Published on August 2nd, 2020 |
by Paul Fosse
August 2nd, 2020 by Paul Fosse
This article is inspired by what I have read recently about Volkswagen. We have been hearing a lot from the company, and not all of it is good. As we reported in this article a couple of months ago, there are a variety of stakeholders in Volkswagen Group and it appears after the company’s many troubles with dieselgate — which cost the company over €31 billion and tarnished its reputation — the large automaker brought in the talented Herbert Diess to lead them in a new direction.
We at CleanTechnica have praised Diess’s plans here and here, and I’ve personally been impressed with Volkswagen’s plans and humility. This article isn’t so much about about the plans as it is about the shortsighted forces that may block its implementation. That being said, the plan is impressive for several reasons.
- It includes many vehicles, not just one or two cars for “environmentalists.”
- Volkswagen publicly committed to produce 3 million vehicles by 2025, far more than anyone else except Tesla (whose comments suggest it will have made about 3 to 4 times that amount).
- Volkswagen is securing batteries for that volume, not just hoping for battery suppliers to increase production without a firm commitment.
- Volkswagen is building new factories and converting factories to produce these electric vehicles.
- Volkswagen understands that “designed from scratch” EVs will be required to be competitive. Many other companies (cough, BMW, cough) think they can have their cake and eat it too by building a flexible platform that lets them produce the same basic car with gas, diesel, hybrid, PHEV, or EV powertrains. Although this certainly has the advantage of flexibility, you still are relatively locked into a production mix based on your production capacity of engines, motors, and batteries. The real problem is that the vehicle efficiency you lose means you need a larger battery, which makes it tough to sell the vehicle at a competitive price and make money.
So, the plan is for an established corporation to transition quickly by bravely making the best EVs possible, and if it hurts gas and diesel sales, be glad you got the sales before Tesla or other good EVs stole those sales anyway. The problem with this strategy is it takes courage and faith that electric vehicles will be the future of the industry. Herbert Diess certainly has this courage and faith, but he may not have been successful at communicating this message to all the stakeholders. Those people enjoying the profits of making gas and diesel vehicles today may think they can continue doing this for a while longer (or even forever). Those who preferred Volkswagen move more slowly “demoted” Herbert Diess on June 8th, and their powerful labor chief, Bernd Osterloh, “went on a roadshow to tell investors that the automaker has no need for deeper cost cuts in Germany.” The board claims to fully support Diess, but with friends like this, who needs enemies?
You see, this wasn’t going to be a cakewalk for Volkswagen. The plan unveiled last year was ambitious — too ambitious for some — and the Covid-19 crisis, which has caused the industry to borrow $132 billion, isn’t going to make it any easier. Volkswagen recently announced its second quarter earnings, and it is interesting that the first slide of the presentation is their proposal to keep the dividend flat instead of substantially increasing it. Volkswagen has been impacted a little less than some other companies by the virus because their low penetration in the US has reduced the impact of broadly falling sales in that market.
Many in the industry, though, have yet to come to terms with the fact that this downturn will be different than previous downturns. In previous recessions, consumers drove their old cars and repaired them until they got their jobs back and could afford to get a new car. This meant that, the longer the downturn, the more demand was built up, just waiting for consumers to have the ability and confidence to buy news cars again, leading to great sales on the economic bounce. So, what is different this time?
- Many people have reduced their driving, and this means a lot of cars that normally would have worn out haven’t.
- Many people and companies have learned that they can be productive working from home and avoiding the daily commute at rush hour.
- Millions of people have had a the chance to ride or drive in an electric car, and this survey suggests that 59% of consumers in the US (certainly not a leading market for EVs) will attempt to buy an electric car when they next shop for a new car. Unfortunately, nobody has ordered enough batteries yet to allow consumers to get the cars they want. So, many of those people will settle for hybrids.
It’s always exciting to talk about the positive effects of electric vehicles, but it is important to realize that this transition will hurt many people too. Obviously, the oil and gas industry will be hurt, but many people in the auto companies have specialized their education and training to become very talented in designing and building the engines, transmissions, and other portions of the powertrain of modern gas and diesel cars and trucks.
Although I agree that these cars will be on the road for a long time and even sold in some parts of the world for more than a decade, we don’t need the tremendous variety of gas and diesel powertrains Volkswagen produces and improves today. They do need to continue to make some efficient and clean running engines as range extenders for the vehicles that can’t get a large battery and be fully electric (hopefully these engines will only be used a few times a year for long trips), but not nearly as many as they make.
Although it is painful for those who have invested their careers in the gas and diesel industry, the sooner that Volkswagen stops spending money on powertrains that won’t have enough sales to justify the expense of their development, the better it will be for the company. The labor leaders pushing for Volkswagen to waste money on gas and diesel technology that is doomed may help some Volkswagen workers in the short term, but if they succeed in causing the company to spend more than it can afford, they will cause the company to fail and cost many more jobs than necessary.
I’m confident that whoever buys the assets of a failed Volkswagen will continue to build their well designed lines of electric vehicles. Its gas and diesel assets would have trouble finding a buyer. Other automakers would prefer to just keep their factories running versus taking over new ones. Volkswagen’s stakeholders may not like the message they hear from Herbert Diess, but if they ignore his well thought out plan and continue to push for slower change, the result may be far more painful for both the shareholders (which generally get nothing in a bankruptcy) and the labor leaders (which don’t do well when most of the workers they represent are laid off).
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