(Adds Rivian's response, share details, paragraphs 9, 13)

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Deal a financial lifeline for Rivian amid EV demand

slowdown

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Volkswagen seeks Rivian's advanced EV architecture and

software

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JV seen bringing economies of scale, lower operating

expenses

By Abhirup Roy, Victoria Waldersee

SAN FRANCISCO/BERLIN, June 27 (Reuters) - A few

camouflaged Audis arrived secretly from Germany early this year

at a facility of electric-vehicle maker Rivian in

California, where some 30 engineers stripped the electronics and

fitted them with the U.S. startup's harnesses and modules.

Intense testing followed at the Palo Alto, California,

facility. The tests concerned how the U.S. startup's

architecture and software - which control virtually every

function - would work in the German cars.

The mission: to see whether future EVs from Audi parent

Volkswagen could benefit from Rivian's advanced

technology, two people close to the situation told Reuters. A

third confirmed that some Audis were shipped to California.

The result: Europe's biggest carmaker said on Tuesday it would

pump as much as $5 billion into Rivian as the two automakers

agreed to a technology joint venture.

The closely guarded deal took the auto industry and

investors by surprise. Details on how it came about have not

previously been reported.

"I think it's an accomplishment in its own right that this

hasn't leaked, given the amount of work that's already happened

... and the number of people involved across our teams," Rivian

CEO RJ Scaringe told Reuters.

Rivian and Volkswagen sought to be "super secretive," aiming

"to see if the electrical topology and everything would actually

work and if they could pull it off," one of the sources told

Reuters.

The three sources asked not to be named because they were

not authorized to provide these details to media.

Volkswagen did not respond to requests for comment. A Rivian

spokesperson said in an email it was company policy "not to

comment on details of private internal updates."

'A SERIOUS CONVERSATION'

The deal is crucial for both companies.

For Rivian, known for its R1S SUVs and R1T pickups, it

provides the financial lifeline it needs to survive a sharp

slowdown in EV demand, build its less expensive R2 SUVs and, it

hopes, turn profitable.

It may also help the company obtain better deals from

suppliers while procuring components in bigger volumes with the

backing of Volkswagen and its brands including Audi, Porsche,

Lamborghini and Bentley.

Rivian shares jumped 23% on Wednesday. On Thursday, they closed

1.8% lower after the company estimated fewer EV deliveries for

the June quarter than analysts were expecting.

For Volkswagen, the deal brings low-cost, high-performance

EV technology that traditional automakers have struggled to

master.

Work at the group's software unit, Cariad - set up in 2020

with the idea of rivalling similar capabilities by Tesla

- has been riddled with delays and losses partly seen

as a result of sluggish decision-making by the group's

management.

The talks that led to the dramatic tie-up began, Scaringe

said, when he and Volkswagen CEO Oliver Blume met privately at

Porsche's experience center in Atlanta.

Two sources said the meeting was in August last year.

"We just went deep, talking product and comparing notes on

the things we like," Scaringe told reporters. "There was

immediate realization that we have some shared vehicle

interests. Quickly that led to a serious conversation as to how

can we look at working together."

'LONG WORK IN PROGRESS'

The companies got to work straight away, with a Rivian team

visiting Volkswagen in Germany last fall.

The testing to make sure everything worked together was

"like a scrimmage," Scaringe told a company town hall on

Wednesday, according to one source. Another trip to Germany

followed early this year with lawyers and software experts, this

person said.

Volkswagen under Blume, who became CEO in 2022, was less

"dogmatic" than it had been previously about what it should do

itself and where it should seek external partners, a fourth

source told Reuters.

To overcome the difficulty of integrating starkly different

work cultures that often plague such deals, Volkswagen

leadership agreed to embrace Rivian's agility, its software

chief Wassym Bensaid told analysts on Tuesday. He said that

"very clear rules and responsibilities" had been set for the

JV.

His comments were aimed at alleviating VW investor concerns

about whether the company's traditional, more methodical

approach to automaking and multiple supplier contracts would

clash with Rivian's nimble software approach.

VW shares fell 2% on Wednesday. VW investors also worry

about Volkswagen spending more when it already has high capital

expenditures compared with peers.

Certainty on the deal came after Rivian ran tests on the

Audis in Palo Alto, which arrived in the first quarter of the

year, leading to financial talks over the past couple of months,

one source said.

A fifth person, close to Volkswagen, said the companies

still need to conduct full-fledged tests to make sure VW

vehicles with Rivian software can drive with complete

functionality.

"This isn't as if it's something that we thought of a month

ago," Scaringe told Reuters on Tuesday. "This has been a long

work in progress."

For Scaringe, who grew up as a Porsche enthusiast and

restored classic 356s, it was a natural fit.

"To be able to see a Porsche on the road that has our

technology in them, I couldn't be more excited," he said.