In an unassuming facility in California, a few camouflaged Audis arrived secretly from Germany early this year. These vehicles were destined for an unusual transformation by electric vehicle (EV) maker Rivian (NASDAQ: RIVN). About 30 engineers meticulously stripped the electronics from these German cars and replaced them with Rivian’s harnesses and modules.
Intensive testing ensued at Rivian’s Palo Alto facility to determine if the U.S. startup’s advanced architecture and software, which control nearly every function of the vehicle, could be integrated into Audi parent Volkswagen’s (ETR: VOWG_p) future EVs. This covert mission was confirmed by two sources close to the deal, with a third source verifying the shipment of Audis to California.
The outcome: On Tuesday, Europe’s largest carmaker, Volkswagen, announced a $5 billion investment in Rivian, forming a technology joint venture that took the automotive industry and investors by surprise. Details of how the deal materialized had not been previously reported.
“I think it’s an accomplishment in its own right that this hasn’t leaked, given the amount of work that’s already happened… and the number of people involved across our teams,” Rivian CEO RJ Scaringe told Reuters.
Rivian and Volkswagen were “super secretive,” aiming to test if their electrical systems and components could work together effectively, according to one of the sources.
Volkswagen and Rivian did not immediately respond to requests for comment outside business hours in Europe and the U.S.
‘A Serious Conversation’
The deal is pivotal for both companies. For Rivian, known for its R1S SUVs and R1T pickups, this partnership provides a financial lifeline crucial to navigating a slowdown in EV demand, building less expensive R2 SUVs, and ultimately achieving profitability. Additionally, it may allow Rivian to secure better deals from suppliers by leveraging Volkswagen’s purchasing power.
On Wednesday, Rivian shares surged by 23%.
For Volkswagen, the agreement brings access to low-cost, high-performance EV technology, a realm in which traditional automakers have struggled. Work at Volkswagen’s software unit, Cariad, has been plagued by delays and losses, partly due to slow decision-making.
The foundation for this partnership was laid when Scaringe and Volkswagen CEO Oliver Blume met privately at Porsche’s experience center in Atlanta in August last year.
“We just went deep, talking product and comparing notes on the things we like,” Scaringe recounted. “There was immediate realization that we have some shared vehicle interests. Quickly that led to a serious conversation as to how can we look at working together.”
Following their initial meeting, a Rivian team visited Volkswagen in Germany that fall. The subsequent testing phase, described as “like a scrimmage” by Scaringe during a company townhall, saw another visit to Germany early this year with lawyers and software experts.
Volkswagen, under Blume’s leadership, displayed a more flexible approach regarding external partnerships, a significant shift from its previous stance, according to a fourth source.
Integration Challenges
To mitigate the challenges of integrating differing corporate cultures, Volkswagen leadership committed to embracing Rivian’s agility. Rivian’s software chief, Wassym Bensaid, emphasized to analysts that “very clear rules and responsibilities” had been established for the joint venture, aiming to alleviate VW investors’ concerns about potential clashes between the companies’ approaches.
Despite this, VW shares fell 2% on Wednesday amid worries about increased spending.
The certainty of the deal followed rigorous tests on the Audis in Palo Alto, leading to financial negotiations over the past few months. However, full-fledged tests to ensure complete functionality of VW vehicles with Rivian software are still needed.
“This isn’t as if it’s something that we thought of a month ago,” Scaringe told Reuters. “This has been a long work in progress.”
For Scaringe, who grew up as a Porsche enthusiast and restored classic 356s, this partnership feels like a natural fit.
“To be able to see a Porsche on the road that has our technology in them, I couldn’t be more excited,” he said.
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