In 2016, just a year after it was founded, the electric van and bus startup Arrival caught the eye of what would be a dream customer for any commercial-vehicle company: UPS.
In an interview with Insider, Arrival president Avinash Rugoobur said he didn't remember which company reached out to the other first, but, he said, UPS quickly saw Arrival's potential and sent employees to the startup's offices to work with its engineers.
Over the next four years, UPS tested components and prototype vehicles and, in 2020, announced it had ordered 10,000 vans from Arrival with an option to purchase another 10,000. If UPS ends up buying all 20,000 vans, the deal could bring in a little over $1 billion, Arrival said in a 2020 investor presentation.
Though it has yet to deliver a final vehicle to UPS or anyone else, Arrival didn't have to do much persuading to close its deal with the logistics giant, Rugoobur said. Their multi-year collaboration meant UPS was already familiar with Arrival's technology. In a press release, UPS said Arrival was the first company that had developed an electric delivery vehicle that met its standards.
"I think they knew if we kept going the way we were going that we would have something very unique and special for them," Rugoobur said.
It also helped that, due to Arrival's small-scale production strategy, UPS knew it could buy a smaller number of vans than a major manufacturer would have been comfortable offering, he said.
A promising but unproven business model
Arrival's investors and partners, which include BlackRock and Hyundai, are betting on a business model that has plenty of upside, but is still unproven. Using novel materials and an innovative production process, Arrival says it can build electric vans and buses that are lighter, more spacious, and cheaper to own than their gas and diesel-powered competitors. And, the company says, its manufacturing strategy will allow it to start making a profit faster than other automotive startups while earning better margins in the long run.
"Arrival is transforming the way the industry is going to operate," Rugoobur said.
In November, the special-purpose acquisition company (SPAC) CIIG Merger Corp. announced it would take Arrival public, likely in 2021.
Among the primary reasons the automotive industry is so difficult to crack for startups is that developing vehicles and building factories is very expensive. Before your first model rolls off the assembly line, you have to spend hundreds of millions, or even billions, of dollars to get all the pieces in place.
Those daunting fixed costs mean it's important to sell as many vehicles as possible. With each sale, you get closer to recouping the money you spent to prepare it for production.
That logic leads automakers to build large factories that can produce hundreds of thousands of units each year. Though buses and vans are made in lower numbers than sedans and SUVs, they're built using a similar manufacturing process and philosophy, said Steve Tam, an analyst at ACT Research who covers the commercial-vehicle industry.
Smaller is better
Arrival thinks large factories are inefficient. Where Tesla calls many of its plants "gigafactories," Arrival is constructing what it calls "microfactories." In the 2020 investor presentation, Arrival predicted that building the capacity to produce a total of 100,000 vehicles per year across 10 smaller factories will require less cumulative space than a single Volkswagen plant. Since Arrival projects that each factory will be less expensive to build and operate than the average auto plant, it can make a profit off a smaller number of vehicles than a typical automaker would need, Michael Ableson, Arrival's CEO of North America, told Insider. And spreading factories across a larger number of cities means the company will save on transportation costs, since it won't have to, for example, ship a bus built in California to New York.
The key to making the microfactory strategy possible was developing a composite material for body panels that, according to Arrival, is stronger and lighter than steel. The material can be dyed, turned into interior and exterior panels through extrusion — a process in which material is pushed through a mold to change its shape — and joined to other panels with a strong adhesive. That means Arrival doesn't need some of the expensive equipment — like stamping presses, paint machines, or welding robots — that other vehicle manufacturers do, Ableson said.
Put all of those pieces together, and Arrival thinks that for every 100,000 vans and buses it makes, it will have to spend about half of what Volkswagen does to produce the same number of vans at its factory in Wrzesnia, Poland.
The impact of Arrival's unconventional strategy could ripple beyond the commercial-vehicle industry — if it works. Rugoobur said there's no reason a production system modeled on Arrival's couldn't make 10 million vehicles per year.
If Arrival succeeds, the likes of General Motors, Toyota, and Volkswagen might start taking notes.
Are you a current or former Arrival employee? Do you have a news tip or opinion you'd like to share? Contact this reporter at mmatousek@jkmperu.com, on Signal at 646-768-4712, or via his encrypted email address mmatousek@protonmail.com.
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