Summary
- Porsche’s chief Oliver Blume replaces Herbert Diess as Volkswagen Group Chairman; senior management change not uncomplicated.
- Developments in China provide a buffer for Volkswagen in a tough market. This includes battery manufacture through Volkswagen Group China.
- India is a new market opportunity for Volkswagen through strategic alliance with Mahindra & Mahindra.
- Software remains a complication for Volkswagen.
- Volkswagen is negotiating complexity in transition from ICE to BEV, but success is by no means assured.
If you want a clear picture of where the world is heading for ICE (Internal Combustion Engine) car makers, look no further than the announcement by Volkswagen, one of the world’s biggest ICE manufacturers, that it plans to stop selling vehicles with an ICE in Norway by 2024, or one or two years before the Norwegian Government will stop manufacturers (start or end of 2025?) selling new ICE vehicles. Note that new Government vehicles in Norway must not have an ICE now. The rest of the world is starting to address the change with the period between 2030 and 2035 becoming popular as the time when cars with an ICE will be banned (e.g., California 2035 ). I’ll discuss elsewhere Toyota’s latest attempts to hold on to ICE manufacture through trying to argue that hybrids are “electrified” vehicles; this looks like a vain hope.
A lot is changing and the fortunes of the major ICE manufacturers remains unclear at this stage. Here I make some comments about what is working and what is not for Volkswagen Group ( OTCPK:VWAGY ). I conclude that while Volkswagen is in the group of the ICE manufacturers that are getting very serious about the transition, investors seem cautious as the share price is struggling, being down progressively 43.3% year on year. Perhaps investors are standing back to see how management changes and an accelerating electrification environment will play out? I think it is early to be making decisions about long term investment in Volkswagen as a lot is changing.
Reasons why the market might be cautious
1. Management commitment to the BEV transition
After a tumultuous period spanning the diesel emissions scandal and the transition towards electrification (with a software hiccup along the way), this week Volkswagen Group Board Chairman Herbert Diess hands over control to Oliver Blume, who will remain as Chairman of the Board of Porsche AG as well. Curiously Blume may continue as Chairman of Porsche after a possible IPO. How will that play out?
Diess was seen as an aggressive Chairman who ruffled feathers, but he achieved a lot to steer Volkswagen through a disaster that almost destroyed the company and make it possibly one of the best Western companies to begin the transition from ICE to BEV. Chinese companies (especially BYD ( OTCPK:BYDDF )) vie with Volkswagen as contenders as best able to make the transition. Diess had problems with Unions and oversaw problems with software in the new Volkswagen BEVs, but ultimately the key shareholder Porsche and Piech families decided on change. Diess has been lauded by Elon Musk, which may or may not have helped. However, there are a lot of structural changes in place (see below) that reflect Diess’s strategies.
Oliver Blume is a return to the establishment families who call the shots at Volkswagen. It will become clear in due course whether Volkswagen will continue the aggressive moves to full electrification. Some, who are likely to be part of a smaller team that Blume will rely on (e.g. Audi’s CEO Markus Duesmann), have in the past been less enthusiastic about abandoning the ICE tradition.
2. Managing huge automotive enterprises
Volkswagen has a lot of brands, many of which are relatively autonomous. I noted in an earlier article that this meant that management of some brands might not be as enthusiastic about the ICE to BEV transition. This seemed to be the case for some time, with Audi management seeking to stay with an ICE future longer than Volkswagen Group management was committing to. There were quite a few questions about management changes and who is responsible for what on the Q2 2022 earnings call.
Of course there can be advantages to have focus through brand differentiation within the overall Volkswagen brand and this seems to be playing out for Volkswagen US (see below).
3. Software still a weak link for Volkswagen?
There seems to be some consensus that Volkswagen underestimated the importance of software in the new BEV world. Tesla has always said that a car is a computer on wheels and the extent of the role for IT in BEVs is becoming clear. Obvious things like battery management impact on the range that a vehicle achieves. It is known in the industry (Ford’s CEO is quite explicit about this) that Tesla is obsessive about maximising the efficiency of use of electrons from its batteries. Effectively this means that a Tesla goes further than another BEV with a battery of comparable size. Collecting data also provides a major edge for a BEV manufacturer as it considers autonomous driving. Tesla has a massive dataset from its vehicles which it is putting to good use in developing self-driving capability.
Volkswagen acknowledges that software inadequacies challenged the release of its first BEVs and it isn’t clear that all is resolved in the software area as questions in the Q2 2022 transcript indicate. CARIAD remains a work in progress on a unified software stack for the whole Volkswagen business.
Areas where Volkswagen seems to be making good progress
1. Good results for China provides a buffer for Volkswagen in a tough market
Volkswagen presents a strong message about its approach to the Chinese market. The plan is for more cohesion within the Volkswagen Group activities in China through strengthened senior management with a “China for China” approach. This will enable faster decision-making, good collaboration between the different brands and integration with JV companies. This puts China in a more autonomous role than has been the case. Ralf Brandstatter will chair the China Board and Stefan Mecha (currently CEO Volkswagen’s Russian business) will become CEO of the core Volkswagen brand in China. This will go along with substantial strengthening of Volkswagen Group’s China activities.
The above also includes battery manufacture through Volkswagen Group China.
2. India, a new market opportunity
Volkswagen MEB platform (Volkswagen)
Source : Volkswagen newsroom
Quarterly earnings transcripts often produce surprises and one from the Q2 2022 earnings came with naming of India as a new market opportunity for Volkswagen.
Subsequent to the quarterly reporting comment, recently Volkswagen Group and Mahindra & Mahindra announced a strategic alliance to accelerate India’s electrification of transport. The alliance is focused on Mahindra adopting elements of Volkswagen’s MEB (Modular electric drive matrix). The MEB involves a toolkit that removes all elements of ICE (Internal Combustion Engine) history. Mahindra plans to use elements of the MEB (including electric drivetrain, battery system and Volkswagen’s unified cell) in developing its INGLO electric vehicle platform. Both parties will also explore further opportunities in e-mobility, vehicle projects, charging & energy solutions and cell manufacturing. It is an ambitious program with a goal of 1 million units over the lifetime of the agreement, to provide MEB elements to 5 all electric Mahindra SUVs. The final supply agreement will be concluded by end of 2022. Mahindra sees this project as not being solely for development of the Indian BEV market, but also global markets although the nature of the global expansion is not yet spelled out. Where Volkswagen’s software fits in the Mahindra agreement seems not yet clarified.
The Indian development is interesting because India is a huge market but one which provides challenges. Tesla has considered entry into the Indian market but thus far hasn’t found a way that works. It has talked about an Indian Gigafactory but this has not proceeded, while export of Tesla vehicles from its Shanghai Gigafactory has not been approved by the Indian Government.
BYD, which has become the world’s second biggest BEV car maker pushing Volkswagen to number 3, is extending its BEV presence in India with the Atto 3. BYD will assemble Atto 3 vehicles in Chennai and is considering manufacture if things go well.
3. New focus on US market?
Volkswagen is such a sprawling auto empire that it isn’t surprising that change happens all of the time. A recent example is the CEO and President of Volkswagen Group of America has recently left the top job in the US after 5 years, to become CEO of Volkswagen’s Scout Motors in a revitalised electric form of the iconic International Harvester Scout. This indicates that Volkswagen sees the BEV space currently being developed by Rivian ( RIVN ) (and eventually Tesla’s ( TSLA ) Cybertruck) to be one worth investing in, probably at a price point lower than Rivian and Tesla’s offerings. Like many Volkswagen brands, Scout Motors will operate autonomously and independently of Volkswagen, although it will draw from Volkswagen’s capabilities and resources. This shows that Volkswagen doesn’t stand still and is always thinking about reinventing its future. The US has not been a strong market for Volkswagen and this move suggests that Volkswagen will become more aggressive in North America.
Keeping it in the family, Volkswagen’s Executive Chair of Volkswagen South America, Pablo Di Si, is moving north to become CEO and President of Volkswagen Group of America and CEO of Volkswagen North America.
ICE manufacturers and the transition to BEV : Volkswagen, Ford, Toyota
Above I’ve focused on some Volkswagen-specific issues. Here I look quickly at the big picture.
The ground is shifting for the ICE industry and it is interesting how major players are adapting. Volkswagen and Ford are clear about the shift and are very actively involved in addressing the ICE to BEV shift. Volkswagen is likewise thinking about its ICE vehicles and it begins to look as if there won’t be a next-generation Volkswagen Golf because it may not have a long enough life when new emissions regulations kick in. Toyota talked a good line about electrification at the end of 2021 but the reality is that the company is still very much in ICE mode , but using its hybrids to call their new ICE offerings “electrified vehicles”.
Ford is aggressively promoting its F-150 Lightning and an announcement with Duke Energy ( DUK ) on V2G grid stabilisation is an intriguing extension of electrification of transport, where the plan is to use the F-150 Lightning batteries to help stabilize the grid.
The politics is changing and this is no better seen than in Australia, where Toyota had a major influence on vehicle policy under the previous Government. The result of this has been no vehicle emissions standards at all and a strong policy to prevent BEV adoption. There was strong Government promotion of Toyota’s FCEV vehicles, where in a promotion about electric vehicles the former Prime Minister highlighted a Toyota hydrogen vehicle. This is changing with a new Government and it will be interesting to see whether Toyota continues to influence Government policy. At a recent Australian BEV summit Tesla, Volkswagen and Polestar were prominent vehicle manufacturers.
Perhaps because it is a Chinese company, the sleeper in the investment discussion involving the transition from ICE to BEV seems to be BYD. BYD dominates the bus BEV space globally and where this company is positioned in the BEV transition in personal transport is now becoming recognised as it moves aggressively into the global BEV personal transport space with sale of its Atto 3 SUV BEV which is starting in Europe, the US, Japan and Australia. BYD is interesting because it started as an ICE company and still makes a lot of conventional ICE and hybrid vehicles, but the direction of its orientation is clearly towards the BEV.
Conclusion
It is fascinating to compare how the world’s biggest ICE car manufacturers are addressing the challenging times of exiting the ICE and going electric. Looking at Toyota’s (number 1) latest quarterly earnings report there is little evidence of BEV orientation, and the recall of its first serious BEV, the BZ4X continues not to be rectified . The contrast with number 2, Volkswagen ( and Ford ) is stark. Volkswagen and Ford are fully engaged with the complexities of the switch, while Toyota talks up its latest hybrid with 28mpg fuel efficiency.
Volkswagen shows every sign that it is facing the future head on. Of course there are challenges and this impacts both corporate leadership as well as core technology details. Volkswagen’s weakest point seems still to be the software that is core not only to electrification, but also the looming transition to autonomous driving. This area is one to pay close attention to. Given this technical issue and some uncertainty about Volkswagen management’s commitment, perhaps it is a time for investors to sit on the side and see how things play out. A lot of change is coming and this includes the rise of the Chinese car industry which is very focused on electrification; one suggestion is that within 3 years the Chinese car industry will be primarily BEV-based. Think about that!
I am not a financial advisor but I pay close attention to the electrification of transport. I hope that my commentary is helpful to you and your financial advisor as you consider your transport-related investments in general and Volkswagen in particular.
For further details see:
Volkswagen And Getting Electrified