Rivian May Be a Mess, But Its Starter SUV Looks Like Savvy ...

(Bloomberg) -- When RJ Scaringe first set out to build Rivian Automotive Inc., he didn’t want a paint shop. 

The auto entrepreneur figured that if his startup were to survive in an industry of corporate Godzillas, he’d have to be scrappy; and painting is one of the most expensive steps in making a contemporary car. Scaringe didn’t want to stamp metal, either. The plan was just to order some prefabricated body panels, keep costs low and produce a car that would appeal to  the mass market, according to dozens of interviews with Rivian’s first employees and advisors. Plan B was similar: a bare-bones, desert-ready pickup. 

In the end, neither of those rigs panned out. Instead, Scaringe went in the opposite direction and Rivian shot for the moon. The company raised big money, bought a big-boy factory and launched a swanky set of trucks — the R1S SUV and the R1T pickup — that offer little in the way of cost-consciousness. All of the paint, from Forest Green to Limestone, is applied in house.

On Thursday, though, Rivian announced a new car that takes a page from Scaringe’s original playbook. The R2, a small, electric SUV that starts at $45,000 and is expected to begin shipping in 2026, will be plenty fast and go plenty far — at least 300 miles. The relatively low price comes from what won’t be on the rig: no electric motor on each wheel, for example, and no built-in Bluetooth speaker. 

Scaringe also channeled his inner Steve Jobs and trotted out a surprise product: an even smaller SUV dubbed R3. That one, which he described as a crossover EV, will serve as Rivian’s entry-level model, though Scaringe didn’t share pricing or production timing. 

California-based Rivian is having a tough run. Last month, the company said it plans to build just 57,000 vehicles this year, short of analysts’ average estimate for more than 80,000 units. In the same week, Rivian said it would decimate its salaried workforce, the third culling in the past year and a half. The company is struggling with high interest rates, supply-chain snags and cost-conscious consumers. Those dynamics have made it a poster child for both EV opportunity and for the challenges of scaling production and stemming losses without revenue from gas models to fall back on. Rivian’s stock hit single digits this winter, barely three years on from a post-IPO peak of $172 a share. Alongside the R2 announcement, Scaringe said the company will look to save $2.25 billion by halting plans to build a new multibillion-dollar factory in Georgia.

Rivian’s showcase this week, meanwhile, is a bet on textbook product strategy: separating the market by willingness to pay. The R2 is meant to appeal to the section of the socioeconomic pyramid that would never spend close to six figures on a vehicle, and the R3 sounds like an attempt to cover all the folks that balk at $45,000. 

For perspective, of the 53 EVs now available in the US, only 16 fall under that price threshold. Scaringe said a lack of affordable options on the market is one reason the R2 got the green light. Here he is on February’s earnings call: “R2 represents the essence of our brand while targeting the significant midsize SUV segment, a massive market with limited compelling EV options beyond Tesla.”

The trick with this kind of good-better-best play is to make sure there’s no crossover or cannibalization between the customer classes. You don’t want the “good” product to be so good that customers forgo the “better.” Likewise, the “better” — in this case the R2 — shouldn’t kill the “best.” Put another way: You don’t want any business-class travelers in coach.

Compared to the R1S, the R2 has three fewer seats and lacks both abundant storage capacity and off-road credibility. That’s by design: Rivian has made its play for the Patagonia Moms. Now it’s going for the Costco dads and their Walmart nephews. 

Tesla Inc. has taken its own good-better-best approach, starting at the top of that staircase. But Tesla’s “better” (the Model Y and Model 3) basically killed its “best” — the Model S, which is now a rounding error on sales reports. In recent years, the company has slashed prices willy-nilly, crushing resale values and eating into profits. 

Rivian’s product pipeline in some ways resembles Mercedes, a shop that knows a thing or two about willingness to pay. Consider the carmaker’s electric SUV line, which comes in four flavors. Crushed it with your Bitcoin options this year? Order an EQS SUV in Maybach trim (starting at $180,000). Cashed out your coins before crypto’s comeback? Try a standard EQS SUV ($104,000) or an EQE SUV ($78,000). Still grinding? There’s an EQB SUV ($53,000) for you. The Mercedes electric G-Wagon ($150,000) will soon join the party.

Though scaling is still proving challenging for Rivian, the company has spent the years since its first vehicles launched bringing down costs, from improvements in production to renegotiating purchasing contracts with suppliers. Rivian still lost over $40,000 on every vehicle it delivered in the fourth quarter, but that was down from $124,000 a year ago. Among other efficiencies, the company figured out a way to cut two out of three control units from its vehicles, essentially mini computers that are among the most expensive widgets onboard. 

“There’s millions of decisions that have to be made,” Scaringe said at the R2 unveiling. “We’re incredibly focused on ensuring every one of those is not only optimizing for what the ownership experience will be, but optimizing our ability to make this very affordable and very accessible.”

If the R2 lives up to Rivian’s hype, the company is surely hoping its sales volume will make for more negotiating power. Chief Financial Officer Claire Mcdonough recently referred to the R2 as “the carrot” for suppliers. “We're just seeing a dramatically different environment for sourcing than what we had previously,” she said. 

Rivian started taking R2 orders immediately, and at least some investors appear to be on board. Shares of the automaker jumped as much as 16% after the product fete, their biggest gain since July.

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