What to make of Volkswagen’s electric vehicle "offensive"?

Over the last nine months, Volkswagen has rolled out a strategy of massively shifting research, development, design, and production toward electric vehicles. Coming from one of the world’s largest auto manufacturers, an icon of innovative design, engineering and manufacturing excellence, as well as modern corporate malfeasance, the strategy warrants serious attention.

In November, VW’s Supervisory Board announced that VW would invest $44 billion – one-third of the corporation’s planned expenses—over the next five years in an “electric offensive” that will include developing the largest electric vehicle production network in Europe and carbon neutral manufacturing. The temperature targets of the Paris Agreement are our “yardsticks,” says Herbert Diess, VW’s Chairman.

In February, VW briefed its International Sustainability Council and several outsiders (disclosure: I attended) on key elements of its strategy. In March, VW’s leadership signed off on the 2050 plan, which establishes ambitious interim milestones: By 2030, at least one of each of VW Group’s ~300 models is scheduled for electrification as either plug-in or full battery electric vehicles, totalling 40% of passenger vehicle sales. The plan also calls for an end to development of new petrol and diesel vehicles after 2026, a pledge that should include continued reductions in CO2 emissions in parallel with EV investments.

VW is making sure the world takes notice. These announcements were reinforced by two new advertisements launched during major sports events: an artsy commercial set to Simon and Garfunkel’s classic The Sound of Silence, launched during the U.S. National Basketball Association finals in June; and a “Drive Bigger” campaign that aired during the FIFA Women’s World Cup finals in early July.

What should we make of all this? Is it another brazen instance of greenwashing, fundamentally no different than VW’s “clean diesel” Super Bowl ads, which aired while the company’s diesel cars were emitting up to 35 times the legal emissions limits? Or is it a serious effort to put the company on a sustainable path stretching far beyond other auto makers and government requirements? Let’s look at the facts.

While each of the four largest global automakers– VW, Nissan-Renault, Toyota, and General Motors – has a climate strategy, VW’s strategy is bigger, bolder, and far more detailed. Rigorous comparisons of them are impossible because they’re only described in general terms within corporate sustainability reports or CEO presentations, while the details remain confidential. Nevertheless, it’s clear that VW’s strategy is distinguished by the highest announced electric vehicle sales share (40%) and production targets (4 million per year) by 2030, and much higher investments in electrification and battery technology. Nissan-Renault’s sales target, for comparison, is 20%–30%, or about 2–3 million vehicles, by 2025; GM’s is 1 million vehicles (about 10%–15% of its total sales) by 2026. The more hybrid-focused Toyota has a goal 1 million (perhaps 6%, based on its partnerships) zero-emission vehicle sales by 2025.

VW plans to make the bulk of its EV sales in 2028 in the markets with the strongest EV policies: China (60%), Europe (25%), and the North America (10%) (see chart). But the automaker’s projected EV sales outpace existing regulatory requirements. Europe has the most far-reaching EV sales benchmark, at 35% of each automaker’s sales fleet for 2030; VW bests that with its 40% goal. California and nine (potentially ten) other U.S. states, along with the Canadian province of Quebec (and British Columbia is on the way), have adopted ZEV regulations that effectively require 8%–10% electric vehicles in 2025. China’s new energy vehicle policy mandates at least 4% EVs by 2020, and its 2025 goal is for a 20% electric share. Indeed, VW is the only one of the four largest automakers whose announced sales projections exceed a minimum compliance pathway in all three of these markets.

chart, projected EV sales, VW

Volkswagen’s projected electric vehicle deployment (Source: Volkswagen)

VW’s planned overcompliance with government EV sales targets suggests that something unusual is happening here. Dating back to the 1990s, I’ve watched as car makers have barely complied – or failed to comply– with vehicle air pollution and climate change standards. From that vantage point, VW’s climate strategy appears to be an early indication of market transformation. It looks like a game changer.

What could be driving VW’s electric offensive? What does VW know that its counterparts do not? Without inside knowledge we can’t say for sure. But we do know that China is VW’s largest vehicle market, and that China’s intentions to drive towards 100% electrification are genuine and purposeful. If VW has to build EVs for China, why not use those economies of scale to drive down the price of its EVs and capture markets in the rest of the world? It is true that this massive investment gives VW a shot at redeeming its tarnished corporate brand. Is it greenwashing if you actually back it up? I don’t think so.

VW seems to be making a bet that EVs will be a better product than conventional vehicles. And that, we also know, is a rational bet. Most experts predict that EVs will be more affordable than conventional petrol vehicles in five years or less. Even now, charging costs for EVs are less than half the cost of gasoline refueling even in the US and China, with their low fuel taxes. Without a transmission, or emission controls, or an engine, maintenance costs will be far lower. Tesla claims, plausibly, that a larger crumple zone and low center of gravity make EVs inherently safer. And instant acceleration of an electric motor translates into an attractive driving experience. Beyond the technical specs, Munro & Associates, a well-respected Michigan manufacturing analysis firm, estimates that the Model 3 has a profit margin of greater than 30%, well beyond the single digit margins usually associated with passenger sedans. The weight of evidence stacks up solidly in favor of a transition to electric vehicles.

Some investors question Volkswagen’s “all in” approach. They doubt consumer demand and favor a more “balanced” strategy that would keep options open for prolonged sales of conventional vehicles. The riskier play, it seems to me, would be to refuse to innovate and adapt to changes in technology, social and environmental demands, and consumer preferences. Time, and the market, will tell. But based upon a well-considered understanding of vehicle technology and policy trends, I’ll offer my own prediction (with a nod to Virgil): Fortune favors the bold.