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Volkswagen attempted to burnish its dieselgate-debased image by unveiling an ambitious electric car plan at the Paris Car Show, but analysts wonder if it might not only be over-ambitious but also threaten the company’s profitability.
At the Paris show, which closes October 16, VW unveiled its ID concept car and said its own-name brand would be selling one million electric vehicles (EV) a year by 2025. The Volkswagen group target is for 30 new EV models by 2025 and annual sales of between two and three million by then, and that includes a sub-compact SUV, a coupe and a replacement for the Phaeton limousine. The ID is due to go on sale in 2020, and VW said because of the space increases from using an electric power-train, the ID will have the interior space of a mid-size Passat in a car the size of a Golf small family car.
Investment bank Morgan Stanley points out that VW’s sales target implies EVs will make up around 25% of its sales in 2025, when industry estimates center-around just 4%, and speculates that this could wipe out VW’s operating profit between 2025 and 2028.
But Professor Ferdinand Dudenhoeffer, director of the Center for Automotive Research (CAR) at the University of Duisburg-Essen, doesn’t agree, saying that the momentum building for electric cars is unstoppable, and VW, not to mention Mercedes-Benz and BMW, are right to concentrate on slashing carbon dioxide (CO2) emissions from their cars.
Morgan Stanley analyst Harald Hendrikse said he has built an illustrative model exploring the potential impact of attempting to reach these EV levels and using assumptions about the impact on internal combustion engine (ICE) sales and EV pricing.
“VW’s targets for EV penetration are much more aggressive at this stage than most industry estimates,” Hendrikse said.
European automakers are being pressured by tightening regulations on fuel economy. Europe has already implemented average vehicle emissions of 130 grams per kilometer of carbon dioxide (CO2) – the equivalent of around 43 miles per U.S. gallon. This will tighten to 95 g/km by 2021 or 57.4 miles per U.S. gallon. The U.S. requires a less aggressive 54.5 mpg by 2025.
According to Hendrikse, this will put huge pressure on VW’s bottom line.
“Getting to even mid-teens EV penetration by 2025 – much lower than VW’s target – could theoretically see VW’s entire auto business loss-making through the ICE-EV transition phase between 2025 and 2028. Such long-dated assumptions are clearly unlikely to be correct and conclusions are very sensitive to the assumptions. The only thing that is clear is the scale of the change facing the industry,” Hendrikse said.
Hendrikse refers to two estimates for EV sales comprising 4% of sales by 2025 and another predicting 10% in 2030.
“In our view, this reflects only the EV penetration that would be required to meet emissions targets, at least in Europe and the U.S.,” he said.
This assumes plug-in hybrid and 48-volt mild hybrid share in 2025 of 10% to 13%.
Hendrikse cautioned that the exercise was mainly illustrative given its speculative nature and said the indications were for VW profits from ICE technology to fall sharply after 2020, reach breakeven by 2027 and lose money thereafter. EV production would dilute VW’s automotive EBIT (earnings before interest and tax) by about 4 billion euros before allowing gross margins to offset investment losses with profits first appearing in 2028.
“Overall VW auto EBIT, which was nearly 12 billion euros in 2015 despite a weak Q4, falls to just 8 billion by 2020, assuming the EV investments, and then falls into loss by 2025, with losses peaking in 2027 before improving EV profitability allows some recovery, on our assumptions,” Hendrikse said.
CAR’s Dudenhoeffer didn’t comment on the impact of all this on VW’s profits, but said the move to electrification is a necessity.
“The world is going into EVs and there’s no chance of escape. The E.U. rules on CO2 are very strong and demanding and upcoming new testing procedures will make it even more difficult,” Dudenhoeffer said.
Currently official E.U. fuel economy figures are shockingly inaccurate. The rules allow car makers to test cars on computers, resulting in claims for economy often more than 30% off target in on-the-road conditions. Next year, so-called “real-world” rules will force auto makers to get closer to the truth.
Car makers face even harsher but as yet unspecified CO2 rules by 2025, and recently some German politicians threatened to ban all internal combustion engine cars by 2030.
This would put thousands of German jobs at risk. Electric cars require only a small proportion of assembly workers compared with traditional vehicles, which require cylinders, spark plugs, and gearboxes. The threat to ban traditional cars by 2030 was ridiculed by German government ministers, but Dudenhoeffer said car makers better watch out.
“It’s no surprise that the minister denied the 2030 ban, but the process is running. We see it in the Netherlands and Norway. China is leading that process too. We are going into a world where car makers will have to invest heavily in electric cars. If not they will have a problem in 2030,” Dudenhoeffer said.
