Shares in electric car maker Rivian rose after VW's overture - but the deal comes with risks. Photo / File
Shares in electric car maker Rivian rose after VW's overture - but the deal comes with risks. Photo / File
Opinion
OPINION
Legacy companies in disrupted industries such as oil and gas or automotive are being lapped. They have to “transition” to new, green technologies.
Yet these are miles away from what they know; technology-native companies have been quicker off the blocks. Given how hard it will be for incumbents tobeat their baggage-free competitors, one option is to buy them instead.
That, at least, is what Volkswagen seems to have concluded. The European automaker has announced a $1 billion (NZ$1.64b) initial investment into Rivian’s equity, with $4b more to come before 2026 assuming financial and operational milestones are met.
Of this, $2b will be further equity injections into the US electric-vehicle manufacturer itself and $2b will go into a software-focused joint venture. In return, Rivian will contribute its proven technology as a base for the JV’s products, which will be rolled out across both companies’ electric vehicle portfolios.
Strategically, the deal enables Volkswagen to reverse out of a tight spot.
As the world transitions to EVs, software — to assist drivers, optimise the vehicle’s performance, and link the car to one’s phone, maps and apps — will be the reason why customers plump for one car over another.
Turning legacy automakers from engineering companies to tech groups is a challenge, to put it mildly. Witness the performance of Volkswagen’s in-house software arm Cariad, whose product delays prevented the release of new models and which posted a €2.4b (NZ$4.2b) operating loss in 2023.
Paying up for a competitor’s proven technology may prove a better bet.
That is especially true given the EU’s decision to impose tariffs on Chinese EVs. To the extent this slows their arrival in Europe, it will give domestic carmakers only a small window of opportunity to play catch-up.
The timing also makes sense. Pure-play EV-makers have hit a bump in the road, with slowing demand growth slamming their valuations.
A motorist using an electric vehicle charging system in Munich. Photo / Laetitia Vancon, The New York Times
Rivian’s shares, prior to the VW announcement, were trading at $10-$11.
That compares with an IPO at $78 a share in 2021. Such a lowly valuation also reflected the US group’s funding gap, which VW’s investments will help fill.
Indeed, Rivian’s stock rose some 30 per cent following the announcement.
The deal comes with risks.
Volkswagen shares fell 2.7 per cent on Wednesday, probably because the company cut its free cash flow guidance as part of the tie-up. The company hasn’t yet reduced its organic investment plans, suggesting a risk of duplication.
Still, in increasingly testing times for cash-rich legacy companies, hitching a ride with fleeter-footed rivals is one way to try to accelerate their transformation.
Lex is the flagship investment column of the Financial Times. Lex has published in the newspaper since 1945 and is a premium commentary service.
