VW Lifts Profit Target as Batteries and Software Boost Sales

Volkswagen AG ratcheted up its mid-decade profitability goal as it hones plans to become the electric-car leader and cash in on what it expects to be a massive new revenue stream from software.

Europe’s largest automaker will target an 8% to 9% operating return on sales in 2025, up from 7% to 8% previously. After wooing investors with a Tesla Inc.-style battery briefing in March, Chief Executive Officer Herbert Diess is elaborating further on VW’s plans to phase out combustion engines and equip cars with software systems that enable automated driving and can be updated over the air.

“We set ourselves a strategic target to become global market leader in electric vehicles -- and we are well on track,” Diess said in a statement. “The next much more radical change is the transition toward much safer, smarter and finally autonomous cars.”

Key stakeholders backed Diess’ action plan last week when the supervisory board extended the former BMW AG executive’s contract through 2025. He’s been retooling the sprawling VW group to meet stricter emissions rules and keep Tesla and others at bay, planning half a dozen battery factories for Europe and switching assembly lines globally to build the industry’s broadest range of EVs.

VW Lifts Profit Target as Batteries and Software Boost Sales

VW’s common shares -- already up almost 70% this year -- slipped less than 1% in Frankfurt trading. The Stoxx 600 Automobiles & Parts Index has risen about 23% this year.

Highlights of the 2030 strategy Diess is briefing investors on Tuesday include:

  • Seizing a share of 1.2 trillion-euro ($1.42 trillion) software-enabled sales that VW expects to expand the overall global mobility market to 5 trillion euros by 2030, from 2 trillion euros today.
  • Increasing the share of total investment that goes to electrification and digital offerings; VW already has budgeted 73 billion euros for those areas from this year through 2025, half of overall spending.
  • Spending 800 million euros on a new research facility in Wolfsburg -- where the German company is based -- that will design a new EV platform that will be available to other carmakers.
  • Building small EVs in Spain, with final decisions dependent on securing subsidies and other factors.

Electric Outlook

Diess, 62, echoed a senior executive’s bullish view on prospects for EV sales growth in the U.S. under President Joe Biden, who’s proposed spending $174 billion on charging stations, rebates for consumers and other support measures.

“The Biden plan gives us a unique opportunity to start from a better position than the competition,” Diess said. “There’s never been a point in time where we were better positioned to significantly increase our market share.”

In Europe, VW announced its Chinese battery partner, Gotion High-Tech Co., will join forces at its second battery factory in Salzgitter, Germany. VW already has said the first plant will be built by Swedish startup Northvolt AB, in which it holds a major stake. It expects to finalize a third facility in Spain and told German workers it’s finalizing plans to add another site in its domestic market.

VW’s namesake brand already has said it plans to stop selling combustion cars in Europe between 2033 and 2035, followed by the U.S. and China at a later stage. Audi sees continued demand for combustion engines in China beyond 2033, but intends to fade them out in other markets by then.

Although EVs aren’t as profitable as combustion cars now, VW expects overall parity to be reached within two to three years. U.S. peers General Motors Co. and Ford Motor Co. have similarly grown more optimistic about margins for battery-powered models.

Autonomous Transformation

Even as EVs take center stage, Diess has repeatedly said that software and self-driving functions will to bring about an even deeper transformation of the industry with cars becoming sophisticated connected devices.

VW plans to offer autonomous driving in major markets worldwide, aided in part by cooperation with Ford Motor Co. and affiliate Argo AI LLC. In China, VW’s largest market, the carmaker has sought partnerships with local tech companies to be among the first to offer autonomous driving, mostly in private cars.

VW Lifts Profit Target as Batteries and Software Boost Sales

The manufacturer remains on solid footing to finance its ambitions. First-half operating profit rose to 11 billion euros, ahead of pre-pandemic levels, VW said last week, with 10 billion euros in net cash flow.

However, fallout from the global semiconductor shortage may be more pronounced during the second half of the year. Analysts also have warned about a slowdown in VW’s business in China and tepid early demand for the VW brand’s electric ID. cars there.

“For now, VW’s ID. product still has too many serious teething issues,” Sanford Bernstein analyst Arndt Ellinghorst said in a July 9 report. The company’s internal combustion-engine business “needs to be managed down in a socially acceptable way whilst battery manufacturing and software capabilities are internalized.”

©2021 Bloomberg L.P.

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