Business Day - Motor News

VW gambles big on future of electric cars

INSIGHT/ German giant to spend $90bn on electric, dwarfing investment of rivals

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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 $91bn (R1.2-trillion) on being able to profitably mass-produce electric vehicles (EVs) a feat no car maker has come close to achieving.

So far mainstream car makers’ electric plans have had one main goal: to protect profits gleaned from high-margin convention­al cars by adding enough zero-emission vehicles to their fleet to meet clean-air rules.

Customers have largely shunned EVs 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 told Reuters. 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 €27bn 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 told Reuters.

“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 of the VW brand’s management board, Volkswagen announced plans to develop an EV platform, codenamed MEB, paving the way for mass production of an affordable electric car.

For months after the Volkswagen scandal blew up in 2015, rival car makers 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.

But the full scale of VW’s ambitions were revealed two months ago when it took the industry by surprise by pledging to spend €80bn to develop EVs 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 law makers, rather than customers, dictating what kind of vehicles can hit the road, analysts at Deloitte say the industry could produce 14-million electric cars for which there is no consumer demand.

It’s an all-or-nothing 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 petrol and diesel engines will be developed by 2026.

Arndt Ellinghors­t, analyst at Evercore ISI, said betting on EVs could be risky because customers did not want to own cars dependent on street-charging facilities. “What if people are still not ready to own EVs? Will adoption be the same in the US, Europe and China?” he said.

But he added that EU and Chinese emissions regulation­s made EV adoption inevitable and that being an early industry mover in that direction offered a “positive risk-reward.”

Another by-product of dieselgate that quickened VW’s electric drive, according to the 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 pioneer a groundbrea­king EV 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 mass produce electric cars profitably, largely because of the prohibitiv­e cost of battery packs, which make up between 30% and 50% of the cost of an EV.

A 500km-range battery costs about $20,000, compared with a petrol engine that costs about $5,000. Add to that another $2,000 for the electric motor and inverter, and the gap is even wider.

Even electric start-up Tesla’s cheapest car, the Model 3, is on sale in Germany at €55,400, priced just below a base model Porsche Macan, a compact SUV. In the US, Model 3 prices start at $35,950.

VW believes its scale will give it an edge to build an EV costing no more than its current Golf, about €20,000, using its procuremen­t clout as the world’s largest car and truck maker 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 told Reuters, declining to be named.

The car maker’s EV budget outstrips that of its closest competitor, Daimler, which has committed $42bn. General Motors, the leading US car maker, has said it plans to spend a combined $8bn on electric and self-driving vehicles.

Renault-Nissan-Mitsubishi said in late 2017 it would spend €10bn by 2022 on developing electric and autonomous cars.

“On a 2025 view, we expect Volkswagen to be the number one EV producer globally,” UBS analyst Patrick Hummel said.

“Tesla is likely to remain a niche player.”

STRICTER TESTING

VW’s test cheating using engine management software —“defeat devices resulted in the introducti­on of tougher pollution tests, which revealed in 2016 and 2017 that emissions readings across the industry were up to 20% higher under real-world driving conditions compared with lab conditions.

This has raised the bar on the auto sector’s efforts to cut emissions of carbon dioxide, blamed for causing global warming.

EU lawmakers in December agreed a cut in carbon dioxide emissions from cars of 37.5% by 2030 from 2021 levels. This was after the EU forced a 40% cut in emissions between 2007 and 2021.

“This goal is no longer reachable using combustion engines alone,” Volkmar Denner, CEO of Bosch, the world’s biggest auto supplier, said about the 2030 proposals.

Every gram of excessive carbon dioxide pollution will be penalised with a €95 fine from this year.

Car makers have struggled to lower their average fleet emissions because of a shift in customer taste towards heavier, bigger SUVs, which make it harder to maintain the same levels of accelerati­on without increasing fuel consumptio­n and pollution.

SUVs are now the most popular vehicle category in Europe, commanding a market share of 34.6%. Even Porsche, which makes lightweigh­t sports cars, relies on SUVs for 61% of sales.

NOW THE ‘VILLAIN’ OF

 ??  ?? The ID will spearhead VW’s electric-car drive when it is launched next year. Below left: VW CEO Herbert Diess is taking a risky bet with plans to raise annual production of electric cars to 3-million by 2025, from 40,000 last year.
The ID will spearhead VW’s electric-car drive when it is launched next year. Below left: VW CEO Herbert Diess is taking a risky bet with plans to raise annual production of electric cars to 3-million by 2025, from 40,000 last year.
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