Charging up the electric vehicle market with RJ Scaringe of Rivian

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2:50This is both a good and a bad problem to have. Good, well, because lots of people want a Rivian. Bad because there's a backlog. Supply, for the time being, can't meet demand. Now, back in 2022, we told the story of Rivian and its founder, RJ Skaring. RJ and his team spent almost a decade in stealth mode working on building an electric pickup truck. And if you haven't heard that episode, it's really great. Just go scroll back in the podcast queue to find it or do a search for Rivian and how I built this in your podcast app. Anyway, we wanted to invite RJ back for an update because the company has big plans.

3:31not just to increase production, but also to build an all-electric midsize SUV in 2026, one that will be significantly less expensive than its current models. But even with all of the success, Rivian has faced many challenges over the past 18 months, including the aforementioned backlog. Much of that has to do with a supply chain squeeze that is really affecting some electric vehicles. We just started production in late 2021, and we launched our truck, our R1T, its sibling variant, the R1S, and then a commercial van with Amazon as the lead customer. Essentially all within very close proximity of each other.

4:16So within six months, we launched those three different products. And with a product as complex as a vehicle, there's thousands and thousands of things that can stop production. You have a supply chain with hundreds of suppliers providing thousands of parts. And if any single one of those components is missing or delayed, the whole system comes to a halt. You can't build a car if it's missing a bolt kind of thing. So we ended up being very challenged as we were not only ramping one vehicle, but the three, and then managing three supply chains just led to it being, I would argue, probably the hardest imaginable year you could pick to be ramping a supply chain, particularly ramping it for the first time and then ramping it across three different vehicles was just, it was a challenge.

5:00It was a challenge. Your primary factory is in normal Illinois in large part because that's where the supply chain kind of meets up. But there are also parts that come from overseas, like the semiconductors. And because there's so much technology in these vehicles, there's also a lot of competition for those chips, for those parts. For sure. We didn't anticipate the supply chain challenges, but we also were fighting a battle with a lot of these suppliers where we had no existing sort of purchasing relationship or history. And so a lot of the decisions on who was allocated chips or who was allocated components was built around buyers and purchasers that had years and years of experience knowing the person on the other side of the line, so to speak.

5:45And I think the thing that we probably talked about less, but was also a challenge, was it's not as if if you're missing one part, the only challenge is just that you're not building vehicles. It's that all the other parts still continue to come. So you have this ballooning challenge of inventory where it's not just the cash. You also have to have a place to put all these parts. If the plant shut down for, let's say, a week because you're missing a handful of components, the rest of the supply chain keeps coming in. So managing all of the suppliers to not only be pushing really hard to get as many of the constrained parts as possible, but then also be managing down production supply of some of the parts that were being produced as expected just meant that it was a full-court press.

6:29I mean, I spent hours and hours every day on the phone or in person with supplier CEOs managing all aspects of this. I mean, it must have been so incredibly frustrating. There's a wonderful video that I've seen that shows the factory in Normal, Illinois, and it's a really high-tech facility that you built there. But at the time we spoke, it was only running 25 to 30 hours a week, which must have been incredibly frustrating knowing what it can do. But you couldn't do that. In the meantime, all of these supplies that you were getting in were just piling up. What could you do? I mean, you mentioned that you were on the phone and you were even going to meet with CEOs of these suppliers.

7:11I mean, were you pleading with them? What leverage did you have? Yeah, I mean, it was all of the above, pleading with them, painting the broader picture of why it was disproportionately important for us as a company to gain access to supply relative to other companies that might have multiple product lines or multiple suppliers providing the same component. But at the end of the day, the only way to get through it was sort of swallow this painful pill and just get through it. You had, I think at the time we spoke in the summer of 2022, there were about 100 ,000 pre-orders, people waiting for their vehicles.

7:44And that year, you would produce a fraction of that. How did you manage frustration? I'm sure a lot of people were angry. They're saying, I put the deposit down. Where's my car? I've seen one in the wild. Where's mine? Yeah, I mean, that was a real challenge. I would say it continues to be a challenge where we have the great fortune of a product that is in high demand. Yeah, it's really resonated with consumers. And as a result, we still have a pretty significant backlog. And some backlog is helpful, but we need to, of course, make sure that that backlog doesn't create a glass ceiling to interest in the brand.

8:22because what we don't want to be known as is Rivian is the brand for which you place an order and you wait years. So we are trying very hard to carry some backlog, but to, of course, shrink that to a much more reasonable level. A challenge in terms of the customer experience is that there is still a wait time, and there are still people that have been waiting for the vehicle for years, and that certainly isn't lost on us. I know that you're on track, I think, to build 50 ,000 vehicles this year, this calendar year. Yeah, we're actually, we've guided to say we're going to exceed 50 ,000. So yeah, we're doing well this year.

8:57And I would say we're in a far better situation than we were in 2022. That's not to say there aren't supply chain hiccups with such a large, complex supply chain. There's always going to be that. That's just the natural course of doing business with this type of a product. I want to ask you about the R2 in a moment. This is a midsize sort of lower priced vehicle that you plan to, I think, release in 2026. But I want to ask you about the general market around EVs, right? Because there's been a lot of chatter that the EV market has slowed down. I think there's some truth to that. We've seen Ford and GM and even Tesla report a slowdown in sales.

9:32You know, what's your take on it? I mean, I think we can probably agree that in 25 years, no one's going to be driving, I mean, except for enthusiasts, no one's going to be driving a combustion engine. Yeah, hopefully sooner, but yeah, yeah. But right now, there seems to be a slowdown, which may be connected to sort of macroeconomic factors. Yeah. Are you seeing that in things like pre-orders? I'm so glad you asked this question because I think often in really complex systems, we try to oversimplify the dynamics of a system. And there's a few big drivers. So first, I'd say broadly, in looking across all manufacturers, combustion vehicles and electric vehicles, interest rates being where they are creates pressure on purchasing expensive assets.

10:16So things like vehicles that have a high percentage of financing, you're just going to start to feel that and you're going to see it manifest with people being more price sensitive than they historically would have been. The second thing is there's actually very limited supply of great EV products. And that may seem surprising when I say that because there's a number of manufacturers have launched products. But when I say great EV products, products that are truly represent a meaningful step forward in terms of features, attributes, a cohesive brand story and product story. And so I think we have a gap as an industry where we need a lot more choices at affordable price points.

11:01And so competition is the ultimate way to get there. And we need to have multiple highly successful car companies that are capable first conceiving of and then developing products that strike a chord that are interesting. Yeah. And then building them at scale and building them at cost. at cost. I don't think we're going to end up in a world where there's one or two electric vehicles that we produce 70, 80 million of a year that the whole world buys exactly those two or three products. I think the world needs lots of products, hundreds of different types of vehicles. Yeah. But today there's like a handful.

11:38We're going to take a quick break, but when we come back, more on RJ's work to create more choice in the EV market, including where to power up. Stay with us. I'm Guy Raz, and you're listening to How I Built This Lab.

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16:42Welcome back to How I Built This Lab. I'm Guy Raz. My guest today is Rivian founder and CEO RJ Skaring. Over the next few years, his company plans to expand their line of all-electric vehicles. So RJ, the R2, this is going to be your mid-priced sort of crossover that you plan to release in 2026. And it'll, as you say, retail for between$40 ,000 and$50 ,000. It reminds me a little bit of how Tesla rolled out its car. It started with the Roadster, if you remember, right, in like 2010. And then it went to the Model S, which was a premium priced vehicle out of range for most people. And then they introduced the Model 3.

17:21And that was really how Tesla achieved profitability. It seems like a similar kind of approach, right? You've got the R1T, which is a pickup truck, and then you've got the SUV version. They are sort of on the higher end of the EV scale. Yeah, yeah. And so this R2 that you'll release in 2026, that essentially is kind of your version of a Model 3. Yeah, I mean, in terms of like strategically, it's very similar. We started with what we think was like our flagship products, the R1. They're intentionally designed to be positioned at a higher price point. The performance, the capability, the feature set is set up for that.

17:58And then we're taking the essence of the brand that's represented by those products and then building that into something that we're achieving lower price points through really intentional and thoughtful tradeoffs we make around content and features. And, of course, innovations we're driving around cost to manufacture. Your two visible consumer products are the truck and the SUV, but you're also developing delivery vehicles, vans, which will be used by businesses. Yeah, there's well over 10 ,000 on the road right now. On the road, yeah. And how much of your business, I mean, do you imagine in the future that is actually going to be the biggest part of your business?

18:35No, the consumer side will always be quite a bit larger just because the dressable market on consumer vehicles is so much larger. But the commercial van was important for us when we launched, decided to go into that business to have a core anchor customer, a flagship customer, if you will. and Amazon is a great first customer. One of the things I always talk about in the context of that product is even for customers that haven't yet decided to buy an electric vehicle, if you buy a package through Amazon and it's delivered with an electric vehicle, you're an electric vehicle customer without even knowing it.

19:11And so I think that's a really exciting manifestation of our mission to see it come to life through the lens of a van. And that van, as you say, they're on the road. I've seen them. It's got the round Rivian lights in the front. Yep. That's very friendly looking. Yeah. The other thing that you did was you signed an agreement with Tesla to allow Rivian vehicles to charge a Tesla charging station. It's obviously the biggest network in the world, which presumably will be an incentive. A lot of people are freaked out about charging. This question I get asked all the time about when people see me in my car, they'll say, well, what if you run out of charge, which never happens?

19:51But presumably that will lay to rest some of those concerns. How is it going to work? I mean, are Tesla still going to have priority at those chargers? Well, there won't be any prioritization. So starting early part of next year, Rivians will be able to access the Tesla charging network. And in the beginning, it'll be through an adapter. And then over time, our vehicle's charging port will move to what's called the North American charging standard, which was previously the Tesla standard, but they've now made it an open standard. I think the thing to recognize is even as big as Tesla's network is, we still need to build a lot more charging infrastructure.

20:23And so we're continuing to invest in our own network, what we call the Rivian Adventure Network. Today, we have around 60 sites live. So we have hundreds of sites to build. But we really believe that having robust charging infrastructure, a few different suppliers or providers of that charging is going to become really important. And part of the agreement with Tesla is also to allow Tesla's, and for that matter, other vehicles, other brands to use our network when we open our network up. And we think that will be important both for us to make sure our network's a profitable part of our business, but also to give, again, customers of all brands access to a lower risk and high confidence, high uptime charging infrastructure.

21:08You know, what I really appreciate about your story is how hard it is. It's just, it's not a cookie brand. And for years, you had a team that was working on something in stealth. They couldn't talk about it. There was no product. It took, you know, seven years before you actually could show something at a, and people were like, what is this brand where it come from? And I know that there's so much sort of obsessive thought put into every detail. I mean, the cars have flashlights that you pop out of the door and an air compressor or inside a compartment in the car. And I mean, just all these things that are really, really cool.

21:45But the cost of building these cars is high. I mean, I believe that effectively Rivian is subsidizing every vehicle, right? Because it costs more money than you actually are making from the sale. You lose money on every vehicle. So how do you cut costs on every car, but still maintain that obsessive kind of, you know, those quirky details and the things that make the car appealing to the customers you're going after? Well, in the case of R1, you know, today the product is not gross margin positive. So today is in like middle of Q4, 2023. But there's a very clear roadmap for that to achieve very healthy margins.

22:27And the two big elements of that are one, we have to ramp production. So when you have a large-scale plant, as you talked about before, that's running at 10 % of its capacity, which is about where we were a year ago, it's just wildly inefficient. So you get no fixed cost absorption. So that ramp is what we're experiencing now, and we're starting to see significant improvement in the cost structure as a result of just much better fixed cost absorption. The other is the material cost side. So what are all the components that we purchase to go into the vehicle? What do we pay for those? And it's worth calling out that when we negotiated a lot of these original contracts for our bill of materials, it was in like 2018, 2019.

23:04So our leverage was essentially zero. We had to beg the suppliers to work with us. And the expectation was always that when we launched, we would be able to then negotiate savings based upon the success. Yeah. What we didn't anticipate was just how hard 2022 was. We couldn't negotiate savings. We were begging just to get supply. That's changed a lot. We're now in a position where suppliers want to see us successful. They're extremely excited about R2, and it's allowing us to make very significant reductions in the overall cost structure. So sort of like how airlines buy fuel in advance, you're now in a position to negotiate better rates for your supplies, which will drive the cost of each vehicle down.

23:48Exactly. Now that's on R1. So R1 has inherent costs built into it, things like the speaker that pulls out of the center console or this flashlight in the door. Some of those unique features will make their way into R2, but R2 has also been, with us as a more mature organization and having a lot more engineering resources than we had when we were developing a lot of the core features in R1, we are optimizing heavily around cost for R2 to maintain, again, as much of what makes a Rivian a Rivian. but at a smaller footprint, so it's a smaller vehicle, and with simplified architecture, and with a completely different supply chain relationship, where the level of leverage we have today is night and day.

24:31And probably the best way to anecdotally explain this is a lot of the sourcing decisions for R1 on sort of the bigger components, I would have to fly to go meet a supplier at one of their offices. The person I'd be meeting was maybe a vice president, but very often like a senior manager. And we would be begging to get them to say, yes, we'll supply you. This is before you produced the first... This is in like 2019. Yeah. Because they were like, who are you? And what are you... Yeah. So they're with like a PowerPoint explaining who is Rivian. Here's what this thing's going to look like. Not a single customer yet.

25:07Today, those very same suppliers have their CEOs flying to normal Illinois or to California to sit down and meet with our team and spend a whole day talking about how they can work with us as part of a broader relationship. So it's just like a completely different backdrop for how these contracts are being built for the supply chain for R2 versus what we had originally put in place for R1. You are an engineer. I mean, that's your background. But I think in the last couple of years, you've had to focus more on the public markets and being the face of a public company and raising money and managing a growing business.

25:44I know recently you assumed responsibility for product development. What does that mean? Why did you take that portfolio on in addition to the other things you're doing? Since the very, very beginning, I've been deeply involved in product. It's the reason I started the company. It's my core area of - It's interesting too. It's more interesting than raising money. Yeah, it's a different part of your brain for sure. Although they both take some creativity. It's sort of where I feel like I could create unique and distinct value for the business. And as the company has evolved, I've maintained half of the product team for a long time.