Volkswagen plans to ‘leapfrog’ Tesla in electric car race

Patrick McGee
A Volkswagen XL1 plug-in diesel-electric hybrid automobile sits on display at a public Volkswagen event on March 15, 2014, in Berlin, Germany.
Adam Berry | Getty Images

The Volkswagen car brand said it is confident it will "leapfrog" the competition and become a leader in electric cars by 2025 as it redirects its attention to battery-powered vehicles and emerges from the 2015 diesel emissions scandal.

The VW brand, by far the biggest company in the 12-brand Volkswagen Group, said it would target 1m electric car sales by 2025.

This would put it on a clear path to clash with Tesla, the US electric carmaker that sold fewer than 80,000 units last year but has pledged to build 1m a year by 2020.

"Anything Tesla can do, we can surpass," declared Herbert Diess, head of the VW brand at its Wolfsburg headquarters.

Moreover, he said, what Tesla will achieve in the premium market, VW will achieve in the volume market. "We are confident that in this new world we will become a market leader," he added.

The electric ambitions of VW and Tesla form one of the big debates in the car world: is it easier for a start-up with proven technology to scale up, or for a traditional carmaker with scale to transform its operations?

Will take years to fully recover from emissions scandal: VW Brands CEO
Will take years to fully recover from emissions scandal: VW Brands CEO

Mr Diess said VW will have "leapfrogging cost advantages" thanks a wider rollout of its "MQB" platform, or car-building architecture, which helps the different VW brands to share parts, technology and assembly sequences.

"[Tesla] is a competitor we take seriously. Tesla comes from a high-priced segment, however they are moving down," Mr Diess said, referring to the $35,000 Model 3, which enters production this summer. "It's our ambition, with our new architecture, to stop them there, to rein them in."

Mr Diess was speaking at what VW called its "first" annual press conference — an odd phrasing for a company that is 80 years old. What it signified is that Mr Diess, a cost-cutting executive poached from BMW in July 2015, is drawing a clear line between the VW brand and the VW Group. The line between them was often hazy under Martin Winterkorn, the former chief executive who led both until 2015.

To enhance the value of the VW brand, it has started to separate certain group-level activities from the brand's balance sheet. Under the new structure, 2016 operating profit was €1.6bn, instead of €1.9bn as reported, but margins were 2.1 per cent rather than 1.8 per cent.

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The challenge for the VW brand's transition towards electric mobility is to ramp up investments in both electric and combustion engine technology, all the while cutting costs overall.

"We foresee substantial financial burdens looming," said Arno Antlitz, chief financial officer for the brand. However, he said the increased capital spending would be "overcompensated" by savings from the "future pact", a deal reached last November to cut €3.7bn in costs and reduce headcount by 30,000 globally by 2020.

Mr Diess said VW would become a leader in three stages: from now until 2020, the focus is on improving profitability by cutting costs, enhancing productivity by 25 per cent, and achieving operating margins of at least 4 per cent. The second stage, until 2025, is to take the lead in electric, connected cars, while boosting margins to 6 per cent. After 2025, VW will double down on mobility solutions.

Central to VW's plan is a "substantial reduction of complexity in the new line-up," said Mr Diess. If VW can achieve that it will be on a solid foundation to sell electric cars at the price of today's diesel models, for profit. "The entire electric fleet," he added, "is to be profitable from the very beginning."

VW's Diess: Have to prepare for difficult years ahead
VW's Diess: Have to prepare for difficult years ahead