Sep 8, 2020

GM and Nikola are a match made in Tesla hell

Trevor Milton, founder of Nikola Motor Company

Security Not Found

The stock symbol {{StockChart.Ric}} does not exist

See Full Stock Page »

If you want something done right, do it yourself. If you are an old-school manufacturer and want credit from investors for innovation, make sure someone else’s name is attached. 

General Motors Co. on Tuesday announced a strategic partnership with Nikola Corp. that will give it a US$2 billion equity stake in the electric-vehicle startup. Rather than pay cash for the ownership foothold, GM is paying in services: It will be the exclusive supplier of fuel cells for Nikola’s Class 7/8 trucks outside of Europe, provide access to its battery technology and take on the manufacturing and engineering work for Nikola’s Badger electric-pickup model. GM expects more than  US$4 billion in benefits from the tie-up, between the equity stake and additional payments for manufacturing and parts work.

GM’s backing provides a much-needed dose of credibility for Nikola, whose shares added a more than 30 per cent gain on Tuesday to a high-flying streak that belied a lack of meaningful revenue thus far. The partnership will save the company an estimated US$5 billion in manufacturing and engineering expenses; basically, it no longer needs to literally reinvent the wheel. But Nikola’s brand and buzz also provide valuable credibility for GM’s electric vehicle aspirations. Arguably, the 112-year-old titan from Detroit is the one who needed this partnership more. 

The market reaction to the news on Tuesday helped underscore how little the share price movements for both legacy and upstart automakers recently have had to do with the actual business of making cars. These days, it’s all about the packaging and messaging. GM rallied more than 7 per cent, while news of its partnership with Nikola was one factor in a rout of Elon Musk’s electric-car darling Tesla Inc. that was the worst on an intraday basis since March. Tesla’s failure to gain membership in the S&P 500 Index also damped enthusiasm, while news of derivative bets by SoftBank Group Corp. underscored the role financial speculation and hype had played in the company’s steep rise this year, as my colleague Chris Bryant noted. 

The Nikola-GM partnership will pose strong and well-financed competition for Tesla's much-promoted Cybertruck, but given how much GM is bringing to the table in this transaction and its pre-existing plan to launch an electric version of its Hummer, that threat arguably already existed. It’s now just marketed better. And that really is the genius of this deal. 

It’s nearly impossible for manufacturers like GM to rebrand themselves for the digital age in the eyes of investors, and not for a lack of trying or a lack of success. GM is in a position to draw on decades of experience to capitalize on new innovations, whether that’s electrical vehicles, autonomous driving or predictive-maintenance software, but legacy investors have decades of memories of false steps and are more interested in a steady stream of dividends and share buybacks. It has poured billions into electric vehicles, and the willingness of Nikola to partner with the company and incorporate its battery and fuel-cell technology into its products is a strong testament to its progress. But Nikola, not GM, is the one with the sky-high valuation.

It’s telling that GM shares had their best monthly performance since 2011 in August — not because of anything particularly notable that the company had done but because of a raft of speculation about an eventual spinoff of its electric-vehicle business.

This may be where GM is eventually headed in its partnership with Nikola. A deal could be structured similarly to Schneider Electric SE’s 2018 agreement to fold its software operations into Aveva Group Plc and take a minority stake in the combined company; as I wrote last month, the benefits of that set-up were clear in the investor reaction to Aveva’s pricey US$5 billion takeover of industrial-software company OSIsoft. For now, the Nikola deal provides GM with some of the benefits of a spinoff, without the headaches of actually carving out the business and standing it up on its own. But it wouldn't be surprising to see the relationship continue to deepen and evolve. 

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Brooke Sutherland is a Bloomberg Opinion columnist covering deals and industrial companies. She previously wrote an M&A column for Bloomberg News.