What happened 

Shares of electric truck start-up Nikola (NKLA -2.02%) were sharply higher on Tuesday morning, after the company announced that auto giant General Motors (GM 0.24%) is taking a $2 billion stake and will build its Badger electric pickup truck. 

As of 10:30 a.m. EDT, Nikola's shares were up about 38.5% from Friday's closing price.

So what

This is a huge deal for Nikola, which just checked off a whole bunch of boxes on its go-to-market to-do list. Here are the key points. 

  • GM will engineer, test, and manufacture Nikola's electric Badger pickup. The Badger will use GM's Ultium batteries, to be manufactured by GM's joint venture with LG Chem, and the Hydrotec fuel cells developed and manufactured by GM's joint venture with Honda Motor (HMC -3.17%).
  • GM will also supply Ultium batteries, Hydrotec fuel cells, and related parts for Nikola's upcoming electric Class 8 (tractor-trailer) trucks. 
A prototype Nikola Badger, an electric full-size pickup truck.

GM will engineer, test, and manufacture Nikola's electric Badger pickup, in both battery-electric and fuel-cell versions. Image source: Nikola Corporation.

And here's what GM gets in return for engineering and testing services and access to its global parts bin. 

  • GM will receive $2 billion of newly issued Nikola stock (at $41.93 per share), and the right to nominate one director to Nikola's board. 
  • GM will receive "cost-plus" payments from Nikola for the parts it supplies and for the contract manufacturing of the Badger. Nikola will also cover the costs of tooling and setting up the Badger's assembly line. 
  • GM will retain 80% of the electric-vehicle tax credits generated by the Badger trucks it manufactures, and will have the first right of refusal to buy the remaining 20% from Nikola. (These tax credits will help it avoid penalties related to the sale of internal-combustion vehicles in California and other U.S. states.)

Note that GM is not investing any cash in Nikola in return for its stake -- and that Nikola doesn't have to pay GM any cash up front. 

Now what

On paper at least, both companies stand to do very well here. Nikola estimates that it will save more than $4 billion in battery and fuel cell costs over the 10-year life of the GM deal, and an additional $1 billion-plus versus what it would have spent to engineer, validate, and begin manufacturing the Badger on its own. 

For its part, GM estimates that it will realize a total of over $4 billion in benefits from the payments from Nikola, the added manufacturing scale to its battery and fuel-cell programs, the tax credits, and the potential appreciation of its Nikola shares.

For auto investors holding Nikola shares, this deal is a powerful validation of the company's business plan and technology -- and a big step toward getting its trucks to market. That's why the stock is surging today.