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Published on September 13th, 2017 | by Zachary Shahan

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Shifting A Giant — Volkswagen’s Progress & Potential Pitfalls From 830,000 Gasmobiles/Month To Electric Heaven

September 13th, 2017 by  

More or less, this story could be about Daimler, BMW, Ford, GM, Toyota, Honda, or any other major automaker. In fact, while this article was in the works, a couple of Daimler execs came out and admitted a couple of the core challenges in a rather direct way. Fiat Chrysler CEO Sergio Marchionne did the same a year and a half ago in his own dramatic style. But the complexity of the story means that it’s not a black and white issue and it also goes far beyond the statements referenced above.

The question is not whether to electrify or not. The question is how quickly to electrify. And the answer is: bruises will come no matter what.

Image by Ed

In “What Goes On In The Minds Of Auto Execs?,” I went through the hypothetical finances and assets of an automotive giant in the face of a shift to electric vehicles (EVs). The figures were simplistic and, as just stated, hypothetical, but they were based on some real-world facts I dug up. The general point was that a quick shift to electric transport would be hugely expensive for the company because it would mean “prematurely” closing down engine factories, retiring patents and other intellectual property that the company spent millions or billions of dollars/euros/yen to develop, killing the profitability of various products (in-house parts for new and used gas/diesel cars), limiting the returns on gas/diesel cars recently developed, shifting from established and competitive supply streams to new supply streams that you need to invest resources to develop, getting your sales staff around the world retrained, and conceding that the engine expertise of many of your company’s top execs is no longer worth anything (expertise that was developed over the course of decades or even many centuries if you add it all up). As you can quickly imagine just reading that verbose sentence, the costs would be massive. Furthermore, how many of the company’s investors would support a quick shift? These are Volkswagen/Daimler/Ford/GM/Toyota/Honda investors, not Tesla investors, remember.

But that also is just one piece of the puzzle. A few announcements this week from Volkswagen stimulated this article and brought the balancing act into more clarity.

On the one hand, Volkswagen Group reaffirmed its intention to quickly scale up its R&D, production, and sales of electric vehicles — planning to launch 50 new fully electric models by 2025. Included in that announcement was this seemingly frank line from Matthias Müller, Chairman of the Board of Management of Volkswagen Aktiengesellschaft: “We have got the message and we will deliver. This is not some vague declaration of intent. It is a strong self-commitment which, from today, becomes the yardstick by which we measure our performance. The transformation in our industry is unstoppable. And we will lead that transformation.” Furthermore, the company said, “there will be at least one electrified version of each of the 300 or so Group models across all brands and markets” by 2030.

On the ground, deeper in the background, Volkswagen Group has apparently been working to develop the critical battery supply chain that will either enable the goals mentioned above or eventually reveal them as unrealistic fantasies or vaporware. It reported this week that it has tenders in the works for €50 billion worth of battery orders. Furthermore, in July, Reuters reported that Glencore had “signed a major deal to sell up to 20,000 tonnes of cobalt products to a Chinese firm, a move that in turn helps Volkswagen secure car batteries for its shift to electric vehicles, four sources said.” These two items hint at a fairly mature pursuit of batteries for large-scale production of electric vehicles.

That was all on just one hand, though. On the other hand, there was this snapshot from a day earlier: “In August 2017, the Volkswagen Passenger Cars brand delivered 495,200 vehicles throughout the world.” That was a shockingly large number to me, which got me wondering how many vehicles Volkswagen Group sells in a year. If you multiply that number by 12, you get nearly 6 million vehicle sales in a year. But summer months are slow for sales, and the total in 2016 was actually 10.3 million. (Who counts those sales!) Apparently, Volkswagen expects that figure to grow quite a bit in the next 8 years, as it is projecting that its electric car sales in 2025 could be 25% of all its sales, up to approximately 3 million sales a year. Looking at that in context, that means an increase of ~2 million annual Volkswagen Group sales. This is where things get interesting. …

Frank Lindenberg, Vice President of Finance and Controlling at Mercedes-Benz Cars, this week said: “In the beginning of the cycle we believe that we will have to face a significantly lower margin — for some vehicles, half of the margin of the vehicles they replace.” Furthermore, this challenge could keep Mercedes-Benz “from meeting its return on sales target.” What does that have to do with Volkswagen? Well, it is surely facing the same challenge. A shift to 25% electric cars will show up on its quarterly reports by pulling down the company’s profit margins and overall profit. That could look bad to investors. However, Volkswagen Group appears to be banking on something else in order to water down this financially challenging effect. It seems that the company is banking on dramatic growth in demand for its gasoline- and diesel-powered cars as well — approximately the same amount of growth purely on a unit basis. Perhaps that would help Volkswagen to weather the storm of a shift to EVs, but it’s also counter to the whole purpose of a shift to electric transport. Additionally, if that extra demand doesn’t manifest, what will that mean for Volkswagen’s electric vehicle plans?…

One more thing to consider: of those 495,200 Volkswagen Group deliveries in August, 265,400 (more than 50%) were in China. Almost certainly, China will remain the biggest auto market, for Volkswagen and others. Western automakers have been lobbying the Chinese government hard to not require “too fast” a shift to electrification there, but if they are counting on moving a lot of non-electrified cars in China in 2025, they may be engaged in some drastically faulty wishful thinking. Here’s a final announcement from this week: “China’s vice minister of industry and information technology, Xin Guobin, has announced that the Chinese government is currently working on a timeline to end both the production and sales of fossil fuel vehicles.”

If Volkswagen’s transition to EVs is going to be smooth enough to not throw its finances into a hurricane, it probably needs several things to go as planned: strong growth of overall sales, significant growth in gas/diesel car sales, EV growth that’s not too strong, and strong growth (including growth of fossil cars) in the Chinese market. What happens if EV demand is stronger than anticipated? What happens if EV growth is as projected but non-EV growth isn’t? What happens if Volkswagen Group’s electric offerings aren’t compelling enough to compete well in the new market, or the company runs into supply chain challenges?

A dramatic technological transition of one of the largest industries in the world is not simple. It’s a race between giants who must cut off their toes and small sprinters in high heels that have to avoid falling on their faces. Neither is in a particularly easy situation, but it’s sort of tough to convince your entire body that cutting off your toes is in its best interest.

But getting back to the fake IAA poster at the top, something else crossed my mind late in this article: These years-in-advance announcements and concept cars may be frustrating to many of us who want to see compelling electric cars on the market tomorrow last year, but they are a signal to investors buyers where they are headed. The help investors and buyers slowly get their heads around the tremendous shift in the market and in the company’s business. It wards off reactionary freakouts from both investors who are too focused on quarterly finances and buyers who might land on an auto dealer’s lot and then run away if most of the cars all of a sudden came with a plug and no place to pump gas.

I know — consumers should be able to quickly learn about electric cars’ many benefits, the smoother & quieter ride, the instant torque (acceleration), the convenient home & workplace charging, the clean area of the back bumper where no tailpipe is needed, etc. But we have to be honest, on the S-curve of technology adoption, there are always laggards and there are plenty of mass market buyers who need to hold someone’s hand and slowly walk into the next technology era. Additionally, while we’re being frank, automakers are nervous and self-conscious about their own electric vehicle readiness. Can they compete? Will they compete? Will a young upstart dunk all over them and leave the crowd laughing?

Related:

What Goes On In The Minds Of Auto Execs?

rEVolution (Video)

50 New 100% Electric Car Models By 2025 From Volkswagen Group!


Check out our new 93-page EV report, based on over 2,000 surveys collected from EV drivers in 49 of 50 US states, 26 European countries, and 9 Canadian provinces.

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About the Author

is tryin' to help society help itself (and other species) with the power of the typed word. He spends most of his time here on CleanTechnica as its director and chief editor, but he's also the president of Important Media and the director/founder of EV Obsession, Solar Love, and Bikocity. Zach is recognized globally as a solar energy, electric car, and energy storage expert. Zach has long-term investments in TSLA, FSLR, SPWR, SEDG, & ABB — after years of covering solar and EVs, he simply has a lot of faith in these particular companies and feels like they are good cleantech companies to invest in.



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