As carmakers across the world are transitioning towards a new era of mobility, focused on autonomous driving, unparalleled safety, and crucially, emissions-free vehicles, new electric models are seemingly announced left and right. Few, however, have gone to announce a full range of models, encompassing seemingly every market segment that is relevant to the consumers nowadays, from a hatchback, saloon, and a station wagon to a myriad of Sport Utility Vehicles (SUV), and even a minivan. While Tesla’s product lineup, while still lacking a few models, comes to the mind as well, Volkswagen’s ID. range is another, with the Wolfsburg, Germany-based manufacturer beginning to hint towards its electrification in 2017.
The first taste of the fact that the manufacturer was moving towards becoming a “leading producer of electric vehicles” was in 2017, with the announcement that Volkswagen would enter the Pikes Peak International Hill Climb in 2018 with an all-electric prototype. "The Pikes Peak hill climb is one of the world's most renowned car races. It poses an enormous challenge and is therefore excellently suited to proving the capabilities of upcoming technologies," at the time explained Dr. Frank Welsch, Member of the Board responsible for Development at the company. With the vehicle having been developed by Volkswagen Motorsport and the car maker’s Technical Development department in its home city, the Pikes Peak climb dawned a new era, as Volkswagen was “developing an all-electric race vehicle for the first time," added Sven Smeets, the Volkswagen Motorsport Director.
The Volkswagen ID. R Pikes Peak was revealed in Ales, France, at a fairly humble press event on April 22, 2018, officially placing the ID. name on a physical product, a what would be a record-breaking sports car destined to buzz around some of the most famous circuits across the globe.
A chance for an electric redemption
The ID.R Pikes Peak, piloted by the two-times winner of the 24 Hours of Le Mans Romain Dumas, has managed to smash the lap time records at Pikes Peak, the Goodwood Festival of Speed hill climb, Bilster Berg, while also becoming the fastest EV at the Nürburgring Nordschleife. The electric sports car became the flagship of Volkswagen’s efforts to eliminate emissions from its vehicle lineup, as the project to build the race car was “part of Volkswagen's process of transforming itself into the leading producer of electric vehicles.”
“By 2025, the Volkswagen brand will already be offering 23 all-electric models,” read the press release, announcing the development of the ID. R in October 2017.
But the reasons why Volkswagen, the second-largest automaker in the world in 2016 and 2017, per data from the International Organization of Motor Vehicle Manufacturers (OICA), was suddenly interested in making battery-powered cars, which were hardly profitable, was not out of choice. After all, manufacturing an electric vehicle, on average, cost $12,000 more, per a McKinsey study from March 2019. While economies of scale would be one of the first things that would come to your mind, the difference in indirect cost because of the low volume of EVs increased expenses by only $2,500. As a result, “apart from a few premium models, OEMs stand to lose money on almost every EV sold, which is clearly unsustainable,” concluded the consultancy company.
The year prior to the low-key glitz and not a lot of glamor event in Alpes, France, on June 28, 2016, the Volkswagen Group (VAG) agreed to pay a $15.3 billion settlement related to the Dieselgate scandal, which was the result of over 11 million VAG-made vehicles having engine software that would recognize and activate emissions controls during laboratory testing.
Despite the settlement, the heads of the group remained cautious, as the Chief Executive Officer (CEO) of the manufacturer Matthias Müller was aware that “we still have a great deal of work to do to earn back the trust of the American people.” Nevertheless, the group has been “focused on resolving the outstanding issues and building a better company that can shape the future of integrated, sustainable mobility for our customers.”
“We will now focus on implementing our TOGETHER-Strategy 2025 and improving operational excellence across the Volkswagen Group,” said Frank Witter, Chief Financial Officer of Volkswagen AG.
While the story has had many more twists and turns, as well as regulatory changes, the consequences were that the executives at the helm of the company had a choice to make. It was either to rebuild the trust and confidence in the Volkswagen brand and continue building Internal Combustion Engine (ICE) cars or, after thinking long and hard, put all of your chips on the table in one place that was marked electric. The company chose the latter, with VW’s Chief Operating Officer telling Reuters in November 2018 that after weighing its options, the company chose electromobility.
A risky bet?
Still, even if the burden of the company’s ICE cars would have slowed down its climb towards eventual recovery from the scandal, choosing to focus and invest another mountain into EVs was questionable.
And it was questionable due to the simple fact that by the end of 2018, when Volkswagen (not the group) sold over 6.7 million vehicles out of a market of over 86.01 million global car sales, carmakers across the globe sold just over 1.2 million electric-powered vehicles, according to data by JATO, a research and consultancy firm focused on the automotive industry. The same year, Volkswagen sold over 51,000 electric vehicles, and in 2019, the number rose a whopping 80% to more than 140,000. For a manufacturer building millions of cars per year, pledging an investment of more than €33 billion ($34.7 billion) into e-mobility alone sounded like a way to burn cash just because, at the time, the all-electric Tesla had four profitable quarters between Q1 2017 and Q4 2019, possibly indicating that making a profit and electric vehicles was not a real possibility.
At the same time, the first quarter of 2020 turned the tide for the all-EV manufacturer, allowing it to post a positive net income every quarter since, with a record $3.3 billion of net income in Q1 2022 announced in April 2022. While looking back through the history with the benefit of hindsight is always easy, there is also this to consider: the European Union (EU) has mandated manufacturers to keep their fleet-wide emissions, meaning all new cars that were produced and registered within the EU from a single automaker, under a certain CO2/km threshold. Thus, even if VW would have gone the other way and stuck with their ICE products, they still would have had to develop electric vehicles, or low-emission cars, to meet the requirements, which have been continuously tightened over several years.
“These targets can only be achieved through a high proportion of electric vehicles. Non-fulfillment of the fleet-wide targets will incur penalties of €95 per exceeded gram of CO2 per vehicle sold,” read VAG’s 2019 annual report, adding that “regulations governing fleet fuel consumption are also being developed or introduced outside the EU28, for example in Brazil, Canada, China, India, Japan, Mexico, Saudi Arabia, South Korea, Switzerland, Taiwan, and the USA.”
Whatever the risk there was of investing so much cash into EVs, getting into the market first would allow Volkswagen or any other manufacturer to capture market share in a space that is yet to blossom fully. With various agreements and regulations concerning emissions on a local and global scale, the question was not if, it was rather when electric cars would be the go-to option when searching for a new vehicle. And sure, the infrastructure, and supplies of crucial components, including metals, are all questions the industry will have to solve in the coming years, there is little reason to believe that lawmakers across the world would reverse the environmentally-saving policies.
The ID. family – something for everyone?
While the ID. R is not exactly a car to carry groceries and run errands around town, the motorsport-focused car was just the starting position of the ID. family, as Volkswagen would soon announce a plethora of automobiles that would bear the family’s name, going on the offensive not only in the electric car market but also across several market segments that are filled with ICE cars.
Volkswagen had also changed its position regarding its future in motorsport – while other group brands, including Audi, Skoda, Seat (Cupra), and Lamborghini would continue having a presence throughout various championships, the main brand of the group would only provide factory support to electric competitions.
“Electric mobility offers enormous development potential, and in this regard, motorsport can be a trailblazer: on the one hand, it serves as a dynamic laboratory for the development of future production cars and, on the other, as a convincing marketing platform to inspire people even more towards electric mobility,” justified the company’s decision Smeets on November 22, 2019. “That is why we are going to focus more than ever on factory-backed electric drive commitments and continue to expand our activities with the development of the MEB. Innovative technology relevant to the car of the future is our focus.”
Eventually, the company revealed the production models of ID.3, ID.4, ID.5, ID. 6, and ID. Buzz. The five models, all of which (barring the ID. Buzz, which will go into production in Fall 2022), are currently in production, have not yet encompassed all of the market segments. The ID. Vizzion, which should conceptualize in the ID. 7 as a saloon and a station wagon, and a yet-to-be-announced ID. 1 and ID. 2, which could be an entry-level hatchback and a subcompact SUV, respectively, would fill the final gaps that are still present in the electric models’ lineup.
Nevertheless, with the introduction of MEB-based models, Volkswagen has also taken a look at its sales processes and how can consumers order and buy vehicles from the automaker. Starting with the ID. 3, it introduced pre-booking to customers, allowing car buyers to book an early production slot to ensure that they would be one of the first few to receive the electric hatchback. The solution was also offered for the ID. 4, ID. 5, and the ID. Buzz.
In addition, Volkswagen began selling its cars online, allowing customers to order cars from the comfort of their own homes in April 2022. The option has been made available for the ID. 4 and the ID. 5 and only in the German market so far, with freely configurable vehicles available for lease agreements that can be finalized without having to go to a financial institution.
“Our mission is to give our customers an excellent offering and buying experience both at dealerships and online. As a result, we’ll also strengthen our competitiveness lastingly,” motivated the move Klaus Zellmer, the member of the Volkswagen Brand Board of Management responsible for Sales, Marketing, and After Sales. Eventually, online sales will also include cash and other financing options, while also expanding to other countries within Europe.
The bet’s pay-off?
While betting one’s chips on EVs might have been a bit premature at the time, the move has allowed Volkswagen to jump ahead of its competition among the traditional car manufacturers, and eye to make strides into the Chinese market. There, the company wants to become “the most sought-after brand for sustainable mobility in China.”
The competition is fierce, as many local car brands have begun selling their products successfully, including Tesla churning out cars from its dedicated Gigafactory in Shanghai, China. After all, the country, according to McKinsey estimates is “and will continue to be the biggest global BEV market for the foreseeable future.” Following the consultancy’s analysis, the projection is that “BEV sales will reach about nine million in China by 2030, representing an annual growth rate of 24 percent,” it said in a study of the market in May 2021.
“Local OEMs may have gained the dominant position they enjoy today by launching their initial BEV models so quickly. Our benchmark analysis showed that these first-generation Chinese BEVs showed substantial variety in design and technology, and many still have the opportunity to optimize their electric-vehicle (EV) platforms and reduce costs.”
Yet international manufacturers still have the opportunity to capture the local market and have made use of that opportunity by either partnering with local carmakers or developing China-only models, such as VW’s ID. 6. Developing cars, that catered to a specific market is not an unordinary move – yet in China, state subsidies have been plentiful, as reported by Reuters, automakers in the country have received over ¥100 billion ($14.8 billion) of subsidies since 2009. They should end as the calendar flips to 2023, yet according to the same report by the news outlet, the government is considering continuing these subsidies due to the tight lockdowns and subsequent economic downturn in the country, where a zero-covid policy is still in place.
As more and more of Volkswagen’s electric offerings reach production and are handed to consumers, seemingly, the company has managed to balance profitable production and increasing volume of EV deliveries. Per the company’s Q1 2022 report, VAG shipped off 99,064 electric cars during the quarter, 65.2% more than in Q1 2021, as the share of battery-powered car deliveries of the total group’s deliveries year-on-year rose to 7.9%. Previously, it was 5.5%, and by March 2022, Volkswagen delivered 30,300 ID. 4 and 13,000 ID.3 units to customers since the start of the year.
Regarding deliveries in China, they have increased fourfold to 28,800 total units.
Still, the numbers are not that impressive in the grand scheme of things – after all, delivering less than 10% of your total volume is a lot of room for growth. Especially since the company has the goal of becoming the leader in electric mobility by 2025 globally.
And so far, the conglomerate has backed up its ambitions with hefty investments in electrifying its plants and hubs across the world, including Europe and North America.
“Demand for our all-electric vehicles is very high worldwide and our order books are thus well filled. The increase in BEV deliveries would have been significantly higher had it not been for the current supply bottlenecks,” commented Hildegard Wortmann, Board Member Sales at the Volkswagen Group (VAG) as the company announced its Q1 2022 results. Despite the constraints in getting the required materials, Wortmann added that the manufacturer continues “to have our sights firmly set on a BEV share of 7 to 8 percent for the full year,” providing a glimpse into the group’s planning for the near-term future.
In terms of the long-term future, the company has continued to make moves to ensure its supply of batteries, including the establishment of a battery hub in Salzgitter, Germany, where Volkswagen has launched a recruitment campaign to attract at least 500 external talents to bolster its ranks at the location. It has also set up a management board, which will start functioning on July 1, 2022, to “oversee all activities along the battery value chain – from the procurement and processing of raw materials to the development of the Volkswagen unit cell and the management of the company's initial six gigafactories,” read the press release announcing the establishment of the management board from May 20, 2022.
“A successful mission needs a clear goal, a clear strategy for getting there, and a team with a strong team spirit. By this, we will be a driving force behind the transformation of the automotive industry and the future of Volkswagen,” ratified Thomas Schmall, the Group Board Member for Technology, and the Chairman of the Board of Management of Volkswagen Group Components.