Germany is starting to close the gap on America in the electric, software and digital race.
Charles Darwin devised a concept, called Darwinism, which stated that evolution occurs through "natural selection". When small mutations happen in organisms that result in an advantageous trait, those organisms survive and pass the advantages on to their offspring, and the less fit organisms die. "It is not the strongest of species that survives, nor the most intelligent, but the one most responsive to change," Darwin said.
There is a similar process occurring in the car industry. Legislative leverage is forcing car manufactures to cut carbon dioxide emissions. The transitional change from internal combustion engines (ICE) to battery electric vehicles (BEV) is transforming the car industry. But the resistance of established carmakers to commit to change has resulted in the car industry mutating. And that reluctance has meant they have fallen behind one electric carmaker in particular, called Tesla.
The brainchild of Elon Musk, Tesla has shaken up the car industry, even destabilised it. It has done so by getting ahead of the curve with the electric car era. This proactive approach has pioneered solutions to the notorious problems associated with electric cars, and in turn restructured the car industry. Tesla have caught established carmakers off guard, turned the car industry on its head, and turned the tables in their favour. These Tesla tremors have sent shockwaves through carmakers, especially the German car industry.
While the Tesla juggernaut was building momentum in 2015, Volkswagen was busy getting caught cheating emissions tests with "defeat device" software, (which I completely condemn). This self-inflicted injury ruptured its reputation and haemorrhaged the group’s finances with fines and compensation. Yet the fiasco really revealed much more. Germany invented the ICE, and makes the strongest ICE cars in the world, IMO. But that success of the German car industry is what hindered the progress of the German car industry. German carmakers had become complacent, and stagnated.
"VW are behind the electric, software and digital curve, whereas Tesla are ahead of it"
German carmakers failed to recognise that to create an electric car success, they had to ditch the ICE success. That reality entrenched the German car industry in a lock-in effect, whereby the only way to covert from ICE cars to electric cars was to commit huge resource and expertise. As well as that, they had misjudged the rate at which Tesla was changing the car industry. Whereas change in the German car industry was being forced through legislation, and not through their own volition. Just one reason that partly explains why is the amount of money German carmakers pocket from making ICE cars.
But with the electric era comes new opportunities. It will cost carmakers lots of money to convert to electric cars, but pots of money are set to be made from electric cars too. The electric era requires a new mindset, and structural change of the car industry. Jobs will be lost, but new ones will be created. German carmakers understand this, but they realized it too late to take an early advantage of the electric era. They had taken their eyes off the ball, they are now playing catchup.
In context with the bigger picture of the car industry, German carmakers are currently at a disadvantage in developing and producing electric cars compared to Tesla. VW are behind the electric, software and digital curve, whereas Tesla are ahead of it. You can tell by the way the German car industry is reacting, particularly the VW Group, that they are under pressure, and that their position is under threat from Tesla. They are determined, even desperate, not to let Tesla run riot in the electric era.
It’s almost become like an obsession to try and emulate Tesla. The VW Group recently held a "Power Day" event, which clearly mimics Tesla’s "Battery Day". As VW outlined its Technology Roadmap 2030 as part of its E-strategy, the underlying purpose was clear. The implicit intention driving the VW Group is to mount a direct challenge to Tesla. CEO Herbert Diess and senior figures revealed the plan to convert the VW Group from a car manufacture into a software company.
It’s an ambitious but convincing roadmap. Battery manufacturing will become a core commerce for the VW Group. VW aims to reduce the cost and complexity of battery cells that store electric energy, and at the same time, increase performance and range. That’s a challenging balancing act. A unified battery cell is set to introduced from 2023 and installed in 80% of its product portfolio, which will cut costs by 50%. And there will be a premium platform for Audi and Porsche cars that will have rapid charging times, even greater ranges and much faster acceleration times.
Battery cell manufacturing will work in a closed loop cycle, whereby VW will develop, produce and secure their own supply chain with external partners. That’ll make the VW Group independent and self-sustainable. To meet demand, six new battery gigafactories are to be built in Europe by 2030. The first two are being constructed in the Swedish town of Qualeftio and Zaitskita in Germany. VW also plans to incorporate a recycling plant for battery cells in the German factory, as 95% of battery cell raw material can be reused.
One obstacle that prevents customers from purchasing an electric car is an insufficient charging infrastructure. This is one of the strongest advantages that Tesla currently has over the car industry, with more than 2000 Supercharger Stations and 20,000 Superchargers located worldwide. VW aim to replicate that scale by expanding their own charging network in Europe, North America and Asia. It’s set to be increased with 18,000 fast-charging points installed in Europe alone by 2025 with external partners.
This is far from vanity project on the periphery, the VW Group is counting its future on the electric era. One part where the VW Group lags behind compared to Tesla is software, which currently operates on a different level. Diess knows this. And to upgrade that weakness, €27billion is earmarked for investment in digitalisation over the next five years. This is a gamechanger for VW as it transforms the business model from a traditional ICE manufacture, into a software company.
"VW are throwing everything at electrification, software and digitalisation"
The need to devise a state-of-the-art software armoury is something the VW Group are acutely aware of. VW has an industrial cloud deal with Amazon for its factories and a software cloud deal with Microsoft for its cars. A division called Car.Software Org has the responsibility of developing a shared operating system for VW Group brands. The Audi led unit is establishing an architecture that manages data flows and connects them to the cloud. VW ruled out outsourcing this to a third-party company, as it wants to retain its software sovereignty.
Alongside that, VW has a Scalable Systems Platform project under development, which integrates software and digital experiences in one electric modular ecosystem. This will be scalable across the dozen brands, reaching every segment. Adjacent to that are plans to branch out into self-driving technology that’s underway through an Argo AI partnership; testing is scheduled to begin this year with the ID. Buzz electric van.
VW’s foray into software is serious. The group is creating its own software stack for cars starting in 2024. And VW have two car projects in progress that are linked to each other. One is called project Artemis. An Audi team is working on a car code-named "Landjet" – an electric car to challenge Tesla – that should break cover in 2024. The technology will then be repackaged for project Trinity. A VW unit is developing an affordable electric car costing about €35,000 for the mass market, that should be then revealed two years later in 2026. It’s all action stations.
VW are throwing everything at electrification, software and digitalisation. And as the period between 2020 and 2030 continues, the mobilisation of more and more resource and expertise will be allocated to these areas. It will be a decisive decade for the VW Group with undoubted trials and tribulations. But despite some stumbling blocks, there are signs that they are ultimately on the right track.
Launched in July 2020, the ID.3 is VW’s first electric car. The hatchback is built on the Modular electric drive matrix platform (MEB) and has been dubbed as the electric Golf. Customers have the choice of three battery sizes. The smallest version is a 45kWh cell making 148bhp and has a claimed 217-mile range. The mid-range version is a 58kWh cell making 143bhp and has a claimed 263-mile range. And the biggest version is a 77kWh cell making 201bhp and has a claimed 336-mile range. All three might appear modest and understated, even underwhelming and boring.
However, GTX is the recently revealed performance brand for ID. models. That means there will be a hot hatch version of the ID.3 at some point. That should be more interesting, even exciting. Yet electric cars are still unknown quantities for most people, so competence is what matters first and foremost. And the ID.3 scores well on that front. UBS analysts took apart an ID.3 and inspected the MEB platform. They found it measured up favourably in many areas compared to Tesla underpinnings. The platform is cost competitive, and it has the best-in-class energy density and efficiency. Not bad for VW’s first electric car.
The findings mean that VW can challenge Tesla for the electric car crown. It would be quite the scalp for VW to overthrow Tesla, the current electric car king on the throne. But that growing threat is real prospect. The VW Group sold 231,600 electric cars in 2020, which is less than half of what Tesla sold. But that constitutes an increase of 214% compared to 2019. And that vaulted VW to the top electric carmaker spot in Europe in 2020. A UBS study has projected that VW could match Tesla sales by 2022. And they forecast that by 2025, VW will make 2.6 million electric cars, overtaking Tesla, who will produce 2.3 million.
Yet whether these estimations prevail or not, it’s clear that VW are gaining ground quickly on Tesla. It would be quite a remarkable accomplishment given the dire straits that VW had inflicted on themselves. In the space of a decade, VW could go from the disgrace of the emissions scandal in 2015, to the biggest manufacture of electric cars in the world by 2025. That would be an extraordinary turnaround.
"VW are still rising from the ashes. Maybe Tesla should enjoy their reign while they can"
Tesla has done to the car industry what Netflix did to television. Taking advantage of the invention of the internet, Netflix conceptualised on-demand tv. People could watch what they wanted, whenever they wanted. Tesla took the electric car and mainstreamed it in a similar way. The pieces of the electric car puzzle were put in place to allow owners to operate off the conventional grid. But traditional tv did catchup with Netflix. And that’s what VW plans to do with the Tesla.
Yet despite evidence, people might snigger, doubting its plausibility. "No one can topple Tesla," they might chunter. But VW are motivated to catch Tesla, and overtake them. It’s instilled a sense of purpose that’s focusing the group on a shared goal. And VW has everything at its disposal to accomplish it. The VW Group can pool resource and expertise with scalability of brands that span every car segment. That’s something Tesla can’t match.
VW are at an earlier stage of the electric, software and digital transition than Tesla. It's a long term project that can't be completely judged right here, right now. Although comparisons between the two are revealing, they are therefore somewhat distorted. VW are still rising from the ashes. Maybe Tesla should enjoy their reign while they can.
Photos: Volkswagen
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