Volkswagen’s Failed Transition to Pure Electric Vehicles

Taking the falsification of fuel efficiency data as an opportunity, VW turned to rationalization countermeasures and electrification, but did not achieve significant results due to stagnation in battery procurement and software development, among other things. VW’s sales in China in 2022 are 25% lower than in 2019, declining for the third consecutive year. To turn things around, VW funded Xiaopeng and Guoxuan High-Tech.

Germany’s Volkswagen is fretting about how to deal with electrification and improve profitability at the same time. Taking the 2015 revelation of falsified tailpipe emissions as an opportunity, VW transitioned to pure electric vehicles (EVs), but has not achieved significant results due to stagnant battery procurement and software development. In the main Chinese market, VW is also losing share due to price competition.

VW announced on Nov. 1 that the location of its planned battery Cell plant in four Eastern European countries, including the Czech Republic, would be postponed again. VW’s CEO Oliver Blume said in response to the reason for the delay, “European demand for EVs is not as strong as expected.” However, in Europe, EV sales from January to September exceeded 1.1 million units, accounting for 14% of new car sales, and in August, for the first time in a single month, accounted for more than 20%.

VW has a very serious problem of its own. VW has followed through on its policy of investing 94 billion euros in EVs and the like after 2017. In order to get rid of the dependence on Chinese batteries, it launched its own production. However, the start of mass production by funded battery maker Northvolt has been significantly delayed. In terms of software strategy, which is the core of pure electric vehicles, the development of the subsidiary CARIAD has also been slow.

Taking the falsification of fuel efficiency data as an opportunity, VW turned to rationalization countermeasures and electrification. Data from QUICK FactSet shows that the EBIT (earnings before interest and taxes) ratio improved from 2.7% in 2015 to 7.68% after three years, but has since hit a ceiling.

In terms of R&D expenses as a share of operating income, VW is higher than rivals Toyota, Tesla and BYD after 2020. Including batteries, the cost of EVs is thought to reach 1.5 times that of engine cars, and VW lags behind Tesla and others in cost reduction. Development costs have become a heavy burden, and VW is also caught up in the fierce market competition in China, a major EV country.

In China, VW sold 4.22 million new cars in peak 2019, owning a 16% market share. But sales in China in 2022 are down 25% from 2019 to 3.18 million units, the third consecutive year of decline, dropping its market share to 12%. It was also left behind by BYD and Tesla in the EV segment, with a market share of just 3%.

The key to turning things around is to reduce EV production costs and make a comeback in China. In an effort to control battery costs, VW has acquired a partial stake in Chinese on-board battery giant Guoxuan High-Tech. In China, it also decided in August to contribute to Xiaopeng Auto. It will use Xiaopeng’s chassis to launch a new all-electric vehicle for the Chinese market by 2026.

The Director of S&P Global Mobility said,  “In China’s new energy vehicle market, where a low price of more than $30,000 and advancements such as digitization are valued, the barriers to entry for foreign investors are getting higher. Giving up independent R&D and deepening cooperation with local partners in China is the right strategic shift.” There is no turning back from the strategy of a significant shift to EVs, and VW is approaching a critical moment.

Source: Nikkei