Volkswagen’s Road to Riches or Ruin Starts in This Factory

(Bloomberg) -- Six months ago, Volkswagen AG plunked down a few dozen building containers next to its sprawling assembly halls in Zwickau, eastern Germany. The graceless space stands apart from the rest of the sleek plant, but it’s inside that the carmaker is really breaking new ground.

One module houses a walk-in time capsule curated with meticulous attention to detail. There’s a vintage bicycle and antique furniture; old books and black-and-white photos adorn the walls under the glow of light bulbs mounted on old-fashioned fixtures; hidden loudspeakers play the clip-clop of horses pulling carriages.

The not-so-hidden message Volkswagen wants to instill in the minds of its 8,000 factory workers being funneled through the installation: change is normal and necessary, and it’s coming here to Zwickau.

The factory represents Ground Zero for one of the most audacious bets in corporate history. It’s here that VW, the world’s biggest carmaker with annual production of more than 10 million vehicles and revenue approaching the GDP of Finland, wants to prove it can morph into an electric-car champion and survive the end of the combustion engine.

Managing the switch is nothing short of open-heart surgery. In Zwickau, most of the factory space is being revamped while production continues. Some 9,000 tons of steel structures are moved, and only about a third of existing machinery can be re-used. With the revamp in full swing, extensive training sessions and seminars kicked off  for everyone from assembly workers to engineers to managers. Electric cars may have four wheels, but they’re fundamentally different from current vehicles in almost every other respect, from the technical architecture to the way they’re assembled to the materials used.

“It’s like getting changed inside a wardrobe,” said Dirk Coers, the personnel chief of VW’s operations in the region, who is overseeing the transition and its effect on workers. “No one has done something like this before.”

The site is the world’s first car factory switching seamlessly from combustion engines to electric ones, and VW has a lot riding on the experiment, investing $33 billion to develop the world’s biggest battery-car fleet and move toward a lofty goal to become carbon neutral by 2050. Zwickau is the laboratory for Volkswagen’s grand reinvention. The site will become Europe’s largest car plant of its kind with annual capacity of 330,000 cars, just shy of Tesla Inc.’s targeted global deliveries this year. The ID. 3 will start rolling off assembly lines in November, and in 2021 the site will have ceased output of conventional cars altogether. All told, VW will sink 1.2 billion euros ($1.33 billion)  into producing three VW electric cars, two for sister brand Audi and another one for Seat in Zwickau.

Volkswagen picked Zwickau because it wanted to kick things off with a German site and because a refit is easier at a modern site. It’s the opening salvo in a global race in which Volkswagen will convert or add seven other factories in Europe, Asia and the U.S. by the end of 2022, including two in China with a combined output of 600,000 vehicles.

The town of 90,000 is no stranger to upheaval. Zwickau is rich in automotive heritage. It’s here that car pioneer August Horch established Audi more than a century ago, and it later became home to the diminutive Trabant car, that boxy emblem of Eastern German mobility whose asthmatic two-stroke engines sputtered down communist roads. Volkswagen picked up the site at the end of 1990, months after Germany was officially reunited, and began building its Polo hatchback there.

Volkswagen is placing a big bet on a battery-powered future, and so is Zwickau. The carmaker is the only major employer in the area, where the population has been shrinking since reunification. In regional elections this month, the far-right AfD party garnered more than a quarter of the votes in Zwickau. Unlike nearby Leipzig, which has attracted substantial investments from companies like BMW and Porsche, most of the money whizzed past Zwickau.

The gloom of the post-communist era’s economic struggle still hangs over the city. Derelict houses with smashed windows and potholes in cobbled streets dot the area around the town center. An air of nostalgia and skepticism fills the wood-paneled pub that dates back 270 years, where the card-playing locals have noticed the growing number of out of towners heading to the VW factory that squats in Saxony’s rolling hills.

“Pretty much everything is changing here at the moment,” said Martin Lehmann, 31, who works in the VW factory’s planning department. “Our jobs, the way we do things, how decisions are made, just about everything.”

Heiko Roesch oversees the manufacturing of car bodies inside the sprawling hall, home to an armada of 1,625 robots spread across an area equivalent of 11 soccer fields. Every morning at 7:30 a.m., Roesch, 52, gathers engineers, co-workers and suppliers next to the assembly lines to track progress and identify problems.

There’s much to discuss. From an advanced welding technique to a more complex way of fitting the battery into the car to a greater degree of automation aimed at reducing assembly time, employees face challenges everywhere.

At this stage, much of the work that will be taken over by machines is still performed manually as employees come to grips with the new tasks and cars. On a recent visit, three men were untangling cables for the dashboard, a step that will become fully automated to speed things up. The goal is to get to 800 cars a day in three shifts over time from currently about 760.

“At the moment it’s not just about learning how things work, but also about learning why some things do not work,” Roesch said. “If you like dealing with a different issue every day, then this is your place.”

One major challenge is the weight of electric cars, which are heavier mainly because of the battery. The entire assembly line has to be revamped because the ID. 3’s chunky SUV sibling weighs 2.25 tons, more than the existing steel gantry can support.

“For years we’ve been fighting for every ounce to lower vehicle weight, and now this,” said Holger Hollmann, who oversees the assembly operations. 

To no small degree, Volkswagen was shocked into this massive retooling exercise by the diesel-cheating scandal that erupted four years ago this month, throwing the carmaker into an existential crisis and forcing it to radically rethink its future. Like most incumbent carmakers, VW had never really embraced electric cars. In Zwickau it assembled a small number of electric Golfs before culling the project in 1996. It would take the shock waves of the diesel scandal to prod the company into action. With its balance sheet intact despite unprecedented fines, VW is now putting its vast engineering and financial muscle to work. 

“VW’s recent earnings and cash flow performance has been impressive,” Evercore ISI analyst Arndt Ellinghorst said. “However, being the largest player in Europe and taking the greatest bet on battery-electric vehicles also bears significant risks that shouldn’t be ignored.”

There’s reason for skepticism. While earning money with upscale electric cars that can command higher prices is already proving difficult (just ask Elon Musk), no one has even come close to making affordable ones without burning vast amounts of cash. The ID. 3, which will be unveiled next week in Frankfurt, starts at 29,900 euros, in line with the diesel version of the Golf.

Undeterred by patchy charging infrastructure, VW plans for no fewer than 22 million units over the next 10 years and anticipates that by 2030 the electric-car share will surge to at least 40% of global deliveries. That lofty projection stands in stark contrast to the realities on German roads today. VW shipped only a handful rekindled battery-powered Golfs last year, and in all of Germany a meager 36,000 electric cars were sold.

“We know the stakes are high, no doubt about that,” said Thomas Ulbrich, a VW lifer and trained metal worker who climbed the corporate ladder to become a board member at the company’s main car brand. “But there is no valid alternative to our strategy.”

--With assistance from Chris Reiter.

To contact the editor responsible for this story: Benedikt Kammel at bkammel@bloomberg.net

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