Why do so many new car brands emerge and why do so many fail?

by Oliver Vogt

In the last decade we’ve witnessed a real boom in new car brands and companies. This article explores what has led to this, but most importantly why so few of them have managed to bring their cars to market.

Two approaches have emerged:

On the one hand established manufacturers have launched new brands for instance Genesis (Hyundai), Lynk&Co and Polestar (Geely), Alpine (Renault), BMWi (BMW Group), Cupra (Seat / Volkswagen) but on the other hand, real start-ups financed with outside capital have also entered.

Established manufacturer sub-brands

Establishing a new brand may initially cost a lot of money, but it can still be worth it. All the brands mentioned above are positioned with clear differentiation – be it focussing on the European market or on e-mobility. Often, they offer only a few products and a clear brand message.

The advantage of building a sub-brand is that you can fall back on the existing know-how and the best specialists of the parent company – especially in the areas of design and engineering to shorten the product development process. A further positive effect is the high motivation of the employees to work in a start-up similar structure – with flat hierarchies, less bureaucracy but still with access to a fully functioning infrastructure.

In principle, it can be assumed that the cost and risk of such brand spin-offs are acceptable considering the added value for the parent company. The fresh image of the new brand transfers onto the parent company, new target groups are being conquered and turnover and sales numbers increase.

 

New start-ups

A completely different category is that of genuine start-ups, which have no parent company in the background. The success story of Tesla, but also the paradigm shift in e-mobility, created a veritable wave of start-ups in the 2010’s. Elon Musk was the first one to equip an e-vehicle with laptop batteries and bring that product to series production. At Tesla, the electric drive was only one of many innovations, the vehicles are primarily a mobile IT platform and the gigantic value of the data collected by the vehicles is one of the most important reasons for the high stock market price.

In China in particular, there were dozens of founders who wanted to become the next Tesla.

However, this kind of venture means high-risks – both the founders and the investors must be aware that $1.5 – 2.5 billion need to be invested to get to production, depending on whether one wants to enjoy the luxury of their own factory.

Brands such as Nio, Lucid or Aiways are among those who have managed to establish themselves on the market. At this point, far more than 30 other start-ups could be listed, many of which you have probably never heard of – the question is which of them will actually make it to mass production. The above-mentioned companies were all founded by private investors and have raised money through financing rounds on the capital market and with state owned funds.

But why do we see very few successful start-ups so far?

Considering the complexity of such a project, the founders were and are facing 4 enormous challenges:

  1. Growing a very large organisation with more than 1,000 employees within a very short time
  2. Developing a high-tech product
  3. Creating a credible brand and sales structure
  4. Financing

The recruitment process of a very large number of employees would not be easy even for established companies, and young companies tend to struggle with the hiring strategy. The pressure to hire as quick as possible can create unstable teams – people are put in Management positions without enough qualifications, sometimes whole business units are recruited without clear missions and responsibilities. As a result, we can see quite a high staff turnover (>10%). Instead of outsourcing parts of the development to suppliers and freelancers many start-ups are only focussing on permanent staff.

As far as technology is concerned, there is often the ambition to do even better than other start-ups, both to impress investors and to be considered an attractive employer. This can lead to product overload and complexity that is difficult to control.

An underestimated aspect is the creation of a strong brand, whose sales and maintenance offer is credible to customers. For private households, a car is the most expensive single investment. Most customers are already emotionally attached to an established brand. Even if they are not always completely satisfied, they feel safer to stick to what they know. Subsequently a newcomer has to compensate for the lack of trust by creating an extremely strong brand image that outshines everything. Not a very easy task.

The most important point, however, is the financing of a start-up company. Since the investors of the first hour are usually neither willing nor able to finance all the financing rounds up to production. In vehicle development, the capital requirement for the development of vehicles increases exponentially towards market launch. Design and development are still relatively cheap, most of the money is needed in the last phase of the project for industrialisation, marketing and sales. That means, each financing round requires approximately double the amount than before!

Who could cope with such a task?

Typically, the founders bring experienced managers from established manufacturers on board. Experts who have earned themselves a reputation in the symphony orchestra of a large organisation over the years. People who leave this fixed and secure world with the goal to finally realise their personal dream car. Unfortunately, however, in a start-up only jazz is played!

As far as the project is concerned, each new colleague brings his or her own experience and agenda – the first conflicts concerning company culture arise.

In start-ups with Asian roots, intercultural challenges and problems of understanding are added. In addition, vehicle development is often spread over several continents, which makes it difficult to form a homogeneous team.

Managers of established companies are used to having a lot of purchasing power and suppliers usually line up to work with them. So, it can be a huge strain on the ego if you suddenly have to flirt with them since they tend to find business with start-ups too risky. The world of fundraising and countless rounds of investors also means accepting new laws. None of these challenges per se cannot be met, but their combination can mix a deadly cocktail that can kill many start-ups.

From 2019 onwards, the party mood among investors was over. It became clear that many start-ups will need significantly more capital than promised, that the product will launch on the market later, that it promises less margin and that meanwhile the established manufacturers are all working on equally attractive vehicles and will soon offer them.  One example is Dyson from the UK, which decided to stop its vehicle project in May 2020 – after already having burned €600 million.

Nio, Lucid or Aiways do not necessarily have the most innovative products, but at least they already sell in an environment where there is not yet much competition. At the same time, this sales market is growing. EVs currently account for only 5% of all cars sold in China – the Chinese government is trying to increase sales to 25% by 2025 through new emissions regulations. There will certainly be more start-ups that will also get the ball rolling, but probably with different methods.

The future may reveal new methods.  It may not be necessary to develop your own platform or build up a development team of your own. We feel new innovative approaches are possible…but more in another post about that.