How a Legacy Automaker Is Handling the Shock of EVs

Cars and trucks are the archetypal examples of industrial hardware. And automotive manufacturing historically has been all about finding ways to efficiently engineer and assemble metal, glass, and plastics into road-going vehicles with consumer appeal. But the big change in locomotion from the internal combustion engine to electric motors has shaken everything up. So when Volkswagen, the world’s highest-earning automaker, announced last month that it was going to invest billions of dollars into a joint venture with the start-up electric-vehicle maker Rivian, it was a dramatic sign of how much automaking has changed over the past decade.

Volkswagen is partnering with Rivian not because it wants access to the company’s manufacturing expertise or even its EV technology. It’s doing so because it wants access to Rivian’s software. What this deal represents is an admission by Volkswagen that it needs help, and that its attempt to go it alone with EVs has stalled. But that’s progress. As they say, the first step to solving a problem is admitting that you have one.

[Thomas Chatterton Williams: Touch screens are ruining cars]

On the face of it, the deal may look almost like an act of charity by Volkswagen. VW is investing $1 billion up front in Rivian itself, another $1 billion later this year in the joint venture (which will focus on developing software and electronics for EVs), and a further $2 billion if certain financial goals are met, plus an additional $1 billion loan to Rivian down the line. The EV maker, meanwhile, isn’t putting up any cash; all it’s contributing is its knowledge and intellectual property.

This is unquestionably a good deal for Rivian, because it’s getting what it most needs right now: money. Running a car company is very expensive, especially in the early stages when the company needs billions in plant and equipment, and it has no economies of scale because it isn’t making that many vehicles. (Rivian is supposed to sell 57,000 of its models this year. Volkswagen, in contrast, delivered more than 9 million vehicles worldwide last year.) Even though Rivian’s SUV and pickup truck have gotten glowing reviews and are very popular among high-end car buyers, the company is still losing more than $38,000 per vehicle. So VW’s billions will come in handy, which is why Rivian’s stock—which had been bumping along at about 10 percent of its 2021 IPO price—jumped 50 percent when the deal was announced.

What’s interesting, though, is that this could turn out to be an even better deal for Volkswagen. That’s because it could solve one of the biggest problems VW has faced in recent years: making software for its electric vehicles that actually works. When VW rolled out its ID.3 model, which was supposed to be its flagship electric sedan, the vehicle’s software was glitchy, the touch screen was unreliable, and some drivers complained that the traffic-detection technology was so erratic that their cars were braking suddenly for no reason.

Even more frustrating for owners, VW was unable to consistently update the software over the air in real time, something Tesla has been doing for years. At one point, ID owners had to drop their car off at the dealer to get a hardware update that was supposed to improve the software updates—an unofficial recall, in effect. Software problems also led to delays in the release of the ID.4 and actual recalls after its launch, as well as coding issues with vehicles from VW’s luxury brands Audi and Porsche.

[Read: Rivian wants to the Apple of electric pickup trucks]

The striking thing is that these failures were not for lack of trying. Volkswagen was not a latecomer to the EV party, trying to buy its way in. Nor was it unaware of the importance of what the auto industry now calls software-defined vehicles. On the contrary, the company has been very committed to electric vehicles and invested heavily in pursuit of the future. VW has poured billions of dollars into manufacturing plants and building more than half a million charging stations across Europe (and some 4,000 in the United States). In 2019, the firm invested $2.6 billion in an autonomous-vehicle start-up called Argo AI. VW also launched a huge in-house software-development arm, Cariad, which planned to employ 10,000 “digital experts.” All of this investment made industry observers optimistic about VW’s electric future: In 2022, the research firm Bloomberg Intelligence predicted that Volkswagen would overtake Tesla as the world’s largest EV manufacturer by 2024.

That obviously did not happen. By market share, VW is now the fourth-largest EV maker in the world, behind Tesla and the Chinese companies BYD and SAIC. As yet, VW sells very few EVs in America. And the CEO who had championed the company’s aggressive move into electric and software-defined vehicles, Herbert Diess, was fired not long after Bloomberg made that prediction.

What went wrong? It was, in some sense, a textbook example of why big, established companies have a hard time adapting to new technologies and markets. After all, even as Volkswagen has been trying to pivot to EVs, it has continued making millions of gas-powered, ICE vehicles every year. So a lot of vested interests at the company had little immediate incentive in helping EVs take off. VW is also a large, bureaucratic organization that changes slowly. And its expertise was very much in hardware—manufacturing cars—not in software. Successful software-defined vehicles (such Teslas or Rivians) also tightly integrate hardware and software from the start. VW has struggled to do that, as the company’s leadership now seems well aware: Rivian is not, in fact, the only company VW has partnered with recently—it has also invested $700 million in a Chinese company named Xpeng, with which it’s planning to build “intelligent connected vehicles” for the Chinese market.

[Read: Tesla is not the next Ford. It’s the next Con Ed.]

To be sure, some electric vehicles from old-school car companies have become popular successes with fewer tech glitches; these include the Ford F-150 Lightning and Hyundai’s Ioniq. But today’s EV-market-defining companies (most obviously, Tesla and BYD) make only EVs and hybrids and are not weighed down by legacy investments, either physical or psychological. The same is true, of course, of Rivian.

All of this could mean that VW’s new joint venture is doomed to be another false start, a halting effort to retrofit cutting-edge technology to legacy auto manufacture. But this conclusion would drastically overstate the nature of Volkswagen’s problem as well as underestimate the potential gains of the deal. Volkswagen still has, after all, tremendous expertise in actually making vehicles, and that still matters in the car business. (When Tesla tried to ramp up manufacturing volume of its Model 3 sedan in 2018, the effort sent the company into what Elon Musk called “production hell.”) So if working with Rivian puts software in those vehicles that’s reliable and user-friendly, VW would be well on its way to realizing its ambition to be a force in the EV market. If you can’t beat ’em, join ’em could be VW’s winning strategy.