Why Things Could Get Worse for EV Startups

Summary

WSJ Tech News Briefing: Why Things Could Get Worse for EV Startups
Release Date: December 6, 2024

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Introduction

In this episode of WSJ Tech News Briefing, host Danny Lewis explores two critical areas in the tech landscape: the burgeoning challenges faced by the artificial intelligence (AI) industry concerning resource consumption, and the growing difficulties confronting electric vehicle (EV) startups amidst escalating costs, supply chain issues, and shifting political landscapes. The episode provides in-depth analyses, expert insights, and notable commentary from industry insiders.

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Artificial Intelligence: Balancing Innovation with Resource Demands

Overview

The AI sector continues to advance rapidly, promising transformative impacts on daily life. However, the infrastructure supporting AI—particularly data centers—consumes substantial amounts of electricity and water, raising sustainability and logistical concerns.

Energy Consumption Challenges

According to consulting firm McKinsey, AI data centers currently account for approximately 4% of the U.S. annual electricity usage, with projections indicating a potential rise to 12% by 2030. This surge is attributed to the increasing complexity and number of AI models being developed and deployed.

Water Usage Concerns

Researchers from the University of California, Riverside, and the University of Texas at Arlington highlight that by 2027, the global water demand for cooling AI data centers could exceed the annual water usage of Denmark. This significant projection underscores the environmental and operational challenges faced by the AI industry.

Efforts to Mitigate Resource Consumption

WSJ contributor Bart Ziegler discusses with producer Julie Chang the various strategies AI companies are employing to reduce their energy and water footprints:

• Enhanced Processor Efficiency: Companies like Nvidia are developing AI processor chips that are 25 times more energy-efficient than their predecessors[^02:22]. Additionally, tech giants such as Amazon, Google, Meta, and Microsoft are designing proprietary chips aimed at further reducing energy consumption.

• Water Recycling Initiatives: AI companies are innovating in water usage by utilizing non-potable sources. For instance, Amazon's data centers in Santa Clara employ processed wastewater from local septic systems for cooling purposes[^03:02]. Other strategies include sourcing water from rivers or industrial processes to minimize reliance on municipal supplies.

• Power Capping Techniques: Research teams at MIT and Northeastern University have discovered methods to reduce power usage by 22-24% through power capping, which only slightly extends response times of AI systems by 5-8%[^03:48]. This approach offers a balance between performance and sustainability.

• Optimizing Data Utilization: Efforts are underway to streamline data usage by creating more specialized and less redundant datasets. This not only enhances AI response quality but also lowers the energy demands associated with data processing[^04:37].

Notable Quote

"We're looking at processor chips that will be more efficient and not need quite as much energy and not emit quite as much heat."
— Julie Chang, WSJ Contributor [02:22]

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Electric Vehicle Startups: Navigating a Tumultuous Market

Current Industry Struggles

EV startups have faced a challenging environment leading up to the 2024 presidential election, marked by falling consumer demand, rising production costs, and disrupted supply chains. High-profile bankruptcies, including those of Fisker and Arrival, signal deep-rooted issues within the sector.

Impact of Donald Trump's Return to the White House

With President Elect Donald Trump poised to return to office, EV startups brace for potentially harsher conditions. Trump’s administration has expressed skepticism towards the EV industry, threatening significant policy shifts that could exacerbate existing struggles.

Policy Changes and Financial Uncertainties

Key concerns include:

• Elimination of Federal Tax Credits: Both Trump and Elon Musk advocate for the removal of the $7,500 federal tax credit, a critical incentive for consumers purchasing EVs[^07:09]. Many startups rely on these credits to make their vehicles more affordable, and their removal could drastically reduce sales.

• Potential Cuts to Grants and Loans: Federal support mechanisms, such as the $6.6 billion federal loan agreement recently secured by Rivian, face uncertainty. The timeline and approval of such financial support remain unclear, heightening investor anxiety[^07:02].

Rising Input Costs and Tariffs

Proposed tariffs on goods from Mexico, Canada, and potentially other regions add to the financial strain on EV startups by increasing production costs. These tariffs threaten to undermine profitability for companies already operating with thin margins[^09:51].

Competition from Chinese EV Manufacturers

Chinese companies like BYD and CATL dominate the global EV market with superior, cost-effective models. Even with the imposition of tariffs, Chinese EVs remain cost-competitive, posing a significant threat to U.S. and European startups[^10:30]. The concern is that without robust support, the U.S. may cede leadership in the EV sector to China.

Historical Context of EV Startup Valuations

The rise and fall of EV startups are partly due to inflated valuations during low-interest periods post-COVID-19, where many companies went public with unrealistic growth projections. As these lofty expectations proved unsustainable, investor confidence waned, leading to sell-offs and financial distress for startups like Faraday Future and Canoo[^08:46].

Notable Quotes

"We're expecting to see a bunch of grants and loans from the Department of Energy and other agencies. Those are expected to be on the chopping block as well."
— Amrith Ramkumar, WSJ Reporter [07:09]

"The $7,500 federal tax credit is a huge deal that's expected to go away."
— Amrith Ramkumar [07:09]

"If you're a startup and all your eggs are in the EV basket, it's just a really difficult time in the US right now."
— Amrith Ramkumar [07:02]

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Conclusion

The episode underscores the dual challenges in the tech sector: while AI continues to push the boundaries of innovation, it grapples with significant resource demands that necessitate sustainable solutions. Concurrently, the EV startup ecosystem faces a precarious future influenced by political uncertainties, financial constraints, and intense global competition. The interplay of these factors highlights the delicate balance between technological advancement and pragmatic resource and policy management.

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For more detailed insights and updates, listen to the full episode of WSJ Tech News Briefing.

Transcript

[Merrill Lynch Representative]

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[Bart Ziegler]

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[Merrill Lynch Disclosure]

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[Danny Lewis]

Welcome to Tech News briefing. It's Friday, December 6th. I'm Danny Lewis for the Wall Street Journal. Artificial intelligence is hot. Literally. The data centers AI companies rely on to train and run models like ChatGPT consume huge amounts of electricity and water to power their chips and cool them down. We'll hear what AI developers are doing to cut back on their energy use. And then it hasn't been a good time lately to be an electric vehicle startup, thanks to rising costs, supply chain obstacles and cooling customer demand. And now, with President Elect Donald Trump, an outspoken EV critic, returning to the White House, the situation could get worse for many young EV companies. WSJ reporter Amrith Ramkumar breaks down the state of the EV industry. But first, the AI industry makes a lot of promises for how the tech could transform everyday life. But developing that tech takes a lot of resources. According to projections from consulting firm McKinsey, the data centers AI companies rely on use as much as 4% of total electricity in the US annually, and that could rise to as high as 12% in 2030. Meanwhile, recently, researchers at the University of California, Riverside and the University of Texas at Arlington say by 2027, AI's demand for water globally to cool the chips in data centers could account for more than the annual demand of Denmark. That's all causing logistical and public image problems for the growing industry. WSJ contributor Bart Zigler looked into what AI companies are doing to reduce their demand for resources. He spoke with my colleague Julie Chang.

[Bart Ziegler]

Bart what is one way companies are looking to cut AI's demand for power and water?

[WSJ Contributor]

So they're looking at processor chips that will be more efficient and not need quite as much energy and not emit quite as much heat. Nvidia, which is the biggest maker of these AI processor chips, says that its newest version will be about 25 times as energy efficient as the previous high end model. And meanwhile, some of the biggest producers of AI or sponsors of AI computing, including Amazon, Google, Meta, Microsoft, they're designing their own AI processing chips that they also believe will be more energy efficient.

[Bart Ziegler]

These systems consume a lot of water, specifically in the equipment used to cool data centers. How are some companies looking to address water use?

[WSJ Contributor]

All the IAI companies are looking at how can they not use so much water, and how can they, when they do use water, use water that's not drinking water? Amazon, for example, there are data centers in Santa Clara, California. They're using water that comes from the local septic system. Now, it's highly processed, but it's basically wastewater they use to help cool their computer centers rather than taking water from the municipal water supply. Other uses companies are looking at are possibly taking water from rivers or water from industrial processes that discharge water. It's all an attempt not to waste potable water. On AI computing.

[Bart Ziegler]

One thing you wrote about that I found interesting was researchers looking at capping the amount of electricity used by AI computers. Tell us more about that.

[WSJ Contributor]

Yeah, that's a fascinating group of studies I came upon. They're actually discovering this one group at MIT and Northeastern University, that they could cut the power transmitted to AI centers by 22 to 24%. And all that did was expand the time to come up with a response from the AI by about 5 to 8%, which they think looks like a valuable way to handle some of the power that these centers use. They believe it could lead to significant reduction in energy consumption. Meanwhile, there's a group at several other universities that is looking at when they train the AI systems initially to vary the power instead of not having the power be on constantly. And they also think that could cut down power use fairly substantially.

[Bart Ziegler]

Is there anything they can do about data specifically since these models consume such vast amounts of data?

[WSJ Contributor]

Yes, that's another area of research. They're looking at whether instead of these incredible large language models, it could cut them down and get the same quality of response. There are a number of stuff going on in that area, and they're actually finding that if the data is more specialized or it removes redundancies or removes what they consider junk data, they can get even better responses to AI queries. And also these smaller databases use less energy. So that's a really promising area.

[Danny Lewis]

That was WSJ contributor Bart Ziegler speaking with our producer Julie Chang. Coming up, electric vehicle startups were struggling before President elect Donald Trump won the election last month. What does his return to the White House mean for the industry? That's after the break.

[Merrill Lynch Representative]

Say, this is your financial life. Over time, things can get more complex. With a personalized plan, Merrill can help you navigate it all. Learn [e-mail] Bullish Merrill, a bank of America company. What would you like the power to do?

[Merrill Lynch Disclosure]

Investing involves risk Merrill Lynch, Pierce Venner and Smith Inc. Registered Broker Dealer Registered Investment Advisor Member SIPC a wholly owned subsidiary of bank of America Corp.

[Danny Lewis]

EV startups have not been having a great year. High production costs and cooling demand have made the market tough for young companies. And several high profile companies, including electric SUV maker Fisker and bus manufacturer Arrival, have filed for bankruptcy. And now that President elect Donald Trump is a few weeks away from returning to the White House, things could get even harder for companies that once had high hopes for making it big. WSJ reporter Amrith Ramkumar joins us now with more. Amrit, what did the EV startup environment look like heading into the presidential election?

[Amrith Ramkumar]

EV startups were already struggling heading into November. It's been a brutal few years. These companies have seen falling consumer demand, turbulence there. Then they have rising costs, higher interest rates. And so that sort of double whammy is really hitting a lot of them hard. We've seen a slew of bankruptcies already this year. And then, yeah, Trump's election could be a death blow for frankly, many of these companies.

[Danny Lewis]

Right? I mean, President Elect Trump has been critical of the EV industry. How might that play out in his second administration?

[Amrith Ramkumar]

Executives in the industry are hopeful that Trump's alliance with Elon Musk will sort of limit some of the fallout. But both Trump and Musk have said they want to get rid of a $7,500 federal tax credit. So that right away is a huge deal for many of these startups because many of them are just starting to ramp up production, which means their cars tend to cost more. They haven't been able to bring the cost down. So that $7,500 federal tax credit is a huge deal that's expected to go away. And then we' expected to see a bunch of grants and loans from the Department of Energy and other agencies. Those are expected to be on the chopping block as well. A company like Rivian, which announced a $6.6 billion federal loan agreement recently. Investors aren't sure whether they can get that done by Inauguration Day in late January and whether that loan will actually happen. There's a great deal of uncertainty. And it's the same old saying on Wall street. Investors hate uncertainty. Again, the context here is so important. It's not like these businesses were doing great and then the election happened. These businesses were really struggling. The fundamentals are very challenged right now. We're Even seeing established automakers like Ford and GM dial back some of their EV expansion plans. If you're a startup and all your eggs are in the EV basket, it's just a really difficult time in the US right now. Another thing to note is that this company called Northvolt in Europe that had raised something like $15 billion from big banks and investment firms, they recently filed for bankruptcy.

[Danny Lewis]

Right. Northvolt is a Swedish battery startup. Amrit, why were these startups struggling to begin with?

[Amrith Ramkumar]

You have to go back a few years to like 2021 and 2022 when a lot of these companies went public. At that time, interest rates were essentially zero. We were coming out of COVID and anyone that said they could try to be the next Tesla became worth billions of dollars seemingly overnight. So a lot of these companies just had expectations that were set way too high and then inevitably they haven't been really meet those. A lot of them promise to grow sales and double them every couple of years and hit $1 billion in sales in historically fast fashion. So yeah, when you make those lofty promises and then don't deliver, investors sell off the stock. So we've seen that happen with a lot of these companies and a lot of them like Faraday, Future, Canoe, names like that, they've been distressed for over a year, almost two, even three in some cases. So a lot of these names are sort of hanging on for dear life. And what will be really interesting is if government loans and government support can bail any of out.

[Danny Lewis]

So in addition to the government subsidies and loans and other supports, could these companies also be impacted by Trump's proposed tariffs?

[Amrith Ramkumar]

Definitely. Proposed tariffs are another huge headwind for a lot of these companies. Especially again, their costs are already very high. They're already burning billions of dollars or hundreds of millions of dollars per quarter per year in many cases. So the idea that their input costs are going to go up even further, which is what many economists predict with these tariffs on goods from Mexico and Canada, who knows where else and who knows at what level. But many executives are already bracing for higher costs. And that again, when you're already unprofitable and burning through cash, that has a huge impact.

[Danny Lewis]

And there's also competition in the EV market from Chinese companies. What could this mean going forward?

[Amrith Ramkumar]

That's the million, billion, trillion dollar question, depending on how much you value the EV industry of the future at. I mean, a lot of the Chinese EVs investors and executives say, are superior in many ways and they cost a fraction of what EVs cost in the US and Europe. Depending on what you're looking at, you can factor in tariffs, but even with the tariffs, the Chinese car still might be roughly cost competitive, which is pretty mind boggling. Companies like byd, Catl, they're the global leaders in this space. What many people are worried about is that if the US takes a backseat in the EV industry and doesn't prioritize this area in the next four years, that China's lead will get even big.

[Danny Lewis]

That was our reporter Amrit Ramkumar. And that's it for Tech News Briefing. Today's show was produced by Julie Chang. I'm your host. Danny Lewis. Jessica Fenton and Michael Laval wrote our theme music. Our supervising producer is Catherine Milsop. Our development producer is Aisha Al Muslim. Scott Salloway and Chris Zinsley are the deputy editors and Philana Patterson is the Wall Street Journal's head of News Audio. We'll be back this afternoon with TNB Techman. Thanks for listening.

[Merrill Lynch Representative]

You want a straightforward path to your goals, but at Merrill we know things may get in the way or new opportunities can put you at a crossroads. With the bull at your back, you get a personalized plan, turn left and a clear path forward. Go to ML.combullish to learn more. Merrill, a Bank of America company What would you like the Power to do.

[Merrill Lynch Disclosure]

Investing Involves risk Merrill Lynch, Pierce Veneran Smith Inc. Registered broker Dealer Registered investment Advisor Member SIPC A wholly owned subsidiary of bank of America Corp.