Tough times ahead for Volkswagen, a key part of the Porsche Empire. As it twists and turns to extricate itself from a seemingly endless Dieselgate, the German carmaker is taking a strategic turn towards electric vehicles, and entering the race late, compared to the competition. On the menu: deep and thorough re-structuring, the sale of profitable assets and a big jump into the void.
Will the Dieselgate ever end?
Rough deal for Volkswagen: after the investigations were launched, investigation agencies established that Volkswagen wasn’t the only carmaker with defeat devices on its vehicles. In fact, virtually every manufacturer had “optimized” their ECU to beat emissions tests. And yet, in the media sphere, Volkswagen was singled out as the black sheep, and the damage done was colossal, be it financial, political or judicial. It is getting difficult to count the number of Dieselgate-related lawsuits which Volkswagen has, or had, to deal with, despite immense compensation payments having already been made. Guardian reporter Jasper Jolly writes: “Volkswagen has already paid out more than €30bn (£26.7bn) around the world in fines, compensation and legal costs since the scandal first came to light in September 2015. The company was found to have installed software that lowered harmful emissions of nitrogen compounds under test conditions.” To the direct financial cost of compensations, must be added gigantic legal fees, loss of goodwill and dipping sales. Reuters reporter Ludwig Burger writes: “German prosecutors have accused Volkswagen’s CEO of holding back market-moving information on rigged emissions tests four years ago, raising the prospect of fresh upheaval at the carmaker just as it tries to reinvent itself as a champion of clean driving.” In a nutshell, Volkswagen is bleeding to death, and fighting hard on every front. And there is little hope to expect from Hans Dieter Pötsch, chairman of the Porsche Holding (its parent company), who has troubles of his own to address.
Entering the game late and slow
In terms of engineering, electric cars are deceivingly revolutionary. They do share a lot with thermal vehicles, and Volkswagen will be able to transfer, with no great difficulty, its robust technology on interiors, undercarriages and safety systems. Unfortunately, that’s not where Volkswagen’s advantage is. After a long string of acquisitions, VW stands out in luxury brands (after acquiring Lamborghini, Bentley and Bugatti) and…. diesel engines. Electric technology is complex, and spearheading competitors such as Tesla have been making great progress on these new-generation vehicles. A recent announcement, however, signaled that Volkswagen was leaving all of its high-value but old-generation behind to follow the market into electric vehicles. Automobile reporter Daniel Golson writes: “The ID 4 (new electric crossover) will be imported from Europe for the first two years, but in 2022 it will begin to be produced at the Chattanooga plant as part of a massive $800 million expansion focused on the new electric MEB platform. That factory currently produces the Atlas and the Passat and is on track to build around 180,000 cars next year, doubling the 2019 total. Keogh says that EV capacity from the factory will be “a lot,” but gave no specific targets.” The only explanation for this desperate move is that Herbert Diess has figured that he simply has no choice but to simultaneously entertain two fronts at once, one legal and the other commercial. Be that as it may, Volkswagen is in for a rough fight. “Tesla generated $7.2 billion in revenue in the quarter, a record for the company”, according to automobile reporter Sean O’Kane, while Volkswagen hasn’t sold a single pure EV yet, and is still fumbling with its internal reorganization. In the time necessary to ramp up technology and production, Hyundai, Tesla and BYD will be miles ahead.
The incomprehensible sale of Renk
In order to get its hands onto fresh cash and finance EV developments, Volkswagen is considering selling one of its most valuable assets: Renk specializes in transmission systems, both naval and land-based, and serves military and civilian clients. It possesses some of the best technology in the world. German armament producer Rheinmetall is a possible acquirer. Reuters reports: “Volkswagen declined to comment on specifics of the deal, saying it was working on a forward-looking solution for Renk in the wider context of developing a growth perspective for the group’s mechanical engineering division. Renk’s vehicle transmissions unit – which makes transmissions used in tanks and other heavy vehicles – saw sales spike by 23% in the first six months.” The sale would provide with approximately 700 million fresh euros, but can be questioned regarding its relevance or even considered puzzling. This sum remains somewhat small compared to what Volkswagen will need to fight the electric fight, if the Dieselgate penalties leave anything at all. In contrast, any investor will wonder why in the world a firm like Volkswagen would sell such a profitable asset, just as it knows it’s about to enter what can only be a dry spell. Renk has performed beautifully on the stock market and has considerably developed its sales internationally.
Rigorous business manager and ex-CEO Ferdinand Piech would surely be raising his eyebrows, had he not recently passed away, facing such a long shot strategy – unless this is a last ditch strategy. Environmental regulations will make life more and more difficult for Volkswagen’s luxury brands, and so it would be unsafe to hope for Bugatti, Lamborghini and Bentley to finance the Dieselgate. This never-ending crisis will drain Volkswagen, just at the moment when it needs to finance a new EV market investment. Let’s hope Herbert Diess is as brilliant a businessman as predecessor Ferdinand Piech.