Rivian & VW – Desperation Bedfellows

VW & Rivian rescue each other. 

• VW’s $5bn investment is precisely what Rivian needs to prevent it from suffering Fisker’s fate but at the same time, it is quite possible that VW needs Rivian just as much and could easily end up acquiring the company.
• VW and Rivian are establishing a joint venture that will focus on the creation of the next-generation architecture for electric vehicles upon the creation of which VW will receive immediate access to and rights of use of Rivian’s current EV architecture.
• In return for this VW will invest $1bn in Rivian immediately, another $1bn when the j.v. is established and a further $3bn over time as certain milestones are met.
• This is a lifeline that Rivian desperately needs because although it has $8bn of cash on its balance sheet, it is currently burning $6bn of cash a year, meaning that it will have to raise more money.
• Even with this rate of burn and VW’s $5bn, it is unlikely that Rivian is now financed to break even which is why many of the bears on the stock remain sceptical.
• However, what it does do is give Rivian another big investor alongside Amazon but one with a much greater incentive to ensure that Rivian does not go bankrupt.
• This means that when it comes to raising more money, VW is likely to backstop Rivian which greatly reduces the risk of Rivian going bankrupt which is why the shares rallied 50% in after-hours trading.
• I also do not think that this is a one-sided deal as VW is in an almighty mess of its own and this deal could pave the way forward for the company to extricate itself.
• VW and most of its legacy competitors are really struggling with the notion that vehicles in the future are more about the software in them rather than the hardware.
• A software-first vehicle carries many advantages in that all of the software can be updated over the air and new features and services deployed without a visit to the service centre.
• It also allows third parties to sell their services into the vehicle and there is potential for the OEM to earn a slice of those revenues which would help save OEMs from a dark fate caused by lower vehicle shipments as a result of electrification.
• To help it reach this goal VW established a wholly owned subsidiary called Cariad in 2020 whose mission is to specify and create all of the software to be used across the VW portfolio of brands.
• Although Cariad has made the right strategic choices, the execution of that strategy has been abysmal resulting in several management changes with the latest clear-out having happened a couple of weeks ago according to Reuters (see here).
• This seems to be very convenient timing and I suspect that almost all of Cariad’s activities will now be focused on the j.v. which I suspect will take Rivian’s technology and adapt it for VW’s brands.
• Hence, it may be that Caraid is about to be disbanded and absorbed into the j.v. which will coincide with VW pinning all of its electric and software hopes on Rivian.
• Rivian’s EV platform is pretty good by all accounts and there are similarities in the choices that Rivian and Caraid have made that will make this quite a good fit.
• If the j.v. succeeds, this should alleviate VW of many of the problems that have caused several embarrassing delays, management reshuffles and billions of dollars in wasted spending.
• It also paves the way for VW to acquire Rivian which would then become the EV hardware and software platform for all of VW vehicles as well as the original Rivian brand which would become part of VW.
• With this bounce, Rivian is now valued at $17.6bn ($9bn EV) which is pretty high for a company that still has a large risk profile in a slowing EV market.
• Instead, I would prefer Lucid which already has a backer and is not in any danger of going out of business and has better technology.
• Lucid is almost certain to be acquired by its backer at some point and given that it already controls the company, there is no guarantee that a stink bid would not pass a shareholder vote.
• Hence, while I like Lucid, I have no desire to own it and my exposure remains Ouster which makes Lidars and is finally starting to do a lot better.
• I am happy to continue holding onto Ouster.