Summary
- Rivian
decided that it no longer wished to pursue a previously planned joint venture with Mercedes-Benz in Europe.
SHORE
- The decision was spurred by the Inflation Reduction Act in the United States
- Is this a mistake for Rivian’s long-term growth prospects?
Rivian Automotive Inc. (RIVN, Financial) dropped a bombshell on investors on Monday by announcing that it will “no longer pursue” a deal with Mercedes-Benz (XTER:MBG, Financial) to produce electric commercial vans through a joint venture in Europe. The electric vehicle maker’s stock fell more than 6% midday after the news.
At first glance, this seems like a disastrous development that could hurt Rivian’s long-term potential. Perhaps this serves as an admission of defeat, indicating that the company may have overwhelmed itself and needs to tone down investments in its future.
However, Rivian says the move will help it maximize the value of its investments by focusing on its home market in the United States, and it remains open to expanding into Europe in the future at a “more appropriate time.” “. This begs the question: is the cancellation of the Mercedes-Benz deal really as bad as it sounds?
Withdraw from the European market
Just three months ago, Mercedes-Benz and Rivian announced their joint venture to much fanfare. The companies planned different designs for the vans, which were due to start production in a few years at an existing Mercedes site in Europe.
In other words, this plan was already not expected to bear fruit for at least a few more years, so even if Rivian can claim that he is open to pursuing another deal in the future, he would probably be so far away in the calendar that investors may as well exclude it from value calculations for the time being. The future is uncertain, and with many European countries investing heavily in electric vehicles, chances are that by the time Rivian tries to enter the market, it will find that it has missed its main chance. to take a leadership position.
Mercedes-Benz has its own electric vans for sale – in fact, it’s been producing electric vans for over a decade, and the company says canceling the Rivian deal won’t negatively impact its own electrification strategy. He was willing to work with Rivian in a joint venture to accelerate vehicle electrification in Europe, and that principle will likely hold true in the future.
The Inflation Reduction Act makes the US market more attractive
So why has Rivian decided to give up what might be its best chance to enter the European market when the time is right? The answer lies in the incentives provided by the Inflation Reduction Act in the United States
Among its many other provisions, the Inflation Reduction Act provides a tax credit for electric vehicles whose final assembly takes place in North America. This changed Rivian’s plans because any vehicle it produces and sells in the United States will be much more profitable than vehicles it could produce and sell overseas.
Of course, this may harm the company’s growth potential in Europe, not only in the short term but also in the long term, but Rivian is far from reaching market saturation in its home country, so it seems that management is keen to get the best risk-adjusted returns are now worth the European market share sacrifice.
Also, while Rivian may be the leading maker of electric trucks and SUVs in the United States, traditional automakers like Ford (F, Financial) and General Motors (GM, Financial) are really stepping up their game. means it may be worth it for Rivian to focus more effort to stay competitive in the United States.
A potential double-edged sword
It’s no surprise that Rivian decided to reap the benefits of the Cut Inflation Act, a law that draws so much attention to business in the United States that Europe has formed a united front to raise concerns, saying it threatens the industry and could violate several international trade rules.
The sweeping legislation strongly discourages US companies from doing business in other countries. While Europe worries about how this could lead to underinvestment in European economies, all is not well for the United States either.
The main potential downside for businesses in the United States is that competition will intensify for American customers and labor, potentially causing a glut of supply driving down the price of some goods while the increased demand for labor creates wage inflation. It’s hard to say exactly how such a situation might affect Rivian himself, but he could potentially face greater competition and higher expenses.
Maximizing Value Amid Supply Chain Challenges
Despite the potential drawbacks, Rivian can only control its own course of action, not government incentives. All it can do is respond to an ever-changing economic environment. With behemoths like Ford and GM taking advantage of incentives to increase production in the US, it makes sense that Rivian wants to make sure it gets its piece of the pie too, especially with the potential for higher yield per vehicle on the European market. .
Additionally, due to difficulties in its supply chain and a potential future decline in the US economy, Rivian has come to see becoming cash positive as a priority. Unprofitable companies tend to underperform their peers in tough economic times, and with the cost of debt rising, Rivian may need to do more to ensure it receives cash.
Rivian sadly had to halve its initial 2022 vehicle production expectations earlier this year due to supply chain issues and component shortages. It initially estimated it could produce 50,000 vehicles, but now it only expects to produce 25,000.
Carry
Pulling out of the Mercedes-Benz joint venture is definitely not a good sign, but it might not be as bad as it sounds. What would be worse if Rivian were to ignore changing economic conditions and proceed with plans that no longer represent what is best for the company at this time.
Ultimately, the costs of supply chain issues and inflation add up, and with the Cut Inflation Act making doing business in the United States more profitable, it makes sense that Rivian would concentrates on its domestic market. This is especially true when you consider that larger, more established automakers like Ford and GM are able to take advantage of the same incentives, and they have the added benefit of already being able to grow their operations profitably.
Disclosures
I/we have no positions in the stocks mentioned and I do not intend to buy any new positions in the stocks mentioned in the next 72 hours.