Nikola and Rivian’s Appetite for Risk Is Prize for GM, Ford
(Bloomberg) -- Detroit automakers have long relied on in-house innovation for competitive advantages and bragging rights, but for next-generation electric and driverless technologies they are adopting a new strategy: If you can’t beat ’em, join ’em.
General Motors Co. and Ford Motor Co. have plug-in electric vehicles and a dominant share of the U.S. pickup-truck market, but they have tapped outside expertise and companies lauded by investors as EV pioneers for some of their first battery-powered trucks.
GM and Ford aim to fix blind spots which have allowed new players to get the jump on them in showcasing new technology. The rush to plug that gap holds the promise of a bigger piece of the car of tomorrow while they churn out the sport utility vehicles and trucks of today. It comes as startups attract billions of dollars from Wall Street at a time when shares of GM and Ford have lagged.
“If you look at the growth some of these EV startups are generating, that’s what gets the investors excited,” said Joe Vitale, head of consultant Deloitte’s global automotive practice. “When the traditional auto companies can demonstrate growth plans in key segments, they will get rewarded.”
They will also join the wild ride that comes with startups. GM’s stock rose 10% after announcing the Nikola deal, but the Detroit automaker’s shares fell as much as 2.3% Thursday after publication of a report alleging Nikola lied about its technology. Hindenburg Research, which owns a short position in Nikola’s stock, called the startup “an intricate fraud” and alleged the company made non working products appear fully functional.
Nikola shares pared a drop of almost 13% to trade down 8.3% to $38.85 as of 9:50 a.m. in New York. Trevor Milton, Nikola’s founder and chairman, criticized Hindenburg’s research as a “hit job” in a tweet. GM expressed confidence in its partner’s ability to create value. “We stand by the statements we made in announcing the relationship,” spokesman Jim Cain said in an email.
GM did not put any cash into Nikola -- it will simply license technology to the company and manufacture its product. But such allegations about its business partner could cast a pall over the deal and become a black eye for the auto giant.
Analysts have praised GM and Fords’ efforts to latch onto startups’ starpower as forward-thinking steps to help bolster their footing in the emerging worlds of alternate-fuel and driverless vehicles. It is Detroit’s latest effort to loosen Tesla Inc.’s lock on the electric-car market and stay ahead of deep-pocketed rivals such as Alphabet Inc.’s Waymo and Amazon.com Inc. unit Zoox Inc. in self-driving technology.
Traditional carmakers hope to piggyback on startups’ swagger and ability to take risks and move quickly. Working through outside partners with more flexible business cultures can help them develop new technology that might run into roadblocks internally.
“Startups will bounce their way through things rather than worrying about the politics of big companies,” said Mark Wakefield, who runs the automotive practice at consulting firm AlixPartners in Detroit. “They can put out an audacious goal for a new vehicle, and it’s not a nuclear event to miss it.”
These partnerships can help conserve cash and bring in more outside dollars, which is especially important in these days of pandemic-depressed sales and earnings. Rivian has attracted billions beyond Ford and Amazon from a wide range of investors, including T. Rowe Price Associates, Soros Fund Group and Fidelity Management & Research Co. Cruise, meanwhile, has raised billions of its own from T. Rowe, Softbank Vision Fund and Honda Motor Co.
“There’s not enough money in the world for these people to invest in all this and do their normal business,” said Gary Silberg, global automotive sector leader at KPMG. “When clients ask me, I tell them, ‘You need to be very careful about where you place your bets, but you are naive if you think you can do all this alone.’”
GM joined forces with Honda to jointly develop vehicles following a similar alliance Ford formed last year with Volkswagen AG, which included a $2.6 billion investment in Argo. That income infusion alone accounted for all the net profit Ford earned in the second quarter as its core automaking operations were mired in the red amid a coronavirus-induced production shutdown.
The conventional wisdom among carmakers has been that EV batteries are big, heavy and expensive to produce and develop. Not long ago, electric powertrains were viewed as too costly and bulky for pickup buyers who’d rather spend on leather seats and ample cargo space. For that reason, GM and Ford fast-tracked electrification of smaller cars and crossovers.
That presented an opening for the competition. Rivian unveiled its electric pickup in 2018, long before GM had developed plans to build a battery-powered truck.
Ford has spread its electric bets by linking with Rivian while continuing to work on its own battery-powered F-150 pickup, which is scheduled to hit the market in 2022. The blue-chip Blue Oval brand has commissioned at least one electric model from Rivian, though it canceled plans to have the startup help engineer a vehicle for its Lincoln luxury line.
GM will sell an electric GMC Hummer pickup truck before Nikola’s Badger comes to market, but the Hummer will be promoted as more of a lifestyle purchase than a work truck. The Badger is a more conventional pickup that will compete directly with the gasoline-powered Chevy and GMC trucks that make up GM’s most profitable vehicle segment.
“The auto companies culturally have to adapt and have a startup mentality in order to survive,” Vitale said. “I’ve seen more openness to change and outside thoughts and perspectives in the last five years than I’ve seen in my entire career in the auto industry.”
By joining with erstwhile rivals, GM and Ford get the benefits of courting electric early adopters in an untested segment and also avoid the risk of being crowded out by sexier competitors with none of Detroit’s baggage as old-school automakers.
Opening up their most lucrative businesses to electrification is an attempt to win approval from investors and share in the sizzle many auto startups have enjoyed in the form of higher valuations. There are some signs their strategy is working. GM’s stock rose to a six-month high on word of the Nikola deal, and analysts called it a sign that Detroit finally is embracing a more electric future.
“We believe today’s strong share price reaction of GM reflects the market’s increasing confidence in the broader narrative around GM’s willingness to explore the unlocking of hidden value through bold action,” Adam Jonas, an analyst with Morgan Stanley who rates the stock “overweight/in-line,” wrote in a report on the day the partnership with Nikola was announced.
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