Rivian’s lack of history is hurting its chances with chipmakers—leaving Amazon facing a $10 billion hit

Little over a week into the month, Rivian founder R.J. Scaringe has already endured a dreadful March.

First the CEO burned valuable goodwill with an ill-advised and poorly communicated price hike affecting early customers. In a bid to regain their trust, he reversed the blunder barely more than a day later, yet still lost thousands of customers and failed to halt a mass exodus from the stock.

With supply-chain constraints and microchip shortages now forcing it to effectively slash 2022 production targets by half to 25,000 vehicles, thereby exacerbating its forecast operating loss, Rivian’s ongoing misery now threatens to derail Jeff Bezos’s retail empire as well. 

Amazon owns roughly 18% of the equity in Rivian as part of a deal to procure 100,000 electric delivery vans. The e-commerce giant is presently carrying a value of $15.6 billion on its books, according to company filings.

Owing to the size of the stake and the fact that it wields influence over Rivian through a delegate on its board of directors, accounting rules put Amazon in the unenviable position of regularly reviewing its holding for possible write-downs. 

Chip shortage set to worsen

Rivian is set to open 13% lower at $35.93 on Friday, an all-time low for the stock, marking a dizzying fall from grace for a company that celebrated last year’s biggest IPO at a price of $78 a share. Its entire market cap could now dwindle to just $30 billion with only a few weeks left before the books are closed on the first quarter, setting Amazon up for a potential impairment charge of $10 billion.

The bad news for Rivian and Amazon does not stop there, however.  

Unlike other carmakers that are starting to see light at the end of the tunnel in terms of the semiconductor crisis with supplies steadily improving over time, Rivian said it expects the exact opposite. Problems will actually become more acute as it tries to ramp up production into an ongoing shortage. 

“That allocation, as we start getting into higher production rates especially in the back half of this year, is where we see risk. And it’s what’s caused us to make the adjustments,” Scaringe said. “Were it not for supplier constraints, we’re confident we could achieve in excess of 50,000 vehicles this year.” 

Being a startup puts it at a distinct disadvantage to its incumbent peers when it comes to procuring the necessary processors and circuit boards for its onboard electronics, according to the Rivian CEO. 

Since the semiconductor industry cannot be certain about actual demand, given carmakers are ordering more than they truly need as an extra insurance policy, Scaringe said chip fabrication plants were allocating supply based on historical sales volumes. 

Lack of history hurts Rivian’s chances

Yet Rivian only started production in earnest in the final months of last year. That meant it could not offer the same degree of certainty to its semiconductor suppliers. 

“So the challenge we have in this regard is we don’t have something to look back to, to say what was Q1 of 2021 like in terms of our demand profile. And with each of these semiconductor providers, we need to give them the confidence that we’re capable of ramping,” he explained. 

Whereas Rivian’s shortage of wire harnesses—the over mile-long cabling in a car that serves as its nervous system—can be helped by deploying teams to assist a supplier, there’s no such recourse when it comes to a microchip fab. 

There was one silver lining in Thursday’s earnings report. According to Rivian, demand has not seen a drop-off since the March 1 price hike took effect for new customers. Roughly 83,000 net preorders from U.S. And Canadian customers have accumulated as of March 8, up from 71,000 in mid-December, roughly a similar rate as before. 

Nevertheless, executives confirmed that a considerable minority of early customers who terminated their purchase did not request reinstatement of their preorders, despite Rivian rolling the price hikes back in a last ditch bid to regain goodwill.