Arno Hill, the mayor of Lordstown Ohio, said it best: “We’re the land of broken promises.” The suffering saga of decline in production in the Midwest continues with the new story of SPACs (Special Purpose Acquisition Companies) and Lordstown Motors.
A Brief History of Lordstown Motors
GM, for a long time, had built Chevy Cruze cars in the Lordstown Ohio plant. Once the demand for Chevy Cruze began subsiding, as the demand shifted to sports utility vehicles, GM found it uneconomical to keep the lights on. The prime culprit in my view is the lack of “operational flexibility” at GM. Demand for car designs shifts all the time (Remember the PT cruisers, hottest selling car in the aughts?), and firms with flexible plans adapt their production schedules. With the lack of flexibility to make other cars in the plant the Lordstown plant in Ohio, GM announced in November 2018 that it will idle the plant, along with few other plants like the Baltimore transmission plant.
Most of the 1600 laborers (under UAW) were transferred to other GM plants in the country. Many declined transfers to stay in the area. The data on decline alludes to the economic costs the local region has borne. GM employed nearly 5000 people in the early 2010s, and in the plant’s heyday in the late 90s, over 10000 people worked at Lordstown. The side effects of this relentless path of desolation have manifested themselves in national politics.
In November 2019, GM sold the 6.2m square foot plant to a company called Lordstown Motors, a “new wave” company whose goal was to make electric trucks called Endurance using design licensed from Elaphe Propulsion Technologies. (The initial hiring plans were about 400 people as they retooled the plant to build the battery packs, and retool the line, eventually extending the full-scale hiring to 5000 people, as they scaled). Seems like a bold forecast for an electric truck without a previous brand identity priced at $52500 (with the EV rebate the price will fall below $45K — a hefty price, no doubt).
Of course, all scaling depends on plans, and the plans depend on cash flow and order commitments. This is where SPACs come in. Companies going via SPACs instead of traditional IPOs have “freedom” to make bolder sales forecasts (that may not survive scrutiny).
Bold Forecasts are a feature, not a bug, of SPACs
Lordstown expected said it expected $1.7bn in revenue by 2022 and over three times that by 2024, largely from the Endurance. The key twist was of this premise, was that it will go “B2B”, i.e., sell trucks to commercial field operators rather than individual buyers of luxury trucks. It went “public” using DiamondPeak Acquisition, set up by a former Goldman guy. Mainly, it convinced the SPAC investors, that it would have 675m in cash, after going public.
Now I am not IPO/SPAC researcher, but the basic idea of SPAC is that it can allow “big bets” to go forward with projections that don’t survive IPO scrutiny. It is not like SPACs are evil: SPACs allow investors in public markets who are often locked out of deals in the IPO process. The recent complaints about SPACs address the concerns that Venture capitalists have become too rich locking out capital to other investors, and many firms go public too late after significant risks are gone, leaving the public investors relatively poorer.
As Steven Davidoff Solomon wrote on Dealbook,
…people were worried about start-ups staying private for too long, depriving public investors of exposure to potential gains. Now that the SPAC solves this problem, regulators are backpedaling.
So, rosier forecasts in SPACs compared to IPOs are a feature.
Back to Lordstown Motors. After a short-seller Hindenburg Research (an apt name for short selling ventures) questioned the proxy reports, SEC began to inquire, leading to the resignation of CEO and CFO of Lordstown Motors.
The issue is not SPACs but SCALE
How is the production at Lordstown motor look? Remember the main reason the GM shuttered the plant was flexibility: They could not shift the production design to make trucks, and train workers to make them quickly enough. So can Lordstown do what GM could not?
Earlier this week, Lordstown management let in analysts and investors to visit the plant for a 90-minute tour. (I would have loved to go). The observations are underwhelming, but new plants can be sometimes that way.
But on this day only a handful of robots were shown handling and welding steel parts together.
Just one of the giant presses was operating, and in a demonstration it stamped just a single piece of sheet metal. Two engineers fed the sheet into the press, a task usually handled by automated machinery.At one station, Lordstown showed the body of a truck being mated to a chassis, but the tooling to add the bed and front end were not yet in place. Nearby workers were adding finishing touches onto four truck beds by hand.
In an area the size of a football field, where wheel-hub motors are to be assembled, the floor was freshly painted but empty of machinery. The equipment is due to arrive in August, company officials said, just a month before production is to start.
The new team headed by Rich Schmidt, an ex-Tesla guy, is quite upbeat:
Lordstown’s president, Rich Schmidt, said that the company would start making trucks at its plant in Lordstown, Ohio, in late September and that it had enough money to last until May 2022. He said the company would be able to make about 15,000 trucks over the next 24 months.
Possible, but I remain skeptical.
Lordstown Motors is essentially the kind of company bet that is likely made possible by SPACs. There is possible room for new electric car companies (I saw quite a few on my visit to China). But the real problem is whether Lordstown can eventually guarantee the steady cash flow to make the production possible, as Operational scaling takes time.
Using the Toyota analogy, the SPAC-based criticism of Lordstown Motors is only a criticism of the symptom, the depth of water (i.e., not enough orders) that is necessary to float the boat. The genuine issue is that how rocky the floor is, and whether the boat is sturdy enough and can sail the rocky, low waters?
Meanwhile, the saga of remaking the Midwest continues, in the land of broken promises.
Related Blog Links:
The Story of Foxconn in Wisconsin
Sources and Links:
GM’s former plant in Lordstown will return to mass vehicle production, thousands of jobs.
GM Closed the Lordstown Auto Plant. Now Ohio May Force a $60 Million Repayment.
https://www.nytimes.com/2021/06/15/business/dealbook/lordstown-spacs-sec.html