Saturday, September 19, 2020
Home Business GM has no reason to back out of its one-sided deal with...

GM has no reason to back out of its one-sided deal with Nikola

A deal they can’t refuse —

“For GM, there’s really no downside to the deal,” one expert told us.


Mary Barra, CEO of General Motors, in 2019.

Enlarge / Mary Barra, CEO of General Motors, in 2019.

Patrick T. Fallon/Bloomberg via Getty Images

GM CEO Mary Barra on Monday signaled that the company is standing by its deal to produce Nikola’s Badger pickup truck.

“The company has worked with a lot of different partners and we’re a very capable team that has done the appropriate diligence,” Barra said during a conference with RBC Capital Markets on Monday.

GM is standing by Nikola despite recent revelations that the startup misled the public about the capabilities of its first truck, the Nikola One. At its 2016 unveiling, founder Trevor Milton claimed that the Nikola One “fully functions.” But on Monday, Nikola admitted that the company never had a working prototype of the truck. The company acknowledged that a 2018 promotional video showed the truck rolling down a shallow hill—not driving under its own power.

So why isn’t GM backing away from the Nikola deal? It poses very little risk for GM. GM isn’t investing a dime in Nikola; instead, all the money will flow the other way.

“For GM, there’s really no downside to the deal,” said Sam Abuelsamid, an auto industry analyst at Guidehouse. “It’s all upside.”

The deal’s terms are extremely friendly to GM

Under the deal, Nikola will pay GM up to $700 million to cover the cost of building manufacturing capacity for Nikola’s Badger truck. Nikola will then pay GM even more money to manufacture the vehicles on a cost-plus basis.

The battery-electric version of the Badger will be based on GM’s Ultium battery platform, which GM will presumably sell to Nikola at a profit. Not only will the hydrogen version of the Badger be based on GM’s Hydrotec fuel cell technology, but GM will also become the exclusive supplier of hydrogen fuel cells for Nikola’s semi trucks (outside Europe) for a four-year period.

These are technologies that GM was planning to develop anyway, so the deal gives GM a chance to do it partly at another company’s expense. Even if Nikola were to go out of business in a year or two, GM would gain valuable knowledge and experience—and might be able to use the Nikola-funded facilities to make its own pickup trucks.

Abuelsamid predicts that GM will build the Badger in Detroit alongside GM’s own electric vehicles such as the electric Hummer and the Chevy electric pickup truck. More volume will increase GM’s economies of scale.

“The more vehicles you can build and sell, the less fixed cost associated with each unit,” Abuelsamid said.

On top of the direct payments to manufacture the Badger, Nikola is also giving GM $2 billion in stock. The contract requires GM to hold the stock for at least a year after the deal closes. GM will be able to sell a third of the stock after one year, another third after two years, and the final third at the conclusion of the deal—possibly as late as 2025.

On top of that, GM gets to retain 80 percent of the valuable electric vehicle regulatory credits from the Badger trucks.

At the same time, the deal is structured to minimize risks to GM’s reputation. The Badger will be branded as a Nikola product, not a GM product. Nikola will be responsible for sales and service of the Badger truck as well as the warranty. So if customers have problems with the truck—or Nikola fails to deliver trucks at all—people will complain to Nikola, not GM.

The deal gives Nikola a reputation boost

Nikola also gains some benefits from the deal—though the nature of those benefits depends on how cynical you are about Nikola’s motivations.

“Up until the announcement last week, the Badger was complete vaporware,” Abuelsamid told me. Nikola doesn’t have in-house capacity to develop a pickup truck. And as Tesla has learned, it takes years and costs billions of dollars to build manufacturing capacity for a consumer vehicle. The GM partnership offers a shortcut for Nikola to bring its truck to market.

The GM deal gives Nikola experience selling a real pickup truck to real customers. Perhaps Nikola can use the experience from the Badger to help it manufacture its own trucks down the road. Or maybe the Nikola brand will be so compelling that Nikola can turn a profit by selling trucks manufactured by others indefinitely.

The more cynical interpretation is that Trevor Milton simply wanted to be able to say that he had a deal with GM. Milton has made himself a paper billionaire by convincing investors that Nikola is on the path to be the next Tesla. Just being able to say they have a deal with GM is likely to give Nikola added credibility with less savvy investors even if the terms of the deal are wildly unfavorable to Nikola.

It’s not uncommon for profitable companies to outsource manufacturing to others—look at Apple outsourcing iPhone manufacturing, for example. But Apple’s generous profit margins come from the fact that the iPhone is built largely on chips and software that Apple itself invented.

Nikola, by contrast, is paying GM to build trucks largely based on GM technologies. It’s hard to make a large profit just reselling products designed and manufactured by other companies. But thousands of Robinhood day traders might not realize that.

Read More

- Advertisment -

Most Popular

Parliament LIVE: Tug-of-War for Numbers as Farm Bills Face RS Test Tomorrow; Govt, Cong Jostle for Support

File photo of proceedings in the Rajya Sabha. (PTI) Prime Minister Narendra Modi has mounted a forceful defence of the three bills, making it clear that his government will press on to get Parliament's nod for the measures aimed at opening private avenues for farmers to sell their produce. Farmers in states like Punjab and…

Priyanka Chopra, Kris Jenner, Jennifer Lopez and others mourn Justice Ruth Bader Ginsburg’s demise

On September 18, the US Supreme Court Justice, Ruth Bader Ginsberg or also popularly known as RBG left for her heavenly abode at the age of 87 after grappling with pancreatic cancer. As per the official statement released by the court, RBG passed away surrounded by her family at her residence in Washington, DC. To…

China slams US ‘bullying’, warns of action over TikTok, WeChat

China has accused the United States of "bullying" and threatened to take "necessary" countermeasures after Washington banned downloads of the Chinese video-sharing app, TikTok, and effectively blocked the use of the messaging super-app, WeChat. Separately, Beijing also launched on Saturday a mechanism enabling it to restrict foreign entities that it deems a threat to its…

Contentious Bills slated for Rajya Sabha, Centre talks to non-Congress Opposition parties

Written by Manoj C G | New Delhi | Updated: September 19, 2020 12:33:33 pm The bill seeks to replace an ordinance promulgated in this regard in June.The Rajya Sabha will take up for passage three contentious Bills, including the two farm-related ones, over the weekend, even as the government and ruling BJP took different…

Recent Comments