Rivian Bets the House on the Volkswagen Deal, Expects To Power Millions of the Group's EVs

Despite lackluster financial results in the third quarter, Rivian reiterated during the earnings call that it would become gross margin positive by the year's end. Regarding 2025, the EV startup warned that not every quarter would be positive, but the year overall will still end with a positive gross profit. If you're wondering how this will be possible, Rivian is betting big on regulatory credits.

In the fourth quarter alone, the EV startup expects to sell credits worth $275 million, which amounts to over $20,000 per vehicle sold in the quarter. This will continue in 2025 and as long as the automotive industry will have to buy credits for their dirty gas-powered vehicles to avoid environmental penalties. Another factor that makes Rivian confident it would become profitable is the recently signed partnership with Volkswagen Group.

In June, Rivian and Volkswagen announced a surprising joint venture to develop next-generation vehicle platforms to benefit both companies. Volkswagen would become Rivian's second-largest shareholder, behind Amazon, thanks to a $1 billion stock buy upfront and commitments to invest a total of $5 billion if things go as planned.

The second part of the deal was creating a joint venture if Volkswagen finds Rivian's technology useful. I was skeptical of the deal when it was announced, but CEO RJ Scaringe begged to contradict me and expressed optimism during the Q3 2024 earnings call.

According to a shareholder deck's slide, Rivian is not only convinced that the joint venture will become a reality in the fourth quarter, but it's already counting the money Volkswagen will invest as part of the deal. More than that, Rivian sees the deal as a "landmark development" for the automotive industry. The EV startup certainly dreams of becoming the go-to OEM contractor for other carmakers besides Volkswagen Group once this partnership proves viable.

Why is Rivian so confident that Volkswagen will pursue this partnership despite the difficulties it faces at home? Well, the EV startup successfully integrated its zonal network architecture and infotainment system into "a drivable demonstrator" prototype from the Volkswagen Group. Rivian demonstrated its software's ability to control the vehicle's core functions, different drive modes, and infotainment features. It also demonstrated remote control of the demonstrator as well as over-the-air updates.

This was one of the conditions Volkswagen stipulated in the contract when it signed the partnership. However, just because Rivian demonstrated its software prowess on Volkswagen's prototype doesn't necessarily mean that the German carmaker will continue with the partnership. However, the startup has another ace up its sleeve, and that's related to the Scout Terra and Scout Traveler recently launched in the US.

The two Scout models will use Rivian's zonal network architecture and software. The prototypes showcased during the unveiling event clearly ran Rivian software on the infotainment system. It's not difficult to imagine that the drivable demonstrator that the startup mentions in the shareholder deck had Scout lettering. This means that Volkswagen already recognized its expertise and will likely give the go-ahead to the joint venture plans.

Rivian hopes the joint venture will see its software and zonal network architecture installed in hundreds of thousands of EVs built by the many brands under the Volkswagen Group's umbrella. The carmaker has three volume brands (Volkswagen, Skoda, and Seat), three luxury brands (Audi, Porsche, and Lamborghini), and two ultra-luxury brands (Bentley and Bugatti) that could use Rivian's Software, besides Scout Motors, which is already onboard.

According to the initial announcement, the joint venture aims to create the next-generation electrical architecture and vertically integrated software for electric vehicles. Rivian specifically mentions Volkswagen's Group scale as an opportunity to reach a broad set of global customers across a diverse range of vehicles and price points. The startup wants to sell Volkswagen its electrical components, not only the software that powers them.

Rivian thinks this will provide the financial opportunity to continue its own vehicle development. The deal involves about $5 billion investment in its stock, and the EV startup also saves through economy of scale. Volkswagen's investment will help Rivian to fund its operations until the R2 production ramps up at its Normal, Illinois, factory. This will ensure it will have enough cash to complete the second factory in Georgia and start production of the mid-size platform vehicles.

This would put the EV startup on the path to profitability, which means more than reporting a positive gross margin one quarter in a year. Rivian targets positive free cash flow, which should allow it to scale operations beyond the startup phase. Still, this is only a dream for now, and the company admits in the shareholder deck that it still needs to achieve "several milestones," besides the actual formation of the joint venture. Will Rivian make it out of the woods? We'll have a clearer picture by the end of the year.