January 4, 2021- In this week’s podcast we welcome special guest Avinash Rugoobur. Avinash is the President of electric vehicle company Arrival, which recently announced a business combination with SPAC CIIG Merger at a $5.4 billion enterprise value. In today’s episode we discuss:
- The process of going public through a SPAC
- Arrival’s future growth opportunities in the market
- What differentiates Arrival from its competitors
- The investment case for Arrival
Welcome investors to the Absolute Return Podcast. Your source for stock market analysis, global macro musings and hedge fund investment strategies. Your hosts Julian Klymochko and Michael Kesslering aim to bring you the knowledge and analysis you need to become a more intelligent and wealthier investor. This episode is brought to you by Accelerate Financial Technologies. Accelerate, because performance matters. Find out more at www.Accelerateshares.com.
Julian Klymochko: Welcome to The Absolute Return Podcast Avinash, real pleasure to have you on the show today. Now to kick things off. Why don’t you tell us a little bit about your background and your role at Arrival?
Avinash Rugoobur: Sure, and thanks for having me. My background, I started out as engineering, engineering focus, mechanics, computer science. I started my career at actually General Motors. So, I’ve been in and out of the automotive industry for the last couple of decades. In between that, I’ve also done a couple of start-ups. So, one in digital health and one piece of the chocolate company, which is a story for another time. I then joined a gym, Silicon Valley office where I was leading advanced technology activities, actually the one-dollar acquisition of Cruise, which know helped stop a lot of the autonomous activity. And then, you know, supported a growing number of start-ups through my role there. And then I actually moved over to Cruise to lead strategy and M&A where, you know, saw acquisition of companies helped to provide a future strategy and it was also leading GM Cruise next gen vehicles. I’ve been, you know, really familiar with, let’s say both sides of the automotive landscape to the technology side, but also then the business side since then, you know, I met Dennis the founder of Arrival and I was just really blown away by what the company was doing. I’m sure we’ll go through this in more detail, but it’s really just transformed how automotive manufacturers design and produce vehicles. So, I joined Arrival almost two years ago now and you know, over 1300 employees. Founded in 2016 and we’d been working on this mission to really transform how we produce engineering, design commercially. So, it’s a really exciting moment for us, and as you’re aware, we have announced that we will be going public. Most important things would be bringing out vehicles and scaling the microfactors out for the next few years.
Julian Klymochko: Yeah, super exciting time for Arrival in this going public transaction with CIIG Merger Corp. Now, if you could describe how that whole process came about, because clearly a massive jump for the company to go from the private market to the public market, with a splash like you guys have done.
Avinash Rugoobur: Yeah, so that was you know, really great time. Yeah, probably worth just a little bit of a history, prior to that, we’ve been installed. So, we’ve been around since 2015, with just a real heavy focus on engineering. So, our work force, 90% are engineers actually. And so, we’ve been really developing a really strong technology and our people full year. We came out of self towards the end of last year with an investment from [Inaudible 00:03:11] motor company. And we also had an investment from Ups and most recently prior to going public we also had an investment from BlackRock. We had a really strong investor base form People Financial. And when we’re looking at what’s the strategy for the next few years, and what’s the best way for us to, you know, start to deploy these microfactories around the world, the technology is mature now. We are looking to bring products to market. And when we met the CIIG team we really aligned on a couple of key points.
One is they shared the same vision of where mobility was going to go, right, the future of electric. But more than that, we have to break the barriers of entry to electrify the fleet by really reducing the price premium that electric vehicles currently inhabit. And then secondly, they brought things to the table that Arrival would really be healthy utilizing in the future. You know, they’ve got a really strong background in running both public and private companies, growing and scaling them, brand development. And obviously we bring a lot of the automotive and technology engineering along with that. So, you know, we went through a competitive process. We met multiple partners. What we really liked about CIIG was that they were also committed to staying with Arrived along this journey, which is going to be a long journey. So, you know, Peter Cuneo the CEO of CIIG is actually joining our board. And, you know, we’ve got a really strong relationship and, you know, working with one team.
Julian Klymochko: That’s interesting. You mentioned that it was a competitive process when looking to go public via a special purpose acquisition company. If you could describe in more detail sort of how that process came about, because clearly there’s a lot of interest in electric vehicle companies these days, and we’ve seen a number of utilize these SPAC structure to go public and clearly with the performance of CIIG since the deal was announced up you know, almost a threefold clearly the market, you know, is very, very keen on Arrival as a public company. So, if you could talk about you know, how that process came to fruition specifically with CIIG and, you know, was it inbound? Did you talk to a couple dozen others, or if you could provide us a bit more detail on that?
Avinash Rugoobur: Yeah, we talked to quite a few, I would say, I think it was one of those things when we met CIIG, I think even after the first meeting we had with them, Dennis the founding CEO and myself, we already that’s the idea would be our partner, like love at first sight. I think because of the alignment that I was discussing earlier that was really critical to us because, you know, we’ve had a lot of good traction raising capital even prior to join. And you know, just to be clear, a lot of that is based on, you know, the deep technology that we’ve got. We’ve also got, you know, a backlog of orders. And so, for us, we were looking for, you know, not just the financial side of this, but also, you know, what could this partnership bring to the table. Then that really was where CIIG show, and I mentioned that, you know, Peter is going to be part of the board. But also, they really even you know, on a day to day, we’re in constant communication, we’re working together on you know, what next year and years off to look like. So, there was a competitive process, but I think once we met the right partner, you know, we made the combination happen. And ultimately even prior to that, we were looking at multiple different avenues and, you know, for us it’s slightly different and I would say to, you know, what we’re seeing in the rest of the industry. For us, it was, you know, when you look at our microfactory model, where we are, you know, instead of going through the traditional macrofactory or Gigafactory, or, you know, even large traditional [Inaudible 00:07:29] factories, these are costing, you know, hundreds of millions or billions of dollars in Capex, right?
And then you having to produce hundreds of thousands of vehicles to be profitable, but without technology, we’re able to deploy smaller factories that even if you look to multiply out, you know, to get them to compare them at similar volumes, they’re less than half the price of a traditional factory. And then about a 10th of the footprint. But even at the volumes we’ve got, so a microfactory can produce 10,000 vans or a thousand buses. We’re talking about numbers where Capex is, you know, in the vicinity of around 45 million to deploy one of these microfactories. So, when you look at our rollout and the financial requirements for us to hit profitability and to get our products out, we’ve just got a very different industry profile. And, you know, this made the most sense for us because it gave us the runway, you know, we’re expecting about 660 million in total proceeds from the merger. And when we look at the, you know, the future 12 to 36 months of Arrival how we roll out the microfactories, this was the best strategic option for us. So, you know, it was a competitive as I mentioned. We found the right partner and we were able to raise enough capital to execute our goals. So, I think that’s, you know, that’s why we went ahead of business.
Michael Kesslering: I think that’s interesting point that you make. I think a lot of investors look at SPACs, they look at the special purpose acquisition company is simply just a shell for the target company to go public. But the way you’re talking about the relationship and the ongoing involvement of this SPAC sponsor, it sounds like it’s a lot more, as you say, a partnership that than just, you know, a pile of cash, right. and so, when you were looking at, your kind of alluding to the decision-making of really a traditional IPO versus this SPAC, more partnership where you find a long-term partner. What really put you over the edge choosing SPAC versus the traditional IPO? Was it that the amount of capital that could be raised, perhaps wasn’t as large with the traditional IPO? If you could just dive a little bit deeper into that?
Avinash Rugoobur: Yeah, absolutely. I mean, there’s a few factors there, right? When you factor in a traditional IPO and the you know, amount of cash that you can raise, obviously the EV market has been phenomenal in growth, but, you know, there’s a lot of uncertainty with COVID, etc as well. There’s a long-time process to that. All of our diligence was done through third parties. We’ve got an OEM as an investor, you know, so really heavy diligence has been done on the company. And when we look at, to your point, what the cash that we could raise, but the fact that there is this partner that is bringing, you know, over 40 years of leadership experience across private and public companies you know, they really understand what it takes to reimagine an entire industry, and that’s really critical part of this.
And so, it was just a firm foundation for us to draw, you know, strategic knowledge, operational expertise. We’ve got the you know, technical capability and you know, we’ve got folks that have come from the industry, veterans of the industry for production. So, it was really just this alignment and, you know, we were able to get to being a public company quicker with the same diligence, but we can fulfil our plans to scale the company a lot more rapidly. And because of our position of where we are in terms of, you know, we were in the cusp of, you know, we have prototype vehicles driving around already, both our bus and van. We’ve got a microfactory coming up in Vista in the UK and Rock Hill South Carolina. We just recently yesterday announced a new headquarters in North America in Charlotte. You know, we’re in a position I would say maturity. And a lot of that comes from, you know, deep technical capability well, so, you know, we’re not looking at this as a runway, you know, for years and years of R&D for us, it was okay. We are going to start scaling. We’re going to start getting into production. We’ve got a partner that can help us grow. They bring a lot to the table; we have the necessary cash to do this. Let’s make it happen.
Julian Klymochko: So, you mentioned your prototypes bus and van, the microfactories, new headquarters, and post-closing of the going public transaction. You’ll have access to $660 million dollars of growth capital, which is significant. So, what are Arrival main growth initiatives beyond building microfactories? What sort of things are you guys planning to do on the product side specifically?
Avinash Rugoobur: So, we have a full vehicle programs that actually in development and that’s the bus. We have a van and we also have a [Inaudible 00:12:52] and we have a small vehicle platform that’s coming out in 2023. So, these are all rolling out over the next three odd years. What’s important there is each of those vehicles share common technologies. So, we have, you know, throughout verdict integration, we’ve developed all of our own components. We select components to develop that can give us cost saving that enable assembly through a microfactory. And also, we select the components to design it in house. What I would say, the ones that are smart, right? The ones that are connected and you know, can measure your health, we’ll give data to the operators. So those components, like our battery module, for example, we’ve got the human machine interface module. They can actually be swapped in and out and shared across vehicles. So, you know, our bus and our van share a lot of the same components as well the small vehicle platform when we bring that to market.
The way you can think about Arrival is a lot of deep technology, a lot of micro technologies that come together to foam any vehicle platform, we’re starting with the bus and the van, and we focused on the commercial vehicle segment. But it enables us to your point as part of the, how we’ll deploy capital. It allows us to, you know, get those to production and allows us to accelerate the deployment of the microfactories. And it allows us really start to do that at scale globally, because the beautiful thing about a microfactory is you don’t need to stick it out in the middle of nowhere, but you can actually bring those microfactories close to the cities that they serve. So, if you think about, you know, the capex profile of that microfactory and the fact that they can build the vehicles in our portfolio, then you can actually start to imagine, you know, the potential for the rollout of these micro factories, as you’ll be seeing governments around the world, and I would say, you know, corporations too, with ESG goals, looking to ship the fleet over from fossil fuel to electric, that’s public transportation, that’s, you know delivery vans, that’s even you know, even in some cases, you know, trucks, road, cars, depending on where you are. So, when you put all of that together, that’s a real important time to strike the market is really now, as this shift is starting to happen and being able to produce the vehicles right, where they’re going to serve, you know, you’re employing local people, you’re paying local taxes, and there’s a sense of community in the products that we develop, you know, they’re built and assembled and sold in the areas that they serve. And we can work with Governments and corporations to design mobility systems that meet their needs. So, a lot of that capital is really going to be deployed on product development and getting out these microfactories, you know, we expect to have around 31 microfactories in the next few years.
Julian Klymochko: You mentioned Arrival 1300 employees of which 90% are engineers, clearly a large focus on technology, focus on engineering. As we look into the increasingly competitive electric vehicle sector, how specifically does arrival differentiate from some of these competitors specifically, if we look at Tesla, which is obviously just a massive company, especially by market capitalization and access to capital and a profile you know, looking at some of your competitors, what sets you guys apart?
Avinash Rugoobur: So, I mean, yeah, first of all, Tesla, what they’ve done for the industry is amazing, right? They really shifted the mindset to people to understand that the future is electric. I would say that, you know, when it comes to what the differentiate Arrival. We’re the only ones who are vertically integrated to the level that we’re developing all of these different layers in house. So, you know, the software. So that’s, you know, there’s three layers of software that we developed. The control level in vehicle software, that’s really managing all of the components and the controls. We have the cloud-based software. So that’s all of that data that goes to the cloud for operators to use. So, you know, think fleet management, vehicle health monitoring, those sorts of things that are really important for commercial, right? And obviously that is one of the differentiators. We are going out there and underserved commercial vehicle market, right?
A lot of these customers, you know, they had to buy a one size fits all product for a long time. OEM, it’s hard to then go and, you know, really deploy all of that capital to the commercial vehicle market. Because it cost so much to do and cost so much for the line. And, you know, every time you’re doing a change, it’s hundreds of millions to a billion dollars. Whereas for us, you know, we able to do that just rapidly and we can deploy these microfactories in six months, at that low Capex.
So, we’re able to focus in on the user experience of what these customers really need. And, you know, so going back to that differentiation, now we’ve got the software. The third level of that software is all in-house development tools, but we actually develop the tools that enable us to do all of the engineering more efficiently and more effectively. And then you’ve got the manufacturing, we’ve talked about, I’m sure we’ll go in a little bit more. We have this very unique composite material. This competent material that we have basically removes the need for a metal stamping plant and a paint shop. It’s a lighter and more durable than steel, and so helps to reduce the total operating costs for the commercial vehicle operator. And when you’re removing the metal stamping plant and the paint shop, these are really costly plants. And you’re also able to shrink the footprint down, which is a key enabler for a microfactory. Then we have the components that we were mentioning earlier that gets shared across the vehicle platform. We design and develop those in house and, you know, [Inaudible 00:19:17] components is you can actually upgrade them over time. So, think about them. You know, when they combined with the software layer, think about them as plug and play. So, what you’re able to do is, you know, buy an asset and then over time, let’s say autonomy comes along in 5 to 10 years full going, we can actually swap out, for example, the compute module with, you know, the latest one that enables that then off we go. So, you know, when it comes to the verdict integration across the software, the composites, the composite materials and the microfactories. These are key differentiators. These are all in-house technologies that we have actually designed and developed.
Sorry, one last thing, all of that, you know, what’s the point of doing all that? The point of doing all of that so that you can actually release an electric vehicle that is best in class. So, for example, our van, it’s a full-time van, two-time [Inaudible 00:20:16-20]. It has, you know, cargo volume that is best in class. So, you’re able to carry heavier payloads and larger boxes or packages. And you’re able to do that with a battery module that can be sized according to your needs, because the battery is the most expensive part of the electric vehicle. If you’ve got a vehicle that’s going under a hundred miles, for example, we can actually size the battery for that. So, you’re saving the money instead of buying, you know, in the traditional way, buying a full range vehicle, and then sort of having to wear that cost. We can size that according to the needs. So, you do all of this so that you can produce the vehicle at lower costs, and then you control the technologies to reduce the cost at every point, so that you can bring an electric vehicle to market that’s at a competitive price with a fossil fuel equivalent. And when you add that to the lower total cost of ownership, that’s when you see the shift across the full car park being electric, and that is something that Arrival is enabling.
Michael Kesslering: So, something that you’ve talked quite a bit about is the microfactory approached. Can you speak a little bit as well to the Genesis of that idea? And obviously you had mentioned your experience within the OEM industry and on the autonomous side as well, but your team’s in-depth expertise with legacy manufacturers, how did that flow into the microfactory approach? And was it really just identifying some of the gaps or kind of, I guess, missing parts of the traditional manufacturing process?
Avinash Rugoobur: Yeah, so what I would say about the skill base, you know, out of that 90% of engineers, about half are software engineers and the other half robotics and, you know, automotive engineers. So, there’s a blend across industries that really create something special because if we keep doing things the way they’re always done and expected different results, you know, you know, as Einstein said, definition of insanity, right? So, when we looked at this and we said, okay, we’re going to go after the commercial vehicle segment, we’ve got to get the right price point, and we’ve got to get the best products we can. One of the key barriers is actually the production process itself. And, you know, since Henry Ford designed it, it hasn’t really changed. It’s been improved over, you know, many cycles, but it’s essentially still the same. You deploy, you know let’s say a billion dollars in Capex. You run that as a line at one speed and all of the operations happen on that line. So, when we looked at that and we said, hey, the commercial vehicle segment needs the flexibility of different types of products at different volume runs. You know, if you do that with a traditional manufacturing process, you’ll never be able to serve this segment. And that’s what we found, right? It is an underserved segment. So why don’t we take a look at the actual manufacturing process itself and transform that, you know, and that is a secret sauce. I mean, this makes us more efficient and flexible than anyone else on the market. To do that, we questioned everything. Why is it a line? Why is it this? Why is it that we really myopically sort of broke it down?
And so, what we’ve come up with instead of a production line, we have technology cells and these technology cells, each perform specific operations within the production process. So, we then take autonomous mobile robots and we move the parts into the cell where it performs an operation, and then we move it to another cell to perform another operation. So, what you’re doing there is creating a level of flexibility where depending on what vehicle type that you want to produce, you’re simply rerouting the order of those operations that the cells do. And you can be much more flexible with that approach. And the cost is significantly lower. You know, we’re using off the shelf robots to do this, to enable that you actually have to then design the vehicle around that manufacturing process and not the other way around, we don’t design the vehicle and then say, okay, go and figure out how to manufacture it. Okay, well, we know we’re going to put a line and we’re going to do this. And, you know, a lot of start-ups and traditional OEMs, as soon as they start sketching a vehicle, they either you know, contract manufacturing to produce it. Going and buying a plant or amortizing an existing plant. And that forces you down a very specific vehicle development process, but for us, by breaking that whole paradigm apart and having these microfractures with these technology cells, we’re then able to create the product around that. So that, you know, the composite material that I was mentioning is part of that process, you know, no metal stamping, no paint shop, you know, colour the composite in the colour we need. And you have, you know, these technologies, these components, these components are all designed to be assembled in a microfactory.
So, you’ve got a harmonious loop between every part of the vehicle, the skateboard platform, same thing. We only use extrusion and castings. We don’t use welding for example. And we’ve, you know, we’ve got bonding, gluing and other processes to cover the structural goals. And so, you’re starting to question all of the traditional approach and you’re creating something new designed around the objective of making sure we get these best-in-class products at the right price point. So that’s really our harmonious loop between every bit of technology that we design and develop that vertical integration it’s in sync with what the microfactory can do. You can’t just take an existing vehicle and then say, hey, let me just go build this in a small factory. It just won’t work. You know, what we’ve done is managed to break that economies of scale. That’s been a barrier entry for the industry for so long.
Julian Klymochko: So, there’s a lot of investor interest in the electric vehicles sector from the top down the macro story, it’s very clear where customers and the industry is moving. Getting away from internal combustion engine and too electric powered vehicles. Now you mentioned Arrival, specifically deep technology for a competitive advantage. Vertical integrated nature, the microfactories and certain features that your products have. Now from an investor’s perspective, there’s more and more electric vehicles and some of your competitors as options in the market to invest in. What sets Arrival apart and what is the investment pitch for Arrival specifically?
Avinash Rugoobur: So, I’ve come up with microfactory. So, you know, essentially what’s important about the microfactory though, is we’re able to scale more rapidly because we can deploy them in six months and it costs us less Capex, good stuff. Then you also are able to produce vehicles at a lower cost. So that really what you’re talking about there is the ability to scale quickly, and also it gives you more flexibility for changing vehicle types over time. So, this is an important aspect, too the scaling factor of Arrival, when you think of having to produce hundreds of thousands of vehicles at low margin to really get the return on investment, you are, you’re walking a tight rope if the industry changes and we’ve seen that in the, let’s say the long time it’s taking the traditional approach to react to electrification, right?
There are things that are built into that system that stops you from being that flex. The microfactors, given that flexibility to scale production rapidly, but also to really bring out different vehicle types of any volume which is something, again, the industry hasn’t seen. The proprietary tech, what that lets us do is control our costs and have unit economics that enable high margin vehicles, but then there’s still price competitive and offer a lower total cost of ownership to fossil fuel equivalent and any other electric vehicles competitive. And then if you take that, and then you look at the order backlog, you know, we’ve got orders from Ups, for example, for 10,000 vehicles, with the options of 10,000 more, we’re in late-stage sales with a variety of different customers, because the product itself has the right attributes and the right price point. You know, I think you know, one of the interests from investors is that, you know, you have this low CapEx model, you have a deep IP portfolio, you know, we’ve got over 180 patents across all of these technologies, and then you’ve got a product that customers are interested in and you can scale all of that rapidly. I think that’s really what you’re seeing is the investment. I mean, I don’t even want to say it’s a pitch. It’s the reality of what Arrival is doing, what its new method enables. That is really unique, I think, to the industry.
Julian Klymochko: So, to summarize, you guys can scale rapidly, you got this proprietary technology that leads to efficiency and profitability, which is super important in manufacturing vehicles, in addition to the flexibility from the microfactories. So certainly, a very interesting value proposition for investors. Now, before we wrap things up today, Avinash were can investors learn more?
Avinash Rugoobur: Obviously they can reach out directly through our website. You know, we’ll be doing the invest the roadshow shortly as well. We’re looking to close the transaction early next year as well in terms of the business combination. So yeah, absolutely investors are free to reach out and we’re happy to have those discussions.
Julian Klymochko: Okay, great. Well, thank you so much for being on The Absolute Return Podcast, Avinash, it was a real pleasure. Wish you all the best in the merger with CIIG and the future public market interactions. You mentioned the transaction closing early 2021. So, investors can look forward to that and yeah, thanks so much. Wish you all the best and hope you have a great day.
Avinash Rugoobur: Thanks for having me.
Julian Klymochko: All right, thanks so much. Goodbye, everyone.
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