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How GM plans to leapfrog Tesla

Yahoo Finance>>> Rick Newman

In the Wild World of Tesla, a 10% move in the stock price is a routine day on the rollercoaster. But for stodgy old General Motors, it’s a sign something radical is happening.

GM’s (GM) stock price jumped 9.8% on Sept. 8 after the automakers announced a deal with a startup called Nikola that has never even built a vehicle. The deal gives GM an 11% stake in Nikola, in exchange for a $2 billion investment. GM will build an electric pickup truck for Nikola called the Badger, due in 2022. GM will also supply batteries and other components for the Badger, along with more advanced technology—hydrogen-powered fuel cells—for at least two series of electric commercial trucks Nikola plans to build.

Shares of both firms rose on the news, which is unusual. The 10% rise in GM’s shares is a rare shot of adrenalin for a clunker of a stock that is still 4% lower than it was in 2010, when GM went public after emerging from bankruptcy. Nikola’s stock soared by nearly 50%, giving it a market value of $20 billion, nearly half GM’s $47 billion value. Investors apparently think Nikola and GM together can each achieve more than either can separately.

A word about auto-sector valuations, at the moment: They’re wacky. Tesla, which only builds electric cars, is worth a whopping $325 billion—nearly 7 GMs—even with a dizzying 30% drop in the share price since the end of August. Toyota (TM), the world’s largest automaker, is worth just $184 billion. Volkswagen, the next largest, is worth just $93 billion. Yeah, yeah, yeah—Tesla is worth so much because it’s a dashing technology upstart poised to outpace the doddering automakers like a teenager lapping an octogenarian. And Nikola could be the next Tesla.

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But GM’s not dead yet, and its recent activities hint at some of the ways it plans to reclaim turf from Tesla and the like:

Massive cost-sharing. A week before announcing the Nikola deal, GM revealed a new alliance with Honda that will allow the two companies to share the cost of developing new technology, including electrification and fuel cells, for the North American market. This will allow each company to spread R&D money further at a time when large investments in electrification and self-driving systems are clearly necessary to remain relevant. Ford and Volkswagen have a similar deal, as do Fiat Chrysler and PSA. Tesla has had modest deals with other automakers, but not a tech-sharing deal like GM just inked with Honda.

Sharply scaling up battery production. GM has fielded electric vehicles since the Chevy Volt hit the market in 2010. The Chevy Bolt replaced it in 2016, and GM now has plans for a full range of EVs. But EVs are still a tiny fraction of new-car sales and the slow pace of adoption limits technology breakthroughs needed to push costs down. GM is obviously trying to speed the whole process and gain a competitive advantage along the way.

GM now builds a proprietary battery system for electric vehicles called Ultium, in partnership with LG Chem. By internalizing and branding battery production, GM is indicating it views battery technology as a core competency key to establishing pole position in the auto industry of the future. Those deals with Honda and Nikola allow for GM to provide its Ultium batteries to the other automakers if desired. Expensive batteries are probably the single-biggest factory keeping EV costs high. Scaling up production, in theory, should bring costs down and give GM an edge if its batteries become a market leader. Tesla, which makes its batteries in conjunction with Panasonic, aims to accomplish the same thing. But it doesn’t have deals with other automakers that provide the scaling opportunity GM seems to be going after with the Honda and Nikola deals.

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Reaching for fuel cells. For all the hype, electric vehicles fueled off the grid aren’t the holy grail of transportation. Fuel cells powered by hydrogen might be. Hydrogen fuel generates essentially no emissions, unlike the fossil fuels that run most of the nation’s electrical grid and power up today’s EVs. Filling a car with hydrogen is about as quick as a gasoline fill-up, compared with 20 to 45 minutes to juice an electric vehicle at a supercharger. And while hydrogen is the fuel providing energy, fuel-cell vehicles still rely on electric motors similar to those in EVs to turn the wheels. That means development of electrification is an investment in hydrogen technology as well.

GM is one of several automakers investing seriously in hydrogen fuel cells, along with Honda, Toyota and Kia. Nikola plans to develop commercial trucks powered by hydrogen, using GM’s input. The technology is still far too expensive for mass-market adoption, plus there are very few public charging stations. But Nikola and Honda could both help GM begin to scale production of fuel cells, and vice versa. If technology breakthroughs ensue, the real automotive revolution could be a shift to hydrogen-powered cars in 20 or 30 years, with plug-in vehicles serving as a bridge to the future, rather than the future itself.

Can GM move fast enough to retain—or reclaim—industry leadership in the technology of the future? Until recently, investors didn’t seem to think so, and they were placing most of their bets on Tesla. But they’re now giving GM another look, and maybe even placing a side bet on the old veteran having some fight left.

Rick Newman is the author of four books, including “Rebounders: How Winners Pivot from Setback to Success.” Follow him on Twitter: @rickjnewman. Confidential tip line: rickjnewman@yahoo.comEncrypted communication available. Click here to get Rick’s stories by email.

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