Seeking to become the Tesla of the electric semi-trailer truck sector, the startup brand Nikola has made several claims about how far its developments have come. In a promotional video (see https://www.youtube.com/watch?v=IAToxJ9CGb8), the brand’s logo is prominently displayed on the front bumper of a semi moving along a road. Critics allege the video implied that Nikola had been able to build hydrogen-powered fuel cells with sufficient power to propel a massive truck; in truth, the truck was simply rolling. The company has not reached a point at which its technology can power a semi. A formal complaint initiated a federal investigation, but in addition to sparking interesting questions about advertising puffery, the situation reveals just how cutthroat business-to-business interactions and competition can become.
According to Nikola, even as it acknowledged that the video might appear misleading, it was a basic advertising appeal, and the complaint was lodged because its source, a hedge fund called Hindenburg Research, had shorted on Nikola’s stock. (We cannot help but note the historical resonance, or perhaps irony, of a company called Hindenburg complaining about hydrogen-powered vehicles.) That is, if Nikola’s stock prices fall, Hindenburg makes more money. After Hindenburg publicized what Nikola called false allegations, the company’s stock price fell by approximately 20 percent.
In contrast, in weeks prior to the hedge fund’s report, Nikola had announced a new partnership with General Motors, which had driven its stock valuation substantially higher. That agreement offered other benefits as well. In return for an 11 percent stake in the startup firm, GM agreed to supply production facilities for future Nikola trucks, as well as sharing its knowledge and resources with regard to batteries and fuel cell technologies.
These resources are critical for Nikola, whose business model entails leasing hydrogen-powered, massive trucks to corporate clients, such as Anheuser-Busch, Amazon, or Republic Services (a waste collection service company). Its value proposition issues the promise that though the costs of leasing the high-tech trucks might be higher, the users’ fuel costs will be minimal. It also plans to set up hydrogen refueling stations, to provide an ongoing service to these business clients.
Several of these collaborators already have entered into agreements with Nikola. If it suffers substantial damage to its brand reputation due to the allegations of fraud though, those partners might grow less willing to wait for it to complete its development efforts. Of course, if the allegations are true, and Nikola ultimately cannot deliver on its promise of hydrogen-based delivery trucks, the point might be moot anyway.
- View the Nikola video at the center of the allegations. Do you regard it as marketing puffery, or is it misleading?
- What are Hindenburg Research’s motivations: bringing an unethical practice to light or benefiting its own hedge fund performance? Or both?
- Should Nikola’s partners and clients continue to work with it? What risks do they confront if they do so?
Source: Ben Foldy, “Justice Department Probes Electric-Truck Startup Nikola over Claims it Misled Investors,” The Wall Street Journal, September 15, 2020; Stephan Wilmot, “Nikola Is Only as Strong as Its Tech Partnerships,” The Wall Street Journal, September 15, 2020