Inside VW’s shift in strategy Strategic perils
Edward Taylor and Jan Schwartz take a look at Volkswagen’s $134 billion gamble on electric vehicles.
IF Volkswagen realises its ambition of becoming the global leader in electric cars, it will be thanks to a radical and risky bet born out of the biggest calamity in its history.
The German giant has staked its future, to the tune of
¤80 billion ($NZ134.36 billion), on being able to profitably massproduce electric vehicles — a feat no carmaker has come close to achieving.
So far mainstream carmakers’ electric plans have had one main goal: to protect profits gleaned from highmargin conventional cars by adding enough zeroemission vehicles to their fleet to meet cleanair rules.
Customers, meanwhile, have largely shunned electric vehicles because they are too expensive, can be inconvenient to charge and lack range.
The biggest strategy shift in Volkswagen’s 80 years has its roots in a weekend crisis meeting at the Rothehof guesthouse in Wolfsburg on October 10, 2015, senior executives said.
At the meeting hosted by then VW brand chief Herbert Diess, nine top managers gathered to discuss the way forward after regulators blew the whistle on the company’s emissions cheating, a scandal that cost it more than ¤27 billion
($NZ45 billion) in fines and tainted its name.
‘‘It was an intense discussion, so was the realisation that this could be an opportunity, if we jump far enough,’’ said Juergen Stackmann, VW brand’s board member for sales.
‘‘It was an initial planning session to do more than just play with the idea of electric cars,’’ he said. ‘‘We asked ourselves: ‘what is our vision for the future of the brand?’ Everything that you see today is connected to this.’’
Just three days after the Rothehof meeting, Volkswagen announced plans to develop an electric vehicle platform, codenamed MEB, paving the way for mass production of an affordable electric car.
For months after the Volkswagen scandal blew up, rival carmakers treated diesel-cheating as a ‘‘VW issue’’, according to industry experts. But regulators have since uncovered excessive emissions across the sector and unleashed a clampdown that undermines the business case for combustion engines, forcing a sectorwide rethink.
Now the ‘‘villain’’ of ‘‘dieselgate’’ is likely to become the largest producer of electric cars in the world in coming years, analysts say, putting it in pole position to flood the market — should the demand materialise.
‘‘Decisions to convert the Emden factory [in Lower Saxony] to build electric cars, would never have happened without that meeting [in 2015],’’ Stackmann said.
However the full scale of VW’s ambitions were only revealed two months ago when it took the industry by surprise by pledging to spend ¤80 billion euros to develop electric vehicles and buy batteries, dwarfing the investment of rivals.
It plans to raise annual production of electric cars to 3 million by 2025 from 40,000 in 2018.
It’s a risky bet.
With regulators and lawmakers, rather than customers, dictating what kind of vehicles can hit the road, analysts say the industry could produce 14 million electric cars for which there is no consumer demand.
It is also an allornothing bet in the long run.
VW, whose ID electric car will hit showrooms in 2020, has set a deadline for ending mass production of combustion engines. The final generation of gasoline and diesel engines will be developed by 2026.
Arndt Ellinghorst, an analyst at Evercore ISI, said betting on electric vehicles (EVs) could be risky because customers did not want to own cars dependent on streetcharging facilities.
‘‘What if people are still not ready to own EVs? Will adoption be the same in the US, Europe and China?’’ he asked.
But he added that EU and Chinese emissions regulations made electric vehicle adoption inevitable and that being an early industry mover in that direction offered a ‘‘positive riskreward’’.
Another byproduct of dieselgate that quickened
VW’s electric drive, according to senior executives, was a purge of the company’s old guard, who became the focus of public and political anger.
This empowered Diess, a newcomer who had joined as VW brand boss shortly before US regulators exposed the carmaker’s emission test cheating.
Diess, who joined from BMW where he helped to pioneer a groundbreaking electric vehicle, has since been appointed CEO of Volkswagen Group, a multibrand empire that includes Audi, Porsche, Bentley, Seat, Skoda, Lamborghini and Ducati.
Carmakers have failed to massproduce electric cars profitably largely because of the prohibitive cost of battery packs which make up between 30% and 50% of the cost of an electric vehicle.
A 500kmrange battery costs around $US20,000 ($NZ30,000), compared with a petrol engine that costs around $5000 ($NZ7500). Add to that another $2000 ($NZ3000) for the electric motor and inverter, and the gap is even wider.
Even electric startup
Tesla’s cheapest car, the
Model 3, is on sale in Germany at ¤55,400 ($NZ93,000), priced just below a base model Porsche Macan, a compact SUV. In the United States, Model 3 prices start at $US35,950 ($NZ53,100).
VW believes its scale will give it an edge to build an electric vehicle costing no more than its current Golf model, about ¤20,000 ($NZ33,600), using its procurement clout as the world’s largest car and truckmaker to drive down the cost.
‘‘We are Volkswagen, a brand for the people. For electric cars we need economies of scale. And VW, more than any other carmaker, can take advantage of this,’’ a senior Volkswagen executive who declined to be named said.