By on April 6, 2022

Practically every automaker on the planet has begun signaling a desire to change with the times by collectively revising their business strategies. The new hotness involves lower volumes, higher margins, and electric vehicles with the ability to push connected services allowing manufacturers to charge you piecemeal for just about every feature imaginable.

While Volkswagen Group has been at the forefront of those trends since the 2015 Dieselgate scandal helped force its hand, it often suggested that the shift to EVs would be a boon to low-income families. It was hardly the only automaker to make such promises, nor has it been the first to break them after deciding that perhaps there’s more money to be made with premium vehicles. VW has decided that its ideal strategy involves culling internal combustion vehicles by 60 percent over the next eight years and focusing on higher-margin products yielding superior profitability. 

It’s more than a little ironic for a company that came into existence to manufacture low-cost automobiles designed to swell German vehicle ownership ahead of World War II and has a name that translates directly into “People’s Car.” But it’s been 85 years since its founding and most would probably argue even VW’s earliest days showcased a severe case of moral ambiguity. The point here is not to single out Volkswagen Group. There are plenty of businesses (including other automakers) that have been accused of similarly grotesque behaviors — both then and now.

There’s often an incredible difference between what a company says and what it ultimately ends up doing, especially if everyone else also seems to be doing it and the scent of money hangs heavy in the air. VW is indeed maintaining its commitment to electric cars, leadership is just hoping it’s accompanied by truckloads of cash. In a recent interview with the Financial Times, Volkswagen’s chief financial officer explained how that might be accomplished.

From FT:

“The key target is not growth,” said [CFO Arno Antlitz] in a reversal of the stance taken by former VW executives.

“We are [more focused] on quality and on margins, rather than on volume and market share.” VW, he said, would reduce its line-up of petrol and diesel cars — which consists of at least 100 models across several brands — by 60 per cent in Europe over the next eight years.

VW’s new strategy is a sign of profound changes in the wider auto sector, which for decades has attempted to increase profits by selling more cars each year, even if doing so required heavy discounting.

The Financial Times is correct in its assessment that this appears to be an industry-wide shift in tactics. Automakers want to see a high market valuation, which they seem to have collectively decided hinges on how quickly they can copy brands like Tesla. But they’ve also learned that they can still turn a healthy profit in times of turmoil by reducing overhead and charging more while output is diminished. In the wake of the pandemic, many businesses ran exceptionally lean. They’re now realizing that this could become an effective long-term strategy, provided they’re not chasing volume — and practically nobody is when global supply chains are in such poor shape and consumers have shown a curious willingness to be gouged.

It’s also a much cheaper solution than investing in facilities that would see manufacturers building more components for themselves. Though the money being spent developing electric vehicles and “mobility solutions” has already spread some companies’ finances uncomfortably thin. Despite government pressure to spur EV sales before planned ICE bans in Europe, automakers are still taking a big risk with electric cars.

Adoption rates may be improving within the EU, but numerous studies have shown that a strong majority of North American drivers aren’t interested in them. Even places like Asia and Europe have shown there’s a sizable coalition of motorists who feel likewise. This requires automakers to reconsider how they handle individual markets in terms of product, which is exceptionally difficult when you’re having to plan several years in advance.

It’s also difficult to say whether or not Volkswagen Group’s strategy is the correct one. My own bias has me feeling incredibly skeptical about pure battery-electric vehicles taking over the market anytime soon when hybrids exist. But I’m even more concerned with the entire industry suddenly deciding to embrace lower volumes and higher margins after a decade of already having done so. Average vehicle transactions have reached an all-time high and inflation is only the latest contributing factor. Before that, we watched a dozen manufacturers opt to cull some of their most-affordable models in a bid to chase down higher margins. We now appear to be getting a second helping of that during a period of economic duress for all but the world’s highest earners.

For as often as automakers bring up the concept of “sustainability,” this plan looks rather shortsighted. Everyone moving upmarket is eventually going to leave a big opening for any brand still selling affordable cars. Assuming regulations don’t force it to play the same game as everybody else, that could result in a handful of nameplates occupying certain segments without a lot of competition. Chinese carmakers have already made inroads in Europe by undercutting legacy automakers, lending some credence to the theory. But we’ve already seen this happen with South Korean and Japanese brands that broke into Western markets.

Though one imagines perpetual growth isn’t all that sustainable either and VW’s previous CEO, Martin Winterkorn, had committed himself to making the automaker the largest automaker by volume before he resigned over the Dieselgate fiasco.

The rest of VW’s eight-year plan is significantly harder to criticize, especially its emphasis on improving quality. After several stalled product launches, some of Volkswagen’s latest vehicles emerged with issues. For example, the Golf Mark 8 had been repeatedly delayed due to software glitches and then endured rolling recalls in Europe for digital gremlins it still can’t seem to fix several years later. Some of the company’s ID-branded electric vehicles encountered similar problems, which it has been trying to address with over-the-air updates. While OTAs are neat, plenty of people aren’t interested in connected vehicles and just want to see cars leaving the factory in a finished state.

Another aspect of Volkswagen’s plan that’s gone largely overlooked is the decision to move production out of Europe and into the United States and China — with the latter nation taking precedence. Framed as a direct result of the conflict in Ukraine, CEO Herbert Diess also suggested that the global market will be volatile until at least 2026. This is somewhat curious since the company still sells more vehicles in Europe than everywhere else. But it’s also been butting heads with its labor union over possible layoffs resulting from the swap to EVs and feels the EU will have some of the highest material and production costs moving forward.

[Image: Volkswagen Group; nrqemi/Shutterstock]

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19 Comments on “VW Plans Mass Culling of Combustion Cars, Loftier Margins...”

  • avatar
    SCE to AUX

    @Matt Posky: Why are you *compelled* to bring up WWII in every article about VW? That chapter is long, long past.

    “it often suggested that the shift to EVs would be a boon to low-income families”
    Q: What other new vehicle is a boon to low-income families?

    On this point, you can get a 200+ mile EV for under $30k after subsidy. My 19 Ioniq EV was $22k after Hyundai took the lease subsidy. You can’t even buy an EV with so little range today, yet mine has gone over 40k miles without a problem, and it’s cheap to run. If I was a low-income family, it would be that boon you’re talking about.

    Also, don’t let the tail wag the dog – every mfr’s EVs have started out expensive. Not because they’re gobbling up margins, but because they’re simply trying to break even. EV development and COGS is expensive.

    However, margin grabs today make sense because the public is willing to pay, and surprise – the mfrs aren’t running a charity. They don’t care about making cheap cars *of any kind* for the poor unwashed masses. Just try buying that $19995 Maverick.

    • 0 avatar

      “If I was a low-income family, it would be that boon you’re talking about.”

      Yeah, but there’s a high chance you wouldn’t have a place to charge it either. Affordable vehicle access is not a very big issue in America… It’s dwarfed by the issue of affordable housing access. Fixing the housing issue would actually break the issue of vehicle access wide open, because people wouldn’t have to commute 100 miles a day. The silver lining of COViD is telecommuting, which has made a real change … for some.

    • 0 avatar

      “you can get a 200+ mile EV for under $30k after subsidy”

      *I* can. And maybe you can. But those who do NOT have a $7500 tax burden that can be offset by the non-refundable tax credit? They’re screwed.

      Joe Sixpack with a mortgage and kids in no way has a $7500 tax burden he can use in that transaction.

      So no, there are no cheap electric cars for the masses.

      • 0 avatar

        Joe Sixpack is probably better off buying a used car now. That will probably still apply when Joe is ready to buy an EV. The federal tax credit helps reduce the price of a used EV as well as a new one.

        Anyone who can afford to buy a new car likely has at least $7500 in total annual taxes. that is only around $60K in base income.

    • 0 avatar
      Matt Posky

      Q: Why are you *compelled* to bring up WWII in every article about VW? That chapter is long, long past.
      A: Because VW (and others) has continued to be accused of benefiting from slave labor and should know better.

      Q: What other new vehicle is a boon to low-income families?
      A: Something that’s actually affordable, is easy for someone in an apartment to live with, long lasting, and easily serviceable by the owner.

      Subsidies don’t make the car cost less, it just changes who is paying for it. But I’ll agree that manufacturers don’t run charities. There’s no shortage of proof for that.

      • 0 avatar
        Jeff S

        @Matt–I think this is more of VW meeting the EV mandates for Western Europe and the eventual banning of new ICE vehicles by 2035 which is only 13 years away. Diesels for many years were encouraged by Western Europe and most auto companies made diesels but now diesels are being regulated out of existence. As for lower volume and higher profit margins VW is not the only one. China has been sending lower priced vehicles to Europe and they plan on eventually entering the US and Canada with lower priced vehicles. Initially there will be a bigger demand for EVs in Western Europe once the mandates take effect but demand will eventually level off. Still will be a number of ICE vehicles in Europe for years. It comes down to if you are an auto manufacture and you want to continue to sell new vehicles in Western Europe you will have to make EVs. For VW, Renault, and Stellantis ( Peugeot, Citroen, Fiat, Alfa Romeo, Jeep, Ram, Chrysler, Dodge, and etc.) this is their major or sizable market so they have to go all EV or not sell in Western Europe.

  • avatar

    Good luck VW. The next decade should be interesting as world power brokers pick the next generation of winners and losers. On a related topic. The wind turbines in Buffalo harbor that were installed around 2008 had their blades replaced last year. Now the old blades are still lying around waiting for a ride to a landfill most likely. Point being, the EV push is somewhat at risk to getting bit as the tech gets old enough for recycling or battery replacement to get widespread attention. Should be interesting. Hopefully soon they can market a good overall EV for the price of a Civic / Corolla without a tax payer subsidy.

    • 0 avatar

      I came across a turbine blade boneyard outside Midland, TX last year. I was out there working on some salt water disposal well pump starters. Blades are also struck by lightning and basically explode and peel like a banana. Ultimately they are continually stressed and probably fracture over time, everything fatigues with time. Greener approaches to energy and transportation don’t mean less waste, everything wears out.

      • 0 avatar
        Master Baiter

        “Ultimately they are continually stressed and probably fracture over time, everything fatigues with time.”

        But…but….FreedMike told me that if we switch to renewable energy, we won’t have to purchase commodities (like oil) on the open market anymore.

      • 0 avatar

        Found an interesting video on Youtube about an American company that gets paid to take turbine blades from GE mostly. They grind up the blades. Then the ground up debris gets burned by plants making concrete. I’m sure that produces no emissions at all, wink wink. Anyway the most interesting part of that video was the plant manager mentioning that most of the blades were about 8 years old. So even more wasteful than most outlets advertise. But that’s still better than dumping them in landfills, at least the energy produced from burning them is useful.

    • 0 avatar

      “The next decade should be interesting as world power brokers pick the next generation of winners and losers.” – when the government gets involved, it bound to be a shit show. The U.S. Government has a history of picking losers and few if any winners.

  • avatar

    VAG plans speedy bankruptcy, no comment on natural gas crisis.

  • avatar

    Translation, EV’s are not nearly as profitable as ICE cars

  • avatar

    Don’t expect EV’s to get cheaper, they’ve already hit a point of cost optimization. Future cost efficiencies will be met with other cost increases and cancelled. Face it: EV’s cost more than ICE vehicles, are a whole lot less convenient, and they always will be UNLESS there is some miracle battery invention that makes all current battery tech obsolete – don’t bank on it. You’re gonna need that subsidy and as pointed out, it needs to be a simple tax credit and not a deduction. And asking people to pay more up front with the argument that it will cost less to own over time is *BS*. The upfront money is financed, which largely negates any savings that you have to wait ten years to recoupe.

  • avatar

    Is this due to EVs, or is it just time for these guys to slim down in the face of a tighter market? I’d say it’s more the latter. VW has a HUGE array of models, particularly in Europe, and that’s not really mentioned in the article (well, some vague point about EVs taking over the world had to be made). Here’s what they offer in the UK alone:

    That’s 18 models on offer, including the EVs. Their home market, Germany, has a similarly huge range. By comparison, in the U.S. – a
    vastly larger market than the UK or Germany – Chevy offers 16 models, and Ford offers 12. Toyota has 17 to choose from.

    Slimmer lineup equals higher profits. Makes sense.

    • 0 avatar
      Jeff S

      @FreedMike–I believe it is both slimming down and EVs. Manufacturers are looking for ways of cutting costs and consolidating manufacturing with less manufacturing plants. VW and other European manufacturers have a 2035 mandate from most European countries to go all EV which puts additional pressure on them especially since the EV mandate is 13 years away. VW will for the most part stop making ICE vehicles altogether except maybe to continue existing models in countries where there is not an EV mandate and most likely there will be no development of new ICE vehicles.

  • avatar

    I’m surprised none of the Chinese-market vehicles that are unique to that nation have been exported to Europe, the U.S. or Canada yet.

    I wouldn’t mind an electric Volkswagen MPV, if the range was there; currently, the Viloran which replaces the Sharan looks good, but it’s only got a turbo petrol engine, no hybrid, and no electric.

    An EV’s practical here in Blackburn with Darwen, even though we only have around 3 or 4 charging points.

    At 159 sq km or 52.9 sq mi, the district I live in is only as big as some U.S. counties, politically.

    Volkswagen is taking on a hell of a risk trying to sell the concept of autonomy and non-ownership in the future.

    For now, car ownership may be declining, but didn’t COVID-19 teach us that vehicle-sharing, outside of a household (and I’m not talking about taxis here, but Zipcar etc.) is risky, especially in the early days?

    Won’t car ownership make a return soon?

    Personally, I miss the days of 1995-2014 when car ownership wasn’t such a thing to criticise and us car owners didn’t get criticized.

    I currently own a 2007 Hyundai Santa Fe, and I would buy a new one if there was an EV version with the range; it’s been mine since March 2007 and it’s still good now. No “cash for clunkers” getting me to get rid of this vehicle I’ve had as a 25th birthday present!

    Well, technically, it’s my second car, as a 2019 Ford Mondeo hybrid is my daily driver… that’s good, but I doubt Ford’s ever going to release an EV replacement for the Mondeo saloon in Europe.

    I’d get an EV version to go alongside this, but I’ve yet to see Hyundai release any plans for a Santa Fe EV in the UK, US, Canada or European markets.

    I wonder if Volkswagen will axe the Touareg and we’ll get a Volkswagen ID replacing it? I wonder if it’ll be a VW ID.8 or ID.9.

    The Touareg is a pretty good car, nearly bought one myself; wouldn’t mind if there was an EV replacement with the same name and a range of like 300-400 miles, but living where I live it may not be practical.

    I couldn’t do telecommuting anyway during COVID as a freelancer; not that I can talk about my job on here, it’s a highly sensitive job.

  • avatar
    Master Baiter

    There’s no point in car companies making a cheap, low-margin, new car.

    Used cars last a long time now, so if you are low income, you buy a 5 or 10 year old Camry or Accord. It would be a more enjoyable experience than buying a new, stripped-down Spark or Sonic anyway.

    • 0 avatar
      Jeff S

      That is if you can find a 5 or 10 year old Camry or Accord now that is affordable and in decent shape. Good used vehicles have increased considerably in price and some that are a couple of years old are more expensive than their new versions. Cheaper newer cars would be a good vehicle for many who cannot afford the average price of a new or slightly used vehicles but those vehicles are more likely to come from the Chinese.

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