Potential GM (NYSE:GM) Investment In Rivian Makes Strategic, Financial Sense

By David Fisher

Disclosure: The author of this report has a long position in General Motors Inc. (NYSE:GM) and Amazon.com Inc. (NASDAQ:AMZN). Positions can change at any time without notice.
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Upstart electric vehicle (EV) manufacturer Rivian appears close to securing financing from General Motors Inc. (NYSE:GM) and Amazon.com Inc. (NASDAQ:AMZN), according to a Bloomberg News report. Bloomberg reports that the deal could value Rivian at US$1 to US$2 billion, and could be announced by Friday.

We believe an investment by GM in Rivian makes strategic and financial sense, particularly if it is structured to leverage GM’s scale and technology.

Strategic Rationale

In our view, GM is in a somewhat tricky spot with its electrification strategy. While the company has  invested heavily in battery technology, it simply lacks the buzz and hipness associated with an upstart EV manufacturer (think Tesla, Rivian, NIO).

Moreover, GM’s retail distribution network is comprised of franchised dealerships that may be hesitant to sell EVs due to (i) potentially lower profits on the initial vehicle sale; and (ii) lower service revenues (EVs require less maintenance), which represent a significant driver of automotive dealership profitability.

By investing in Rivian, GM could gain the benefits of a fresh, on-trend brand without alienating its existing franchised dealer base who would likely view any move by GM to establish its own EV brand as a direct competitive threat.

We believe Rivian is likely to forge a path similar to that of Tesla by establishing sales locations in major retail destinations (shopping malls and other highly trafficked areas). Rivian sales employees will be incentivized to sell EVs — likely in contrast to GM’s existing dealerships.

Depending on how the proposed transaction is structured, Rivian could also leverage GM’s battery technology and purchasing power to significantly reduce costs prior to commercially launching its vehicles. GM’s current battery technology is considered competitive and the company is on a glide-path to possibly reduce battery costs by half by 2021. We are hopeful that the companies are able to conclude an agreement that incorporates these benefits, rather than simply a financial transaction. In our view, a comprehensive agreement could enable Rivian to sell a profitable EV in the popular truck/EV space while further bolstering GM’s EV technology.

Financial Rationale

An investment in Rivian also makes sense from a financial standpoint because upstart EV manufacturers trade at significantly higher valuations than incumbent automotive companies. As such, this investment – while speculative – could prove profitable, particularly if Rivian conducts an IPO at some time in the future. Moreover, if Rivian agrees to buy batteries from GM, it could help offset some of the heavy R&D expense that GM is incurring to develop this technology.

Summing It Up

In summary, we believe a well-developed investment in Rivian that leverages GM’s scale and battery technology would be broadly beneficial to both companies.