Will your franchise win in the NEV wars? Part 5: Volkswagen Group

This entry is part 5 of 9 in the series New Energy Vehicles

This post is the fifth of a series reviewing the financial resilience of seven major auto makers and their ability to make profits during the transition from conventional to electric vehicles. The auto-makers reviewed are Daimler, BMW, Volkswagen, PSA, Ford, General Motors and Toyota. The first post asked where they might get the money to fund the transition to new energy vehicles (NEV’s). The second gave the financial results for each firm under three scenarios based on the speed of adoption of NEV’s: SLOW, MODERATE an FAST. The rest of the posts look at the outlook for each firm individually taking into account its publicly stated strategy for the transition. This post assesses Volkswagen Group.

Click on images or tables to enlarge.


VW’s Modular Electric Toolkit (MEB) Platform

Volkswagen Group are ranked #3 in the Financial Forecast, the best showing for a mixed volume and premium manufacturer. Their performance is especially impressive since their financial results were significantly dented by the ‘Dieselgate’ scandal  in the period 2015 – 2016.  During that time VW lost some $25BN is operating profit on top of receiving over $30BN in fines and their troubles with the US SEC are not yet over. However, it is a testament to VW’s financial resilience that they posted no losses and maintained their dividend throughout. What financial factors underpin their success? Two drive their growth: their enormous brand/product range and their commitment to R&D investment to develop innovative new models. By 2017 they had returned to their pre-crisis unit sales volume and, among the OEM’s surveyed in the 2013 – 2018 period, only Toyota spent more on technology and model development.  Shareholders have paid a high price for loyalty: the annual dividend has halved and the share price is still over 20% below the pre-crisis level.

As mentioned in earlier posts, exchange rates were helpful in VW’s recovery. Over half their products go to China (40%>) and the US (<10%), both of which have an exchange rate disadvantage to the Euro. In terms of the financial forecast, VW’s operating leverage, 3.33:1, causes them to lose heavily in the SLOW scenario but to accelerate profits faster than some of their competitors in the MODERATE and FAST scenarios.


In Financial Resilience VW rank #5 – partly due to the legacy financial effects of ‘Dieselgate’, which reduced Shareholder Returns, but also due to their high levels of investment in NEV technology, which squeezed profitability. However, VW Group’s Operating Profit Margin is double that of Ford and 40% higher than General Motors, so they accrue profit faster when business is good. They do have other weaknesses: Liquidity & Debt too has become weaker since the diesel scandal. Added to that, vehicle sales are flat in Europe and weak in the US and Asia outside of China. Growth for VW depends on holding onto current European and US volumes and expanding in China and other developing markets.

What is VW’s NEV Strategy?

To make sense of Strategy 2025, it may be useful to look at its predecessor launched in 2007 by the controversial former CEO, Martin Winterkorn, in 2007: Strategy 2018. The aim was to become the largest auto maker in the world in two steps, Step 1, move from number 3 to number to, by overtaking Toyota. Step 2, move to number 1 by overtaking General Motors. Events conspired to help them. By 2016, Winfried Vahland, then President of Volkswagen Group China, reported that VW would reach their target of 2MN sales earlier than planned. By 2016 VW Group sales in China had almost reached 4MN. In 2010, Volkswagen’s U.S. chief Stefan Jacoby, announced that their US target was 1 million units. By 2016 they were selling 930,000 units. Undoubtedly, VW Group were aided by events. First, GM went bankrupt in 2009 and emerged as a smaller and weaker opponent, divesting its European arm, Vauxhall-Opel to Groupe PSA in France in 2017. Second, Toyota’s vehicle sales were dented by accelerator faults in the ‘pedal-gate’ recalls from 2009 – 2011 which led them to recall 9.0MN vehicles world-wide and temporarily suspend North America production and sales of eight models. In 2012 Toyota paid over $1BN to settle driver lawsuits and in 2014 a further $1.2BN in fines to the US Government. It lost an estimated 2MN sales during the crisis period from 2008 to 2014. Volkswagen was unscathed by the US recession as sales in Europe and China more than made up for US losses. By 2015 Volkswagen had achieved its Strategy 2018 goals…just in time to be hit by the ‘Diesel-gate’ scandal and for Winterkorn to be forced to resign.

In 2016 Volkswagen announced its Strategy 2025, spurred equally by a desire to regain its commercial reputation and by a commitment to a new business model based on NEV’s. Described by VW as the “biggest change process in the Company’s history”, the aim is to raise NEV sales from under 500,000 in 2015 to between 2.5 to 3.0 MN units by 2025. While, achieving “neutral emissions” as a company by 2050 at the latest, the financial target is to treble net operating profit by 2025. What does VW have in mind to achieve the strategy? On the organizational front, there are two aspects: first, re-create the organization as a more ‘agile’ employer, to attract digital natives and reduce resistance to change and transition; second, decentralize product decisions to global regions, such as North and South America and China, in a bid to expand sales in the US and maintain them in China. China will be positioned more centrally as a manufacturing hub. It is expected to produce 50% of all electric vehicles for the VW group world-wide. At the end of 2019 the SAIC-VW joint venture at Anting began pre-production with an eventual goal of 300,000 all-electric vehicles per year. This highly automated, ‘industry 4.0’ plant allows up to 6 different cars to be produced simultaneously. In addition, capacity at the existing FAW-Volkswagen joint venture in Foshan, China will be doubled to 600,000 units and at least 50% will be BEV. While contracts with VW’s existing battery supplier, CATL, remain in place its own battery factory in Saxony (partnered with NorthVolt) is already in pilot production and another factory, partnered with SK-Innovation of South Korea, is in planning. VW has made it clear that it will require up to 150 GWh annually by 2025. That means even more ‘giga-factories’.

Can VW Win The NEV Wars?

VW’s EN Chassis for All-Electric ID range

There are four ‘must-have’ elements for a conventional auto-maker who want a central role with new energy vehicles: First, the senior management must be committed and aligned with the strategy. Second, they need the money to fund the technology and the transition. Third, the OEM requires control of battery and fuel cell production and technology. Otherwise, much of the potential profit is in the hands of the cell or battery supplier.  Finally, a dedicated NEV platform is required. It costs more but, without it, the vehicles produced are, at best,  an acceptable compromise. For a manufacturer aiming at the mass-market, such as VW, two additional factors are critical: the know-how to build low cost vehicles and access to a volume NEV market.

VW’s management team have all four of the core ingredients and they believe that they have the scale to switch quickly to NEV’s. Their Strategy 2025 envisages 20 fully electric models by 2030. In 2018 they announced that they would not be building ICE

Drivetrain integration McKinsey 2019

vehicles beyond 2040. The last ‘new’ ICE vehicle will be launched in 2026.

Can they afford the transition? By 2018 VW could repay its debt interest 24 times over. Its gearing (debt to equity) is less than every other car maker, except Toyota, in our survey. In contrast to BMW it has developed a dedicated NEV platform – the MEB. Development began in 2015 and, after an investment of €7BN, the first of eight new ID models are expected in 2020. VW have teamed up with Northvolt to build a Giga-Factory in Lower Saxony to be ready by 2024. It’s rumoured that they aim to buy a 20% share in Chinese lithium-ion battery manufacturer Guoxuan High-tech Co Ltd in 2020.

VW have stated publicly that they want to sell around 150,000 EV’s in 2020 alone and reach a target of 10,000,000 by 2030. At present VW sell less than 80,000 units a year. So, where will these sales be made? In the short term, not in Europe. Their aim is to compete directly with Chinese models in the Asian market, as well as the rest of the world, so these are to be affordable, daily drive cars with the respected VW build quality and reliability. And selling the first car isn’t the only issue. Only Tesla has achieved residual values which keep buyers coming back. That will be another test for VW.

EV Battery Configuration on Platform Types

Considering the factors specific to profitable mass-market production the outlook is more opaque. According to McKinsey, the vehicle build cost is driven by four key elements. The first is a ‘native’ EV platform. This allows flexibility in the architecture of the power-train and configuration of the battery for different driving missions – city run-about, commuting or long-haul, for example. Second is the drivetrain – charge module, inverter, converter, gearbox, motor and battery. There is no agreement yet on a single drivetrain configuration but the direction of development is towards greater integration of elements. For example, the Tesla Model S (2013) had 14 components in its drivetrain. The Tesla Model 3 (2017) has 4. Third, is the number, size and flexibility of ECU architecture. The latest Mercedes Benz S-Class has between 11 – 14 ECU’s; the current Tesla Model S needs between 3  and 4. Finally, is the pace at which Design-to-Cost can be applied to achieve scale economies. This is an area where all existing OEM’s should have an advantage against new market entrants.

Volume market access is clearly under detailed consideration by Volkswagen. China is the worlds largest market and has plans to export cars, reversing the trend of the last two decades. VW is expanding its vehicle production capacity in China. It currently absorbs one-in two of all VW brand cars and one-in-three of AUDI brand cars, so is highly significant to the group. While selling almost 40% of VW group products in Europe, until EV’s 10% segment of the European market grows substantially, and VW’s share of it grows too, VW will not have a ‘domestic’ EV market available to it. This leaves it searching for a share of China’s EV market to achieve the volume needed to achieve scale economies. This is not without political and supply chain risks, such as import or export tariffs and product regulations. No doubt Volkswagen is weighing these carefully. Similar difficulties face Volkswagen Group in the NAFTA market.













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