Editor's letter: Polestar shows how tough being a start-up can be

It’s tough to be a start-up in the car industry. It’s one thing to engineer a car ready for production, quite another to then put it into mass production, satisfy all kinds of legislation, manage sales channels and aftersales and generate public awareness. No other product requires such careful cradle-to-grave management and burden as cars, and you have to do it for multiple models at the same time for wildly different global markets. Tesla made a loss for 17 straight years before turning a profit in 2020 and is truly the anomaly for car-making start-ups achieving success; so many names have faded away (eg Faraday Future), others have got there but are struggling (eg Rivian) and Dyson got to the point of making a car, having spent billions to get it to production readiness, then pulled out anyway. Then there's Polestar. It's a start-up in the sense that it didn’t exist as a car company a few years ago, yet in being spun out of Volvo and part of the Geely group, with access to all those technologies and other operations, it has had a huge leg-up from those truly starting from scratch. Still, in being listed on the New York Stock Exchange, Polestar’s financial reports show just how tough life is as a start-up and how much money you need to spend in scaling up the business, building sales channels and in research and development before revenues come in on selling cars. So far in 2023, Polestar has spent more than $1.5 billion (£1.2bn) in paying for day-to-day operations, development and continuing to scale the business. To that end, Volvo and Geely have recently provided it with “additional liquidity” and the company is seeking a further $1.3bn (£1.0bn) in funding, all with the ultimate goal of Polestar becoming cash-flow break-even from 2025. On the cars it has sold this year, it has taken in $1.8bn (£1.5bn) in revenue but at a margin of just 1%. The goal is to get margins closer to 20% when the Polestar 2 is joined by the 3 and 4 SUVs and the 5 saloon. By that point, if all goes to plan, development costs will be much lower and the cash burn will slow as profits from selling cars can go into development of new ones. For now, Polestar’s share price is about 80% down on its all-time high and its market capitalisation is remarkably less than 1% - one per cent! - that of Tesla, despite the 2 being an excellent car and Polestar on track to sell 60,000 examples of it this year. A good car doesn’t always bring financial success. “Building a new brand, a new company, isn't easy,” CEO Thomas Ingenlath told investors and media at a special event last week in Los Angeles called Polestar Day, designed to show off all the work the company was doing and models it had in development. However, he added that the company was “resilient”, despite the fact “things don’t always go according to plan”. So how will Polestar crack the code and get to its goal of being cash-positive by 2025? “It’s a combination of things,” Ingenlath told me later on, after the covers had come off the new models. “The product portfolio is evolving with [the] 3, 4 and 5, and with two of those cars in SUV segments, they have a higher margin potential.” Then there's the diversification of manufacturing footprint, with Polestar taking 3 production for the US market to Volvo’s South Carolina plant and 4 production for the US and South Korean markets to Renault’s Busan plant. (Contract manufacturing is Poletsar’s strategy for building cars, because “manufacturing isn't an expertise for us”, according to Ingenlath). Building cars in the US for the US is a “prerequisite to being financially successful in the US", he added. Cost reductions are expected to achieve “normal levels and better levels” for the likes of raw materials and logistics in the near future, and then there's more general “big work on cost efficiencies” and a “strict cost focus”. These are what Ingenlath calls “traditional levers” for any business to pull. You then feel a sense of relief from Ingenlath when he lists more of the big costs that will be behind Polestar. “Over the last two years, we established a digital market environment, and you can imagine how expensive that is and how many consultants you need to actually do that. Now there's a digital system and the markets are developed,” he said. And of course there are reduced development costs for new models, with money coming in from new models to support it. Polestar is also not trying to conquer as many markets as before; it will instead more strategically focus investments on markets where electrification is really taking off. Ingenlath didn’t name which markets would see a reduction in investments, however. As a designer, Ingenlath has created a brand that's undeniably cool and some cars that have been well received so far. Now the hope is that a range of desirable Polestars, rather than a single model, will help propel the brand towards profitability. Further USPs come from a bespoke operating system for China, the brand’s adoption of automated driving technology and a focus on sustainability. The jury is out on how far autonomous driving technology will ever go, but you would imagine the market will ultimately come to brands with a focus on sustainability, either through customer demand or legislators getting involved. “Product is key for Polestar,” said Ingenlath. “Clearly, the big, big wave of investment with [the] 3 and 4, and with [the] 5 being in the final stages of development, means that big first round [of investment] is coming to an end.” As he said himself, building a new brand is not easy. Who would launch a car company?