Faraday Future had the worst year possible for an EV startup
The company has spent the past year fighting with its main investor.
Stop me if you've heard this one before: Faraday Future is almost out of cash. At the tail end of 2017, the much-hyped EV startup was sliding toward financial oblivion. But then a crucial round of funding from a then-mysterious benefactor gave the team a lifeline. Faraday planned to finish its first car, the FF 91, and start production before 2019. Like Tesla, the company wanted to usher in a new wave of electric, autonomous and "seamlessly connected" vehicles. But unlike its closest rival, Faraday hasn't spent the past year building and shipping transformative cars. Instead, it's been fighting the investor that decided to bail it out.
The beleaguered EV maker was originally saved by a company called Season Smart, which agreed to invest $2 billion, starting with an $800 million payment, in exchange for a 45 percent stake in the company. In June 2018, Season Smart was acquired by Evergrande Health, a subsidiary of a giant property developer in China, for roughly $853 million. Evergrande took control of Season Smart's stake and agreed to pay the remaining $1.2 billion, split into two $600 million chunks, in 2019 and 2020. As part of the updated deal, it took control of Faraday's assets and intellectual property.
"This marks a major milestone for Faraday Future to achieve the vision of delivering a clean, intelligent, connected and shared global mobility ecosystem," the company wrote in a statement on Twitter.
For a while, everything seemed OK. Faraday began constructing a long-overdue factory in Hanford, California, where a Pirelli tire factory once stood. The company hoped it could eventually match Tesla's enormous Gigafactory in splendor and efficiency.
But there was a problem. By July Faraday had already burned through its initial $800 million payment. To survive, the startup needed more money -- and it couldn't wait until 2019 for another cash injection.
Management required at least another $663 million to get the FF 91 into production before the end of the year. Evergrande agreed to pay an advance of $700 million -- $300 million in August, $200 million in October and a further $200 million sometime later -- with some conditions. These required Jia Yueting, the CEO of Faraday Future, to remove himself as director of various offshore companies tied to the electric vehicle maker "as soon as reasonably practicable," according to court documents. He also needed to turn over his 33-percent stake in Faraday to a non-affiliated third party.
The compromises were designed to mitigate Yueting's entrepreneurial baggage. The Chinese businessman, also known as YT, started a streaming company called LeTV in 2004, well before Netflix completely revamped its DVD-centric business model. He used the platform's reputation to borrow money and build out new businesses, including a film studio and smartphone initiative, under the LeEco umbrella. Few of these ventures were successful, however, and Yueting's debts eventually caught up with him. The businessman is now camped out in California, where Faraday is based, avoiding the Chinese government and companies he owes money.
Evergrande's demands were designed, presumably, to stabilize Faraday and distance Yueting's financial quagmire. The two companies couldn't agree, however, on whether the businessman had upheld his side of the bargain. Evergrande never made its first $300 million payment.
Faraday believes this move was "tactical." It suspects Evergrande is trying to force the company into bankruptcy, either to avoid future payments, seize Faraday assets in a fire sale or enter some kind of renegotiation that would favor the investor. The Chinese health subsidiary denies these claims.
While the two companies bickered, Faraday employees tried to complete the highly anticipated FF 91. By August, the company had finished its first preproduction car. The announcement was quickly overshadowed, however, by the startup's financial woes. According to The Verge, Faraday had just $18 million in the bank at the start of September. Then the company's one and only preproduction car reportedly caught fire after a Futurist Day event for employees and their families.
Faraday had to act. In October, the company took Evergrande to arbitration in Hong Kong over the promised $700 million. "The only reason 'FF is trying to get out of the deal with Evergrande,'" the company wrote on Twitter, "is because Evergrande has failed to live up to its end of the bargain and make the payments it agreed to make. This is a matter of basic, common-sense fairness. Evergrande shouldn't be permitted to withhold the funding and simultaneously prevent Faraday Future from accepting alternative financing or investments."
While the arbitrator mulled over the case, Faraday started laying off staff and reducing employee wages by 20 percent. As part of the measures, Yueting and other members of senior management reduced their annual salaries to a single dollar.
Later that month, the court in Hong Kong gave Faraday permission to seek "emergency relief" of up to $500 million while the case proceeded. The company called it a "decisive victory" in a statement posted to Twitter. "FF is, and will continue, to seek funding from investors around the world who share our vision," the EV maker wrote. "At the same time, the Company will work towards delivering a transformative product -- a 'New Species' FF 91 to its paid reservation holders in 2019."
It was a lifeline, but by this point many employees at both the top and bottom of the company had grown tired of the struggle. Peter Savagian, senior vice president of product and technology development at Faraday, reportedly left at the end of October. Nick Sampson, one of the company's three co-founders; Dag Reckhorn, senior vice president of global manufacturing; and Catherine Steinmetz, director of environmental, health, safety and training, followed shortly afterward, among others.
The exits weren't enough to put the company on solid ground. Faraday shut down some of its operations in California and placed many workers on unpaid leave, or a "furlough." Without new funding, it seemed unlikely that the cash-strapped startup would survive the year.
With few remaining options, a group of Faraday employees took Evergrande to court in Los Angeles. It claimed that the health subsidiary breached its financial duties and "plotted" to send the struggling EV manufacturer "off a financial cliff." Evergrande wrote in response: "The company and other parties will take all necessary actions to protect the company's and Season Smart's rights, and to protect the interests of the company and its shareholders."
At the tail end of November, the arbitrator in Hong Kong ruled against Faraday, keeping the company's assets and intellectual property under Evergrande's possession. "On November 29th, 2018, Season Smart [Evergrande] received the result of the emergency arbitration," Evergrande wrote in a statement. "The emergency arbitrator rejected in its entirety the Joint Venture's application to release Season Smart's security over [Faraday's] assets."
The arbitration case is still ongoing. Until a final decision is made, Faraday has to hunker down and find a way to survive. In the first week of December, it announced that more employees would be furloughed. The company also admitted that its funding issues wouldn't be solved for another two or three months. "We are grateful to all of the 1,000 global employees, especially hundreds of employees in the US who are willing to stay and continue to work on the FF 91 production and delivery, as well as those who will be on a temporary furlough," the company said in a statement.
Meanwhile, Yueting is under increasing pressure to solve the mounting debt problems that permeate so many of his businesses. One company, Taoyun Capital, has sued Yueting in the Eastern Caribbean Supreme Court (ESCC). It's targeting his 33-percent stake in Faraday, which, if successful, would transfer even more power to Evergrande.
Faraday Future won headlines and the public's imagination with its dream of a truly luxurious electric car. But that vision has felt like a nightmare for some time. The year 2018, like 2017, has been hellish for the company, underscored by countless financial and legal battles. Unless it can wrestle control from Evergrande, it seems unlikely that the business will recover and deliver the FF 91, or any other car, in meaningful volumes.
