New Tesla challengers are scoring huge investments, but Nikola, Rivian, and Lucid may arrive too late to gain ground in the electric car market

• A batch of electric-vehicle startups — such as Lucid, Rivian, and Fisker — has launched exciting new vehicles and attracted billions in investment.
• The traditional auto industry is also shifting to EVs and taking stakes in startups: GM acquired an 11% share in Nikola last week.
• Everyone is banking on the EV market growing and growing fast, but it's currently tiny, and Tesla has a commanding lead.
• Ultimately, the market may never grow large enough to support the level of investment that's now being undertaken.

As Tesla was busy becoming the most valuable automaker in the world, minting a market capitalization well over $350 billion, a bunch of new names were entering the electric-vehicle race.

Lucid, Nikola, Fisker, and more either made big announcements or pulled the cover off new, Tesla-fighting designs. Nikola and Fisker both went public in 2020 through "special purpose acquisition companies." For Nikola, that meant an initial valuation of over $3 billion that quickly shot up to $13 billion, and for Fisker, a $3 billion valuation with a cool billion earmarked to bring the carmaker's first vehicle, the Ocean, to market.

Lucid unveiled its Air sedan last week, amid considerable hoopla. Understandable, as the $170,000 top-trim of the car has performance specs that put the Tesla Model S in the rearview.

It gets better. Fisker has rolled out plans to produce a family of three vehicles and, in interviews with Business Insider, CEO Henrik Fisker outlined a business model that seeks to turn the traditional paradigm of auto ownership on its head.

Meanwhile, Nikola teamed up with General Motors, trading 11% of the company's equity — $2 billion — as well as $700 million in "reimbursements" to manufacturer the Nikola Badger pickup truck, using GM's Ultium battery technology.

And don't forget about Rivian, which was the talk of the auto-circuit in 2019 (back when there were auto shows) and looks like the old man of this group, thanks to a $500-million investment by Ford last year.

Reality check!

That's a lot of action, but how about some context? Lucid has been around, in one form or another, since 2007, and got a huge shot in the arm financially in 2018 when the Saudi sovereign wealth fund invested at a $1 billion valuation. Skeptics could argue that it took the startup 13 years to reveal one car, which looks fantastic on paper but isn't, well, you know, built yet.

Nikola founder Trevor Milton wisely realized that manufacturing the Badger while also bringing a semi-truck to market was too heavy a lift, so he effectively hired GM to make the pickup, turning it into a showcase for Ultium, a technology that GM has ambitious plans for over the next decade.

Fisker has been arguing, refreshingly, that the old manufacturing model is hopeless for startups. So he's transformed himself, in his latest auto industry act — he founded Fisker Automotive before the financial crisis and was widely seen as an early Tesla rival — into a vocal advocate for asset-light car-making, with a focus on customer experience, rather than nuts and bolts.

The difference between this next-generation trio of electric carmakers and Tesla is obvious: Tesla did it the hard way, with a modest 2010 IPO that raised around $260 million, followed by a decade of slogging through what CEO Elon Musk has often called "production hell."

The reward is the titanic market cap and the awe of Wall Street. But Tesla still sold only 367,500 vehicles in 2019, while GM alone sold nearly eight million. It took Tesla 17 years to reach that mark, a pace that doesn't exactly augur rapid success for the likes of a direct competitor like Lucid, which has about four years of furious catch-up to play.

The biggest player in a tiny market

The critical issue is that Tesla now dominates what is a globally minuscule market for EVs —just about 1 to 2% of total sales. Many analysts and experts expect that market to grow rapidly in the coming years, hence the enthusiasm for Tesla among investors (who've already reaped an 8,000% return since 2010).

But while Tesla has had the market largely to itself, with its main challengers over the past decade coming from low-key EVs (such as the Nissan Leaf and Chevy Bolt) the traditional automakers and their enormous cash-flows and R&D budgets have now seriously leaped into the fray, and SPAC-powered investors are on the hunt for promising startups that can catch the Tesla wave.

What's uncertain is whether the natural growth of the EV market is going to happen — or whether it might need help from governments that want to address the threat of climate change through regulatory action. And even substantial exertion on that front might not move the needle. After all, consumers need to want to buy electric cars, and up to now, they've mustered plenty of reasons not to.

If growth arrives, then both startups and established automakers intend to make a grab for it. The question then is whether they'll be able to convince people to buy something other than a Tesla — or offer vehicles in segments that Tesla isn't pursuing.

If the growth doesn't arrive, however, or doesn't arrive fast enough, then you have too much investment chasing too little potential market share. Big Auto can handle this, as 98% of its sales are of gas-powered vehicles. And Tesla already has more than half the EV market in the US, so it could consolidate its position.

The nightmare scenario for the rest is that the bottom falls out, and fast.

This isn't a death sentence for startups

If I were handicapping, I'd say Nikola and Rivian could hang in there and that Fisker should make the most of its money, getting ahead of Tesla with a flexible-ownership concept that actually creates something of an interesting side market, particularly for leasing. (Fisker wants to offer a sort of easy-in-easy-out lease structure, so people aren't stuck with a car if their financial situation changes.)

But Lucid looks like it could be trying to replicate Tesla and become a competitor about 10 years too late, with a vehicle in the Air (base price: $80,000) that's chasing buyers in a slice of an overall EV market that's essentially a rounding error for worldwide sales.

Competition is a funny thing. There looks to be plenty of EVs, what with mega-name-brands like Porsche bringing vehicles like the objectively stupendous Taycan to the party, and a fresh surge of combatants making a lot of noise in 2020.

But competition only makes sense if there's something to compete for, beyond media attention. About 17 million people bought a vehicle in the US last year. Almost none of them bought an EV.

The tide has turned a little bit toward the idea that EV market penetration could pick up in the next decade. But then again, top auto execs in 2010 were predicting that EVs could capture 15% of sales by now. The bottom line is that today, there is no meaningful competition in the EV market, so everything is a wager on not just the desire for competition to emerge, but for actual customers to buy actual electric cars.

The jury's even out on Tesla, if you think about it. As I pointed out a while ago, Tesla is worth more than Toyota, the world's most valuable carmaker for many years prior to Tesla's epic stock-market rally in 2020. But Tesla has been valued at that level for less than a year, while Toyota has stewarded value for decades.

Say the EV market tops out at 5 to 10% in the US and Europe and fails to dominate in China, the globe's big growth opportunity. Then, even if Tesla is number one, it can't defend a market cap of almost $400 billion on sales of just a few million vehicles annually.

Where's my creative destruction?

Another thing that concerns me about Tesla bullishness and all the new aspirants to the EV throne is that what the economist Joseph Schumpeter called the "perennial gale of creative destruction" isn't blowing hard enough.

We should be seeing EVs replacing internal-combustion-engine vehicles at a much brisker pace if the technology is truly superior, or at least superior enough to attract consumer dollars to go along with investor dollars (which aren't the same thing).

We should also see traditional automakers enduring incredible transitional pain or even failing outright. Instead, before the coronavirus pandemic, automakers had been raking in cash, building up fortress-like balance sheets against a downturn, buying entire Silicon Valley startups, and posting consistently profitable quarters as pickups and SUVs flew off dealer lots.

If you follow the logic, then unless the EV market quickly replaces the gas-powered market, or replaces a significant portion of it, there ultimately is no EV market. There could be a Tesla market, and I've already argued a couple of times that Tesla is on its way to establishing a micro-monopoly (one too small to deserve government anti-trust attention).

EV startups, then, have a dual challenge. First, they have to draw even with the first-mover, Tesla, which will be difficult and costly. Then they have to hope that anticipated growth does more than arrive — it has to beat expectations to make enough space for profitable competition.

If you think that all sounds harsh, welcome to entrepreneurship in the transportation business! There's a good reason why Lucid, Nikola, and Fisker have reeled in billions — the risk is so crazy that only fortunes are bold enough to favor it.