11 Sep 2019

Huge EV bet could turn diesel pariah VW into "game-changing" pioneer

VW has initiated a remarkable transformation in the wake of the Dieselgate scandal. Shaken to the core by the emissions cheating scandal of its own making, the world's largest carmaker has embraced electric mobility more vigorously than any other major auto company under its latest CEO, Herbert Diess. VW's first fully electric car aimed at the mass market will be presented at the Frankfurt car show in September. Deliveries will start in 2020, and initial sales will provide a first hint of whether the company's massive bet on battery-electric mobility will pay off. Some critics remain unconvinced, however, and warn that VW's actions do not yet match its sustainability commitments. This factsheet provides a quick overview of the company and its plans for sustainable mobility [UPDATE with IAA announcements September 2019, new company logo]

VW Group key figures 2018

Sales: 235.8 billion euros (compared to 2017: +2.7%)

Earnings after tax: 12.2 billion euros (+6%)

Vehicle deliveries: 10.8 million (+0.9%)

Employees (average 2018): 655,722 (thereof in Germany: 292,729)

Market capitalisation (August 2019): approximately 70 billion euros
(September 2015 - before Dieselgate: 91 billion euros)

[Sources: VW Group Annual Report 2018, VW Group Sustainability Report 2016]

VW shares: On 18 September 2015, the US EPA served a Notice of Violation on VW Group alleging emissions cheating
VW shares: On 18 September 2015, the US EPA served a Notice of Violation on VW Group alleging emissions cheating

"Dieselgate" triggers radical overhaul

Volkswagen (VW) admitted in September 2015 that it had for years cheated on US diesel emissions tests with secret software masking excessive nitrogen oxide pollution, causing a wave of lawsuits and fines. The “Dieselgate” scandal has cost the Wolfsburg-based company at least 30 billion euros. During the fallout, the group twice replaced its CEO. Since April 2018 VW has been headed by Herbert Diess, a former BMW manager, who initiated a radical shift towards battery-electric mobility.

VW's 10.8 million vehicle deliveries in 2018 made it the world’s biggest carmaker for the fifth time in a row. The Volkswagen Group comprises 12 brands from seven European countries: Volkswagen Passenger Cars, Audi, SEAT, ŠKODA, Bentley, Bugatti, Lamborghini, Porsche, Ducati, Volkswagen Commercial Vehicles, Scania and MAN.

The Group operates 122 production plants across the globe that churn out more than 40,000 vehicles every weekday on average. VW is a publicly listed company. The group, whose main shareholders include the state of Lower Saxony and Qatar, is controlled by Porsche Automobil Holding, the investment vehicle of the Porsche and Piech families, which holds the majority of voting rights.

"The supertanker is picking up speed"

The sheer size of VW means the group's strategy not only has massive repercussions for the entire car industry, but also affects general efforts to fight climate change - its passenger cars are responsible for one percent of global CO2 emissions.

Following the Dieselgate scandal, VW repeatedly stepped up its electric ambitions but could not dispel widespread doubts about its true conviction. This changed with CEO Herbert Diess, whose strategic overhaul, presented in early 2019, silenced most critics. "Volkswagen will change radically," Diess said. "Some of you may still be rubbing your eyes in amazement. But, make no mistake – the supertanker is picking up speed."

Diess announced that Volkswagen would accelerate the rollout of zero-emission cars by launching almost 70 new electric models by 2028, and forecast that VW would build 22 million vehicles on the group’s electric platforms by then. The company also affirmed its target to become fully CO2-neutral by 2050. “The 2025 target is to reduce the CO2 footprint of the vehicle fleet by 30 percent across the lifecycle compared to 2015 […] At the same time, CO2 emissions at all plants are to be cut 50 percent by 2025 compared with 2010 […] The share of electric vehicles in the group fleet is to rise to at least 40 percent by 2030.”

Europe’s federation of green mobility NGOs, Transport & Environment (T&E), called the VW announcement “a game changer for the automotive industry." T&E executive director William Todts commented that "this is the first credible climate plan by a major automaker.”

Sustainable mobility NGO The International Council on Clean Transportation (ICCT) agrees with this assessment. "While each of the four largest global automakers– VW, Nissan-Renault, Toyota, and General Motors – has a climate strategy, VW’s strategy is bigger, bolder, and far more detailed," wrote the ICCT's Drew Kodjak in an evaluation of the plans which aims to answer the question whether it's "yet another brazen instance of greenwashing" or a "serious effort to put the company on a sustainable path." He argues that VW has the highest announced vehicle sales share and production targets that even exceed regulatory requirements, and much higher investments in electrification and battery technology.

VW CEO Herbert Diess presents the company's zero-carbon strategy. Photo VW
VW CEO Herbert Diess presents the company's zero-carbon strategy. Photo VW

In contrast to domestic rivals BMW and Daimler, as well as most other conventional carmakers, VW decided to place a sole bet on battery-electric cars instead of keeping its options open for possible alternatives, such as plug-in hybrids or fuel cell vehicles. It has committed many billions of euros to their development and teamed up with Swedish company Northvolt to set up its own battery cell production, which is also a very costly step that has been long shunned by German carmakers.

"Our emphasis is on the electric car, because from today's perspective it is the best and most efficient choice for reducing CO2 in transport," Diess explained. Most transport experts would agree because propelling cars with fuel cells would require a much larger amount of energy.

Media reports reflect the enormity of the changes at the company. VW "has embraced electrics with the enthusiasm of a religious convert," wrote Charles Riley for CNN Business. "Success means that Volkswagen will overtake rivals, including Tesla, in electric car sales and fend off new challengers from China and Silicon Valley; failure could signal the beginning of the end for a company with 665,000 employees and annual revenue of 265 billion dollars." The Economist called VW's plans "the biggest commitment to battery power by any car company. Mr Diess is taking on the tough task of turning a supertanker around."

VW's move is all the more remarkable because in contrast to young companies focusing exclusively on e-mobility, the group needs to transform a huge legacy business with extremely strong union representation. Given these challenges, ICCT's Kodjak wonders about the company's underlying motivations. "What could be driving VW’s electric offensive? What does VW know that its counterparts do not? Without inside knowledge we can't say for sure. But we do know that China is VW’s largest vehicle market, and that China’s intentions to drive towards 100% electrification are genuine and purposeful. If VW has to build EVs for China, why not use those economies of scale to drive down the price of its EVs and capture markets in the rest of the world?"

Not all investors are convinced that VW has taken the right decisions by putting everything on the EV card. "We have concerns that it could be a bumpy road for VW and the entire industry excluding Tesla with adoption rates likely falling materially short of expectations," Berenberg analyst Alexander Haissl told Forbes

The matrix to transform a latecomer into a frontrunner

Industry watchers agree that VW urgently needs a turnaround - not only because of the Dieselgate scandal, but also because in an international comparison, the VW Group is a latecomer to future mobility business areas. The core brand VW still does not have a single model that is exclusively electric, offering instead electric engines only as an option in existing models developed for combustion engines, such as the electric city subcompact e-up! and the e-Golf.

In 2018, electrified vehicles amounted to less than 1 percent of Volkswagen Group's total sales – and that's including plug-in hybrids. Fully electric cars represented a mere 0.3 percent.

VW, however, has laid the foundation for a whole new range of pure electric vehicles by developing an entirely new underlying electric vehicle platform, the modular electric drive matrix (MEB), which is at the core of VW's electric ambitions. “The modular electric drive matrix is arguably the most important project in the history of Volkswagen, similar to the transition from the Beetle to the Golf,” says Thomas Ulbrich, the Volkswagen Brand management board member responsible for e-mobility. By placing all the batteries skateboard-like underneath the car's interior, a pure electric platform opens entirely new possibilities to design the vehicle around people instead of all the technology required in a combustion-engine car.

The first model based on the new platform, the ID.3, was unveiled at Frankfurt’s International Motor Show (IAA) in September 2019, and is due to hit showrooms in 2020. Other models based on the platform, such as the ID Buzz van, an electric followup to its legendary VW Bus, are to follow.

Unveiling the ID.3 at the Frankfurt motor show. Photo CLEW
Unveiling the ID.3 at the Frankfurt motor show. Photo CLEW

The group's premium brands, Audi and Porsche, are slightly more advanced than the core VW brand when it comes to electrification. Audi started to sell the electric SUV e-tron this year and Porsche will follow suit with its Taycan electric model. These earlier luxury models are highly important for the group because Audi and Porsche generate most of Volkswagen's profits despite selling only a fraction of Volkswagen-branded cars. 

VW wants to establish the MEB not only as a company, but an industry standard by licensing it to competitors. In an expansion of an existing collaboration, US carmaker Ford announced in July 2019 that it would use it "to design and build at least one high-volume fully electric vehicle in Europe for European customers starting in 2023." Joining forces with other carmakers could help VW to scale up its market power during negotiations for entirely new supply chains necessary in the switch to e-mobility.

The core of VW's electric ambitions: The modular electric drive matrix (MEB). Image: VW
The core of VW's electric ambitions: The modular electric drive matrix (MEB). Image: VW

With MEB and cell production, VW is betting heavily on the mass-market breakthrough of full battery-electric cars, whereas many competitors – including German premium carmakers Daimler and BMW – are also focusing on plug-in hybrid cars that still contain a combustion engine while keeping an open mind about fuel cell technology. VW has essentially started to wave goodbye to conventional motors and plans to end development of new petrol and diesel vehicles after 2026, while many other companies insist they could have a long-term carbon-free future if powered by synthetic fuels made with renewable power.

This one-sided VW strategy is highly controversial in the industry, not least because the company has openly called for policy backing. According to media reports, VW even threatened to quit influential car industry association VDA because it wanted the lobby group to fully focus on electric vehicles instead of insisting rigidly on “technological openness”. Diess reportedly said that policy support for other propulsion technologies would only divert much-needed resources for a battery-electric push, including backing for a charging infrastructure. In the end, BMW, Daimler and VW agreed to focus on electric and hybrid cars because fuel cells won't be market-ready for many years to come.

VW's nascent mobility services also reflect its electric ambitions. In mid-2019, VW launched the carsharing service "We Share" in Berlin, comprised entirely of full electric e-Golfs. It has also started to roll out its MOIA ride-sharing service, which only uses electric vans.

Still from VW commercial advertising the ID Buzz
Still from VW commercial advertising the ID Buzz

Harming the climate now in order to save it later?

Some critics remain unconvinced of VW's supposed catharsis, however. NGO Environmental Action Germany (DUH), which set the ball rolling on inner-city driving bans, says it doesn't buy that a serious change of course has taken place under Diess, describing the new strategy as "nothing but announcements". DUH points to the fact that VW plans to launch "a plethora of new SUV models" in the near future. VW counters: "For us, SUVs are certainly the models with the highest margins, and in view of the uncertainties surrounding the switch to electric mobility, it would be economically irresponsible to say that we are leaving this lucrative business to our competitors."

VW has quietly stopped sales of the e-Golf and e-up, and has recently transferred technicians from upcoming ID models to fix problems at current combustion engine models, according to DUH. The advocacy group has also expressed scepticism about VW's upcoming dive into mass-market e-mobility because the carmaker's models will have to compete with seasoned rivals, such as the third generation Renault Zoe.

VW is also still accused of not taking full responsibility for the Dieselgate scandal given its opposition to hardware retrofits, which are effective but expensive. Adding to these criticisms, the European Commission officially accused carmakers VW, BMW and Daimler of illegal collusion to avoid competition on emission reduction technology in April 2019.

Screenshot from VW website - https://www.volkswagenag.com/en/news/stories/2018/10/focusing-on-suvs.html
Screenshot from VW website - https://www.volkswagenag.com/en/news/stories/2018/10/focusing-on-suvs.html

VW changes company logo to signal simplicity and transparency

Facing an unprecedented wave of climate protests, Germany's trio of car groups, BMW, Daimler and VW, put their sustainability ambitions at the centre of their presentations at the Frankfurt Motor Show (IAA). In contrast to BMW andDaimler's Mercedes-Benz, the Volkswagen brand focused exclusively on what it described as "largest electric offensive of the automobile industry," without mentioning any conventional cars at all. For the show's press days, VWshowcased around 20 fully electric vehicles only, but staff said it would add combustion engine models, including SUVs, for the general public opening. The company also exchanged its logo at the start of the car show to signal more "simplicity and transparency."

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