Virus Complicates Legacy Auto’s EV Plans

Christoph Rauwald and Bruce Einhorn have an interesting piece on changes in the global EV market as we enter economically turbulent times:

Much of the story focuses on Volkswagen’s plans to launch the ID.3:

The Zwickau assembly lines, which produce the soon-to-be released ID.3 electric hatchback, are the centerpiece of a plan by the world’s biggest automaker to spend 33 billion euros ($36 billion) by 2024 developing and building EVs. At the site, where an East German automaker built the diminutive Trabant during the Cold War, VW eventually wants to churn out as many as 330,000 cars annually. That would make Zwickau one of Europe’s largest electric-car factories.

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330,000 cars would be a huge achievement –– but less than the half a million cars Volkswagen’s upstart rival Tesla will sell this year, and less than the 360,000+ units Tesla sold in 2019. By the time they reach that rate of production, Tesla should be well over a million units a year including units produced locally in Europe at the new Gigafactory Berlin. All this of course assumes that Volkswagen hits 330,000 units on schedule, and everything goes according to plan.

But Covid-19 is putting VW’s and other automakers’ electric ambitions at risk. The economic crisis triggered by the pandemic has pushed the auto industry, among others, to near-collapse, emptying showrooms and shutting factories. As job losses mount, big-ticket purchases are firmly out of reach–in the U.S., more than 36 million people have filed for unemployment since mid-March.

Also, the plunge in oil prices is making gasoline-powered vehicles more attractive, and some cash-strapped governments are less able to offer subsidies to promote new technologies.

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In other words, COVID will provide an excuse for legacy auto to weasel out of their EV plans. This will be a true test of who can think long term, and who will succumb to short term pressures to instead face the threat of extinction.

The global market contraction raises the prospect of casualties. French finance minister Bruno Le Maire has warned that Renault SA, an early adopter of electric cars with models like the Zoe, could “disappear” without state aid. Even Toyota Motor Corp., a hybrid pioneer when it first introduced the Prius hatchback in 1997, is under pressure. The Japanese manufacturer expects profits to tumble to the lowest level in almost a decade.

Automakers who for years have invested heavily in a shift to a high-tech future – including autonomous vehicles and other alternative energy-based forms of transportation such as hydrogen — now face a grim test. Do their pre-pandemic plans to build and sell electric cars at a profit have any chance of succeeding in a vastly changed economic climate?

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It’s looking like stormy weather in Legacy Auto-ville. And stormy weather isn’t exactly the climate to try something bold and new.

Naturally, the situation hasn’t helped Volkswagen’s beleaguered ID.3 project:

The cautious approach has reduced capacity—50 cars per day initially rolled off the Zwickau assembly line, roughly a third of what the plant manufactured before the coronavirus crisis. Persistent software problems also have plagued development of the ID.3, one of 70 new electric models VW group is looking to bring to market in the coming years.

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What kind of safety measures did they introduce that forced them to reduce production by 66%? I’m not an expert in automotive production, but could it be that they simply got tired of building cars with broken software and storing them in the parking lot out back?

To put the 50 unit per day production rate into context, earlier this year Tesla was producing well over 1,000 electric cars a day.

“My new working week starts together with Thomas Ulbrich at the wheel of a Volkswagen ID.3 – our most important project to meet the European CO2-targets in 2020 and 2021. We are fighting hard to keep our timeline for the launches to come.”

Herbert Diess, Volkswagen CEO, via LinkedIn

If you haven’t been following the emissions target situation in Europe, automakers are set to face billions of dollars in fines unless they meet certain targets for fleet-wide average emissions. Producing electric vehicles is key to escaping those billions of dollars in fines, even if they lose a little bit of money on them. It’s important that Volkswagen looks like it’s making an honest effort to produce compliance cars.

Therefore, these cars will go into limited production whether anyone wants them or not. Just don’t expect Volkswagen to make any more than they’re legally required to.

A more pressing worry that could hamper VW’s ability to scale up production is its existing inventory of unsold vehicles. The cars need to move to make room for new releases, but sales are down as consumers are tightening their spending. One response has been to offer improved financing in Germany, including optional rate protection should buyers lose their jobs. VW also has adopted new sales strategies first used by its Chinese operations, such as delivering disinfected cars to customer homes for test drives, and expanding online commerce.

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They may talk a lot about the electric vehicles they’re going to make tomorrow, but in the near term a more pressing concern is all the polluting cars they already made yesterday. Legacy auto is offering great deals to get more polluting cars on the road, because that’s the majority of their business.

If everyone suddenly demanded electric vehicles and were no longer interested in gas cars, Legacy Auto would hurt immensely as they grappled with costly unsold inventory that nobody wanted. You can’t honestly expect any person or business to take a course of action that involves shooting themselves in the foot, nor is it morally correct to force someone to do so. For that reason, I wouldn’t bet any money on legacy auto ramping costly EV production efforts on schedule.

A potential obstacle for all these companies—apart from still patchy charging infrastructure in many markets—is the Supply bottlenecks appear inevitable given that the number of electric car projects across the industry outstrip global battery production capacity. And boosting cell manufacturing is a complicated task.

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This is a completely new skillset that legacy automakers better start developing fast if they want their brands to continue existing long into the future. So far, no automaker has presented a compelling plan to scale battery production to the levels needed to truly replace global demand for new vehicles with zero emissions drivetrains.

But hey –– good luck getting all your batteries from LG Chem when every automaker in the world is fighting for the same cell supply.

NIO, the Shanghai-based startup that raised about $1 billion from a New York Stock Exchange initial public offering in 2018 but lost more than 11 billion yuan ($1.5 billion) last year, was thrown a much-needed lifeline when a group of investors, including a local government in China’s Anhui Province, offered 7 billion yuan last month.

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Maybe I was being too harsh on legacy auto. Most EV startups don’t seem to be fairing much better than their older brothers and sisters.

VW said it spent $7 billion developing MEB after Ford Motor Co. last year agreed to use the technology for one of its European models. Separately, the group’s Audi and Porsche brands are built on a dedicated EV platform for luxury cars that the company says will be vital in narrowing the gap with Tesla.

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Developing electric vehicles is insanely expensive. To make this effort worthwhile, Volkswagen had to position MEB to investors as a “platform” that lots of vehicles would be built on, from many different companies. But who wants to use a platform whose flagship vehicle, the ID.3, is constantly getting delayed due to software problems? It’s easy to imagine Volkswagen’s electrification effort costing $10 billion, $30 billion, or more…

VW plans to escalate its electric-car push by adding two factories, near Shanghai and Shenzhen, that it says could eventually roll out 600,000 cars annually, more cars than Tesla delivered globally last year.

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Well, get to it then! Do it!

Remember all the “auto experts” who said it would take Tesla years to build Gigafactory Shanghai? They said that because it actually does typically take legacy auto years to build a new factory. If the old school OEMs want to compete in an electric future, they need to get moving.

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