Volkswagen risks stalling with its electric gamble

Volkswagen, the world's largest car marker, faced an existential crisis in the autumn of 2015, when the Dieselgate scandal erupted. The company became a German national embarrassment and international pariah when it admitted to having rigged its diesel engines to pump out false readings in environmental tests. The engines were much worse polluters than advertised.

As the lawsuits and fines piled up – the bill so far is about US$25-billion ($31-billion) and can only rise – some analysts and car-industry watchers thought the company would have to break itself up or seek a government bailout to survive.

VW was able to avoid meltdown. The chief executive officer, Martin Winterkorn, was ousted and the new boss, Matthias Mueller, launched an aggressive cost-cutting and efficiency drive. The formula, coupled with rising cars sales across the entire industry, has produced impressive results. VW's sales grew 4.2 per cent in 2017, to a record 10.7 million vehicles, profit margins expanded strongly and the shares took off. They are up more than 80 per cent from their Dieselgate low, and have climbed 20 per cent in the past year. No big division was sold (VW recently cancelled the planned auction of Ducati, its Italian motorcycle company).

The VW crisis is over, but a new one could emerge, for the VW group is about to take the biggest gamble of its corporate life – a massive bet on electrification that could be wildly premature. "I've never seen a company take a bet like this," Bernstein analyst Max Warburton recently told the Financial Times. "They are taking risks that no one else is taking."

Even as it strives to bring down capital expenditures to trim costs, VW plans to spend some €20-billion ($30.9-billion) on electric cars, and another €14-billion on autonomous cars and shared mobility, by 2025. The effort will see it roll out 80 new e-cars across its brands, which include Audi, Porsche, Skoda and Bentley. That's at least a doubling over its previous commitment and represents a colossal challenge with only seven years to go.

In essence, the e-car effort is reinventing the company. But does it need reinventing?

VW seems to be doubling down on its e-car bet because it was rattled by the success of Tesla, whose market value, at US$58-billion, is only about US$22-billion less than VW's – remarkable, given that Tesla's output in 2017 was about 1 per cent of VW's. Contrition seems the other reason. After Dieselgate, VW had an abysmal reputation. The best way to fix an image problem is admit your mistake and drown out the bad news with good news –in this case, the launch of a fleet of zero-emission cars.

The image makeover worked. What may not work, in the business sense, is the e-car lunge. In spite of all the hype, the technological advances and the government purchase subsidies, the global e-car market share is insignificant. In the United States in 2016, e-cars took only 0.9 per cent of the market, according to the International Energy Agency. While global e-car sales are climbing fairly quickly, the rise comes off a minuscule base and estimates of their future market share vary wildly. In the United States and Canada, the hot sellers are crossover SUVs, not e-cars. Ditto in Europe.

Certainly, VW's few e-car models are poor sellers, because of their relatively short range, the lack of charging points in cities and highways and, mostly, their eye-watering prices. Volkswagen Italia sells a stripped down Golf for €20,350. The electric version of the same car is almost double the price (before government subsidies).

Note that the gasoline, diesel and electric Golfs all look the same, which highlights another obstacle for VW's e-car revolution: High platform costs.

A few years ago, VW launched the development of a highly versatile platform, called MQB, that could be used for minis and big family cars and everything in between, regardless of the propulsion systems. The MQB for the Golf can house a gasoline, diesel, methane or electric engine. Sounds good until you realize that VW spent tens of billions of dollars (a few reports said it was as much as US$70-billion or more) on the platform. The high price means that VW has to charge high showroom prices if it is to recoup the platform's development cost. In doing so, it locks itself into the premium end of the market.

Electric cars will have to fall in price dramatically if they are to become popular, but VW's ability to sell cheapie e-cars is constrained by the high cost of the MQB platform. The solution, of course, is to develop a cheaper platform tailored to e-cars, but that could take a while, and adding another platform at any price still still cranks up the R&D bill.

Some auto makers must be astonished by VW's horrendously expensive bet on e-cars. Note that Sergio Marchionne, the Italian-Canadian CEO of Fiat Chrysler, is not jumping into the e-car parade. At January's Detroit Auto Show, he noted that no electric car line anywhere is making a profit and that embracing a technology that may be superseded by another technology is hugely risky. His philosophy is to make Fiat Chrysler "technology-neutral," meaning he has no interest in betting the ranch on e-cars. VW is going flat out on e-cars and may find it is merely leaping from one crisis to another.