucid's carpets and automotive glass have encountered supply chain challenges as well. CEO Peter Rawlinson said that the suppliers of carpets and glass have not been able to meet Lucid's quality control standards, and Lucid is also looking for new suppliers to replace them, but it is not going smoothly.

On the Lucid car owner forum (an active forum formed by Lucid users and fans, not an official organization of Lucid), some fans posted pictures of the finished product of Lucid with wave-like wrinkles on the windshield, and analyzed that it may be caused by serious defects in the coating process.

After the release of Lucid's Q2 financial report, it announced that it will reduce its annual delivery by 50%! From 12-14,000 vehicles to 6,000 to 7,000 vehicles. (This is the second time Lucid has lowered its delivery target this year. The first time was in February, when it announced a reduction from 20,000 vehicles to 12-14,000 vehicles).

In addition, like Rivian, Lucid is burning money too quickly:

Under GAAP, Lucid's operating loss in the last quarter was as high as 559 million US dollars, which was much higher than the loss of 249 million US dollars in the same period last year. Even under non-GAAP, EBITDA loss was 414 million US dollars, which was also higher than the expected loss of 411 million US dollars by the market. The loss in the same period last year was 218 million US dollars.

Peter Rawlinson, CEO of Lucid, said: "...we have encountered tremendous supply chain and logistics challenges. We have identified the main bottlenecks faced by the company and are taking appropriate measures, such as building our own logistics business, adding key employees to the management team, and reorganizing logistics and production organizations. "

One of the few good news is that in the second quarter, the more expensive Lucid Air Dream Edition (average selling price of $169,000) accounted for the vast majority of the delivery volume.

Lucid CEO Peter Rawlinson said the company still has 37,000 orders, and the Saudi government has 100,000 fixed orders and 50,000 floating orders. It seems that for Lucid and its investors, the orders in hand and the cash and cash equivalents of $4.6 billion are one of the few reassuring news.

Second, a big change of manufacturing executives

Lucid's poor delivery performance naturally means that the management will be responsible for it. In just a few weeks, 6 manufacturing executives resigned, including global manufacturing vice president Peter Hochholdinger, project deputy general manager Ralph Jakobs, Arizona plant logistics manager Mike Boike, new product introduction and project management director David Peel, logistics engineering senior manager Chris Barber, and optimization management director Keith Champion.

Among them, Peter Hochholdinger used to be Tesla's manufacturing vice president and worked for Audi for more than 20 years, so he has very rich production planning experience. Mike Boike has been working at Lucid for over six years and was promoted to head of the Arizona factory last year, while David Peel, who is responsible for introducing new products, moved to the controversial new force Nikola. The remaining three who resigned had worked at Lucid for 2-3 years.

From publicly available information, Lucid's quality control is not up to par. In May 2022, Lucid publicly stated that sold vehicles may have hidden dangers: the glass cockpit instrument panel may not work due to the wiring harness not being properly secured, and the screen may not display key speed and other information, posing a driving safety hazard.

According to estimates by the US National Highway Traffic Safety Administration (NHTSA), up to 1,117 vehicles could be affected by Lucid's potential impact, which means that almost all of Lucid's sold vehicles need to be tested at designated stores.

According to many Lucid employees who analyze the situation on the Lucid owner forum (an active forum formed by Lucid users and fans, an unofficial organization), Lucid's biggest problem is currently QA (quality control). The QA process needs to be restructured, otherwise the product quality cannot be guaranteed. During the second quarter, Lucid was only able to deliver 5-10 vehicles per day for a period of time, and many finished products had to be reworked, seriously dragging down the delivery progress.

Currently, Lucid has appointed Steven David, a former senior executive of the Stellantis Group, as senior vice president of operations, leading supply chain, logistics, manufacturing, and quality businesses to restructure business processes. The hope is to return to production track by leveraging this move.

III. The Saudi Donation

Lucid's largest shareholder is the Saudi sovereign fund: Public Investment Fund (PIF), which currently holds about 61% of the shares. Lucid's largest customer is the Saudi government, with 100,000 fixed orders and 50,000 floating orders. Lucid is building a factory, AMP-2, in the King Abdullah Economic City (KAEC) in Saudi Arabia. After the factory is built, Saudi Arabia will invest up to $3.7 billion in Lucid.

For Lucid, Saudi Arabia is their major shareholder and customer, and the future site of their large factory. Lucid Motors is more of a Saudi new car force than a US new car force.

Stefan Zweig once said: "All gifts given by fate have been marked with a hidden price." So what does Lucid need to do to answer Saudi Arabia's generous support?

To answer this question, we need to start with Saudi Arabia's highly ambitious, controversial, and extremely expensive national development plan, Vision 2030. In 2015, the current Saudi King, Salman, succeeded to the throne and made his son MBS the new Crown Prince, with MBS leading the country in practice. Since taking office, MBS has shown a radical and even iron-handed style in centralizing power, combating corruption, and promoting economic development, which has been somewhat effective but also controversial.

The background of Vision 2030 is that although Saudi Arabia is rich in oil, it is excessively dependent on it (with oil industry revenue accounting for 87% of national budget revenue, 90% of export revenue, and 42% of gross domestic product), and fluctuations in oil prices have a huge impact on the economy and people's livelihoods. More than 96% of the country is covered by desert, and industries other than oil are very weak, with a relatively high unemployment rate among the people.

As scientific and technological advances continue, it is highly likely that oil will be replaced in the future, which has caused great concern for the Saudi government. In 2016, under the leadership of MBS, Saudi Arabia announced the Vision 2030 plan, making various commitments:

"By 2030, the Saudi government aims to make significant and quantifiable progress in areas such as people's livelihoods, the economy, government efficiency, and national attractiveness. Among them, the Saudi government also aims to turn the Public Investment Fund (PIF) (a major shareholder of Lucid) into the world's largest sovereign wealth fund."

And the PIF Fund itself will work with the government to fulfill the commitments in Vision 2030. The main purpose of the PIF's investment in overseas high-tech and clean renewable energy companies such as Lucid Motors is to support the domestic new energy industry, introduce the industry chain, and create jobs. Financial returns are a relatively secondary demand.

Lucid Motors, which has received PIF investment, naturally needs to help Saudi Arabia introduce job opportunities and supporting industries. Lucid is building a new factory, AMP-2, in Saudi Arabia, with a planned annual production capacity of 155,000 vehicles (about four times that of its US factory). CEO Peter also said that AMP-2 is not just an assembly plant, but a full-fledged production plant, and that a supporting battery factory will be established in Saudi Arabia in the future, which is expected to bring 4,000-5,000 job opportunities to the country.

Of course, Lucid still needs to address the supply chain issues for its Saudi factory, which may be another significant challenge.

For Lucid, building a factory in Saudi Arabia is conducive to its efforts to compete for the market in the Middle East and North Africa (MENAT) region, which has strong consumer purchasing power: a large population, considerable per capita GDP, and a high percentage of young people (70% of Saudi Arabia's population is under 30), ensuring stable market growth. In addition, since Saudi Arabia allowed women to drive independently in 2018, the automobile market has rapidly expanded.

These markets are currently dominated by Japanese and Korean cars, with Toyota, Hyundai, and Nissan being the best-selling brands in the Saudi region. Electric vehicles are still a blank slate, and there are many wealthy individuals in the MENAT region, making it a suitable market for luxury cars like the Lucid electric car.

So, it seems that Saudi Arabia and Lucid are a perfect match, right? Hold on, not so fast! As we mentioned in our previous article, "Musk's Wall of Sorrows: Lucid, the New Car Force in the United States," building a car factory in Saudi Arabia is not without risks.

Firstly, the development of the city where Lucid's AMP-2 factory is located, the King Abdullah Economic City, may not meet expectations. The city was established in 2009 and is expected to have a population of 2 million by 2025. However, there is no data on the population of this new city. The latest population statistics are from 2018 and show only 7,000 people living there (Wikipedia). Therefore, it may be difficult for the city to reach a population of 2 million by 2025.

If the overall development of the city falls far short of expectations, the cost of recruitment, logistics, and other aspects for Lucid in the local area will become very expensive. We believe that there is another reason why this city is at risk of development, and that is because Saudi Arabia is currently building another city, Neom (the city of the future).

This city is known for its extremely high cost, avant-garde science fiction design (including even an artificial moon), and unique linear layout. Building two new cities at the same time will bring tremendous pressure to Saudi Arabia in terms of finance, personnel, logistics, and other aspects. Moreover, Saudi Arabia is obviously leaning towards Neom in the hope of turning it into an international business card for the country. Therefore, the development of the city where Lucid is located may not meet expectations.

Secondly, Saudi Arabia barely has a basic and complete automobile industry supply chain and ecosystem. Many components such as batteries, glass, and wheels require importation. The Gulf Cooperation Council, which includes Saudi Arabia, only levies a 5% tariff on imported cars, making it very cheap. Therefore, localized car manufacturing is not competitive and has no price advantage.

Thirdly, the labor cost in Saudi Arabia is too high to be suitable for labor-intensive industries. According to official Saudi data, the total number of manufacturing workers in Saudi Arabia is 830,000, of which 610,000 are foreign workers, and only 220,000 are local employees, accounting for only 20%. The overall labor structure of the market is unstable, with many illegal foreign laborers and labor rights not being guaranteed. At the same time, the cost of legal labor is high and remains so. In 2021, Saudi Arabia's per capita GDP was as high as US$20,000, and labor-intensive industries are not suitable for Saudi Arabia. In 2017, Saudi Arabia hoped that Toyota would build a factory there, but Toyota found that even under the most optimistic assumptions, building cars in Saudi Arabia would be a losing proposition. In the end, they went to Turkey, where the market was larger and labor was cheaper.

4. Cheap fuel prices in Saudi Arabia mean lower operating costs for gasoline cars

Saudi gasoline prices are 57% of US prices and 47% of China's, which reduces the operating costs of gasoline cars by quite a bit.

Of course, Saudi electricity prices are relatively cheaper, with household electricity consumption only 29.6% of that in the US. Electric cars can still reduce operating costs. But because gasoline prices are relatively low and Saudi Arabia's basic electric vehicle infrastructure is incomplete, consumers are not as willing to substitute electric cars for gasoline cars.

Data Source: GlobalPetrolPrices.com

4. Rough Value Estimate

We have lowered our delivery expectations for Lucid, assuming that:

1. In 2022, Lucid can deliver at least 6,000 vehicles annually.

2. Assuming Lucid can only slowly climb out of production capacity hell, sales will reach 8,000 per month five years later and less than 15,000 per month eight years later.

3. According to Lucid's plan, Gravity will be launched smoothly in 2024, and another more affordable model will be launched smoothly in 2026. Taking into account its current actual execution capacity, we assume that it will be delayed by one year.

Estimation basis:

Compared to the first coverage of "Lucid, the new car-making force in the United States that stumped Musk” due to the fact that Lucid's production is severely below expectations, the author has lowered the delivery volume.

Due to the launch of the ultra-luxury version of the Air (Sapphire Edition), but the expected sales proportion of the ultra-luxury version will not be too high., the author slightly raised the average price of the Lucid Air.

In terms of production capacity planning: Lucid is currently expanding its production capacity at the AMP1 factory in Arizona, and it is expected that the expanded production capacity will reach 90,000 vehicles. The factory will also have a third expansion plan, which is expected to reach 400,000 vehicles.

Combined with AMP-2, which is scheduled to start construction in 2025 (with an expected production capacity of 150,000 vehicles), the Lucid Air factory can reach a production capacity of about 550,000 vehicles.

Because the automotive industry supply chain is relatively complex, factory output is subject to many factors. Based on the current execution capacity, the delivery volume in 2030 corresponds to a capacity utilization rate of 30% (total delivery of about 170,000 vehicles per year). The author believes that the company's business is still in its early stages with significant fluctuations, and it is difficult to make accurate predictions. It is estimated that the company will reach a preliminary stable state by 2030, so the company's valuation is based on the EV/Sales ratio in 2030.

The ratio is based on early estimates of Rivian and Tesla, and a suggested multiple of five times EV/Sales is recommended for the relatively stable year of 2030.

Considering the great uncertainty of production capacity/sales delivery and the current rise in long-term bond yields, I have raised the discount rate from the previous 14.5% to 16%, and discounted the 2030 valuation back to the end of 2022.

In summary, the corresponding valuation is approximately $17 per share, which assumes a neutral to optimistic judgment that Lucid will ultimately survive and overcome the production capacity hell. However, since it has not yet proven its ability to overcome production capacity hell, there is not a high safety margin for the current share price of approximately RMB16 without proof of delivery capacity.

![Image] (https://pub.lbkrs.com/uploads/2022/e8e7b146217f1a665381ff7a86d2699d)

With nearly 30,000 car orders in hand, Lucid's core still needs to focus on production releases, and if Lucid continues to fail to meet expectations, it may face further declines. After all, there are too many seemingly outstanding car companies that have not crawled out of production capacity hell and have disappeared into the river of history.

5 thoughts:

The reason why Lucid Motors accepted investment from Saudi Arabia may be that it is not favored by the US capital market and financing is relatively difficult.

This is evident from its use of the SPAC (Special Purpose Acquisition Company) method for listing at the beginning. In the era of hot new energy vehicles and generally overvalued in 2021, Lucid did not use traditional IPOs, but chose this method of listing, which appears suspicious. At the beginning of 2022, when Lucid Motor's annual production guidance was first lowered to 12,000 to 14,000 vehicles, many research institutions believed that Lucid's annual production volume would not exceed 10,000 vehicles, and the overall environment had low production expectations for Lucid. As a comparison, when Rivian, another new car manufacturer reduced its production guidance, many investment institutions still believed that Rivian could even slightly exceed its production target.

Lucid's listing method in special times when it's thirsty for the next Tesla + the situation that is generally believed to have failed to meet expectations in production reflects the market's concern about it. Under difficult financing circumstances, is the combination of Lucid and Saudi Arabia a good move?

The author believes that this move is no problem, as Saudi Arabia’s generous investment gives Lucid a bottom line and can help Lucid when it is in deep production capacity hell. From this point of view, Saudi Arabia's investment is the last straw to save Lucid. If it misses this life-saving straw, Lucid's situation today will be much more difficult. However, Saudi Arabia itself is an oil-rich country, and many industry associations are deeply tied to the use of oil for vehicles. Investment in electric cars is cautious, contradictory, and even complex. It wasn't until 2020 that the Saudi government established its first commercial electric vehicle charging station in Riyadh. Meanwhile, the United Arab Emirates, also a Gulf state, has established at least 200 charging stations, and electric vehicle owners in the UAE can enjoy free charging nationwide, as well as extra warranties, discounts, and toll reductions until 2021.

As a comparison, northern European countries, which have similarly abundant oil reserves and lacking local factories, intentionally raise oil prices or impose taxes on gasoline cars, while offering tax breaks for electric cars to stimulate industry development. The automobile supply chain industry produces complex products. Support for the automobile industry requires a complete set of long-term incentives and support measures, otherwise it is difficult to achieve success in the oil-rich Middle East.

In addition, contrary to the plans of many electric car companies, the United States has increased its subsidies for electric cars domestically. On August 16, 2022, President Biden signed the "Reducing Inflation Act," which was officially enacted into law, and the new U.S. electric vehicle subsidy policy was implemented. The new policy maintains tax credits for electric vehicles up to $7500 and removes the restriction that only subsidizes up to 200,000 vehicles per manufacturer.

This law will use $7.5 billion to build new energy vehicle charging stations nationwide. Michigan will be one of the first 35 states approved to conduct advanced charging infrastructure construction within the state. It is expected that there will be 500,000 charging stations in the entire United States in the future. However, the law stipulates that new energy vehicles that must be assembled in North America can enjoy the subsidy, and the key minerals must be mined in a certain proportion in North American Free Trade Agreement countries, and the battery components (including positive and negative electrodes, electrolytes and other materials) must be manufactured in a certain proportion in North America. The aim is to stimulate the development of the local new energy industry in the United States. However, Lucid, which has already sold itself to Saudi Arabia, is unlikely to withdraw from the Middle East, where the policy outlook in the Gulf and Turkey (MENAT) is uncertain, even if the domestic market in the United States has strong development prospects and advanced industrial chain support.

Gifts have always been valuable, and it has been difficult to enjoy both Eastern and Western foods since ancient times. Generally speaking, although Lucid has a wealthy benefactor supporting it, its road is still long, winding, and full of pitfalls. However, entrepreneurship has always been a game for the brave. Which entrepreneurship has ever been smooth sailing? If Dolphin Analyst can make good use of Saudi Arabia's resources, Lucid can also create its own world.

Risk disclosure and disclaimer for this article: Dolphin Analyst Disclaimer and General Disclosure