GM pulls investment from electric carmaker Nikola, spelling trouble for the startup

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FILE - This Friday, May 16, 2014, file photo, shows the General Motors logo at the company's world headquarters in Detroit. General Motors and Honda are teaming up to create a self-driving vehicle.
(AP Photo/Paul Sancya, File)

The electric car business is largely dominated by a few companies. However, disruptive startups are starting to make a name for themselves as consumers open up to the idea of alternative-powered vehicles.

Nikola was one such startup. However, it now finds itself in a bad situation after auto giant GM backed away from an agreement that would have seen it become a major investor and manufacturing partner. Although it’s unclear exactly what caused the change of heart, the writing has been on the wall for some time.

Nikola now finds itself in serious trouble with an unclear path forward. The startup’s stock plummeted by nearly 27 percent on the news.

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Reverse Card

Monday was about as bad as it gets for a startup in Nikola’s position. In early September, it seemed to be on top of the world when it signed a deal with GM. The latter agreed to manufacture a fuel cell pickup truck with Nikola’s Badger branding by the end of 2022. It would have also given GM an 11 percent stake in the company.

The deal was valued at $2 billion, making it a true industry-changer. However, things quickly soured when experts started to wonder what GM had to gain from partnering with the hydrogen-electric carmaker. After all, Nikola still hasn’t released a car of its own despite being founded in 2014.

In the days following the news, things got worse for Nikola. Hindenburg Research, a known short-seller, accused the startup of fraud. Those claims triggered an investigation from the U.S. Securities and Exchange Commission (SEC). They also caused Nikola’s founder, Trevor Milton, to step down from his role as executive chairman.

Although Nikola pushed back against the claims, some points couldn’t be disputed. For instance, a promotional video for its first hydrogen-powered semi-truck was found to be fake. The company made it look like the truck was propelling itself (and thus further along in the design process) when in reality it was simply rolling down a hill.

The entire situation was strange, once again raising questions of why GM was partnering with the startup. While GM hasn’t confirmed that the fraud allegations played a role in its sudden change of heart, it is hard to believe that the situation didn’t have some sort of impact.

For now, GM has signed a nonbinding memorandum of understanding which states that it will work with Nikola to design its Hydrotec fuel cell system.

Trouble Ahead

Although Nikola and GM haven’t cut ties entirely, it’s clear that things won’t be playing out in the same way. Even the deal noted above is described as a “potential agreement.”

In other words, it could collapse even further.

That being said, the agreement is now much more favorable for GM. Should it go through as written, the auto giant would supply Nikola with the Hydrotec system on a ”cost plus” basis, according to TechCrunch. This means that Nikola would pay the upfront cost for the system’s design and engineering.

Nikola could be in serious trouble moving forward. The startup has shown that it is struggling to bring a vehicle to market. Without the help of an established company like GM, it may never be able to do so.

In the meantime, Nikola will refund any customers who pre-ordered one of its hydrogen-electric Badger pickup trucks. It reportedly collected some $6.9 million in deposits.

Perhaps Daniel Ives and Strecker Backe, analysts at Wedbush Securities, put it best by saying, “This went from a game-changer deal for Nikola to a good supply partnership but nothing to write home about.”

This situation is worth monitoring in the coming days.

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