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GM has no reason to withdraw from its unilateral agreement with Nikola

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 signaled Monday that the company stands by its agreement to produce Nikolas Badger pickup.

“The company has worked with many different partners and we are a very skilled team that has done the appropriate care,”

; Barra said during a conference with RBC Capital Markets on Monday.

GM stands by Nikola despite recent revelations that the startup misled the public about the capabilities of its first truck, the Nikola One. At the unveiling in 2016, founder Trevor Milton claimed that the Nikola One “works fully.” But on Monday, Nikola admitted that the company never had a working prototype of the truck. The company acknowledged that an advertising video from 2018 showed the truck rolling down a low hill – not driving under its own power.

So why is GM not backing away from the Nikola deal? It poses very little risk to GM. GM does not invest a penny in Nikola; instead, all the money flows the other way.

“For GM, there are really no downsides to the deal,” said Sam Abuelsamid, a car industry analyst at Guidehouse. “It’s all upside down.”

The terms of trade are extremely friendly to GM

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

The battery-powered 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 be the exclusive supplier of hydrogen fuel cells for Nikola’s semi-trucks (outside Europe) for a four-year period.

These are technologies that GM planned to develop anyway, so the agreement gives GM a chance to do so in part at the expense of another company. Even if Nikola were to go out of business in a year or two, GM would gain valuable knowledge and experience – and possibly be able to use the Nikola-funded facilities to manufacture its own pick-up trucks.

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

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

In addition to the direct payments for the production of the Badger, Nikola also gives GM $ 2 billion in stock. The contract requires GM to hold the share for at least one year after the termination of the agreement. GM will be able to sell one third of the share after one year, another third after two years and the last third at the end of the agreement – possibly as late as 2025.

On top of to, GM gets back 80 percent of the valuable regulatory credits for electric vehicles from Badger trucks.

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

The deal gives Nikola a reputation boost

Nikola also gets some benefits from the deal – though the nature of these benefits depends on how cynical you are about Nikola’s motives.

“Until the announcement last week, Badger was complete vaporware,” Abuelsamid told me. Nikola does not have the internal capacity to develop a pick-up truck. And as Tesla has learned, it takes years and costs billions of dollars to build production capacity for a consumer vehicle. The GM partnership offers a shortcut to Nikola to bring its truck to market.

The GM agreement gives Nikola experience in selling a real pickup to real customers. Maybe Nikola can use the experience from Badger to help manufacture her own trucks down the road. Or maybe the Nikola brand will be so compelling that Nikola can make a profit by selling trucks made by others indefinitely.

The more cynical interpretation is that Trevor Milton would simply be able to say he had a deal with GM. Milton has made himself a paper billionaire by convincing investors that Nikola is on track to become the next Tesla. Just being able to say they have an agreement with GM will probably give Nikola extra credibility with less wise investors, even though the terms of the agreement are wildly unfavorable for Nikola.

It is not uncommon for profitable companies to outsource production to others – see e.g. On Apple outsourcing of iPhone production. But Apple’s generous profit margins come from the fact that the iPhone is largely built on chips and software, which Apple itself invented.

Nikola, on the other hand, pays GM to build trucks that are largely based on GM technologies. It is difficult to make a big profit by simply reselling products designed and produced by other companies. But thousands of Robinhood day traders may not be aware of it.

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