Automotive News Europe — 2023-09-12
Automotive Industry
Shortly after taking the most important job in German industry, Volkswagen Group CEO Oliver Blume got some bad news.
A top executive had been dispatched to China to review the competitive landscape and his assessment was grim. At the company’s headquarters in Wolfsburg -- a sprawling factory complex the size of Monaco -- he told his new boss that Europe’s largest automaker was losing the electric vehicle race in its most important market and had no prospect of catching up on its own.
VW had fallen behind in China during the pandemic and by the time the country began to reopen, BYD, Nio and other local brands had doubled the number of plug-in hybrid and full-electric models, with most being cheaper and better than VW’s offerings.
Those new competitors are now turning toward Europe as China’s economy stumbles.
The extra pressure comes as VW and other German manufacturers feel the strain of high energy prices in the fallout from the country’s long reliance on Russia.
Half a world away, Tesla has continued to expand and has laid claim to leadership in automotive innovation, undermining the German giant’s cash cow Audi -- alongside Mercedes-Benz and BMW.
Instead of sleek Audi sedans claiming “Vorsprung durch Technik,” Teslas have become the choice for consumers wanting to show they are on the cutting edge.
The competitive vise squeezing VW from top to bottom and from the U.S. to China might evolve into its biggest crisis since the 2015 diesel emissions cheating scandal.
The issues could be even harder to overcome and reflect the risks looming over Europe’s largest economy.
“The auto industry is faced with the question of whether and how we will be a global leader in the future,” German Foreign Minister Annalena Baerbock said at the IAA Mobility auto show in Munich last week. “For our nation, where the auto industry accounts for a large share of value creation, this is not just an economic issue, but also a question of security.”
The time for VW to get its EV strategy right is running out. An inflection point is coming, and the group risks getting confined to the waning market for combustion-engine cars and lacking the volumes to support its bloated structure.
Its struggles are evident in a market value that is less than one-tenth of Tesla’s even though revenue is more than triple that of its Texas-based rival, and the competitive pressure is evident in the aggressive price war in China, where many brands are selling at a loss.
The company has already spun off minority stakes in sports car maker Porsche and its heavy trucks unit Traton, and calls for a deeper breakup may grow louder if it starts losing market share in Europe, said Daniel Roeska, an analyst with Bernstein.
But Blume and his team are banking on VW’s vast resources paying off as electric vehicles go more mainstream.
“It’s a marathon, and not everyone in a marathon who comes out fastest will be seen first or at all at the finish line,” said Ralf Brandstätter, VW’s China boss.
At Europe’s biggest auto exhibition this year, China’s automakers showed that they are ready to take the fight to Germany.
Their ranks at the Munich show more than doubled compared with 2021, and BYD positioned its Seal sedan -- which will start at about €45,000 ($48,000) when it goes on sale later this year -- as a direct rival to Tesla’s Model 3 and several of VW’s electric cars.
VW symbolizes the “economic miracle” of Germany’s postwar recovery like few other companies. The ongoing challenges of the company and country are still equally intertwined.
Both are heavily exposed to the risks posed by China’s growing industrial and political ambitions.
The Asian superpower is Germany’s largest trading partner and the source of nearly 40% of VW’s global deliveries last year. Also, the struggle to pivot to cars that rely on software more than horsepower is indicative of Germany’s difficulties adapting to the digital era.
Like Germany, VW is complex and slow-moving. The company employs nearly 700,000 people across more than 100 factories around the world. It makes everything from exotic Lamborghini supercars to thrifty Skoda hatchbacks and powerful Scania trucks. Complicated internal power dynamics bog down change, while hubris has been fueled by decades of success.
“The car industry in Germany is closely intertwined with other branches in the manufacturing and services sector. Production still has not reached its pre-pandemic level, making it an important factor behind the ongoing weakness of the German industrial sector,” Martin Ademmer, economist at Bloomberg Economics, said.
Propelled by government policy, China’s shift to EVs is happening even faster than other countries. EVs are set to account for half of all cars sold in the world’s biggest auto market by mid-decade.
China’s threat to German automotive supremacy was on display in Munich. BMW executives marveled at the sleek Cyberster roadster from SAIC's MG brand. The Cyberster will go on sale next year starting at about €57,000, in line with BMW’s gasoline-powered Z4.
Over at BYD, VW’s top labor representative Daniela Cavallo intently watched its presentation.
“Our international competition is not sitting idle,” said Hildegard Müller, head of Germany’s auto lobby, the VDA. “Our companies are mainly generating their profits abroad, helping to keep jobs in Germany. But the pressure is rising because of weak economic growth and conditions that are no longer internationally competitive.”
Alongside a smattering of technical advances, German brands focused on heritage -- something Tesla and Chinese rivals could not match.
At Mercedes-Benz’s stand, the automaker had a mocked-up electric version of its experimental C111 supercar from 1970.
BMW’s Neue Klasse deliberately recalls its groundbreaking line of cars from the 1960s, and VW displayed the GTI electric-car concept, evoking the sporty version of the Golf.
With Blume now in the job for a year, the contours of his response to the alarm bells from last October are taking shape. The effort involves a host of new partners, a third try at a competitive electric-car platform and overhauling management at Cariad -- VW’s in-house software developer that has failed to keep pace with Tesla and other rivals.
“Every company has to start with itself -- to innovate, to develop and at the end to perform,” Blume said at the auto show in Munich. “It’s up to us.”
The most aggressive move was paying $700m for almost 5% of Chinese automaker Xpeng.
The stake in the money-losing company, which is not in the top 10 for EV sales in its home country, was the price VW was willing to pay for access to a technology platform to help fast-track its mainstream electric-car offerings. It was widely taken as a last-ditch attempt at a turnaround.
Already with three joint ventures in China, the Xpeng deal was preceded by new cooperation agreements with a battery maker, an autonomous driving specialist and an infotainment developer.
The expanded roster of Chinese partners piles on complexity and deepens entanglements in a country increasingly antagonistic toward the West.
For the 55-year-old Blume, who has been at VW since joining a trainee program in 1994, the approach sticks to a familiar playbook: When in doubt, expand. It’s a common strategy for a group that operates 10 brands and counting.
VW is structurally skewed toward expansion, with the main power players keen to protect their turf and agreements often requiring time-consuming horse trading.
There are the descendants of Ferdinand Porsche, who created the concept for the iconic Beetle and are keen to keep dividends flowing; VW’s home state of Lower Saxony, which has a special blocking minority; and the company’s powerful works council.
“VW is like a big tanker ship that needs time to make a turn,” said Mathias Miedreich, CEO of Belgian manufacturer Umicore, which has a deal to supply the automaker with battery materials. “Once the tanker ship starts to turn, you cannot stop it.”
The inclination to grow to fix a problem is also evident in VW’s efforts in the U.S. The German automaker has struggled to play a major role in the market ever since Beetle mania faded in the late 1970s.
The latest push includes a new $2 bn factory in South Carolina to revive the off-road Scout brand, which has been dormant for four decades.
Beginning in 2026, the plan is to make battery-powered SUVs and pickups as a retro-themed answer to Tesla’s Cybertruck and models from U.S. EV startup Rivian.
VW’s messy transition to EVs has its roots in the diesel-emissions cheating scandal. For years, the company had pushed “clean diesel” as a fuel-efficient alternative to plug-hybrids, only to eventually acknowledge that those claims were bogus and millions of its vehicles had emitted illegal amounts of pollution.
The revelations tarnished Germany’s reputation for engineering prowess and triggered a catch-up strategy under Blume’s predecessor, Herbert Diess.
The former BMW executive, who joined just before the diesel-cheating revelations, vowed to carry out historic change, but he ruffled feathers, especially at VW’s works council, while software issues caused new models to flop and others to get delayed.
In early 2022, as pressure on Diess grew, VW hired McKinsey to help figure out a plan to fix Cariad.
Developers from Audi, Porsche and the software unit struggled with infighting due to brand allegiances and were overwhelmed by the task of building out two new platforms -- one for Audi and Porsche and another for other VW Group brands.
Ineffective top-down decision-making and managers with no experience overseeing software development made the situation worse.
Diess wanted to disrupt VW’s culture -- zipping over the water of the Wolfsburg factory canal on a hydrofoil and donning a Batman mask to promote new models -- but by last summer, his shock-and-awe approach had outlasted its welcome.
The situation at Cariad remained so dire that after taking over in September, Blume created a “savior crew” to develop a new strategy and cancelled the five-year financial planning update that autumn.
As a VW lifer, Blume -- also head of the Porsche brand, which is close to the Porsche-Piech family -- is well-schooled in navigating the company’s factions. While that might bring calm to Wolfsburg, there are questions whether adding yet more partners in China will pay off and how Blume’s steps to finally squeeze more returns from VW’s mass-market brands are any different from previous attempts that failed to deliver.
His key priorities involve fixing Cariad, stabilizing market share in China, growing in the U.S., raising the VW brand’s profit margins and building a competitive EV portfolio at Audi. None of it is quick and easy.
In his first year on the job, he swapped out the Audi chief, tasked the namesake VW brand with finding savings to boost earnings by €10 bn by 2026, and started a portfolio review for possible asset sales.
While VW is dogged by complexity and power struggles, it has deep pockets to fight back. Its auto division had €33.6 bn in net liquidity at the end of June. And after listing a minority stake in Porsche a year ago, there are plenty of other options to raise more money if needed.
“Competition should spur us on, but not scare us,” German Chancellor Olaf Scholz said in a speech at the car show. “In the 1980s, it was said that Japanese cars would overrun all other markets. Twenty years later, it was cars 'Made in Korea,' and today it’s supposedly Chinese electric cars.”