Volkswagen’s US$5 Billion Bet on Rivian Is a Sign of Things to Come in Automotive

In June 2024, Volkswagen (VW) announced its intention to invest up to US$5 billion in Electric Vehicle (EV) startup Rivian by 2026, creating a Joint Venture (JV) that will develop EV technologies and software that will benefit both Original Equipment Manufacturers (OEMs) as they seek to navigate their shared and unique challenges during a period of enormous change for the automotive industry. As both established OEMs and startup EV automakers face headwinds in the form of investments drying up, rising costs, tariffs and other restrictions, and a disappointing EV sales environment, the market should expect more consolidation, either in the form of acquisitions or JVs.

This latest move gives more insights into the kinds of partnerships the market should expect to see emerging and the key technology areas of interest for OEMs looking to cooperate.

The year 2023 was a challenging one for Rivian, beginning with the news that Ford, its former major OEM partner had offloaded almost all of its stake in the fledgling EV automaker, having formerly adopted and later abandoned Rivian’s EV platform for its own models. The VW JV differs significantly from this failed partnership with Ford.

At the time of Ford’s interest in Rivian, the EV startup was heavily focused on electrifying light trucks, a segment that is vital to Ford, and which Ford must electrify as part of a successful net-zero transition. The similarities in the two OEMs’ target markets made the partnership, at the time, seem logical.

While Rivian has expanded into smaller Sport Utility Vehicle (SUV) segments, in the meantime, the contrasts between the EV startup and VW are what make the partnership so interesting. VW is a European OEM with strong volumes in its domestic market and the Chinese market, while Rivian is focused more on its native U.S. market. Most of Rivian’s volume, to date, has shipped into a vehicle segment that accounts for very little of VW’s shipment volume. Whereas VW is a large OEM, with proven manufacturing and massive economies of scale, struggling to implement technology transformation (particularly with respect to software), Rivian is a proven innovator, struggling to bring down its manufacturing costs in order to remain competitive and manufacture at scale.

It is the differences between the two OEMs that makes them such potent partners, with each potentially helping the other to access new geographies and address market segments, as well fill in the missing piece that OEMs need to continue as automakers in the software-defined era. For Rivian, this is the ability to scale up its innovation, and for VW, the ability to innovate at scale.

For Rivian, this can only be seen as an important win. In the short term, the investment provides a very welcome cash injection at a vital stage for the EV startup, as it looks to increase deliveries of its existing models, and sustain its operations beyond the upcoming launch of its key R2 SUV model. In the medium term, the establishment of the JV will give Rivian access to VW’s negotiating heft when securing components such as semiconductors for its own manufacturing, This will go a long way toward achieving mass market pricing, and structurally improving Rivian’s business; the automaker is said to lose US$40,000 on each vehicle currently sold.

For VW, success will depend heavily on how the JV is governed, and how its outcomes are integrated into VW’s current EV and Software-Defined Vehicle (SDV) development. Details on the exact software layers being developed by the JV are still emerging, but all indications suggest that this goes beyond electrification, and applies to areas such as zonal architectures. This is existential for VW, which has struggled to move software development in-house, and which must up its game in the software domain to compete against not only Tesla, but the myriad of digitally native EV OEMs expanding out of China and into Europe.

However, as any longstanding observer of technology markets will well know, consolidation is rarely a silver bullet, whether in the form of acquisition or cooperative development in a JV. The history of technology markets is littered with large, lumbering behemoths that find themselves falling behind due to a culture that stifles innovation, finding an innovative partner or Mergers and Acquisitions (M&A) target that soon has its edge blunted once it has been acquired, or otherwise bent to the innovation culture that created the need for an acquisition in the first place.

Wassym Bensaid, Chief Software Officer at Rivian, has already taken steps to address this concern, communicating to analysts that Rivian’s agile approach to software development would be embedded into the JV through “very clear rules and responsibilities,” with the blessing of VW’s leadership team. This will be essential if the JV is to, at long last, enable VW to break through into the era of SDVs.