The slumping stock market and rising interest rates have made it tougher for EV companies to raise fresh capital from investors.

JOE WHITE and BEN KLAYMAN – Reuters

DETROIT — Electric vehicle startups that promised to disrupt the automotive industry by using a software- and technology-heavy approach are now scrambling to cut costs amid the type of industry slowdown that has bedeviled Detroit automakers over the years.

To remain a player in an increasingly competitive business as incumbent automakers introduce their own EVs, startups like Rivian Automotive Inc. and Arrival SA will need to tighten their belts and in some cases reinvent themselves, industry officials and analysts said.

In many cases, they are partnering with larger, deep-pocketed companies to aid their survival and provide access to funds.

Those who fail to control their spending or find the right partners could wind up like electric delivery van startup Electric Last Mile Solutions, which filed for Chapter 7 bankruptcy protection last month. Industry officials do not expect that to be the last startup to hit a pothole.

“Like every company that is burning money, you need to make the right adjustments so that you can get to the other side of the desert,” said Evangelos Simoudis, a Silicon Valley venture capital investor and industry adviser.

Even as overall new-vehicle sales have slumped during the COVID-19 pandemic, EV demand remains strong. Global sales of battery electric and plug-in hybrid electric vehicles nearly doubled last year to 6.6 million, according to the International Energy Agency.

On Tuesday, British startup Arrival said it planned to cut spending, reorganize its business and potentially shed 30 percent of its workforce in response to the challenging economic environment.

Arrival, trying to launch production of electric delivery vans, is following the lead of industry stars Tesla Inc. and Rivian, which have cut jobs as supply-chain snarls hobbled production, holding revenue below expectations and sending costs soaring.

Arrival said its $500 million in cash on hand would last until late 2023 with the proposed cuts. The question is whether that will be enough.

“One billion dollars doesn’t last very long in the auto business. That’s a redesign for a Malibu or something,” Cox Automotive executive analyst Michelle Krebs said.

In CR’s largest-ever nationally representative survey, more than a third say they’d consider buying an EV today

A growing number of consumers are eager to buy a battery electric vehicle, especially if certain concerns related to EV ownership are addressed, such as creating greater access to charging, extending vehicle range, and lowering purchase prices, according to findings from the largest-ever nationally representative survey from Consumer Reports (PDF).

The survey of 8,027 U.S. adults found differences across racial/ethnic and income groups in terms of how people perceive EVs and the potential purchase barriers. Almost half of respondents also reported being unaware of existing federal and state incentives that would defray the purchase price of many EVs, sometimes up to $7,500 for the federal credit, key knowledge that might sway someone to make an EV purchase. 

With improvements to the nation’s charging networks, more lower-priced EVs coming to market, and increasing range from battery technology advances, many barriers to EV ownership are showing signs of breaking down over time. The survey results bear this out: We found that 14 percent of American drivers say they would “definitely” buy or lease an electric-only vehicle if they were to buy a vehicle today. That’s up markedly from the 4 percent who said the same in a 2020 nationally representative survey from CR of 3,392 licensed U.S. drivers.

Overall, our latest survey found that more than a third of Americans would “definitely” or “seriously” consider buying or leasing an electric-only vehicle) if they were to buy a vehicle today. Among their reasons: More than 3 in 10 U.S. adults say that it costs less to charge an EV than to refuel a gas car (33 percent), overall lifetime costs are lower (31 percent), and maintenance costs are lower (28 percent). 

“The survey shows that there is clear interest among Americans in reducing costs for transportation and lowering their environmental impact,” says Quinta Warren, PhD, CR’s associate director of sustainability policy. “It underscores some key concerns, but fortunately, many of these barriers to owning a battery-electric vehicle EV can be addressed through experience and education.”

There’s no denying soaring demand for electric vehicles and hybrids. Gas prices are at record highs, and Americans increasingly are turning to electric vehicles. EV sales rose 76 percent in the first quarter, compared with the same period last year, according to Cox Automotive, an information and services company. EVs promise reduced operating costs, and there are more choices on the market, with more models from various categories on the way. 

Consumer Reports conducted the survey to better understand demand and awareness of battery EVs and low-carbon fuels. It was partially funded by the environment-focused philanthropic group Breakthrough Energy and the Energy Foundation, a nonprofit organization dedicated to a safe, equitable economy powered by green energy. It was fielded Jan. 27 to Feb. 18, 2022, when the national average price for gasoline ranged from $3.34 to $3.52 per gallon. The price of gas has surged to a national average of about $5 per gallon for regular as of late June. (Download a PDF of the survey report.)

The survey results illustrate an EV landscape in transition, as more Americans become aware of the purchase option in a societal atmosphere of increasing concern about climate change and the role fossil fuels are playing. 

CR is committed to supporting sustainable transportation, reducing harmful emissions, and saving drivers money—so much so that fuel economy is a key factor in the Overall Score that we give to every car we purchase and test. As a result, the Overall Scores elevate good all-around models that are energy-efficient, helping shoppers make their purchase decisions and encouraging automakers to prioritize energy efficiency. CR also launched a Green Choice designation last year using vehicle emissions data from the Environmental Protection Agency, highlighting the vehicles that are among 20 percent lowest contributors to smog-forming and greenhouse gas emissions for their model year. You can find these Green Choice vehicles on our website and in our print publications. They are denoted by a green leaf icon wherever our ratings are presented.

See our hybrid/EV ratings and buying guide.

Auto makers are likely to report a slowing U.S. sales pace for recent months, as dealers have ready buyers but a lack of inventory

By Nora Naughton  By and Mike Colias

U.S. car sales continued at a blistering pace in the second quarter but showed some signs of slowing in June, as the number of vehicles on dealership lots continues to dwindle.

General Motors Co. reported a nearly 40% increase in vehicle sales for the second quarter compared with the same period a year ago. The Detroit auto maker’s sales were also up compared with the first quarter, but less so, rising 10% over that period.

Gasoline prices drop below $5 a gallon as a record number of drivers are expected to hit the road over July Fourth weekend, according to AAA

 By Omar Abdel-Baqui and Hardika Singh

Americans are still paying close to $5 at the pump. That isn’t going to stop them from hitting the road this July Fourth, analysts say. 

The average price for a gallon of gasoline Friday was $4.84, compared with $3.12 during the same day last year, according to data from OPIS, an energy-data and analytics provider. 

Mr. Melek said he attributes the consumer resilience in part to many Americans saving cash during the Covid-19 pandemic and to the low unemployment rate. 

Most of all, people are making up for lost time, Mr. Melek said. And with expensive airfare, unreliable flight schedules and a lack of public transit options in much of the U.S., driving is one of the few options left for Americans looking to travel domestically this summer.

There will be some demand elasticity, Mr. Melek said, meaning more people may eventually change their habits as the prices remain around $5 a gallon. “But I think this is a particularly special time when we all just want to get the hell out and do fun stuff,” he said. 

Gas prices have dropped 18 cents a gallon since June 14, when they peaked at $5.02 a gallon. The drop isn’t expected to persist, said Tom Kloza, global head of energy analysis for OPIS. OPIS is owned by News Corp, the parent company of The Wall Street Journal. 

“Prices go up like a rocket, and they come down like a feather,” Mr. Kloza said.

There are some early signs that suggest record prices are prompting at least some Americans to change their driving habits. Gasoline demand in the week ending June 25 is down 6.3% compared with the same period last year, according to OPIS. Demand for gasoline in mid-to-late May fell to its lowest levels in nearly a decade, according to government data.

With consumer inflation also at record highs, many drivers are making more calculated budget decisions. 

“Gasoline prices to consumers are top of mind,” Mr. Kloza said.

Julie Pargo, a recently retired hospital administrative clerk living in Toledo, Ohio, drives about 150 miles every few months to visit her three children in Columbus. 

She spends about $70 filling up her 2018 Buick Envision. To save money, she has started strategizing her grocery shopping trips and where she buys gas.

“It’s sad when $4.69 sounds like a deal now,” she said. The average cost of a gallon of gas across Ohio was $4.78 on Friday, according to OPIS.  

Mr. Melek cautions Americans not to expect relief at the pump until after the busy summer driving season. More oil on the market and an easing of refinery bottlenecks could drag down prices. The Federal Reserve accelerating interest-rate increases could also decrease demand by potentially kicking off a recession, he said.

“There’s a light at the end of the tunnel—maybe a bit of a faint light—that we won’t reach until well past the summer,” Mr. Melek said.

The Biden administration has tried to urge the U.S. oil industry to boost output, but with existing refineries running near capacity, there is little that can be done short-term to ease the supply gap, analysts said.

Gasoline demand and prices typically hover around their highest levels in July and August. Any disruptions to refineries, which sometimes occur during the summer hurricane season, could lead to higher prices at the pump this year, Mr. Kloza said.

A May report from JPMorgan suggested retail gas prices could jump to $6.20 a gallon by August. Mr. Kloza said that isn’t likely without significant supply disruptions in July. 

Several agencies at the state and federal levels have taken measures to slow increasing prices. Some states have suspended their gas taxes. The U.S. Environmental Protection Agency issued an emergency waiver in April that allows gas stations to sell high-ethanol content gasoline this summer, despite concerns about increasing air-polluting emissions. 

The Biden administration has also tapped oil supplies from the U.S. Strategic Petroleum Reserve, releasing 1 million barrels of oil a day.

Ms. Pargo, the retiree in Ohio, said she would drive to visit her family across the state more if prices weren’t so high. 

“You do have to think about, ‘Do I really want to spend $70 just to drive there?’ ” she said.

Auto maker has a waiting list of 77,000 but is making about 12 a day, trailing pace of similar offerings from Ford, Rivian

By Mike Colias

The waiting list for General Motors Co.’s GM -2.42%▼ new GMC Hummer electric pickup truck and related SUV model recently topped 77,000 prospective buyers. Most are likely in for a long wait.

Supply constraints make a return to 2008-style discounting hard to imagine. The question is what will happen when those constraints end.

By Stephen Wilmot

Don’t worry too much about a recession hitting Detroit. The real concern should be normalizing supply.

The U.S. new-car market is stuck in a low but lucrative gear as manufacturers struggle with production. General Motors warned Friday that its second-quarter profit would be lower than previously expected due to parts shortages curtailing deliveries to dealers. First-half sales across the market came in at about 6.8 million, according to Wards Intelligence, down 17 percent from the same period last year. 

Yet supply constraints have created surprisingly profitable conditions for dealers and manufacturers. With few new vehicles on lots, the average price of a new one hit a fresh record of $45,800 in June, according to an early reading by J.D. Power. The losers have been consumers and parts suppliers, which are typically locked into long-term contracts.

Without many signs that the environment is changing, the question is why Detroit auto-maker stocks, which were very strong in 2021, had such a terrible first half. GM and Ford both fell 46 percent —much worse than the broad market.

The obvious answer is rising recession risks as interest rates rise. The average new-car loan cost 5.08 percent in May, up from 4.45 percent a year earlier. In the 2008 downturn, manufacturers had excess inventory and discounted aggressively to keep cash flowing to support their high fixed costs.

But a recession might not make so much difference in the current new-vehicle market which, in addition to being supply-driven, is now the preserve of the affluent. Buyers with incomes of less than $50,000 now account for less than a quarter of sales, down from roughly 40 percent at the start of 2016, according to Cox data.

Another concern is high pump prices, which ought to make the gas guzzlers Detroit specializes in less attractive. There are some signs of shifting tastes in the used-car market: Prices of small cars have been stronger than those of pickup trucks lately, says Charlie Chesbrough, senior economist at Cox. With inventories much lower for new vehicles, though, the trend might not feed across soon.

This isn’t to say that Detroit had a great second quarter. Rising raw-material prices are starting to squeeze auto makers more as supply contracts get renegotiated. The cooling used-vehicle market won’t give their financial-services arms the tailwind they got last year. Profits are surely past their best.

Still, the real test of car makers’ mettle will come when supply once again exceeds demand. Manufacturers say they won’t fall back into the old trap of overproducing, but this is hard to believe when the industry still has significant excess capacity and investment in electric-vehicle production will lead to even more.

However this plays out, normalization could take years. As supply gradually recovers, risks from a slowing economy need to be set against the benefit of pent-up demand. Consulting firm AlixPartners doesn’t expect U.S. new-vehicle inventories to start rising meaningfully from their current multidecade lows until 2025. That could mean the next few years are more comfortable for car makers than recession-obsessed investors seem to think.

Cars don’t offer value at the moment, but car stocks just might.

Auto makers mark up electric vehicles to offset rising battery-material costs and capitalize on the interest caused by higher gas prices

By Mike Colias

High gasoline prices are prodding more people to consider an electric vehicle. But car shoppers are likely to face sticker shock at the dealership, too.

Auto makers have been raising prices on electric cars, partly to offset the soaring cost of materials used in their large batteries. Car executives also are capitalizing on strong consumer interest in EVs, as a new wave of plug-in vehicles hits the market.

By Mike Alford, Chairman and Jeff Weber, Chairman, Regulatory Affairs Committee

On June 23, 2022, the Federal Trade Commission (FTC) proposed a rule that would impose a wide range of unwarranted and ill-advised new duties and restrictions on motor vehicle dealers. (A summary description of these proposed new obligations is set out below.) The FTC’s proposal relies on the agency’s authority in section 5 of the FTC Act to issue rules that prohibit unfair or deceptive acts or practices (UDAP). However, the FTC fails to provide sufficient support to justify its sweeping set of proposed duties and restrictions.

NADA is mounting a comprehensive and detailed response to the proposal, which will defend the highly competitive and pro-consumer benefits of the optional, dealer-assisted financing model, and show that, in fact, the FTC’s proposal is likely to harm consumers.

In addition to proposing sweeping new obligations, the proposed rule seeks comments to justify even more expansive regulations. Specifically, in its proposal the FTC asks 49 sets of open-ended questions on issues related to the proposed duties and restrictions, including (1) whether they should be expanded (e.g., “should additional restrictions be placed on all add-ons?” and “[s]hould the Commission consider… requiring retail installment sales contracts to include a clause prohibiting financing-contingent sales, prohibiting the dealer from transferring title to a trade-in vehicle or performing any repairs or reconditioning before a sale is final or requiring dealers to return trade-in, deposit, and fees, if financing is not approved?”) and (2) how the market operates (e.g., “Do dealers already calculate a figure equivalent to the Offering Price for every vehicle in their inventory?” and “[h]ow many add-ons do dealers typically offer, and how many of those are sold regularly?”). 

These unusually broad inquiries are more typical of an Advanced Notice of Proposed Rulemaking when an agency seeks information that could potentially lead it to issue a proposed rule. The FTC’s omission of this preliminary and vital step casts serious doubt on whether its proposals are the result of neutral, thorough and carefully considered market research into the auto purchasing process.  

The FTC has provided the public 60 days to respond to the proposed rule after it is published in the Federal Register. NADA will seek an extension of time to file and then submit an in-depth response to the FTC’s proposal that will further educate the FTC on the array of consumer benefits provided by dealers, and explain how the many flaws in the FTC’s proposed rule will threaten those benefits.

The duties and restrictions in the proposed rule generally include –

1. A prohibition against misrepresentations involving any of 16 different activities related to the advertising and sales process;
   
   
2. A requirement that dealers disclose:
   • a vehicle’s “offering price” (the full cash price a dealer will sell or finance a motor vehicle to a consumer excluding only required government charges) in any advertisement or communication with a consumer that references a specific vehicle or any monetary amount or financing term for a vehicle;
   • an “Add-on List” on each website, online service, or mobile application (or, for other forms of communication, a website, online service, or mobile application where a consumer can view the Add-on List) that includes an itemized list of all of the dealer’s optional “Add-on Products or Services” and the price of each item (or, if the price varies, a price range the typical consumer will pay for the item);
   • that the purchase of “Add-ons” is not mandatory;
   • the total amount a consumer will pay to purchase or lease a vehicle when the dealer makes any representation about monthly payment amounts;
   • the amount of any consideration provided by the consumer; and
   • whenever comparing payment options and discussing a lower monthly payment, that a lower monthly payment will increase the total amount the customer will pay to purchase or lease a vehicle (if such statement is true);
     
     
3. A prohibition against charging for any “Add-on Product or Service” that would provide no benefit to the consumer (with certain types of products identified);
   
   
4. A requirement that dealers make certain disclosures and conform to other requirements, including obtaining a newly defined and redundant form of express and informed consent, regarding such optional “Add-ons”; and
   
   
5. A requirement that dealers retain for 24 months an extensive set of records that include, among many other items, all advertisements, sales scripts, training materials, and marketing materials regarding the price, financing, or lease of a motor vehicle; all “Add-on” lists and all documents describing such products and services; calculations of loan-to-value ratios in contracts including GAP Agreements; and copies of all written consumer complaints related to a wide variety of topics.

Burger giant adds new standards to owner reviews; ‘A new franchise term is earned, not given

By Heather Haddon

McDonald’s MCD -1.14%▼ Corp. is planning to make some of the biggest changes in decades to the franchising system that underpins its U.S. operations, as it seeks to reinvigorate its base of restaurant owners.

Executives this week notified the burger chain’s franchisees that they will have to go through a more stringent review every 20 years to keep their restaurants, according to an email to franchisees viewed by The Wall Street Journal. McDonald’s will consider new factors, like performance history, as it asks owners to apply to keep their locations. The company will consider new factors, such as customer complaints, to determine which McDonald’s franchisees can add new locations.

In a shift that could affect some of the chain’s longest-tenured restaurant operators, McDonald’s is also requiring that some next-generation heirs put up more cash to keep operating their locations—and to designate a single family member as the operator. Current McDonald’s franchisees can designate several heirs, such as the children of a parent owner, to take over their McDonald’s restaurants as part of their agreement with the chain.

“This change is in keeping with the principle that receiving a new franchise term is earned, not given,” McDonald’s said in the message to franchisees regarding the changes.

Franchisees run 95 percent of the company’s U.S. restaurants. McDonald’s anticipates it will begin to implement the franchising changes next January.

McDonald’s, the world’s biggest fast food chain, relies heavily on its franchisees, who own and operate McDonald’s locations while paying the chain royalties to use its branding, marketing and supply chain.

The arrangement, which is also used by fast food giants like Wendy’s Co. and Burger King, is a way for restaurant companies to focus on high-level operations while entrusting day-to-day operations to individual operators, who maintain a stake in the performance of each restaurant.

The pandemic fueled tensions between many franchisees and corporate parents across restaurants, hotels and retail shops, as both sides navigated an unprecedented disruption to business. Franchisees pushed back on store upgrades, promotional discounts and fees they said were excessive in light of the crisis. Companies imposed shifting rules in response to changing government mandates.

Many fast-food restaurant chains recovered their sales from the pandemic last year as Americans flocked to their drive-throughs, boosting franchisee profits. Valuations of chain restaurant franchises grew, prompting turnover as some owners retired and sold their businesses.

McDonald’s in the past year has been assessing how it can attract operators who come from more diverse backgrounds, along with franchisees who cultivate a good environment for workers and abide by the company’s corporate values. The new policies are meant to advance those goals, chain U.S. president Joe Erlinger wrote in a message to U.S. owners and employees viewed by the Journal.

Some McDonald’s owners said they were caught off guard by the new rules. Chain franchisees are scheduled to meet with company executives next week, and some owners said they intend to push back at the changes. The National Black McDonald’s Operators Association sent a message to franchisees Thursday asking if they should issue a vote of no confidence toward company CEO Chris Kempczinski.

McDonald’s declined to comment.

More than 1,750 McDonald’s locations exchanged hands last year, up from roughly 750 in 2019 and 2020, the chain’s most recent franchise disclosure document shows. The total number of U.S. restaurants stood at 13,679 last year, compared with 13,912 at the start of 2019.

The company counted more than 2,400 U.S. restaurant owners as of the end of last year.

Some critics have said that McDonald’s hasn’t done enough to help recruit Black people and other minorities into restaurant ownership in recent years. McDonald’s last year said it would offer $250 million in low-interest loans to new franchisees over the next five years to help increase diverse ownership of its U.S. restaurants.

McDonald’s owners generate some of the largest annual sales per restaurant among any U.S. fast-food chain, but it is costly to get into franchising at McDonald’s. Total initial investment needed to operate a traditional McDonald’s franchise ranges from $1,366,000 to $2,450,000, including a starting franchise fee of $45,000, according to the disclosure document. Franchisees pay rent and service fees based on a percentage of total sales.

Chain executives this year have signaled to owners that they want its franchising group to evolve. During an address at the company’s global convention in April, Mr. Erlinger said that McDonald’s wanted owners who were committed to operating great restaurants, and that could come from outside its current franchisee group.

“Everything, or should I say everyone, we need to build the future of McDonald’s isn’t in this room today. We must attract the right people and we will do that together,” Mr. Erlinger said during his remarks to company employees, franchisees and suppliers, a recording of which was viewed by the Journal.

Franchisees have been on edge about the company’s push to recruit new owners. Some owners also have bristled at a new grading system of their restaurants that the chain plans to roll out in January 2023 to encourage better operations through inspections and more training.

CarMax is thriving despite sky-high used-car prices, rock-bottom consumer sentiment

By Jinjoo Lee

Last year, used-car retailers were on a roll, fueled by new-vehicle shortages, low interest rates and a strong consumer. Are they starting to run out of gas?

Not quite yet. CarMax, KMX -3.13%▼ the largest such retailer in the U.S., reported on Friday that its total revenue grew 21 percent in the quarter ended May 31 compared with a year earlier—higher than the 18 percent increase analysts polled by Visible Alpha were expecting. Net income was largely in line with expectations. Its shares rose 7 percent in midday trading.

The boost in revenue was mostly thanks to higher prices: While CarMax sold 11 percent fewer used cars, consumers had to shell out $6,311 more per vehicle on average, a 28 percent increase from a year earlier. The company made a gross profit of $2,339 per used car, an increase of $134 compared with a year earlier.

Despite still healthy numbers, it is worth noting that this was the second consecutive quarter of declining units sold year over year, indicating that inflation and rising interest rates are squeezing some consumers out of the market. CarMax noted during its earnings call on Friday that the sales mix has shifted toward older vehicles, with cars four years old or less comprising about half of sales, down from the two-thirds seen a year earlier. Cars in the roughly six-year-old range typically comprise about a fifth to a quarter of sales but made up about 35 percent of revenue in the latest quarter.

Certain trends that kept used-car retail business on full throttle are now slowly reversing. New-vehicle inventory remains tight, which is helping keep prices high on both new and used cars. But used-vehicle supply is starting to return to 2019 levels. As of mid-June, new-vehicle inventory was down 70 percent compared with the same period in 2019, according to Cox Automotive. Used-vehicle inventory has recovered and is down just 11 percent over the same period. Meanwhile, consumer sentiment about buying conditions for vehicles had plunged to the lowest reading in the history of University of Michigan’s survey in June—even worse than perceptions of the housing market.

Another place to watch is CarMax’s lending business, which could start facing pressure as higher interest rates mean funding costs become more expensive. Last quarter’s healthy interest margins largely reflected those from previous years because CarMax has an “earn over time” rather than immediate “gain on sale” accounting model, CarMax noted during Friday’s call. Seth Basham, equity analyst at Wedbush, noted in a research report that the spread between CarMax’s loan rates for consumers and its own funding cost has narrowed to the lowest level since 2008.

CarMax shares remain down about a quarter year to date. There is no cliff in sight, but used-car retail is certainly headed downhill.