VW to triple EV engine budget to €9bn as analysts warn of ‘structural threat to German industry’

02 May 2017

Volkswagen (VW) CEO Matthias MÜller has defended suggestions that his company has been too slow to react to the incoming electric vehicle (EV) revolution, calling on the media to regain a grounding in reality after a frenzied reaction to Tesla’s market value surpassing General Motors to become the biggest car manufacturer in the US.

He stressed: ′Volkswagen Group produced 10.3 million vehicles last year – Tesla around 80,000″¦. And the fact is, electro-mobility continues to be a niche.’

He cited figures that EVs currently account for only 0.9% of the total car market globally – just 750,000 units. While conceding that ultimately ′the future of driving is electric,’ he said that ′modern combustion engines will still be relevant for at least another 20 years.’ Persevering with the tech through this period will leave VW at the mercy of increasingly stringent emissions regulations. MÜller stressed that by 2025, three out of four VW cars will still be run by diesel or petrol engines, so it was important to continue to invest in the technology.

MÜller is currently planning to launch a pro-diesel campaign alongside other manufacturers to combat the negativity surrounding the technology post-Dieselgate and in the face of moves towards diesel bans in major European cities. He is also planning another campaign to promote natural gas-driven vehicles, in a move against the trend in the industry.

Analysts are concerned that German carmakers are not doing enough to compete with rivals further advanced in EV development such as stock market favourite Tesla, which has built massive brand value as a symbol of future mobility around its extensive charging network and tech. They are also concerned about the serious threat from China. The rapidly growing auto market, already by far the world’s largest, is so expeditiously advancing that Evercore ISI analysts warned on Friday that soon ′it could prove [to be] a structural threat to the German auto industry.’

MÜller said VW Group plans to plough €20 billion by 2022 into the development of more efficient, cleaner engines. While announcing a tripling of its ′alternative’ drive technology investments over the next five years to around €9 billion compared to the last five – as was widely expected owing to its major planned EV offensive from 2020 – Volkswagen is still set to spend more on eking out small efficiency improvements from traditional internal combustion engines (ICEs). This is as the ICE-dependent group grapples with rapidly tightening emissions rules in its key markets of Europe and China. It plans to plunge a further €10 billion over the next five years into improving the efficiency of its combustion engines by 10-15%. This is money that sales rival Toyota, with its hybrid-focussed line-up, can plough into future drivetrain technologies instead.

To control costs, MÜller said VW aims to reduce the variety of mass-market model engine types it uses by as much as 40% through 2020, with one motor introduced last year able to be used in 45 models across the group’s Audi, SEAT and Skoda brands. He signalled that ′expensive and nonsensical parallel developments’ for the group were ′a thing of the past.’

Effectively admitting that electric vehicles are still not central to the company, MÜller said that battery technology will have to become a ′core competency’ of the group, due to their high expense meaning they account for nearly a third of an electric car’s value.

Nevertheless, Volkswagen appears to be successfully keeping to its 2020 EV offensive deadline, led by its I.D. EV brand, which its executives have stressed is critical to reduce its ICE dependence. ICE developments are sharply rising with no end likely in the face of EU emissions targets (with Brussels politicians ultimately aiming for carbon neutrality) and the increasing introduction of ever-tighter city-level restrictions, whose stringency is variable, unpredictable and vulnerable to rapid political change.

From 2019, Volkswagen is set to offer customers electric cars with an extensive 600km range ′at the price of today’s diesel.’ Many manufacturers are compensating for public EV range concerns, and worries about lengthy waits for their cars to charge, by offering cars with ranges much longer than the average tank range of those with internal combustion engines.

To avoid being left behind, MÜller concluded: ′What’s at stake is to develop a future-proof drives portfolio as a basis for transforming the core autos business.’