Hello, everyone, and welcome to Arrival's Second Quarter 2021 Earnings Webinar. My name is Megan, and I will be your operator today. Before I hand the call over to the arrival team, I'd like to go over just a few housekeeping notes for the program. As a reminder, this webinar is being recorded. After the speakers' remarks, there will be a question and answer session.
Thank you for your attendance today. I will now turn the call over to Mitesh Soni, Investor Relations for Arrival.
Good morning, and thank you all for joining us today to discuss Arrival's 2nd quarter 2021 financial results. My name is Mitesh Soni, VP of Investor Relations. And with me today is Dennis Sverdlov, Arrival CEO Avinash Raghubour, President Mike Abelson, CEO of Automotive And Tim Hulbrow, Interim CFO. Before we begin, I'd like to remind everyone that certain statements made on this call today are forward looking statements. These statements are subject to various risks and uncertainties and reflect our current expectations based on our beliefs, Assumptions and the information currently available to us.
Although we believe these expectations are reasonable, We undertake no obligation to revise any statements to reflect changes that occur after this call. Descriptions of these factors and other risks That could cause actual results to differ materially from these forward looking statements are discussed in more detail in our filings with the SEC. During the call, we also refer to certain non IFRS financial measures. These should be considered in addition to And not as a substitute for or in isolation from our IFRS results. For further information, please refer to our Investor Relations website atinvestors.
Arrivall.com. With that in mind, I'll turn it over to Dennis.
Thank you, Mitchez, and thanks, everyone, for joining our webcast this morning. The main message today, Q2 was great for us. We increased number of vehicles in Sines OAIs by 4 times during first half of this year. We received 2 more owners, And we have very strong interest for new micro factories all around the world. Our main activities like sales, micro factories, procurement are all on track.
We have very strong evidence that our new method works and our customers require more granular of our products. Based on that, we have expanded our R and D and accelerated CapEx for our microfactors. Just an example, One of the biggest challenges we faced was to develop new materials and the production process of body parts. Our first production line of body parts started to work And has already produced more than 500 composite panels at this factory. I would like to use this opportunity to remind That arrival is a very unique company.
We have invented a new method to design and produce vehicles using micro factories and this is something which never been done before. As President Biden recently tweeted, the future is electric, and this is something we have believed And been developing for us since 2015. We are on a mission to have clean air by replacing all vehicles to electric Produced by local microfactories. We are focused on commercial vehicles now, but our method does not limit us only to commercial vehicles. So we have managed to create best in class electric vehicles.
We call them devices on wheels. They will have competitive pricing with up to 50% lower cost of operations. This radical new method to design and produce electric vehicles using micro factories allows us to avoid stamping, welding and fictions. Our micro factories are rapidly scalable and low CapEx. We are vertically integrated and have developed in house tech with a very strong IP portfolio.
We witnessed strong demand for our products, and we continue to grow our team. Now we have over 2,200 Full time employees. All this will make a high margin business enabled by hardware software and next generation robotics, Making us one of the largest and fastest growing EV companies globally. This was a brief overview of Q2 results. Now let me hand over to Avinash, President of Arrival.
Thanks, Dennis. In Q2, we have been pushing the accelerator as we get closer to our product launch sets. We continue to execute on our business plan, And we are especially pleased with the progress we have made on sets. Since the close of the quarter, we've announced 2 new orders, which demonstrate the momentum of our sales pipeline. The first order from LeasePlan is an initial order for 3,000 vans.
LeasePlan is a leading car as a service company And will be the preferred leasing partner for our electric vans. The sales agreement is expected to be completed in Q3 of 2021. The second order is from California's Anaheim Transportation Network, a customer who recently secured a $2,000,000 grant to replace 5 of their buses We've arrived 0 emission battery electric buses. This is our 1st bus order and marks a significant step forward for this vehicle program To add to the two orders that we already have for the event, we have a very strong sales pipeline with LOIs increasing approximately 4 times since the start of the year to 49,000. We have seen a dramatic increase in potential orders from emerging markets, including India, and we are pleased to announce we'll be opening an R and D center there to meet this demand.
This shows the global interest in Arrival's local production method and best in class products at competitive prices. A big driver of this strong demand is the continued push in industry I want to highlight the historic U. S. Bipartisan infrastructure funding bill That earmarks tens of 1,000,000,000 of dollars over the next 5 years for electrification. We are seeing this trend being replicated in all of our target markets.
At Arrival, we are building vehicles and the ecosystem around them. Our strategy is to combine our in house expertise With high quality partnerships that provide a comprehensive mobility solution. Since Q1, we have announced several partnerships with leaders in their respective fields, Including Microsoft, with whom we are collaborating on a powerful open data platform as well as Hitachi, STMicroelectronics and Umbrella. Arrival's automated driving system also completed a live demonstration of the Arrival van without a human driver inside Performing operations at a fully functioning parcel depot. This shows our progress towards our vehicles being depot autonomous ready in the future.
Lastly, I want to discuss not only the strategic and financial impacts of our business, but also our community impact. This is a key pillar of our strategy I will uplift the communities in which we operate. This slide shows an independent study of the impact we expect to have in Rock Hill alone. We have over 500 direct and indirect jobs created and $159,000,000 added annually to the local economy. We've seen tremendous government interest in our microfactories.
And as we scale microfactories across the globe, this becomes a unique advantage of Arrival's ability Our CEO of Arrival Automotive, Mike Abelson, will now give us an update on our program development and microfax
Thanks, Avinash. As Dennis mentioned, today we'll be providing more detailed road map for our bus and van programs. On this slide, you'll see that we've outlined key milestones for each program From private and public road trials to final certification validation to starter production in one of our micro factories. On our bus programs, we've decided to build the buses for customer trials in our facility in Banbury in the UK instead of Rock Hill, South Carolina. This enables us to serve the UK trial with First Bus much more efficiently than shipping buses from Rock Hill.
The trial buses will be built Between Q4 2021 and Q1 2022 with production intent components including composite panels and battery modules Manufactured with production equipment. We'll start trials at UK proving grounds in Q4 of 2021. We'll then move to public road trials in Q1 of 2022. By building our trial buses in Banbury, we can ramp up the Rock Hill Microfactory and focus it on saleable builds beginning in Q2 of 2022. This timing will allow us to incorporate any product changes that are required as a result of product validation and certification.
This timing is still in line with our original business plan, which expected saleable buses only in the second half of twenty twenty two. For our van program, timing is on track with production scheduled for Q3 of next year at our micro factory in Bicester in the UK. We've already started van testing with UPS utilizing our current prototype fleet on proving grounds in the UK. We expect to move to public road trials in Q1 of Sure. We then expect to complete certification and type approval of our van in Q2 of next year.
Today, I also wanted to announce a number of new variants To our van lineup. The pictures and videos of our van that you've seen to date all reflect a high roof walk in configuration as used by UPS. We'll also offer a variant that's 12 inches lower in overall height. Both these variants will be available in 2 wheel bases. We'll also offer a cargo van variant in both roof heights.
The cargo van will be available with traditional rear doors and side cargo doors. All of the variants I've described are scheduled to enter production before the middle of 2023. An obvious benefit of our composite panel technology is that the tooling cost of the Specific panels for each of these variants is extremely low. The flexibility of our micro factory approach also means we can implement all these variants Without modifying the layout or the basic factory equipment in our micro factories. In our discussions with additional potential van As we continue to monitor the interest in the different variants of the van and large van platforms, as we described in our Q1 update call, we've put both of these products under the same development Our ability to continuously evaluate demand and adjust production timing and mix for our product variants is another advantage of our micro factory method.
I'd also like to give you a few updates on the progress we're making in developing our micro factories. Our Rock Hill, South Carolina bus micro factory has over 80% of Production equipment ordered or delivered. Equipment installation is expected to be complete in Q4 of 2021. Our Vistra U. K.
Van microfactory has over 75% of production equipment ordered or delivered with equipment installation expected to be complete in Q1 of 2022. Our equipment CapEx remains on track to be $50,000,000 or less per micro factory. With the vast majority of equipment ordered, we're now very confident we'll meet this objective. Our Charlotte, North Carolina band micro factory will start production in Q4 of next year. We have identified the site, and the building is due to be complete in October of this year.
To be clear, we're leasing the site and don't expect to be ordering equipment for the Charlotte Microfactory until early next year. As discussed in our last update, we're pulling ahead equipment spending in our Vistra Van micro factory in order to install production equipment there for process validation well in advance of Production in Q3 next year. We're doing this work in Vistra rather than Rock Hill or Charlotte due to Vistra's proximity to our R and D facility in London. In Bicester, we've now installed the first of our composite production lines. With appropriate tooling, this line can make parts for any of our products.
The first cell in the composite line is an automated kitting cell. This cell takes rolls of our composite material and cuts it into individual plies. The cell uses a robot to then stack supplies 1 on top of another while dynamically adjusting the fiber orientation in each ply. Taking and placing of the flies is done using an arrival belt and effector. The cell is controlled by arrival software that optimizes the nesting of the parts During cutting to minimize waste and also calculates robotic trajectories in real time.
The composite production line also includes an automated CNC trimming cell for precise Post processing and machining of the concept parts and an automated binding cell for the pre treating, applying adhesive and then assembling composite panels. All stages of the binding process are completed by a single robot. By changing the end effectors on the robot, we enable multiple processes to be completed in the same cell, Minimizing our capital investment and footprint, while at the same time increasing our flexibility, modularity and equipment utilization. This is the same approach we're taking for our technology cells in the general assembly portion of the micro factory. On the battery side, it's important to note that we've already produced 1432 high voltage battery modules using our production process.
I also wanted to speak briefly on an additional arrival developed technology Used in the traditional assembly plants. In the micro factory, AMRs will carry both parts and vehicles through the assembly process. These robots operate autonomously in the micro factory. They don't follow a predetermined path or a wire in the floor. Each AMR incorporates 2 lottery units and 4 cameras that allow it to accurately map its surroundings.
As you can see in the video, they can move in any direction. We'll also be able to virtually connect 2 or more AMRs in order to coordinate their movement. We'll use this operating mode to move objects that are either too large or too heavy To be handled by a single AMR. The software to control these robots has also been developed in Rival and is part of our micro factory software BMRs will first be deployed in our van micro factories. From the above examples, I hope you can see that we're making substantial progress in validating our micro factory processes.
Believe me, we're just as proud of what's going on inside of our micro factories as we are of our vehicles on the road. I'll now turn it over to our Interim CFO, Tim Mahobrod, to go through the financials.
Thanks, Mike. Arrival EBITDA loss Q2 of 2021 was €29,000,000 By comparison, the EBITDA loss in Q2 2020 was €16,000,000 lower
€12,000,000 After making several adjustments to this
number, as said in our press release, Arrival's adjusted EBITDA loss for the Q2 of 2021 Was €35,000,000 compared to €12,000,000 in the Q2 of 2020. In total, our H1 adjusted EBITDA loss €62,000,000 We expect our Q2 EBITDA to be broadly representative of the run rate for the remaining quarters 2021. A large part of this is due to our headcount, which is now over 2,200 employees. Total capital expenditure for Q2 2021 was €65,000,000 This includes costs already attributable to product development that are capitalized as assets under construction, primarily the cost of staff working on our development programs. It also includes the cost of assets purchased for these development programs such as prototypes, costs relating to the installation of facilities And costs related to Robo factoring equipment and our microfactors.
Total capital expenditure for H1 2021 is €106,000,000 We expect total CapEx spend for H2 2021 to be in the reach of €175,000,000 to €225,000,000 The increase in CapEx spend is you first placed CapEx in our Vista Micro Factory that's been brought forward into 2021, in addition to Rock Hill, which we always planned in 2021. We expect total microfractory CapEx for both Rock Hill and Spitzer to be around €55,000,000 in H2 2021, With €25,000,000 of this brought forward from 2022 in our original plan. Secondly, it's due to higher production tooling investments of around €50,000,000 in These are related to one off costs for each vehicle program as we develop our supply chain ahead of first production. Finally, the remaining €100,000,000 we aim to continue to invest in R and D in H2 2021 for more variants, for better components and better software. This is a choice.
Our spending is headcount focused, so we have full flexibility to ramp up and down as required. However, we believe now is the right time to accelerate our growth. Cash and cash equivalents at the end of Q2 2021 were €445,000,000 a decrease of €71,000,000 on the balance of 31st March 2021 €516,000,000 Net cash inflow in Q2 from the exercise of Arrival's public warrants was €57,000,000 And excluding this cash inflow, Arrivell's net cash outflow for Q2 2021 was €128,000,000 A further €60,000,000 is expected to be received into our cash balance from the public warrant redemption process, bringing the total raised from the process
Thanks for your time today. In conclusion, I would like to summarize. Governments are pushing EV transition and local production, supporting our new method of using micro factories to produce locally. We have strong momentum in LOIs all around the world, driven by both bus and van as we ramp up our micro factories. And based on sales conversations requesting new variants, we have seen the potential to capture a greater market opportunity.
Probably while we are getting the Questions. I also wanted to give you this opportunity to announce that we Getting new CFO join us is John Wozniak. So we'll publish press release today about this. So team was our interim CFO from the very beginning. That was the plan.
We found very strong candidate who joined us from 23rd August, and wanted to use this opportunity to welcome John on board. And also I would like to thank Tim for everything he did So far, Tim is very important part of our team. Tim is continuing to work to be part of the team in arrival, focusing on what we call strategic finance. And Jim, thank you very much for everything you did so far. Thanks, Dennis.
Thanks, Dennis. It's exciting to have John joining, and
I think
he and I have a very complementary skill set, so we're looking forward to working together going forward.
Excellent. Well, your first question comes from Brian Johnson at Barclays. Your line is open.
Okay. Am I unmuted now?
Yes, we can hear you.
Okay, thanks. Two types of questions. First, around the orders and second, just around some of the manufacturing progress you're making. Vis a vis the orders, can you give us a little breakdown in terms of since the beginning of the year or end of last quarter, Kind of what are the big chunks of letters of intent, of orders that came in?
I will ask Kavanesh to answer
Sure, Brian. So since the start of the year, it's been, I would say, predominantly in the growth in the band. We have we're not giving the exact split, but it's driven by also the order from lease plan to significant other orders That is coming on that. And that's quite well split amongst different industry sectors. So the usual e commerce, parcel delivery, post.
And so that's where majority of the growth is. We still are also growing orders on the bus. You've seen Anaheim. I just want to remind everybody that we also had our first public trial coming up in the U. K.
And early while we start that build of those vehicles Already, there'll be more bills out of the U. K. Later this year, and we'll be running public trials early next year. And a lot of the growth we've seen On buses being in the UK, Europe, U. S, but we've also seen some additional interest worldwide on that.
I
want to take
quite a bit of color here is that we were actually as a team, we're trying to find the right term for the type of documents we're signing, of course, it's not exactly a letter of intent, it's actually well developed relation with the customers. It's not like a link or the message on our website. It is the Sales team working with those customers, they understand their certifications. It's a signed document. So it's like paper with the signs from both companies.
So it's so we see them as Why is it important? Because it feels like all customers understand that electric vehicles, given a lot of advantages, it not only comes from the push from government, but Because they see that they can save a lot upon their operations. So essentially, it's helping them to be more profitable businesses. And the sentiment is that there are going to be limitation for the supply. So and that's why today's customers are securing their volumes for the To be sure that they will get those vehicles.
Yes. I think we mentioned in the last call, demand has not been an issue.
Well, let's move on to the second question. And not to sound like I'm interviewing the manufacturing manager, so I don't know if I want to take on Mike or Avinash, But yes, certainly good progress in the micro factor, particularly the composite paddles. Can you give us an example of A problemiterative learning that came up during the quarter as you're producing those panels, kind of What the issue was, what the constraint, how the team attacked it, just to kind of get a little bit under the hood or behind the scenes on what's going on in the factories.
If you don't mind, like I would like to before you answer directly that question, I wanted to I mentioned that in my part of the speech that One of our biggest challenge was actually everything which relates to body panels because like this is Very new technology. We didn't want to use stamping, welding and painting because this is very expensive in terms of CapEx. It defines your size of the factories and actually this defines the business model for the automotive companies. And this was one of our biggest Enazer for Microfactories. And working with the fabric wasn't easy.
I mean, so fabric is Extremely complex media to work with and we were showing videos today that we found the solution. We created our own Briefer to work especially with fabric and it's very and Victor does it very well because I'm really pleased to say that in Q2 we managed to produce Sorry, in this half of the year, for the 1st 6 months, we mentioned to produce 500 parts using our production line. And we see that the cost is very stable, so which is very, very, very pleased. But I also would like to remind you that we're on this challenge already for More than 6 years. So it's not something which happened like immediately now.
We tried many, many things. So we had the time before to test many things and Fine. What works? So I would say that now we are very pleased with the results. Mike?
No, I was going to use exactly the same example, Dennis, because handling fabric sounds easy, but it's actually very difficult With robotics. So we looked at a number of different technologies for the end effector and have settled on one that, as Dennis said now, is working very well with the So I think that's only one example of the search issues we've been working through with the production equipment in Vistra.
Okay. Thanks.
Your next question comes from Jeff Osborne at Cowen. Jeff, your line is open.
Yes, good morning. Thanks for all the detail on the call. A couple of questions on my end. Just great to see the progress on the automation. Is there any change in your thinking on the throughput?
I think originally you were targeting 10,000 vans and 1,000 buses a year. And your initial work is with the Particularly on the composite side, any changes to that thought process?
No, no changes at all, Jeff. We still anticipate 10,000 vans a year on
I think last quarter you made reference to a facility in Spain, sort of an undetermined time. Has that been nailed down? I didn't see it mentioned today As to what you're going to be producing and when?
So we didn't announce timing today. We are committed to 4 micro factories Next year, we continue to look at other potential locations. As we look at locations, we look at both demand and whatever government And again, because we can roll out micro factories so quickly, we don't have to make a decision Even now on where exactly that 4th micro factory will be next year. So it will be a van micro factory, but we haven't announced timing yet.
Got it. And then maybe for Avinash or you, Mike, could you touch on India and the scope of the development center, how that complements what's in the U. K. And Russia, for you today?
Yes. Absolutely, Jeff. So it's a product development R and D center that's looking at a Variants of our products that, let's say, suits the emerging markets who have a different price point and different spec, And that's where the engineering effort will be spent. As you know, we are already aiming to be price competitive with diesel, and we think we can Potentially go even lower than our current bond position in those markets. And so that's really driven by a Really significant demand, not just in India, but in markets similar to India that require those products, hence the R and D center over there.
Yes. And the last one yes, go ahead.
I'm sorry, I would like to add here is that I think the Indian market is extremely important. It's a very unique market in terms of size from Pricing for the products and the sophistication for the product is very much different to what we used to see in Europe or United States. And for us, it's extremely important, because this enables us to create Vehicles which can be successful in countries like in Asia and India and so on. So for us, it's a big, big And another very important part of this story is that it's seen many companies who are announcing their plans, Like new EV companies or the old EV companies, they're normally because of their method, it's normally a huge investment in a huge factory. And that's why it's like takes many, many years and opening new countries is always a huge challenge.
I would say that we probably have like because of our method, it enables To make our activities in many countries much easier than other companies. So I would position probably I would probably use the Svanitsupposition As is a real global player in this way. So this just opens Real market opportunity for us. So that we know that world is not organized in the way that one vehicle can work everywhere in the world An ability to create new variants which are suitable for particular markets is extremely important and our method is exactly what's designed for that. And this is our advantage as compared to other companies.
Yes. Now with that, just I think it's important if we just remind everybody of the modular nature of The vehicles that we've built and the vertical integration and because that's all our own IT, it allows us to adjust and create new variants much more rapidly than the So, it's right in line with what we want to do and to centralize micro factories all around the world.
Perfect. That's all I have. Thank you.
Thanks,
Jeff. Your next question comes from Rob Salmon at
Robbie, maybe I'm
Sorry about that.
Can you hear me now? One of the big factors kind of with automotive production as well as the broader economy has been And in an inflation environment, can you give us an update in terms of your thoughts with regard to the expected BOM? And if this is Any impact on the gross margins you expect your vehicles to produce as we look out?
I will probably take this. We definitely see changes in the cost of metals. And like we've seen that aluminum Price has grown very much compared to what it was. But if you've seen percentage, steel grew much more than the aluminum, So which makes for us, I believe, a bit better situation compared to Other companies who are adopting the steel bodies. I would say that overall, if you take like the mix of the metal and other things Because we obviously vehicle boom is very complex element and some parts are becoming more expensive, some parts we are failing.
So from the information we have right now, we don't see so we're targeting our profitability the way we were Planning because we still can also do it with the pricing as well. So we will and this is quite important for our method is that we In our mission, we say that we do affordable electric vehicles. So it means that we expect that our pricing is going to be more competitive compared to Other traditional players who are putting the electric vehicles on the market. And because of that, we have a flexibility to Control our margins. So we are not pushed from sulfur pricing.
We still have a room there.
Thanks. That's helpful. And kind of earlier in the presentation and kind of one of the announcements So earlier in the quarter was about autonomous testing that you're doing with UPS. Could you talk a little bit about your Internal targets for autonomous driving and obviously there are several players that are kind of going down this path. And can you talk us kind of what you feel Arrival is doing differently with regard to autonomous and the
Rob, I think yes,
upfront, it's important. We're not committing resources Like competitors like Cruise and Waymo in this particular phase for full driverless autonomy, what we're doing is we're creating an autonomous platform that's We call our vehicles devices on the wheels, and they're autonomous ready. And so that means we have a team that looks at Full autonomy and depot autonomous, which I'll cover in a sec, and figures out what's the software architecture and hardware components that need to be in the vehicle. So for example, we have A unified compute platform in a vehicle, which you displayed architecture, as the hardware requirements for autonomy changes, we're able to upgrade the hardware Our vehicles accordingly. So they're essentially autonomous ready.
You can add different sensors to it, and it's all sort of plug and play. In terms of our initial rollout of autonomous features, it's around the advanced driver safety systems. And we are, as mentioned, what you saw in that press release is that we're also working on full depot autonomous operations, And that's where our team is focused on in terms of product launch. And that's because a depot is an area where you can have safety issues And it's also more efficient to run autonomously. And so that's a benefit for the operator and the safety of the people in the depots themselves.
And So our vans will be equipped with the technology for that, and we'll roll that out over time.
I would probably, Nachish Dov, I'd like to rephrase that our first focus is deposit It can bring the value now. We don't need to wait until the regulation will change and allow those vehicles everywhere. In the cities, we can get the values of that Technologies like immediately, and this is very, very important. So it means that actually when I'm seeing any other The market in this category, I'm talking about vans, AV vans or buses, we've never seen even And I hear that those vehicles are autonomous in any form. So what is important about our vehicles is that they're Fully driven by our systems with the compute platform inside and the cameras and other sensors already integrated and utilizing those sensors and all these Technologies for the operations where we're getting grading the failure immediately.
But it also means, which we like we need to explicitly say is The regulation will allow us to have autonomous vans on the streets like everywhere Or in the place where we like our customers are starting to operate, our vehicles are extremely easy to it's It's extremely easy to integrate autonomous technologies from other players within our vehicles. And what an important thing about autonomous technologies, they normally are very That's super hyperlocal, right? So that's the important part of the story. So because when even big guys like Vemma is creating the algorithms, it It starts to work in a very particular market and it doesn't necessarily mean that it works in other markets where you have snow or rain or different weather conditions and other things. And So we believe that we will start to see that in each region, there are going to be leaders for the autonomous technologies.
And we are ready for integrations so that we can take those autonomous technology integrated inside our vehicles because our vehicles already ready in terms of hardware.
Platform, yes.
That's kind
of a nice segue into the potential recurring revenue streams. Could you give us an update In terms of your thoughts kind of post launch with regard to these potential recurring revenues,
Whether we're
talking about fleet management, other SaaS type solutions?
So nothing to Announced specifically, but we believe that there are significant future upside potential in the business. So right now, The model is very much on the sales of the vehicles themselves. But to your point, we have a significant portion. We've mentioned before that Majority of our staff, 90% engineers, half of software. So when you think about what that means for staff, there's tremendous opportunity fleet management tools and vehicle health predictive monitoring to basically move to recurring revenue.
But I'd also say that our components are modular in nature. There's opportunities there. We've discussed autonomy. And I think that there's Even with the vehicle, the fact that it's upgradable and its price point, when you think about factoring in the total cost of operations, you can see A different business model through fleet as a service, mobility as a service. So this vertical integration of tech gives us vertically integrated business models, I would say, and it
gives us
Significant avenues for us to go, but the team is very important. The team is heavily focused right now on our key task, which is Getting the bus and the van to our customers over the next 6 to 12 months.
And Just want to use this, I wanted to remind that we have quite a big part of our executive team coming from different industries where the product for telecom or the recurring revenue is the breadth. So I would like to say it's our bread and butter. So we exactly know what is recurring revenue. We could bear in our ourselves for that. And just to spend a 30 seconds on this point is that a rival car, which we do together with Uber, Extremely important product because now there are no vehicles specially made for this sector.
And if you start to think about it, like even simple things like keys, Like how you distribute the keys, physical keys, it's already become a problem. So our vehicles are keyless, right? So The fact that you can start the vehicle using the app or like in a different type of authorization is also part of the story. So we In terms of technologies and hardware, we do everything to be hands on ready for recurring revenue using our products. But we don't factor it in our business plan.
I mean, so we first of this there is a bit of high level of uncertainty, and we didn't
Your next question comes from Alex Potter with Piper Sandler. Alex, your line is open.
Great, guys. Can you hear me?
Yes.
Okay, excellent. So I guess my first question is around supply chain. Any risks? You've highlighted this, I think, several months ago when we were having our first discussions, if you were talking about Some of the gating factors that might keep you from hitting your milestones. Obviously, there's some things that you can control, some things that are going to be up to your suppliers to make sure they're Anything around battery cell supply or anything else that you would highlight is progressing better than or worse than expected?
So, Alex, yes, I would say, ironically, the biggest impact for us from the chip shortage has been A delay in getting laptops for new employees is, as we outlined last quarter, Our volumes are still relatively low, certainly by industry standards in this year, and we don't Start ramping up to production volumes until the latter half of next year. So I really don't see any evidence that the chip shortage will Have an impact on any of our operations here this year and early next year. On the battery cell side, We continue to work with LG. We announced last quarter, we've already got a 5 year agreement in place with them With cells that we that covers our initial production ramp up. So on the cell side, we really don't see any risk either.
Okay, great.
Probably Alex, just to give a bit of color, obviously, we always have some Situation where something didn't arrive immediately now like we planned, but 1 week later or a bit earlier because we have many parts we are managing and But nothing we can raise as the roadblocks. I mean, it's something which can create a critical impact on our programs.
Did you mention that agreement with LG that covers everything in your ramp, fans, buses?
Okay. Yes. We're using the same battery architecture for all our vehicles. And actually, I would like to use this opportunity when you touched at that point to raise that Point again is that if you take bus production, we normally even like super big bus manufacturer in the world, They're talking about like 10,000 buses a year, like so it's super big because the market is majority of the small players. Assume that the company goes to buy electric motors, for example, they buy to the producer of the electric motors and we buy 10,000 motors a year.
So it's very small volume for Tier 1, Tier 2, Tier companies. That's one of the reasons why buses are expensive. Of course, you almost can count all of these buses as low volume production products. We managed to create a system where we Reusing all our components from the van, which must when we produce product inside our bus. Just an example, even steering wheel In our bus, it's exactly the same as in our van, which was never been done in industry before because normally for the bus, you need to have a bigger diameter of the steering wheel What talks and then other things.
So this carryover kind of model allows us to Make our buses much more cost efficient than other players. And another example is that our motor from the van, exactly same motor, Exactly, like same model, 4 motors goes to the bus. So it means that in terms of volumes of the motor, we are not talking about only bus volumes, we are talking about all volumes of our products, including batteries So this is very important part of our design philosophy, and I believe it's a very strong advantage for us. Because if you take Even established players, I don't know, like anyone like I can mention, like Mercedes, for example, you don't see much carryover apart from the passenger of Mercedes to the Mercedes Benz, right? So it's totally different product.
And this is the case for every other company in the industry. So this is a I see it's a very strong competitive advantage for us.
Yes, it makes sense. Okay, good. That's helpful. Then The last question I had is just maybe elaborating on India and emerging markets overall. I mean, you mentioned You generally don't see some of the higher end European or American OEMs Participating in some of those markets because like you mentioned, it's sort of a bloodbath when it comes to pricing, The components on the vehicle, I mean, you can see very clear decontenting versus what you have in Europe or the U.
S. So how will your vehicles be Different in India or any other emerging market versus how they are in the U. S. And Europe? And if they're not much different, then Why?
Will pricing be different?
So I mean, I think you can see us all smiling because, again, we think this is a unique opportunity first. The one thing that everybody is under the same impact is, is the effect of climate change, right? So regardless Of the products and which company is aware, we as a society definitely need 0 emission vehicles all around the world. And so it will be a failure if we create a 2 tier market, where only part of the world can move to electrification. So the market is there.
And Alex, to your point, it's a bloodbath, but it's also a huge opportunity. This is an underserved Segment never had the electrification is new. So when you have a sort of step Change in industry, it allows for innovation to go and capture part of that market share. So we can bring local production through our micro factories. In the case of India and some of these larger emerging market countries' supply chain, there's a significant portion already being purchased from that.
So for us, when you think about the cost of our body panels, the shared use of the components that Dennis mentioned earlier, We really think that we can bring vehicles and don't forget, our electric vehicles are already tracking towards price competitiveness with diesel In the Established Markets. So we think there's an opportunity to move that even lower. And also there is things that you can do with the business case When the residual value is we're not going to disclose what the residual value is, but when you think about the upgradability of the vehicles, there's opportunities there To capture a market that no one's been able to. So we are extremely excited about and to prove that, I mean, we have already got Demand and otherwise from India, where we've given early indications of the vehicle. So we're extremely excited about Like you said, no one's touching it.
And we think it's a great example of Arrival's differentiation.
Also would like to add a different angle here is that we already have the procurement center in India. So we're utilizing the local Supply chain for our global products as well, and we understand very well like how this market works today there. And also there is an opportunity. So everything we can develop in India, which is much, much cheaper than in Europe, we can actually Because of our modular nature of our products, we can reuse those components in our European and American version. So it means that actually Making the product for India, great for us and cost optimization opportunity for all our vehicles, which will allow us to increase our profitability on the Products in other markets.
Okay, great. Very helpful. Thanks, guys.
Thanks, Al.
Your last question comes from Michael Siletov with Berenberg. Michael, your line is open.
Yes. Hi. Can you hear me? No. Great.
Thanks. Thanks for taking my question. So I guess just going back to some of the topics you touched on already, Around sort of the pricing of the vehicle, my understanding is you use a lot of aluminum, which is quite expensive. There's your composite materials, which I think are more expensive than traditional steel. But correct me if I'm wrong.
I understand that you get scale on the component side because you can leverage it across your vehicle platforms. But I have to imagine competitors say Investors like UID or Yutong can similarly get that kind of scale given they're established players. I guess what else gives you that sort of price advantage outside of
Yes. Let me try to answer this question. So first of all, When we're using aluminum, we need to remember that aluminum is much lighter than steel. So it means that in terms of weight, we're using much less weight, Yet more expensive material, but less weight, so which is compensating the difference, not fully, but a lot. And the reason why we went like with the aluminum road is because it allows us to enable micro factories from one side and from other side, it Also allows us to spend much less on the CapEx of the tooling.
So because we're using extrusions and Some other technologies allows us to make it much, much cheaper in terms of upfront tuning investment. The composite material is very similar stories that even if material itself is Actually, what is interesting is that the numbers I was using before are not valid anymore because steel became much more expensive. So previously, it was 700 Dollars per ton for this kiln, now it's almost $1700 And our composite materials is a core kind of number. So we're using very cheap materials, Polypropylene and well fiber where the price of those materials are around €1,000,000 per kilogram. So and components are cheaper, lighter.
So we are like In terms of weight, we are almost twice lighter than the fuel body. The combination of the less weight And actually, price didn't grow for the composite of same way as for the steel, Like it makes this model much more like so we're getting advantages here. Plus, you know, what things normally, this is not available to people when the accounting depart, the accounting was still to metal We're still too confident, but in our case, we don't use the paint shops, welding and other technologies in the assembly lines. If you combine all those together With the cost of equipment for the CapEx, so the picture starts to look in different ways. So if you take a total cost of the body, including all the processes, So this picture starts to look different today.
And so it's not enough just to analyze cost of steel compared to cost of aluminum. So you need to see like a full picture here. And but coming back to the components and that was my topic, actually that was my point is that even a company like Yutong, Which produces 10,000 vehicles or 10,000 buses like a year. In terms of components, it's very small volume. So they cannot get right pricing on that.
We are getting this because, first of all, we are vertically integrated. So it means that we instead of paying Margins and tuning costs and like other kind of things to Tier 1 companies, we're keeping it for ourselves. And so we know in detail what is the cost of our competitors on the bus As you know that many of our components are radically cheaper because of that.
Understood. I appreciate the answer very detailed. One last follow-up here. Just in terms of the way your manufacturing process, right? I understand it's sort of the cell based manufacturing process.
It's very modular. But you're also making your own components, a lot of your own components internally. So are those being produced in the same factories that you're producing the vehicles? And then how do you sort of sort out the timing Assembling the components versus manufacturing the components so that everything lines up and runs smoothly.
Yes. Look, so in terms of components, we only assemble battery boxes as a part of our micro factory operation. So cells are coming to the factory, and this is how we assemble that. But a lot of components like inverters or motors and other things, they come and they already depart To the factories, and we're using Tier 2, Tier 3 partners who are doing this. We have a service agreement with them where they produce it for us Based on our specifications and engineers, so then this just describes the like approach how we work with the In terms of logistics and supply chain, we need to remind you that because of our cell based manufacturing, we are not We don't need to be just in time model.
So we don't have a conveyor line where you need to be just in time. So we deliver parts to the Our factories, like in the beginning of the shift and even if the parts are Coming like 2 or 3 hours later, it still doesn't make impact on our operations in the factory. And but we also have 3PL operators As a partner in particular countries where we do operating, so we do buffering we're creating buffers of the volumes for our components that they can be shipped to the right Micro factory in the country to produce the vehicles. So and of course, we build our factories normally in the big metropolitan areas With Big City Square, the logistics is very well developed. So think about this
as
any type of deliveries happening in the cities. Because our components are majority of our components are done in the way that you can The analogy here, if I can give it like it's very similar how I receive my parcels from Amazon, like every day. I mean, because of the packaging course Well, the size and weight of those components, they are done in the way that it's very easy to handle them.
And one important point, One nuance to your question, Michael. When we design the components, they're in sync with the micro factories. So as we showed in the video, we do The software in the cells, we understand what that operation needs to be in each cell. And so the component is actually designed in a very specific grid architecture So that we know that the micro factory can build it. If our internal system says it can't be built, then we simplify the components and redesign That simplicity, which takes a long time to engineer, is what enables us to know that the micro factory can build the product With our components alongside supplier parts.
Understood. Thank you. And just one quick one. The Anaheim award basically, I guess, I assume you would do localized manufacturing for wherever you're basically addressing demand. Does that mean you're going to build a micro factory out west to address demand in Anaheim?
It certainly means that, that will be one of the places we look for one of our next micro factories, but we're not announcing anything today.
Yes. Just to
give you the right feeling about it, I think it's again understanding our distributed network means that We have a flexibility. Obviously, if we don't see enough volume in particular regions, there is no need for us to build the micro factory there. We're using the other micro factories in the country. When we see that demand is growing in a particular region, so we open those micro factors. So this flexibility is part of our business model.
And this is very, very important because like we're avoiding this situation where you need to invest 1,000,000,000 of dollars in the factory and then Wait like 2, 3 probably more years until you will get like full capacity. So all this time, While you're not on full capacity, the company is losing money. In our case, like we're optimizing that much more based on the job.
Yes. We're really bullish. I mean, it's $50,000,000 in CapEx from micro factory. We've shown some of the demand that we're getting. I mean, in the medium term, we expect micro factories in every major city.
So I think there's a huge scaling opportunity. Our micro factories scan in parallel. I think that's an important point too, right? We're not we don't have to wait 3 or 4 years to get the factory ready, spend 1,000,000,000 of dollars. As we see demand such as Anaheim and others, we can put microfractory down really quickly.
And I think that really is an agile and unique aspect of arrival that no one else in the industry has. Okay. I think that's the close. I have Wes. Someone is going to put up a slide.
Yes, thanks. I just want to remind everybody why arrival is different as we end the call. Thank you everyone.
Thank you.