In a surprise announcement, Volkswagen (VW) and Rivian partner for the development of software for future electric vehicles (EVs).

In the deal, VW will invest an initial US$1Bn in Rivian, followed by an additional investment of US$4B later in the future. As both parties face quite different challenges in the transition to electrification, this looks to be a fruitful partnership.

Rivian has struggled with finances in recent times as it continues to scale its model base and manufacturing capability. After multiple years it remains largely unprofitable selling its premium R1T and R1S EVs, which ultimately has a limit on the extent of market penetration. Rivian has more affordable R2 models (targeting US$45,000) on the way, which will no doubt have a higher impact within the mass market, however, it must retain cashflow until it reaches full-scale production of these EVs. The mass market is where these startups will see significant gains, but producing an EV cheap enough remains a major hurdle.

Like with many modern EV startups Rivian excels in software and integration for its vehicles. It has the benefit of integrating software in a standardised manner through all vehicles from the start, cutting wiring requirements and streamlining user interface across all models. Having this flexibility has allowed EV startups such as Rivian to become software companies as well as vehicle manufacturers. This has been exemplified by Xiaomi, which is traditionally a tech company but has now recently entered the EV space with a compelling and integrated offering from phone to vehicle.

On the other hand, VW and other legacy automakers have struggled with integrating software across their platforms. It is now the expectation that EVs come equipped with advanced technological features and software integration, something that is unknown with respect to traditional internal combustion engine (ICE) vehicles. Next-generation EVs will therefore become entirely different types of vehicles compared with ICEs, pushing the boundaries for how consumers use and interact with their vehicles. For traditional automakers such as VW, this presents a challenge when competing against startups that have software at the front and centre of operations. VW has the widespread vehicle manufacturing and financial upper hand compared with most, but lacks this vital and advanced ingredient within its models.

This deal therefore looks to combine the benefits of each partner, whilst combatting the challenges they each face directly. It appears to be an important strategic move for both, provided they can both hit key milestones over the coming years. For VW, it is a route to become more competitive against Tesla in this new software-driven EV age, whilst for Rivian it is a crucial cash injection at a make-or-break moment.