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GM has no reason to give up its one-sided deal with Nicola

Mary Barra, CEO of General Motors, in 2019.
Zoom in / Mary Barra, CEO of General Motors, in 2019.

Patrick T. Fallon / Bloomberg via Getty Images

GM CEO Mary Barra signaled on Monday that the company was sticking to its deal to produce Nicole̵

7;s Badger pickup.

“The company has worked with many different partners and we are a very capable team that has made the appropriate diligence,” Bara said at a conference with RBC Capital Markets on Monday.

GM is on Nikola’s side, despite recent revelations that the startup has misled the public about the capabilities of its first truck, the Nikola One. When it was unveiled in 2016, founder Trevor Milton said Nikola One was “fully functional.” But on Monday, Nicholas admitted that the company had never had a working prototype of the truck. The company admitted that the promotional video from 2018 shows that the truck is rolling on a shallow hill – it is not moving on its own.

So why is GM not backing down from Nicholas’ deal? This poses a very small risk to the GM. GM does not invest a penny in Nicholas; instead, all the money will flow differently.

“There really is no flaw in the deal for GM,” said Sam Abuelsamid, an automotive analyst at Guidehouse. – Everything is reversed.

The terms of the deal are extremely friendly to GM

Under the deal, Nicolas will pay GM up to $ 700 million to cover the cost of building production capacity for Nicolas’ Badger truck. Nicholas will then pay GM even more money to produce the cars on a plus basis.

The electric version of the Badger will be based on GM’s Ultium battery platform, which GM is likely to sell to Nicholas at a profit. Not only will the hydrogen version of the Badger be based on GM’s Hydrotec fuel cell technology, but GM will also become the exclusive supplier of hydrogen fuel cells for Nicholas semi-trucks (outside Europe) for a period of four years.

These are technologies that GM plans to develop anyway, so the deal gives GM a chance to do so in part at the expense of another company. Even if Nicola goes out of business in a year or two, GM will gain valuable knowledge and experience – and may be able to use the funds funded by Nicola to make its own pickups.

Abuelsamid predicts that GM will build a Badger in Detroit along with GM electric vehicles such as the electric Hummer and Chevy electric pickup. The larger volume will increase GM’s economies of scale.

“The more vehicles you can build and sell, the less fixed costs are associated with each unit,” Abuelsamid said.

Along with direct payments for Jazowiec’s production, Nikola also gives $ 2 billion in stock. The agreement requires GM to hold the shares for at least one year after the transaction is completed. GM will be able to sell one third of the shares in one year, another third in two years and the last third at the conclusion of the deal – probably in 2025.

On top of everything that, GM manages to retain 80 percent of valuable regulatory vehicle loans from Badger trucks.

At the same time, the deal is structured to minimize risks to GM’s reputation. The badger will be branded as a product of Nicholas, not as a GM product. Nicholas will be responsible for the sales and maintenance of the Badger truck, as well as the warranty. So if customers have problems with the truck – or Nicholas fails to deliver trucks at all – people will complain to Nicholas, not GM.

The deal gives Nikola a reputation

Nicholas also gains some benefits from the deal – although the nature of those benefits depends on how cynical you are about Nicholas’ motivations.

“Until the announcement last week, The Badger was full of evaporative software,” Abuelsamid told me. Nicholas does not have the internal capacity to develop a pickup. And as Tesla has learned, it takes years and costs billions of dollars to build production capacity for a consumer vehicle. GM’s partnership offers a shortcut for Nikola to bring its truck to market.

The deal with GM gives Nikola an experience of selling a real pickup to real customers. Maybe Nicholas can use Badger’s experience to help him build his own trucks along the way. Or maybe the Nicola brand will be so compelling that Nicola can make a profit by selling trucks made by others indefinitely.

The more cynical interpretation is that Trevor Milton just wanted to be able to say he had a deal with GM. Milton has become a paper billionaire, convincing investors that Nicholas is about to be the next Tesla. Just so I can I say they have a deal with GM likely to give Nicholas extra confidence with less ingenious investors, even if the terms of the deal are wildly unfavorable to Nicholas.

It’s not uncommon for profitable companies to outsource production – look at Apple, for example, outsourcing iPhone production. But Apple’s generous profit margins come from the fact that the iPhone is built largely on chips and software that Apple invented.

Nicholas, by contrast, pays GM to build trucks largely based on GM technology. It is difficult to make a big profit just by reselling products designed and manufactured by other companies. But thousands of Robinhood day traders may not realize it.

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