Electric Ambitions: Can Volkswagen Pull Off Its Aggressive EV Strategy?

Following its diesel emissions scandal, Volkswagen leaned hard into electrification. The automaker needed to look environmentally conscious after being caught cheating on emissions tests, and promising a glut of electric vehicles seemed like a good way to accomplish that goal. Of course, building EVs also allows companies to offset fleet-wide emissions — protecting the existence of highly profitable crossovers using the internal combustion engines that most people still prefer.

However, Volkswagen isn’t talking about chucking in a few zero-emission vehicles under its I.D. sub-brand. Back in 2017, the automaker promised $84 billion for EV development after announcing an initial investment of $10 billion. VW Group subsidiaries like Audi and Porsche are busy readying electrics of their own. While incredibly ambitious, the swift change in direction means Volkswagen is effectively gambling with its future.

As good as new automotive tech looks on Wall Street, typical consumers wandering around dealer lots haven’t been nearly as interested.

Globally, plug-in sales (including hybrids) have risen dramatically but are not on pace to overtake internal combustion vehicles anytime soon. As of 2018, less than 4 percent of the American market constituted plug-in vehicles — and the vast majority of those went to California buyers. But even China, which has a fairly aggressive plan to impose EV adoption and builds more of them than any other country, still sees plug-ins occupying a niche subset of the market.

VW intends to launch 300 electric vehicle models by 2030 and finish developing its final round of internal combustion engines in 2026. What happens if demand doesn’t shoot up? Not to put too fine a point on it, but Volkswagen will probably be ruined.

Reuters recently explored the decisions that led to the German automaker’s big push into electrification. If you’re looking for the abridged version, widespread panic from within the company (stemming from the emission crisis) resulted in VW throwing all of its eggs in one basket.

The outlet also got some hot takes on the issue, with Arndt Ellinghorst, an analyst at Evercore ISI, saying the automaker is taking a big risk with its current strategy. “What if people are still not ready to own EVs? Will adoption be the same in the U.S., Europe and China?” he mused, adding that EU and Chinese emissions regulations have made electric vehicle adoption inevitable.

Whether or not consumers are ready, government intervention assures an influx of electric vehicles over the coming years. While this seems like it should be a boon for Volkswagen, it might not be. Most global brands are considering adding EVs to their lineup as a way of coping with regulatory measures enacted by China and the EU. If the market isn’t ready, that means an even smaller cut for VW.

Every cloud has its silver lining, though. Due to Volkswagen’s immense manufacturing capacity, the company feels it can reduce the cost of electric vehicles dramatically. “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, requesting anonymity.

Battery cost is expected to gradually drop as mining and production efforts ramp up over the next few years. Most analysts believe this will ultimately lower the cost of EVs to a point where they become competitive with their gas-powered rivals — probably by 2025.

“On a 2025 view, we expect Volkswagen to be the number one electric vehicles producer globally,” UBS analyst Patrick Hummel said. “Tesla is likely to remain a niche player.”

Assuming everything goes perfectly and electric vehicles explode in popularity, the company should find itself sitting pretty by the end of the coming decade. But no such guarantee exists. While many automakers are investing heavily into electrification and autonomy, several have taken a more cautious approach.

Popular or not, EVs will remain a fixture of the automotive landscape for a while. Following a post-Dieselgate crackdown, including citywide bans for passenger models using the fuel, the European Union announced its intent to further cut CO2 emissions from passenger cars. The EU now wants to cut vehicle carbon dioxide emissions by 37.5 percent by 2030 (vs 2021 levels). The region previously embraced a 40-percent reduction in emissions between 2007 and 2021. Regardless of what happens with the United States’ efficiency mandates, automakers will still have to contend with global policies. Many feel the only way to do that is through rampant electrification.

“This goal is no longer reachable using combustion engines alone,” Volkmar Denner, CEO of Bosch, the world’s biggest auto supplier, said of the European proposals.

Perhaps the futility of resistance will be Volkswagen’s biggest asset. But, as things currently stand, VW still isn’t on schedule to meet Europe’s existing emission rules for 2021. There’s a lot of work to be done before it becomes the world’s largest EV manufacturer, and its management team prays the world will be ready once that happens.

[Images: Volkswagen]