Inside Nikola, The One-Time Wall Street Darling Mired In Controversy

The last couple of months can only
be described as a roller coaster ride for battery-electric and
hydrogen-powered semi truck maker Nikola. In just a couple of weeks,
Nikola has gone from the highest of highs to the lowest of lows. On June 9th, just a few
days after its initial public offering, Nikola's market cap briefly surpassed
that of Ford, making its founder, Trevor Milton, a
billionaire in the process. The hot, new electric vehicle maker,
Nikola, has been surging since its June 4th debut. Up over 87 percent. For a company that hasn't brought
a product to market and has practically no revenue, the
valuation raised some eyebrows. Still, a major deal
with a trusted U.S. automaker seemed to
legitimize Nikola. Nikola, forming a strategic
partnership with General Motors. This morning, Nikola Badger will be
engineered and manufactured by GM. GM getting an 11 percent ownership stake
in Nikola as a result and the right to nominate one
director to the board.

But only a few days
later, Nikola began to unravel. Hindenburg Research put out a
report yesterday accusing Nikola of being an intricate fraud. And the hits have
just kept on coming. Trevor Milton, the founder of
electric truck company, Nikola, is voluntarily stepping down as executive
chairman and giving up his board seat. This move comes
after short seller, Hindenburg Research, accused Milton of making false
statements about Nikola's technology in order to try and grow
and secure partnerships with automakers. CNBC has now confirmed that two
women have come forward with sexual assault allegations against Nikola
founder, Trevor Milton.

I think the euphoria got ahead of
itself and it really became a 'nightmare on Elm Street'
few weeks for Nikola. And I think right now going forward,
it's a 'prove me' stock that's squarely in the investor penalty
box until they prove otherwise. With the SEC and the DOJ now
both reportedly looking into Nikola and the company's deal with GM uncertain,
what does the future hold for the one-time Wall Street darling? CNBC visited Nikola's headquarters in
Phenix, Arizona, to get a firsthand look at its Nikola
Two, hydrogen fuel-cell truck prototype. So he's going to
turn on the system. So he pushes that button and it
will turn on the high voltage system.

And to find out if Nikola can
be a real contender in the emerging hydrogen truck market. The morning of our visit, CNBC met
with members of Nikola's team at a racetrack near the
company's headquarters. The Nikola prototype that we saw was
built about two years ago, but there were some
technical difficulties. So the fuel cell did not boot up. Cycle T-15 or? There's no current output
from the fuel cell. CNBC returned to the track a few
hours later, when the Nikola team was able to get the semi going. Typically in a class 8 diesel truck,
you have things like turbo that has to spool up and you have
the torque converter that has to spool up. In the Nikola Twos and
the Nikola Tres it's instant torque. There's no spool up for torque, so
you have torque right away, which gives you a much more responsive
reaction t ime for the driver.

Nikola has an ambitious
list of business ventures. It positions itself as an energy company
as well as a maker of power sport vehicles, though the latter seems
to have become a footnote in the company's business plan. Nikola's main focus is to disrupt
the over $1 trillion global trucking market by replacing
diesel semis with zero-emission, hydrogen fuel-cell and
electric trucks. The hydrogen fuel-cell truck, when
you're looking at longer distances where you need higher power density
and payload and weight becomes more significant, we believe that that
is the better solution for customers. Batteries are going to
be more relevant for shorter distances and operations where a
customer's truck leaves from a certain location and then returns
to that location over time.

The company was founded by Trevor Milton
in 2015 in Salt Lake City, Utah. Like the inspiration of
another famous electric carmaker, the name Nikola comes from inventor, Nikola
Tesla, who is best known for developing the basis of
alternating electric current. The company's headquarters have
since moved to Phoenix. In July, Nikola broke ground on a
$600 million factory about an hour away in Coolidge, Arizona. CNBC did not visit the site of
the factory where Nikola says that it is on schedule to produce its Nikola
Tre semi starting in 2022 and its Nikola Two trucks
starting in 2023.

The Nikola Tre is
a battery-electric vehicle. It's powered only by batteries. Where the Nikola Two will be powered
by a hydrogen fuel cell, which takes hydrogen on board and combines it
with oxygen from the air and makes the electricity that way. The only byproduct of
that is water. It's a really elegant way to power
a heavy-duty truck and allows you to get a heavy-duty truck a lot
farther than you can with batteries. So two different trucks,
two different missions. Nikola says it's already building five
prototypes of the Nikola Tre in Germany for testing. And that initial production of the Tre
will be done by Nikola partner Iveco in Germany. Along with building
semis, Nikola is attempting to construct a network of 700 hydrogen
stations in North America and an additional 70 stations in Europe in the
next eight to 10 years to fuel its trucks.

The company has said it will make
its own hydrogen by using energy from solar and
other renewable resources. Nikola plans to bundle the cost
of maintenance, hydrogen fuel and its semis as part of a seven
year or 700,000 mile lease. Nikola, along with GM, also plans
to build a consumer pickup truck called the Badger. CNBC did not get
to see the Badger while in Phoenix. So far, only renderings of
the vehicle have been made available. Nikola said the pickup was
not slated to debut until December. The original idea with GM was
that we would partner on the Badger pickup truck. They would provide their Ultium
battery and their hydrotech fuel-cell system, and we would provide
the concept and the design. But more importantly, the relationship was
going to be about the technology that GM can help bring
to the table here at Nikola. News of the deal back in September
brought a surge to Nikola stock.

If you looked at the company
prior to its announcement with General Motors, you essentially had an
undercapitalized startup with no manufacturing capability. So they were essentially a
design firm, an idea. They get a partnership with GM
that includes access to technology that's incredibly difficult to develop
on your own, A, and manufacturing capability that is
incredibly expensive and difficult to develop on your own. And all
of a sudden, Nikola becomes like a legitimate player where
they weren't before. For General Motors, it seemed like
a can't lose proposition initially because they essentially get to ride
the coattails of this SPAC trend where somebody gets huge stock
appreciation just for, essentially, having an outlet to sell
their technology and to contract manufacturer, effectively, someone
else's vehicles. But the partnership and the fate of the
Badger now seem to be up in the air, following fraud and
sexual assault allegations against Nikola founder and former
executive chairman, Trevor Milton.

Still, there is hope that
the deal will go through. We're totally excited
about the opportunity. We've been developing fuel cells here
for commercial use for a while. We've got a joint
venture with Honda. We think we have a technological
lead on it, Nikola agrees. So the opportunity to put our fuel cells
into a Class 7 and 8 vehicle is is spectacular. So we know there's great operational
cost advantages, there are great efficiencies and there's
great opportunity. So we continue to to work
on the opportunity with Nikola. A public filing by Nikola says the
deal may be terminated by either side if it's not
close by December 3rd. The Badger was something we were doing
because a lot of people were interested in it. And we said from
the beginning that if we build the Badger, it will be with a partner.

If we don't have a partner,
we probably won't build the Badger. In the meantime, Nikola is focusing
on its core business of building semis. We have a backlog of over
14,000 orders for the Nikola Two. We haven't disclosed our backlog for
the other vehicles at this point, although we have
disclosed some customers. We have disclosed our contract with
Anheuser-Busch for 800 trucks and our contract with Republic
Services for 2,500 trucks. Despite this early interest, Nikola's future
remains in limbo, as a slew of controversy
surrounds the company. Perhaps nowhere is Nikola's short and
turbulent history as a company represented better than in the roller
coaster ride its stock price has taken since going public. Nikola went public on June 4th through
a transaction known as a SPAC. The process foregoes the traditional
IPO, which is often lengthy, expensive and requires the disclosure
of a lot of information. As soon as they created the new
company through the SPAC, they, all of a sudden, got a
huge market capitalization. When you're doing an IPO, you have
to put out what's called an S-1.

That essentially is the full
disclosure of everything about your business. And it has a long
list of essentially warnings and risk signs about reasons why
you might fail. With a SPAC, you don't
have to do that. Nikola's stock skyrocketed on June
9th, after then executive chairman, Trevor Milton, tweeted that reservations of
the Badger would open up June 29th. Since then, the
stock has taken numerous hits. Throughout the years, Nikola, and in
many cases, Trevor Milton in particular, have been criticized
for touting breakthrough technology that was later revealed to be
vaporware and inflating the company's progress. For example, in December
of 2016, Milton unveiled Nikola's first prototype semi-truck,
the Nikola One. Oh, that thing is so awesome.

Oh, we've been waiting so long
to show this to the world. You've no idea. It's it's hard to
even contain my emotion about this. At the event, Milton explained that visitors
would be able to go on stage and look at the truck,
but not enter the cabin. We will have a chain on the
seats to prevent people from coming in just for the safety. I don't want
someone to end up doing something and driving the truck off the
stage, but this thing fully functions and works, which
is really incredible. Despite the grand reveal, at the time,
Nikola was far from having a working prototype. According to a
report published by Bloomberg earlier this year, the truck that Nikola
showed off to the crowd in December of 2016 was not only
inoperable, but it also lacked components, including gears, motors and
the hydrogen fuel cell to power the vehicle.

In the months
following the Nikola One unveiling, Nikola secured partnerships with big
names in the automotive industry, including Bosch, fuel-cell
maker, PowerCell AB, and hydrogen company, Nel. Then, in January of 2013, Nikola
released a video titled 'Nikola One electric semi truck in motion.' The
video seemed to show the Nikola One speeding along an empty road. Two years later, the video, among 43
or so other claims, was cited as evidence of fraud by Milton in
a scathing report released by short-selling firm,
Hindenburg Research. Hindenburg said that Nikola had staged the
semi to make it appear as if it were moving by
rolling it down a hill. Nikola rebutted the fraud claims, saying
that there were dozens of inaccurate allegations in
the report. Milton took to Twitter, calling the
report a 'hit job' and pointing out that the short seller stood
to gain from tanking Nikola stock.

But the company didn't dispute Hindenburg's
claim that it had staged a video showing the Nikola One appearing
to be functional when it wasn't. I asked Nikola's CEO
about the Bloomberg and Hindenburg reports over a remote interview. How do you respond to critics that
say that Nikola has a track record of exaggerating the capabilities
of its vehicles? So we built the Nikola One back
in 2016 as a concept prototype, and during the manufacturing, the building of
that prototype, we made a pivot to hydrogen power. The original concept for the
Nikola one was natural gas. So even during the construction of
that prototype back in 2016, we were in the process of pivoting
to our current business model, which is hydrogen-based for
a fuel-cell truck. So why did Nikola end up saying
that that video, the motion one video, the truck was moving by itself
when it when it clearly wasn't? Our point is that the Nikola One
was a groundbreaking prototype and we learned a lot from
from building it.

And that helped give birth to
the business model that we've been following in the years since. Back in 2019, Nikola teased having
invented a new battery cell technology that Milton said is 'the
biggest advancement we have seen in the battery world.' It later came
out in a lawsuit that Nikola intended to obtain this breakthrough
technology by acquiring battery company ZapGo. Nikola sued ZapGo after finding out
that the battery technology that ZapGo claimed to have didn't exist. In a subsequent press release, Nikola
refuted that ZapGo was the inventor of this breakthrough battery
technology and says that the battery advancements are related to
an R&D partnership with an academic institution.

Still, Nikola seems to be
outsourcing battery production to suppliers. There are some claims that Nikola
has not come up with any of its own battery and fuel-cell
tech, but is instead using technology built by GM
and Romeo systems. What's your response to this? Batteries for vehicles use cells, that
are put into modules, which are then put into battery packs. Nikola owns our
battery pack design. The battery pack that we're using
on the prototypes in Germany today, contains modules that were developed by
Romeo and contains cells that were provided by another supplier. Cells are provided by only a
handful of people for almost all vehicles worldwide. In the past, Milton
has also often touted that Nikola is able to produce hydrogen
at an extremely low price. Here he is on
the Tesla Charts podcast. We've been able to chop the cost
of hydrogen from $16/kg down to, we're down below $3/kg on our hydrogen
now, which is, $4/kg as parity with diesel.

Again, I
asked Nikola for clarification. Is Nikola currently
producing any hydrogen? Nikola is not producing
hydrogen at the moment. Nikola has drawn criticism even
for technology that does exist. One of the specific claims that
Hindenburg made was that Nikola regularly uses off-the-shelf products from
third parties and then claims that it makes
its parts in-house. One of the things that they pointed
to was the inverters in the Nikola Two powertrain that were
made by Cascadia Motion. Why did Nikola say that its
technology was mostly proprietary and then backtrack and say that
it's mostly an aggregator? Kind of, which is it? So Nikola,
from the beginning has been a partner company. We partnered very
early on with Bosch. Particularly on the e-axles, on
the batteries, on inverters. We've partnered with Bosch, on those
on those components for several years now. We've partnered with other
companies on other parts of our business model.

Nel for hydrogen
stations and things like that. So we've been very clear about the
fact that we use partnerships in developing our vehicles. But the software, the design of
the components overall, that's what Nikola does. Nikola is even embattled
in a lawsuit with Tesla. In the suit, Nikola accuses Tesla
of stealing the design for the Tesla Semi from the Nikola One.

In a countersuit, Tesla claims that
Nikola itself stole the design from Croatian automaker,
R imac Automobili. It's not necessarily the end of the
world if Nikola does not own this special technology. Inside the auto industry, it is
extremely common to buy technology from suppliers. What's uncommon is having someone say that
you are the one making the technology when you're not, and that's
a different issue than whether there's a viability to
the company, or not. Even if Nikola recovers from the
mounds of controversy, the company has staked its success on a
technology that's proven difficult to build out. Hydrogen fuel cells have
not really been developed for the commercial segment because there are
a huge number of obstacles. One, the physical fuel
cell is very expensive.

To be able to break a hydrogen atom
apart, you need to hit a catalyst that's usually made a very expensive
material like platinum or gold. Basically, battery-powered and fuel cell-powered
vehicles are not too different as both use electricity
to power an electric motor. The former stores electricity in
the battery until it's needed, while, in the latter, hydrogen fuel
chemically fuses with oxygen in an electrochemical reaction. The reaction produces an electrical
current and releases water vapor as a byproduct.

Beyond the cost of
the fuel cell itself, a t the moment, producing and storing hydrogen
is still expensive and difficult. In June, Nikola said it
purchased over $30 million worth of electrolyzers from Nel, which Nikola says
it will use to equip its first five hydrogen filling stations
to produce the necessary hydrogen on-site. It's not like electricity. It's like a fuel that
you have to refine. And then once you have it, it's
hard to squash it down, right? It wants to go everywhere. So hydrogen has to be kept
under a huge amount of pressure. You do have to have
very expensive, extremely high-pressure tanks. But by far the biggest hurdle
is the billions of dollars of infrastructure that needs
to be built. You have to build the stations.

You have to build
the refining capability. You have to have the trucks that
can move hydrogen to the stations or the pipes under the ground
to move them to stations. You put it all together and it's
like, wow, there's an absolutely lot of things that have to happen before
hydrogen fuel cells are going to proliferate in a large scale. According to the U.S. Department of
Energy, there are just over 40 public hydrogen fuel stations in the
country, with all but one in California. My speculation is that it
will be into the 2050, 2060 range before we have
really wide-scale, hydrogen fuel-cell infrastructure. Nikola has been vocal
about plans to partner with established energy companies as a way
to build out its hydrogen infrastructure. But those plans
have hit a roadblock. Still, Nikola is betting on
hydrogen fuel-cell technology for two reasons. You essentially get
much faster refueling times. Five minutes for the hydrogen
fuel-cell vehicle compared to 45 minutes for the battery vehicle. You also, with a hydrogen fuel-cell
vehicle, get about five times better energy storage per
unit volume and weight. So that frees up more room
in the automobile for other things, passenger space, storage space, and also
allows you to go further.

So you're going to get longer
ranges with a fuel-cell vehicle. Having more space is especially
appealing for the trucking market, where every spare inch can
be used to transport extra, revenue-building cargo. Today, new developments are starting
to make fuel-cell technology cheaper, and new government regulations
are giving the hydrogen market a boost. In addition to
Nikola, Toyota and its truck subsidiary, Hino, are working on a
hydrogen truck, as is Hyundai. France's oil and gas giant, Total,
also recently invested in hydrogen fuel-cell truck and bus
startup, Hyzon Motors. But one car maker who stands
diametrically opposed to using hydrogen fuel tech for vehicles is Tesla.

In fact, Elon Musk has gone as
far as calling the technology 'mind bogglingly stupid.' Instead, Tesla is
working on an electric semi-truck, which it hopes to
start delivering in 2021. Still, analysts don't see Nikola and
Tesla as being in direct competition . Currently, I think they
only compete in the sense that they are both in a cutting-edge
technology and that people may group them together in their minds. But in the actual market,
they don't compete very much. It's easy to lose track of
Nikola's goals among the company's many projects and ever-changing
business model. But Nikola's success will ultimately hinge
on whether or not it can bring hydrogen fuel-cell technology to
market safely, reliably and cost effectively. The biggest challenges
we see facing the company going forward are
hitting our milestones. We've got our five Nikola Tre
prototypes being completed in Germany. And then we move on to
production of Tre next year.

We break ground on
hydrogen stations next year. We start on prototypes of
the Nikola Two next year. And then we move on to the
production of the Nikola Two in 2023. Even if Nikola manages to
hit these milestones, profitability likely remains distant. As of Q2 of 2020, the only
revenue that Nikola has recorded has come from solar panel
installations for Milton. Even the CEO seemed
confused by this. I'm not sure exactly
why that was included. We're a pre-revenue company. We're going to make money by
building trucks and by providing fuel for them. In order to get from where
they are now to even their first product, t here's a lot of capital
that will have to be spent. As for how critical the GM partnership
is to the success of Nikola, analysts disagree.

If the GM partnership falls
apart, dark days ahead. The company already has sort of
a black cloud over their head. And I think investors could hit
the sell button, given there's more risk to execution in the near term. I don't think despite the revelations that
have come out, that this is necessarily a bad move
by GM, anyway. Startups generally come
from two things. They either are a technology that
is seeking a business, right? Or they are a business idea
that is seeking technology to implement it. So if Nikola is simply
an interesting business idea, where they have to collect together technologies
and then eventually develop their own, that's what Tesla did. Tesla didn't have technology
when it started. But it does now. And so I think
that it's not crazy to invest in a company like this, even if they don't
have a lot of their own technology.

You May Also Like