Volkswagen faces tough competition from Tesla and China in the electric car race
Volkswagen's dominance in China, threatened by Tesla and China's EV market boom, could mark a turning point for the brand after the Dieselgate scandal Can VW make a comeback?
In 2019, Volkswagen, the world's largest carmaker, unveiled its ambitious plans for electric vehicles, aiming to surpass Tesla and become the top manufacturer of battery-powered cars by the mid-2020s.
The then-CEO, Herbert Diess, assured shareholders that Volkswagen was on the brink of radical change, emphasizing that the company's momentum was gaining speed like a supertanker.
Despite nearly five years passing, the Volkswagen Group, along with Audi and Porsche, has yet to undergo the transformation it had aimed for. They are still significantly trailing behind Tesla (TSLA), selling fewer than half of its US rival's 1.31 million electric vehicles (EVs) last year. To add to their woes, the German manufacturing champion is also being outperformed by new competitors from China, despite it being Volkswagen's largest market and holding the position as the best-selling car brand in the country since at least 2000.
Volkswagen is on the verge of losing its top position to local electric competitor BYD. "Volkswagen has fallen behind in the battery electric vehicle race," stated Al Bedwell, a director at GlobalData who specializes in e-mobility trends. "The main issue is China, where we anticipate Volkswagen's sales volumes to decrease this year," he informed CNN.
In a market where EV sales are expected to grow by more than a quarter in 2023, Volkswagen's sales are forecast by GlobalData, a data analytics company, to shrink by 7%. The group now sits in eighth place in China's fast-growing market for electric cars, with a share of just 3.3%. BYD, which holds the top spot, has 25% and Tesla, in second place, has 15%, according to GlobalData.
BYD electric cars at Taicang Port in China's eastern Jiangsu province. The Warren Buffet-backed firm will soon overtake Volkswagen as China's largest carmaker.
AFP/Getty Images
Investor excitement over Volkswagen's electric vehicle goals waned after initially surging in response to the carmaker's plans to build six battery-making gigafactories in Europe by 2030 and sell over 2 million electric cars annually by 2025. Despite a 60% stock surge in 2021, doubts about the company's ability to deliver have led to a 14% decline in stock value so far in 2022.
Daniel Roeska, head of EU automotive research at Bernstein, a brokerage, expressed that if the initial plans had been successfully executed, even to some extent, there would be widespread acclaim for VW. He also mentioned that while the Diess plan was impressive in its goals, it was never truly feasible.
Volkswagen appears to be facing reality. The CEO of Volkswagen passenger cars, Thomas Schaefer, acknowledged last month, as reported by Reuters, that the company's flagship brand is no longer able to compete due to high costs and low productivity. Human resources board member Gunnar Kilian also stated at the time that the company needs to make bold and honest decisions to eliminate redundancies and unnecessary burdens that are hindering good results.
Executives are currently in discussions with employees to find ways to reduce costs by â¬10 billion ($10.8 billion) in order to increase efficiency. With the Volkswagen brand's profit margins in the low single digits, it is barely breaking even, especially with car prices at an all-time high, as stated by Roeska.
"Whatever they do in this cost restructure, its definitely going to be better than not doing it⦠its also likely that they will be unable to do enough."
Dieselgate still casts a shadow
In September 2015, Volkswagen was thriving after surpassing Toyota as the top carmaker in the world based on sales for the first half of the year.
However, the company's success took a turn when the "Dieselgate" scandal came to light. Volkswagen confessed to manipulating the software in millions of diesel cars to deceive nitrogen oxide emissions tests, making them seem less harmful to the environment than they truly were.
The unexpected disclosures ultimately caused CEO Martin Winterkorn to step down, sparking years of probes and resulting in fines and settlements totaling at least $39 billion for the company.
"Dieselgate severely undermined their faith," Roeska stated. This prompted Volkswagen to implement an excessive level of compliance measures, leading to a more cautious and consequently slower approach.
And when it comes to EVs, speed trumps size, because of the rapidfire pace at which innovation is moving, Roeska added.
A VW ID. GTI Concept electric car on display at the Munich Motor Show in Germany, on September 4. The vehicle is due to come to market only in 2027.
Krisztian Bocsi/Bloomberg/Getty Images
Restructuring an 86-year-old company with 115 factories and nearly 676,000 employees worldwide to keep up with the demands of the EV race was always going to be a challenge. At the Munich Auto Show in September, the company unveiled its concept electric GTI, scheduled to be released in 2027. According to UBS's Patrick Hummel, Volkswagen's development cycle and speed to market are vastly different, making it a relatively slow-moving giant in the industry.
Will Volkswagen bounce back?
In August, UBS revised its advice on Volkswagen stock, shifting from "neutral" to "sell." Investors are now being urged to offload their shares, partly due to the escalating competition from Chinese rivals, not only in China's market but also increasingly in Europe. Volkswagen currently holds the top spot for EV sales in Europe. Despite this shift, the bank's overall perspective remains unchanged.
Volkswagen, unlike newer competitors, has the added challenge of maintaining its existing business of producing millions of combustion-engine cars each year, which still makes up the majority of the company's sales and profit.
For the first nine months of this year, electric vehicles accounted for only 8% of the company's deliveries, with 531,500 out of 6.8 million vehicles sold. Volkswagen aims to increase this to a 50% share by 2030.
In order to reach this goal, Volkswagen must work on closing the technology gap with top competitors in the industry. According to Bedwell at GlobalData, the carmaker's weak point has been its inferior software. This has been especially evident in the ID.3, Volkswagen's leading electric passenger car and the electric version of the highly popular Golf compact.
Bedwell told CNN that the on-board technology was glitchy, the software wasn't fully developed, and promises of fixes were either not delivered or came late. "VW was just perceived as being behind the curve," Bedwell said. "The early software glitches with ID.3 have been addressed but VW lags the industry leaders."
A Volkswagen ID.3 electric car is shown at the Volkswagen factory in Zwickau, Germany in February 2020. The leading electric passenger car from the brand has faced challenges with its software. (Photo by Sean Gallup/Getty Images)
Volkswagen has faced significant costs in China, leading the company to partner with local carmakers to enhance its product range and technology. According to a Volkswagen spokesperson speaking to CNN, the new models are expected to drive growth, with the ID.3 remaining one of the top-selling EV models in China.
The company also believes there is potential for expansion in the United States, where it has previously had difficulty establishing a strong presence. The spokesperson stated that EVs present a market opportunity for Volkswagen to become a key player in North America.
Volkswagen's bold battery strategy is a significant question mark. The company's multi-billion-dollar investment in its own battery production has the potential to lower costs and yield substantial rewards, but it also comes with high stakes and uncertainty. As Bedwell pointed out, getting the battery cell technology right is crucial for the success of this risky gamble.
GlobalData predicts that Volkswagen Group will sell 717,000 EVs in 2021, capturing a 7% global market share and earning the fourth spot behind Tesla, BYD, and Chinas SAIC Motor. The company is expected to become the leading EV brand globally by 2030, five years later than originally anticipated. Bedwell emphasized the company's strong resources, global brand recognition, and diverse portfolio of brands across various markets and price points, allowing it to fill more gaps than Tesla.
"There are solid reasons why VW will bounce back," he argued, "but right now they are finding life a bit tricky."
Peter Valdes-Dapena contributed reporting.
