GM has no reason behind unilateral deal with Nicola

in great shape / General Motors CEO Mary Barra in 2019.

Patrick T. Via Fallon / Bloomberg Getty Image

GM CEO Mary Barra indicated on Monday that the company stands with its deal to produce Nikola’s badger pickup truck.

“The company has worked with many different partners and we are a very capable team that has done due diligence,” Bara said during a conference call with RBC Capital Markets on Monday.

Despite the recent revelations by GM Nicola that the startup misled the public about the capabilities of its first truck, the Nikola One. At the time of its 2016 unveiling, founder Trevor Milton claimed that Nikola One “functions perfectly.” But on Monday, Nicola admitted that the company never had a working prototype of the truck. The company admitted that a 2018 promotional video showed the truck rolling off a shallow hill – not under its own power.

So why is GM not far from the Nikola deal? This poses very little risk to GM. GM is not investing in Nicola; Instead, all the money will flow the other way.

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

The terms of the deal are extremely favorable to GM

Under the deal, Nicola will pay GM up to $ 700 million to cover the cost of manufacturing Nikola’s Badger truck. Nicola would 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 likely sell to Nikola for profit. Not only will the hydrogen version of Badger be based on GM’s Hydrotech fuel cell technology, but GM will also become the exclusive supplier of hydrogen fuel cells to Nikola’s semi trucks (outside Europe) for a period of four years.

These are technologies that GM was planning to develop anyway, so the deal gives GM a chance to do it partially 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 may be able to use Nikola-funded facilities to build their own pickup trucks .
Abulesimid predicts GM will build the Badger in Detroit with GM’s own electric vehicles, such as the electric Hummer and Chevy electric pickup truck. The higher volume will boost GM’s economies of scale.
“The more vehicles you can build and sell, the lower fixed costs associated with each unit,” Abulesimid said.

On top of the direct payment for Badger’s construction, Nicola is also giving GM $ 2 billion in stock. GM is required to hold stock for at least one year after the contract 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 by 2025.

On top of That, GM is to receive 80 percent of the valuable electric vehicle regulatory credit from Badger Trucks.

At the same time, the deal is structured to reduce risk to GM’s reputation. Badger will be branded as a Nikola product, not a GM product. Nikola Will be responsible Badger truck sales and service as well as warranties. So if customers have a truck problem – or Nicola fails to deliver the truck – people will complain to Nicola, not GM.

The deal gives Nicola a chance to boost his reputation

Nicola has also gained some benefits from the deal – although the nature of those benefits depends on how cynical you are about Nicola’s motivations.

“Until last week’s announcement, the badger was completely volatile,” Abulesimade told me. Nicola does not have the capability to develop pick-up trucks. And as Tesla has learned, it takes years to build manufacturing capacity for a consumer vehicle and costs billions of dollars. The GM partnership provides a shortcut for Nicola to bring its truck to market.

The GM deal gives Nicola the experience of selling an actual pickup truck to real customers. Perhaps Nicola can help build their trucks down the road using Badger’s experience. Or perhaps the Nikola brand would be so forced that Nikola could make a profit by selling trucks manufactured by others indefinitely.

A more blasphemous explanation 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 explaining to investors that Nicola is on the way to becoming the next Tesla. Just able to it is said They have a deal with GM, likely to give Nicola added credibility with less savvy investors, even if the terms of the deal are wildly hostile to Nicola.

It is not uncommon for profitable companies to outsource manufacturing to others — see 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 invented itself.

Nicola, by contrast, is paying GM to build trucks based on GM technologies. Simply reselling products designed and manufactured by other companies is difficult to make a big profit. But thousands of Robinhood day traders may not realize it.

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