Keep your friends close and your enemies closer.
Two hydrogen companies look past their competitive overlap.
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Without further ado…
The hydrogen economy is still in its infancy. There’s a big need for infrastructure, which should benefit from public policy by way of tax credits and grants. But even then, sometimes companies need to explore unconventional approaches to jumpstart growth.
Such as partnering with a competitor.
Keep Your Friends Close and Your Enemies Closer
In December, Nikola and Power Plug — two hydrogen-focused competitors — announced a surprising partnership for the betterment of the industry.
Nikola makes heavy-duty, commercial trucks that run on batteries and fuel cells (known as BEVs and FCEVs, respectively). But the company has plans to build hydrogen production facilities and fuel stations under the brand HYLA. Meanwhile, Plug develops hydrogen fuel cell systems for a range of vehicles and equipment, but the company has started producing hydrogen-powered heavy vehicles under its joint venture with Renault, Hyvia. So, there’s some overlap.
As far as the agreement goes, here’s a summary:
Plug will buy up to 75 Nikola Tre FCEVs over the next three years; the Tre FCEV is expected to begin production in the second half of 2023. For reference, Nikola sold 131 Tre BEVs in 2022, so it’s a noteworthy deal for Nikola.
Nikola will buy a Plug hydrogen liquefaction system for its in-development Arizona hydrogen hub, as well as 100–125 tons per day of green hydrogen.
It’s a step in the right direction for building the hydrogen economy, but it remains a tall, expensive task — and both companies have their work cut out for them, particularly Nikola.
Will they even be around to see the benefits of this agreement?
How Is Nikola Doing Financially? Spoiler: Not So Great
As an automaker, Nikola’s most prominent KPI is ***drum roll*** truck sales. Nikola initially planned to deliver 300–500 trucks to dealers in 2022; they fell very short, delivering 131. Misses happen, but the reasoning behind the miss is a bigger concern.
Nikola faces a sort of chicken-and-egg dilemma. Trucks need built-out networks of charging/fueling infrastructure. However, that infrastructure needs a large enough fleet of trucks coming in and out to operate profitably — and opening stations is a lengthy, red-tape-riddled process that requires significant capital.
Scaling to fleet-level infrastructure is a daunting challenge alone, current macroeconomic conditions aren’t making it any easier. On the company’s Q3 earnings call, management admitted that Nikola’s customers are reluctant to invest in charging infrastructure amid broader headwinds, which they reaffirmed on their recent Q4 call.
In light of these headwinds, the Nikola management team has opted to produce fewer Tre BEVs than it initially planned for in 2023 because, at the company’s current scale, the cost to produce a single truck dwarfs its average selling price. So, the more trucks Nikola sells, the greater its gross losses. To give you an idea, Nikola generated $6.6 million of revenue in Q4 from truck and charging product sales; the associated bill of materials alone — which doesn’t account for fixed costs like labor and overhead — was $8.6 million.
Here’s management guidance for 2023:
We plan to produce 250 to 350 Tre BEVs, and 175 to 225 Tre fuel cell electric vehicles [in 2023] and deliver 250 to 350 Tre BEVs and, beginning in late Q3, 125 to 150 Tre fuel cell electric vehicles.
Our revenue guidance is 140 million to 200 million. We anticipate gross margins for the full year 2023 will be -75% to 95%.
That’s far beneath the company’s production capabilities at its Coolidge plant, which will have a nameplate annual capacity of 20,000 units once Phase II of its expansion is complete (est. Q2 of 2023).
Operating performance will only look worse in the meantime, while the company integrates its recent acquisition of Romeo Power into its financials. Eventually, Nikola hopes to achieve significant cost savings by transitioning battery modules and pack production from Romeo to its Coolidge truck production facility.
We have already realized $31,000 in material savings per truck post-close, as the temporary pack price increase associated with delivery incentives before the Romeo transaction close no longer is in effect. We expect to achieve an additional $41,000 [per truck] in material savings by switching the battery pack enclosure and junction boxes manufacturing process from machined billet to casting. Additionally, by transitioning battery modules and pack production to Coolidge and implementing battery line automation, we expect to reduce labor and overhead costs by roughly $33,000 per vehicle. We believe bringing battery module and pack manufacturing in-house provides us with long-term strategic value.
As of right now, Nikola estimates that gross profitability is right around the corner.
Our current plan is to achieve a positive gross profit margin in 2024 and break-even to positive EBITDA in 2025. We believe our outlook is achievable if our business develops as planned, our business milestones are achieved, and we will continue to have access to necessary capital. We are laser-focused on executing our glide path to profitability.
Using 2022 as a benchmark, that’ll be quite the achievement.
In short, Nikola is far away from achieving cost efficiencies, let alone operating at a profit. Considering Nikola’s operations burned through $576.7 million in 2022, Nikola’s future rests in the hands of the capital markets.
Three Eye-Opening Tweets
And finally, we close with three eye-opening tweets.
Oh, the irony.
Not looking good for SIVB.
The realest real estate advice of the year.
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