Rivian's Next 2 EVs Have a Secret Weapon That Could Transform Its Profits

It's an exciting time for Rivian (NASDAQ: RIVN) investors with the pivotal R2 ramping up production, a second shift that just came online late Q3 with a third shift planned next year, and the R3, which is expected to launch from its upcoming Georgia factory. Here's the thing about Rivian's drive toward profitability: The company isn't interested in the business of making cheaper vehicles; it's in the business of making vehicles more cheaply. Let me explain how.

The game of leverage

There was a simple yet phenomenal example of exactly how Rivian is making vehicles more cheaply, rather than cutting features and options, which would remove value for consumers. That example came in an interview between The New York Times and Rivian CEO RJ Scaringe, when the latter noted the difference in leverage.

Scaringe essentially said that when Rivian prepared to launch its first R1 vehicles, the young, unproven, and obviously unprofitable electric vehicle (EV) maker had no negotiating leverage with suppliers that took on the risk of Rivian failing. Rivian's lack of leverage forced it to budget for supplier pricing premiums of roughly 40% to 50% -- such is the game in business.

My, how the tables have turned. Now Rivian boasts highly rated vehicles, improving gross profitability, an expanding vehicle lineup, and more credibility as an automaker and EV brand. Those same suppliers pushing for a 40% to 50% premium no longer have the same negotiation leverage over Rivian, giving the EV maker the ability to negotiate lower prices. All in all, the R2 bill of materials is expected to check in at about half of the R1's.

Image source: Rivian.

Savings without sacrifice

Those are only examples of leverage and pricing; there's a long list of other improvements and increased efficiency with less redundancy. One massive example is Rivian driving an expected component-cost savings of 70% by swapping the R1's double-wishbone architecture with a strut design. Another example can be found in the underbody, where investors will find roughly 90% fewer parts and about 30% lower piece cost driven by large castings. One last one for the road: Rivian even managed to reduce rear-door parts by 65% and expects a 55% cost savings from the redesign.

We haven't even touched on the R2's lower pricing opening a much bigger consumer market that should drive scale higher. Those examples also didn't touch on the R3 crossover, which is slated to launch at the EV maker's Georgia factory, which opens in 2028. Scaringe noted in the interview that the R3 crossover pricing will even check in "materially lower" than the R2 and is expected to share the same platform.

Why it matters

For investors, Rivian's ability to reduce manufacturing costs, without sacrificing quality or value, could prove far more important than the lower sticker prices of its upcoming vehicles. That's because the combination of more affordable models, improved supplier pricing, and growing production scale could eventually drive both higher sales volumes and a stronger automotive gross margin.

To be fair, lower manufacturing costs don't guarantee improved profitability. The R2 and R3 will also sell for far less than Rivian's R1 vehicles, and ramping up production can bring additional expenses, early inefficiencies, and quality-control challenges.

But the opportunity is clear: Rivian is developing vehicles that can reach a much larger market while simultaneously finding ways to manufacture them more efficiently. If the company can turn those advantages into sustainable margins, its next generation of EVs could fundamentally change its path to profitability.

After all, the real opportunity isn't simply for Rivian to build and sell cheaper vehicles. It's for Rivian to build vehicles cheaper -- and become a more profitable automaker in the process.

Daniel Miller has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.