Volkswagen is losing the electric car race to Tesla and China

Analysis by Hanna Ziady, CNN

London (CNN) — When Volkswagen mapped out its electric future in 2019, it was the world’s biggest carmaker, with every chance of overtaking Tesla as the no. 1 manufacturer of battery-powered vehicles by the middle of this decade.

“Volkswagen will change radically,” then-CEO Herbert Diess told shareholders. “Some of you may be rubbing your eyes in amazement. But make no mistake — the supertanker is picking up speed.”

But that transformation hasn’t happened. Nearly five years on, the Volkswagen Group, including Audi and Porsche, is still miles behind Elon Musk’s Tesla (TSLA), selling fewer than half its US rival’s 1.31 million electric vehicles (EVs) last year.

To make matters worse, the champion of German manufacturing is also losing out to new challengers from China, which is its single largest market and a country where Volkswagen has been the biggest-selling car brand overall since at least 2000.

The brand is close to losing that crown to local electric rival BYD.

“Volkswagen has just fallen behind in the battery electric vehicle race,” said Al Bedwell, a director at GlobalData who focuses on e-mobility trends. “The big problem is China, where actually we expect Volkswagen to go backwards this year in terms of sales volumes,” he told 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.

Initial enthusiasm among investors about Volkswagen’s EV ambitions quickly turned to skepticism, as seen in the company’s share price: the stock surged 60% in 2021, as the carmaker pledged to build six battery-making gigafactories in Europe by 2030 and announced plans to sell more than 2 million electric cars per year by 2025.

Most of those stock gains were lost in 2022, as it became clear that Volkswagen was falling short on execution. The stock has continued to slide, and is down 14% so far this year.

“If what they laid out… had actually been accomplished, even partially… I think everyone would be singing VW’s praises right now,” said Daniel Roeska, head of EU automotive research at Bernstein, a brokerage.

“The Diess plan was phenomenal in terms of what they wanted to achieve, (but) it never was realistic.”

Volkswagen, it seems, is coming back down to earth. Last month, Thomas Schaefer, the CEO of Volkswagen passenger cars, admitted, according to Reuters, that the group’s flagship brand is “no longer competitive” owing to high costs and low productivity.

A spokesperson told CNN that the internal remarks were aimed at reinforcing to employees the urgent need for change to secure the future of the brand.

Human resources board member Gunnar Kilian also reportedly said at the time: “We need to finally be brave and honest enough to throw things overboard that are being duplicated within the company or are simply ballast we don’t need for good results.”

Executives are now talking with workers about how to cut €10 billion ($10.8 billion) in costs to boost efficiency.

With profit margins on the Volkswagen brand in the low single digits, “it’s barely break-even at a time when (car) prices are higher than they’ve ever been,” according to Roeska.

“Whatever they do in this cost restructure, it’s definitely going to be better than not doing it… it’s also likely that they will be unable to do enough.”

‘Dieselgate’ still casts a shadow

In September 2015, Volkswagen was in a strong position, having overtaken Toyota as the world’s largest carmaker by sales in the first half of that year.

And then, the “Dieselgate” scandal erupted. Volkswagen admitted to rigging the software on millions of diesel cars so they could cheat nitrogen oxide emissions tests and appear less polluting than they actually were.

The shocking revelations led to the resignation of then-CEO Martin Winterkorn, years of investigations, and fines and settlements that cost the carmaker at least $39 billion.

“Dieselgate shook their confidence quite a bit,” said Roeska. It caused Volkswagen to “over-correct” on compliance, making it “a lot more cautious and in turn a lot slower.”

And when it comes to EVs, speed trumps size, because of the rapidfire pace at which innovation is moving, Roeska added.

It was never going to be easy for an 86-year-old company with 115 factories and nearly 676,000 employees worldwide to move at the speed demanded by the EV race. Take its concept electric GTI, which it unveiled at the Munich Auto Show in September and plans to bring to market only in 2027.

“BYD will decide on a product (in 2025) that enters the market in 2027. There’s a totally different development cycle and speed to market,” according to Patrick Hummel, who leads European autos research at UBS. For Hummel, Volkswagen is still “a relatively slow-moving supertanker.”

In August, UBS downgraded its recommendation on Volkswagen stock from “neutral” to “sell,” advising investors to sell the shares partly because of the growing threat from Chinese competitors — not only in China’s market, but increasingly in Europe too, where Volkswagen is currently the biggest seller of EVs. The bank hasn’t changed its view.

Will Volkswagen ‘bounce back’?

Unlike newer entrants, Volkswagen has also had to run an existing business that churns out millions of combustion-engine cars each year and still accounts for the vast majority of the group’s sales and profit.

In the first nine months of this year, EVs made up just 8% of the group’s deliveries — or 531,500 of 6.8 million vehicles sold. Volkswagen is targeting a 50% share by 2030.

To get there, Volkswagen will need to close the technology gap with industry leaders. Inferior software has been the carmaker’s “Achilles’ heel,” said Bedwell at GlobalData.

That has been particularly true of the ID.3, Volkswagen’s flagship electric passenger car, the electric equivalent of the hugely popular Golf compact.

“The on-board technology was glitchy, the software wasn’t fully developed, they kept promising fixes which weren’t really delivered or came late… VW was just perceived as being behind the curve,” Bedwell told CNN. “The early software glitches with ID.3 have been addressed but VW lags the industry leaders.”

That has cost Volkswagen dearly in China, where it is now partnering with local carmakers to expand its product range and improve technology. “The new models will provide growth impetus,” a Volkswagen spokesperson told CNN, noting that the ID.3 was still “one of the best-selling EV models in China.”

The company also sees potential in the United States, where it has struggled to build a significant presence. EVs are “our market opportunity to become a major player in North America,” the spokesperson said.

One other big unknown is how Volkswagen’s bold battery strategy plays out.

The company is investing billions to build its own batteries, which will reduce production costs. The carmaker could reap huge rewards if it goes to plan, but it’s a risky gamble. “They obviously have to get the (battery cell) technology right,” noted Bedwell.

GlobalData sees Volkswagen Group selling 717,000 EVs this year, giving it a global market share of 7% and putting it in fourth place behind Tesla, BYD and China’s SAIC Motor. The firm still sees VW becoming the world’s biggest EV brand by 2030 — five years later than previously forecast.

Bedwell pointed to the company’s resources and global brand recognition as key strengths, as well as the sheer spread of brands across many different markets and price points, which will allow it to “plug many more holes” 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.

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