Rivian just got a $5 billion investment from Volkswagen, and it could help Rivian solve one of its biggest problems

• Volkswagen will invest up to $5 billion in Rivian, an EV maker that's struggled with profitability.
• Rivian, which lost $1.4 billion in the first quarter, aims to develop a more affordable SUV.

Volkswagen just inked a deal to invest up to $5 billion in Rivian, the electric-vehicle maker that has, like its peers, struggled to turn a profit.

The deal, announced Tuesday, creates a joint venture focused on developing software to be used in both companies' cars. It also affords Rivian, which lost $1.4 billion in the first quarter, a financial cushion to continue developing a much cheaper SUV.

The partnership is expected to "lower cost per vehicle by increasing scale and speeding up innovation globally," the joint announcement said.

Software is one of Rivian's strengths, Goldman Sachs analysts noted in January — "a key part of the value proposition and monetization opportunity for Rivian."

But the company has struggled to sell more cars profitably. It's still just a small slice of the overall EV market. Rivian delivered nearly 14,000 cars in the first quarter, compared with Tesla's almost 390,000.

The race to create cheaper EVs is heating up across the industry, as car makers confront an affordability problem that has narrowed the potential buyer pool.

Rivian's current SUV costs nearly $80,000. In March, the company introduced two smaller SUVs designed to reach more mainstream customers.

"These represent our future," CEO RJ Scaringe said of the new models.

One of the models, called the R2, is slated to launch in 2026 and will cost $45,000, about the same as Tesla's Model Y.

The R2 "will be foundational to Rivian's long-term growth and profit potential," the company said in its first-quarter earnings report.

Tesla has been teasing a $25,000 electric vehicle for years. Last year, Tesla's top engineers told investors that the company's next generation of electric models would cost 50% less to make. But the production road has been bumpy — last month, Tesla pulled back on plans to roll out a new manufacturing method for its electric cars, Reuters reported.

In April, Ford CEO Jim Farley said the company is working on new affordable EVs that could be priced as low as $25,000 to $30,000.

The Volkswagen news sent Rivian shares up 50% in after-hours trading.