Volkswagen's ambitious electric car strategy is being spearheaded by the ID.3 hatchback.
Volkswagen's ambitious electric car strategy is being spearheaded by the ID.3 hatchback.

Volkswagen ramping up electric car production to leapfrog Tesla

By Edward Taylor, Jan Schwartz and Joseph White Time of article published Oct 29, 2019

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WOLFSBURG, GERMANY - Volkswagen is ramping up production of electric cars to around 1 million vehicles by end of 2022, according to manufacturing plans seen by Reuters, enabling the German carmaker to leapfrog Tesla and making China the key battleground.

Volkswagen is readying two Chinese factories to build electric cars next year. The Chinese plants will have a production capacity of 600 000 vehicles, according to Volkswagen's plans, which have not been previously reported - revealing VW’s ability to industrialise production faster than other pioneers in the electric vehicle market.

Tesla is still trying to reach its goal of making more than 500 000 cars a year by building a new factory in Shanghai, China, while VW can rely on an established workforce in two of its plants in Anting and Foshun to build zero-emission cars.

The scale and speed of VW's electrification push marks a shift in favour of established manufacturers that can use existing factories and profit from combustion-engined SUVs to scale up faster than startups.

"The truth is barriers to entry in autos remain high," said Max Warburton, an analyst at Bernstein Research. "Making cars is hard. The move to electric vehicles will be expensive, but will probably be led by traditional manufacturers."

VW is leveraging its large infrastructure of suppliers, factories and workers, long a handicap to its profitability, more aggressively than rivals BMW, Renault , General Motors and Tesla, which were all quicker to sell a custom-designed electric car.

Rather than adjusting production gradually, and using multi-powertrain platforms, Volkswagen is making a massive bet on a dedicated electric vehicle architecture, known as MEB, in the hope of increasing economies of scale sufficiently to push down the price of electric cars to around 20 000 euros (R325 000).

Volkswagen's MEB platform is exclusively for electric cars.

The Wolfsburg, Germany-based carmaker is retooling eight plants across the globe by 2022 to specialise in manufacturing electric cars, and license its electric MEB platform to rivals, senior VW executives told Reuters, putting it on track to become the world's largest maker of zero-emission vehicles.

Tesla has emerged as a serious competitor with a credible car, its Model 3, Volkswagen Chief Executive Herbert Diess told Reuters last week. But startups have a hard time entering mass production without sufficient production facilities, he said.

"The question is, can you expand your production quickly enough? The capital intensity is increasing," Diess said.

To fund its own electrification shift, the German carmaker aims to increase sales of VW SUVs, with combustion engines, to 40% of overall sales by 2020 from 23% in 2018.

The powerstation that supplies energy for VW's flagship e-vehicle factory in Zwickau, Germany, marked by two tall chimneys, was built to power production of the combustion-engined Volkswagen Golf.

Now Zwickau can piggyback off this infrastructure to ramp up production to 330 000 VW ID electric cars by 2021.

Volkswagen Group will increase economies of scale by rolling out electric vehicle platforms to its Audi, Skoda and Seat and Porsche brands.

The company will be in a position to build 22 million electric cars by 2028, of which 11.6 million could come out of Chinese factories, VW said.

Production pain

VW’s expansion push comes at a time when investors have started to question businesses delivering growth without real profit, a change in sentiment that is crippling the ability of several electric car pioneers to raise more cash.

Back in 2016, Tesla said it wanted to build more than 500 000 Model 3 cars by 2018, a goal it has failed to meet. This year it expects to deliver 360 000 to 400 000 cars, a target that includes selling all models.

Tesla's struggles have dampened optimism about how easy it is to enter the car business, making it harder for China's NIO, backed by internet company Tencent Holdings Ltd, as well as others like Faraday Future and Byton Ltd, to fund the next stage of growth: capital-intensive volume production and sales.

"So much respect for those doing high volume manufacturing, Tesla CEO Elon Musk tweeted earlier this month. "It's insanely hard, but you make a real thing that people value. My hat is off to you."

After starting trial production runs at its factory in Shanghai, Tesla now hopes to reach its 500 000-vehicle target in the 12-month period ending June 30, 2020. Tesla is also looking for a site to start production in Europe.

Volkswagen is converting two German plants, Hanover and Zwickau, to build electric vehicles and will retool other factories including plants in China: Foshan which VW runs together with its joint-venture partner FAW-Volkswagen, and another in Anting, which VW runs together with SAIC.

Technology interlopers

The cutthroat rivalry between carmakers and software companies started when Google presented a prototype autonomous vehicle in 2012, leading analysts and industry executives to fear a so-called Nokia moment. This occurs when a new player from the tech sector unveils a superior design, in the way that Apple presented the iPhone in 2007, ending Nokia's dominance of the mobile handset business. Today, Tesla's cars are generally perceived as cutting-edge and potentially more sophisticated than VW's. Volkswagen's ID.3, which starts production this year, has an operating range of between 330 and 550 kilometers, below the 560 km long-range Model 3 version offered by Tesla.

That is because Tesla has a sophisticated software algorithm to control how much electricity goes to the electric motor, air conditioning, seat heaters, in-car infotainment, and cooling system.

Volkswagen's edge is more blunt: price and massive economies of scale.

Inside the VW ID.3.

The ID.3 has a starting price of under 30 000 euros (R487 000) in Germany. By contrast, Tesla's Model 3 had an average selling price of $50 000 (R813 000) in the second quarter. The long-range version retails for 52 390 euros in Germany.

The VW vehicle's lower price comes from the carmaker's ability to place large orders which, by nature of their size, help drive down the price. Volkswagen is investing 50 billion euros to buy battery cells and will also license its MEB electric car platform to rival carmakers to further increase economies of scale.

That is, Volkswagen will make that huge investment if suppliers can keep up.

"There is a lot of investment," Stefan Sommer, Volkswagen Group's board member responsible for procurement, told Reuters last month. "But even the big companies like Samsung, CATL, LG Chem, the big guys, SK, they hesitate to take so much money and invest because they are not seeing the market on the other side."

"We are now seeing the first battery plants, LG in Poland, CATL in Germany, they don't have the skilled workforce. That will be the bottleneck," Sommer said. "It's a learning curve everybody has to work through. This will cause some lags in supply. We have no other choice."


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