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Volkswagen's race with Tesla

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The race for battery-powered cars is on. Source: mauritius images

Tesla CEO Elon Musk unveiled big plans – again. A giant electric semi-truck will hit the market by 2019, Mr. Musk said in California. The 18-wheelers, capable of driving 500 miles (800 kilometers), would just need to be recharged at solar-power charging stations across the US. But the CEO did not stop with his electric vehicle for truckers. He also wants to create automobiles that compete with the likes of Porsche and Ferrari – an ambition that puts Volkswagen on the spot.

Hours after Mr. Musk unveiled Tesla’s e-mobility offensive, the Wolfsburg-based company revved up. Matthias Müller, CEO of Volkswagen, presented a 5-year investment plan approved by the VW supervisory board. Of the €72 billion ($85 billion) investment, roughly half will be used to develop new technology, like long-lasting batteries, self-driving cars and mobility services. Electromobility will no longer play a supporting role, but will take center stage with gasoline and diesel engines, Mr. Müller explained. This follows after the company said it would invest €20 billion over the next 8 years to produce 50 new, all-electric car models, in September.

Volkswagen’s ambitions, to become the world’s leader by 2025, rival Tesla’s. “We are underpinning this goal with concrete and solid planning for investments, vehicle projects and plant occupancy for the next five years,” Mr. Müller said. Under the plan, 25 percent of vehicles produced by the VW Group will be purely powered by batteries.

“The future of electromobility is very much being made in Germany.”

Matthias Müller, Volkswagen CEO

Production of Volkswagen’s electric cars will initially be concentrated in Zwickau, a city in the former East German state of Saxony. Existing factory buildings are being converted into a central plant for VW’s e-mobility, costing the company approximately €1 billion. And current operations in the area, like Golf and Passat production, will be handed off to factories in Wolfsburg and Emden.

The decision to stay in Germany is a commitment to the home market: “The future of electromobility is very much being made in Germany,” he said. And by 2020, 100,000 new-generation electric vehicles will be produced.

But there are almost always casualities. In the northwestern city of Osnabrück, VW’s executive board and the works council could not agree on an allocation plan for the plant in Lower Saxony, affecting close to 3,000 employees. A possible solution proposed by Mr. Müller was that Porsche models be produced at the factory, in order to ensure that the VW plant’s capacity is fully utilized. Porsche rejected the idea.

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The head of the works council, Bernd Osterloh, described the investment plan as a reasonable compromise “that everyone can accept.” The investments are a signal to the workforce, because it means they can expect secure jobs, he continued. Volkswagen hopes to resolve the issue within a year.

In the race to come in first, Volkswagen is putting the pedal to the metal and investing a large sum of money, while simultaneously maintaining strict cost discipline – driving growth and margins. And the company’s investment ratio, or the ratio of investments to sales, will be permanently reduced, VW officials said. The goal is to get investments down to 6 percent, an industry standard, by 2020. The current ratio is around 6.6 percent, a decrease from 6.9 in 2016. But reducing the quote will require “disciplined work,” Mr. Müller said. Even if all factors or conditions were the same, VW would still have to play catch up across all brands.

“Investors should welcome [Volkswagen’s] commitment to more investment discipline,” said Arndt Ellinghorst, an Evercore ISI investment advisor. Furthermore, the company is not limiting e-mobility to Europe, and has its sights set on China. VW operates its production in the country with local partners in three joint ventures. Around €10 million will make its way to Chinese partners over the next 7 years, said Jochem Heizmann, head of VW China, at a motor show in Guangzhou. Joint ventures raise investment frunds from their own resources, meaning the money does not come from corporate coffers in Wolfsburg and is not a part of Volkswagen’s new investment package.

Whether Volkswagen’s new investment can help the company speed past Tesla and secure a lead in the e-mobility revolution remains to be seen. But there are zero doubts that the company is flooring it to a future with electric cars.

Stefan Menzel writes about the auto industry and focuses on Volkswagen. To contact the author: menzel@handelsblatt.com.

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