Volkswagen So Desperate It's Willing To Pay $1 Billion Just To Look at Rivian's Software

As surprising as it seemed, the announced partnership between Rivian and Volkswagen must've been long in the making. The terms of the deal sound great for both companies, at least on paper. Rivian gets an immediate cash injection that is vital for its survival as it tries to ramp up Gen 2 production and work on the R2/R3 lineups. In exchange, Volkswagen benefits from Rivian's expertise in developing and producing software-defined vehicles. Beyond this idyllic landscape, though, the details paint a different picture.

The terms of the deal show that Volkswagen is paying $1 billion by the end of the year to acquire Rivian stock. Half of this sum is locked at a Rivian stock price of $10.84 per share, which was likely the price when the deal was inked. The rest will reflect the share price closer to the deal completion date but not earlier than December 1, 2024. Even if the stock skyrockets by then, Volkswagen is projected to become Rivian's second-largest shareholder, behind Amazon.

This first part of the deal sounds like a marriage of convenience, with Rivian basically selling a big chunk of the company to Volkswagen for cheap. This reflects Rivian's dire financial situation as it tries to ramp up Gen-2 production and continues the development of the R2/R3 models. However, the second part of the deal is equally important, showing Volkswagen's desperation to have a working software platform that its software arm, Cariad, couldn't deliver.

The deal includes setting up a joint venture, with Volkswagen and Rivian as equal partners. The joint venture aims to create "next-generation electrical architecture and best-in-class software technology." As Rivian CEO RJ Scaringe explained during the investor call on June 25, this would not include collaboration on drive units, batteries, or vehicle platforms. However, written in fine print is that the joint venture is not a done deal and will only happen if "certain milestones" are achieved.

Rivian-Volkswagen joint venture seems doomed to fail

The Volkswagen press release offers more details than Rivian's, explaining that the joint venture depends on "the final results of the further review of the technical feasibility of the integration of [Rivian's] E/E-architecture in vehicles of Volkswagen" and "further negotiations between the parties." Volkswagen emphasizes that a final decision on establishing the joint venture has not been made yet. Based on past Volkswagen joint venture records, it might never happen.

This essentially means that Volkswagen's $1 billion investment buys not only a significant stake in Rivian but also the right to analyze Rivian's software platform and electrical/electronic architecture. The move shows that despite Volkswagen's huge resources, Cariad has not progressed much on its next-generation software architecture. However, even if Rivian delivers a turn-key software solution to Volkswagen, there's no guarantee that it will help the company much.

Software organizations are mostly about culture, and Volkswagen's complicated bureaucracy is simply not fit for Rivian's agile startup thinking. Whatever software solution Rivian brings to the table will not be easy to implement in existing Volkswagen vehicles. New models must be developed from scratch with new ECUs and a different network architecture for this to work.

In the meantime, an army of Volkswagen managers will work hard to delay or even prevent any changes, if possible. At best, the Rivian-Volkswagen software joint venture would not be more successful than Cariad. Software-defined vehicles are built differently, with a high level of vertical integration that allows tight control of hardware and software. I just don't see Volkswagen changing the way it has built cars for decades. If it had been willing to do that, Herbert Diess would still have run the company.

Rivian could be great for Volkswagen if it's willing to change

The fact that the joint venture is equally divided between the two partners will complicate things even further. Making decisions will be nearly impossible, and they'll most likely look like a compromise that will fail to yield the desired results. History shows that Volkswagen is very bad at keeping its joint ventures alive, and some (the one with Suzuki springs to mind) have ended in international scandals without producing any results.

Volkswagen has tried before to patch its software illiteracy by investing in other startups. In 2019, it invested $2.6 billion in Argo AI, an autonomous driving startup that also had Ford as a backer. However, Argo AI shut down in 2022 after Ford and Volkswagen withdrew support and vowed to pursue their own software projects. We know how well this went, as Cariad failed to produce the breakthrough Volkswagen hoped for despite burning billions of dollars.

I sincerely hope the Rivian-Volkswagen partnership will prove successful, but there's a long way to go. The fact that Volkswagen doesn't seem very committed to the joint venture and is more focused on getting a look inside Rivian's software platform is telling. However, if Volkswagen is genuinely interested in making this partnership work, Rivian could offer it a chance to fight in the fast-changing era of software-defined vehicles. The startup could also provide key technology for Volkswagen's newest brand, Scout.