Digging deeper into the joint venture between Rivian and Volkswagen

Volkswagen’s multi-billion dollar investment into Rivian may prove to be a watershed moment for the EV startup, not only for equipping the company with some much-needed cash but also for legitimizing its presence as a serious contender in the electric vehicle market.

What happened: Rivian announced its new partnership with Volkswagen this Tuesday, catching investors on both sides off guard after going to great lengths to keep the deal hidden. As part of their agreement, the German automaker will invest $1 billion into the startup now, with the goal pf establishing a joint venture responsible for developing EV software and architecture. Over the next two years, Volkswagen plans to make additional investments, bringing its total to $5 billion.

The response from shareholders has been mostly positive.

• Up till now, doubt over Rivian’s survival given the challenging conditions of the EV market has hindered its ability to raise capital. The collapse of Fisker earlier this month did little to help the overall pessimism among investors.

• However, in response to Tuesday’s news of a partnership, Rivian’s share price soared 30%, a dramatic revival signaling a massive jump in shareholder confidence.

• This turnaround isn’t just because Rivian has more funds at its disposal. Rather, investors are hoping the EV brand will use its new capital to cut costs and reduce losses. The company posted a net loss of $1.45 billion for the first quarter alone.

Not everyone is encouraged by the news however.

• This isn’t the first partnership with a major automaker that Rivian has attempted to organize. Previously announced deals with Ford and Mercedes-Benz fell through in rapid succession, as confidence in the EV market deteriorated.

• The high price of its vehicles, which start in the low $70,000’s, also severely handicaps its ability to reach new consumers. In spite of the demanding price tag, the company still loses more than $30,000 on each unit.

• Morgan Stanley still expects Rivian to burn through another $8 billion over the next three years, warning that the brand will likely struggle to scale its production in a profitable manner.

Bottom line: Rivian and Volkswagen went to great lengths to keep this deal a secret, apparently using camouflaged Audis to test the EV startup’s technology without letting others catch on. The effort clearly underlines the willingness of both companies to make things work. At the same time, the main issue facing Rivian is the market itself, meaning that any improvement to its profitability depends on a substantial jump in EV demand.

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