VW's $91B spend on EVs outpaces investment of rivals

WOLFSBURG -- If Volkswagen Group realizes its ambition of becoming the global leader in electric cars, it will be because of a radical and risky bet born out of the biggest calamity in its history.

VW has staked its future, to the tune of 80 billion euros ($91 billion), on being able to profitably mass-produce electric vehicles -- a feat no automaker has come close to achieving.

So far, mainstream automakers' electric plans have had one main goal: to protect profits gleaned from high-margin conventional cars by adding enough zero-emissions vehicles to their fleet to meet clean-air rules.

Customers have meanwhile largely shunned EVs because they are too expensive, can be inconvenient to charge and lack range. 

The biggest strategy shift in Volkswagen's 80 years has its roots in a weekend crisis meeting at the Rothehof guesthouse in Wolfsburg on October 10, 2015, senior executives told Reuters. 

At the meeting hosted by then VW brand chief Herbert Diess, nine top managers gathered on a cloudy Saturday afternoon to discuss the way forward after regulators blew the whistle on the company's emissions cheating, a scandal that cost it more than 27 billion euros in fines and tainted its name. 

"It was an intense discussion, so was the realization that this could be an opportunity, if we jump far enough," said Juergen Stackmann, VW brand's board member for sales. "It was an initial planning session to do more than just play with the idea of electric cars," he told Reuters. "We asked ourselves: What is our vision for the future of the brand? Everything that you see today is connected to this."

Just three days after the Rothehof meeting of the VW brand's management board, Volkswagen announced plans to develop an EV platform, code-named MEB, paving the way for mass production of an affordable electric car. 

For months after the Volkswagen scandal blew up in 2015, rival automakers treated diesel-cheating as a "VW issue," according to industry experts. But regulators have since uncovered excessive emissions across the sector and unleashed a clampdown that undermines the business case for combustion engines, forcing a sector-wide rethink. 

Now the "villain" of the VW scandal is likely to become the largest producer of electric cars in the world in coming years, analysts say, putting it in pole position to flood the market -- should the demand materialize. 

"Decisions to convert the Emden factory [in the German state of Lower Saxony] to build electric cars, would never have happened without this Saturday meeting," said Stackmann, one of five senior VW executives who spoke to Reuters.

However the full scale of VW's ambitions were only revealed two months ago when it took the industry by surprise by pledging to spend 80 billion euros to develop EVs and buy batteries, dwarfing the investment of rivals. It plans to raise annual production of electric cars to 3 million by 2025, from 40,000 in 2018. 

It's a risky bet. 

With regulators and lawmakers, rather than customers, dictating what kind of vehicles can hit the road, analysts at Deloitte say the industry could produce 14 million electric cars for which there is no consumer demand. 

It's also an all-or-nothing bet in the long run.

VW, whose Golf-sized ID Neo electric car will hit showrooms in 2020, has set a deadline for ending mass production of combustion engines. The final generation of gasoline and diesel engines will be developed by 2026. 

Arndt Ellinghorst, analyst at Evercore ISI, said betting on EVs could be risky because customers did not want to own cars dependent on street-charging facilities.  "What if people are still not ready to own EVs? Will adoption be the same in the U.S., Europe and China?" he said.

Ellinghorst said EU and Chinese emissions regulations made electric vehicle adoption inevitable and that being an early industry mover in that direction offered a "positive risk-reward." 

Another by-product of the diesel scandal that quickened VW's electric drive, according to the senior executives, was a purge of the company's old guard, who became the focus of public and political anger.

This empowered Diess, a newcomer who had joined as VW brand boss shortly before U.S. regulators exposed the automaker's emissions-test cheating. 

Diess, who joined from BMW where he helped pioneer a ground-breaking electric vehicle, has since been appointed CEO of the parent Volkswagen Group, a multi-brand empire that includes Audi, Porsche, Bentley, Seat, Skoda, Lamborghini and Ducati. 

Automakers have failed to mass-produce EVs profitably largely because of the prohibitive cost of battery packs which make up between 30 percent and 50 percent of the cost of an electric vehicle. 

A 500 km (300 mile) range battery costs around $20,000, compared with a gasoline engine that costs around $5,000. Add to that another $2,000 for the electric motor and inverter, and the gap is even wider.

Even EV maker Tesla's cheapest car, the Model 3, is on sale in Germany at 55,400 euros, priced just below a base model Porsche Macan, a compact SUV. In the United States, Model 3 prices start at $42,900, following a price cut announced Wednesday. 

VW believes its scale will give it an edge to build an electric vehicle costing no more than its current Golf model, about 20,000 euros, using its procurement clout as the world's largest car and truck maker to drive down the cost. 

"We are Volkswagen, a brand for the people. For electric cars we need economies of scale. And VW, more than any other carmaker, can take advantage of this," a senior Volkswagen executive told Reuters, declining to be named. 

VW Group's electric-vehicle budget outstrips that of its closest competitor, Daimler, which has committed $42 billion. General Motors has said it plans to spend a combined $8 billion on electric and self-driving vehicles.  The Renault-Nissan-Mitsubishi Alliance said in late 2017 it would spend 10 billion euros by 2022 on developing electric and autonomous cars. 

"On a 2025 view, we expect Volkswagen to be the No. 1 electric vehicles producer globally," UBS analyst Patrick Hummel said. "Tesla is likely to remain a niche player."

VW's test cheating using engine management software - "defeat devices" - resulted in the introduction of tougher pollution tests which revealed in 2016 and 2017 that emissions readings across the industry were up to 20 percent higher under real-world driving conditions compared with lab conditions.

This has raised the bar on the auto sector's efforts to cut emissions of carbon dioxide, blamed for causing global warming. 

EU lawmakers in December agreed a cut in carbon dioxide emissions from cars of 37.5 percent by 2030 compared with 2021 levels. This was after the European Union forced a 40 percent cut in emissions between 2007 and 2021. 

"This goal is no longer reachable using combustion engines alone," Volkmar Denner, chief executive of Robert Bosch, the world's biggest supplier, said about the 2030 proposals. 

Every gram of excessive carbon dioxide pollution will be penalized by European lawmakers with a 95 euros fine from this year onwards.

Strategy firm PA Consulting forecasts VW will face a 1.4-billion-euro penalty for overstepping average limits in Europe by 2021, while Ford and Fiat-ChryslerI face fines of 430 million euros and 700 million euros respectively.

Daimler, BMW, PSA, Mazda and Hyundai will miss their 2021 average emissions targets, PA Consulting forecasts. Toyota, Renault-Nissan-Mitsubishi, Volvo, Honda and Jaguar Land Rover are on track to meet their goals.

PA Consulting's forecasts were extrapolated using 2017 registration data for each powertrain type and consumer buying trends, but do not include more recent sales trends.

Ford, VW and BMW said they would meet their targets because of a push to sell more hybrid and electric cars in 2018. Daimler said it aimed to meet the targets, PSA said it would respect the targets while Fiat-Chrysler declined to comment. Mazda had no immediate comment, while Hyundai did not respond to a request for comment.

Automakers have struggled to lower their average fleet emissions because of a shift in customer taste toward heavier, bigger SUVs, which make it harder to maintain the same levels of acceleration and comfort without increasing fuel consumption and pollution.

SUVs are now the most popular vehicle category in Europe, commanding a market share of 34.6 percent, according to JATO Dynamics. Even Porsche, which makes lightweight sports cars, relies on sports utility vehicles for 61 percent of sales.

As the industry-wide scale of excessive emissions prompted Brussels to push through tougher laws late last year, VW executives concluded that purely electric cars were the most efficient way to meet carbon dioxide goals across its fleet.

This was the point of no return, according to executives, when the company made the final electric investment decisions and committed to staying the course it had plotted after the diesel scandal.

"After evaluating alternatives, we opted for electromobility," chief operating officer Ralf Brandstaetter told Reuters about VW's deliberations in November.

U.S. plans

In the United States, VW's move to EVs will have a dramatic impact.

Last month, VW said it is adding a second Chattanooga assembly plant in Tennessee to build electric vehicles for Volkswagen and potentially other brands, with an $800 million investment expected to create 1,000 jobs at the automaker's only U.S. assembly operation.

VW announced at the Detroit auto show that the new factory -- which will be built next to the existing plant producing internal combustion vehicles -- will begin producing EVs for North America in 2022. The EVs will be built on VW's modular electric toolkit chassis, known as MEB.

When production begins, the Chattanooga site will be one of six VW Group assembly plants globally dedicated to producing battery-electric vehicles, and the only one in North America. The 3.4 million-square-foot Chattanooga plant employs about 3,500 workers.

VW has committed to an aggressive battery-electric plan for North America, beginning with the I.D. Crozz crossover set to arrive in the United States in 2020, and including what the automaker calls a "multipurpose" electric vehicle based on the I.D. Buzz concept. The I.D. Buzz was a retro styled version of VW's former Microbus, and is expected to return to the U.S. in 2022.

Automotive News contributed to this report