Volkswagen logo sits on a sign outside a Volkswagen AG (VW) showroom in Berlin, Germany. (Photographer: Krisztian Bocsi/Bloomberg)

VW Increases Electric Vehicle Target by 50%

(Bloomberg) -- Volkswagen AG is gearing up its electric-car onslaught, adding more battery vehicles to expand a bet that has already strained profit margins at the world’s largest carmaker.

The German manufacturer plans to produce 22 million electric cars over the next decade, after previously mapping out a goal of 15 million cars based on its main electric-car platform for compact and mid-size vehicles. VW’s pursuit of a dedicated format rather than a more flexible one emulates e-car pioneer Tesla Inc.

Tesla’s approach “is right,” rather than building platforms for both electric and combustion engine cars as some traditional automakers have done, VW Chief Executive Officer Herbert Diess told analysts during a capital markets day Tuesday. “Fully-electric cars are the most efficient way to cut CO2 emissions.”

Diess is pushing forward with the industry’s most ambitious electrification plan, using VW’s heft to lower costs as regulators pick up the pace on emissions regulation. The risk is that buyers stay on the fence, delaying the payoff for years down the road. By comparison to VW’s goals, General Motors Co. expects to sell 1 million electric cars annually by 2026.

Some carmakers lacking VW’s scale have opted for electric models that’ll share underpinnings with combustion models or roll down the same production lines. VW is retooling whole plants to make room for its specifically developed platform. The world’s biggest carmaker needs its gamble to pay off, with its key three brands already showing the strain from higher spending on electric-vehicle technology, alongside trade disputes and weakening markets.

To share costs, VW is in “very good talks” with Ford Motor Co. to expand a planned collaboration on light commercial vehicles to autonomous driving. Ford is also considering using VW’s electric-car technology, dubbed MEB, in Europe or China, Diess said.

VW Increases Electric Vehicle Target by 50%

“The supertanker is picking up speed,” Diess said Tuesday in a speech at VW’s annual earnings press conference. “We are aligning Volkswagen with e-mobility like no other company in our industry.”

Global automakers are under pressure to generate savings to finance the industry’s biggest transformation in decades. VW is spending 44 billion euros ($49 billion) through 2023 on electric and connected cars. Keeping profitability level this year from 2018 will be an achievement given the U.S.-China trade spat and falling demand in China, VW’s biggest market, Diess said in a Bloomberg TV interview.

Making Progress

Volkswagen fell 1.1 percent to 143.80 euros at 6:05 p.m. in Frankfurt. The stock has declined 7.6 percent in the past year, compared with a 22 percent drop in the Stoxx Europe 600 Automobiles & Parts Index.

VW is also making progress on a plan for a partial share sale in trucks unit Traton SE. A date will be agreed “in the foreseeable future” with VW weighing up market conditions “in the next days,” Diess said. The division is valued at as much as 30 billion euros. “The entire management board thinks it’s a very good idea,” Chief Financial Officer Frank Witter told analysts.

Separately, the company has started a review of its joint venture in China that’ll conclude early next year. As part of the project, VW will weigh potential changes the shareholding structure, Diess said. VW plans to give an update on possible sales of “valuable non-core assets” during the second half.

Operating return on sales in %20182017
VW brand3.84.2
Audi7.98.5
Porsche17.418.5

For the Audi E-Tron and the Porsche Taycan, VW’s first two battery cars that are part of a 70-model onslaught until 2028, VW said it has received 20,000 reservations each -- with Porsche boosting planned production because of high demand.

As VW works toward the expensive dawn of the electric era, the company is struggling to push down costs and make the 12-brand behemoth more agile. Diess’s plan to save more costs is facing growing discontent among the ranks of VW’s powerful labor representatives.

On Tuesday, Diess sought to strike a conciliatory tone citing “constructive” talks with works council head Bernd Osterloh. But he was blunt pointing out labor costs as a “big concern” at the main VW and the Audi brands, with management determined to free up funds toward the planned overhaul. There might be “some smoke” emanating from Audi’s headquarters and main factory in Ingolstadt, CFO Witter said.

“VW needs to stop its infighting and tackle its challenges in order to transform itself,” Evercore analyst Arndt Ellinghorst said in a note. “The future will certainly not be much easier.”

VW is preparing to update investors on its mid-term targets this summer, including goals reflecting a stronger focus on shareholder value. Management remuneration will be geared more toward share price performance.

VW Tuesday confirmed a forecast for revenue to rise by as much as 5 percent for this year, despite weakening markets globally, as well as maintaining profitability between 6.5 percent and 7.5 percent of sales this year. The predictions assume markets improving during the second half of the year, Diess said.

©2019 Bloomberg L.P.