Volkswagen Bets On New Technology To Take On Tesla

Volkswagen AG (OTCMKTS:VLKAY) is one of the largest automakers in the world, expected to reach record sales of 10 million annual vehicle units this year. As the world pushes for cleaner technologies and environmentally-viable modes of transport with stricter emission standards, the demand for electrically-powered vehicles has rapidly increased. Although the percentage contribution of plug-in electric vehicles (PEVs) to the net global vehicle sales remains next to nothing at present, the PEV market is estimated to grow at a CAGR of almost 25% through 2023, outpacing the expected 2.6% annual growth for the overall light-duty vehicle market. This potential growth has prompted automakers around the world to dive into the electric vehicle space, but how much of this growth could be captured by Volkswagen?

We have a $44 price estimate for Volkswagen AG, which is roughly 3% above the current market price.

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Volkswagen launched its e-Golf, an all-electric car, in the U.S. at the tail-end of October, and its line-up in Europe, comprising the e-Up!, e-Golf, and the newly launched Audi A3 e-tron, holds 8% market share. However, the German automaker’s supremacy in selling vehicles powered by traditional internal combustion engines hasn’t been mirrored in the electric vehicle segment. Volkswagen is still selling much fewer PEVs than Nissan, BMW, Ford, GM, and Tesla, but the company is looking to change that. Volkswagen is looking to launch over twenty electric and plug-in hybrid electric vehicles in China, its single largest market, over the next few years, ranging from small-sized cars to large SUVs. The German auto giant is not only looking to launch more electrically-powered vehicles in the future, but has also invested in a new battery technology that could potentially shake-up the PEV market.

Volkswagen Buys Stake In QuantumScape

Volkswagen Group of America has bought a 5% stake in QuantumScape Corporation, a battery start-up, aiming to develop a new energy-storage technology that could more than triple the range of an electric car. ^[1] Despite the evident benefits of purchasing an electric vehicle- including lower running costs, as compared to gasoline-powered engines, low battery prices and provision of subsidies and other government incentives in some countries, the PEV market still remains massively under-penetrated. In addition to the absence of a well established battery-charging infrastructure in most countries, electric vehicle sales still remain low due to small electric ranges.

Volkswagen is looking to be the solution to the low-electric-range problem, and take on the likes of Tesla in the PEV market. QuantumScape is working on solid-state batteries as a substitute for the lithium-ion technology, which is used in many electric vehicles today. By doing so, the company believes the range of an electric car could be extended to nearly 430 miles, more than the present day industry-leading ranges of around 265-300 miles for the Tesla Model S. Another advantage of the solid-state batteries is that these are burn resistant, boosting the safety aspects of electric vehicles using such battery packs. Last year, three Model S collisions that led to car fires elicited consumer concerns over the safety of the highly popular luxury sedan. Besides the new battery technology, Volkswagen’s luxury division Audi also plans to develop an all-electric car with a Tesla-like electric range of around 280 miles by 2017. Earlier this year, Audi was also rumored to be developing an electric version of the crossover SUV Q8, with a range of 370 miles, which would compete with the Tesla Model X, scheduled to launch by Q3 next year.

EV Sales Could Add To U.S. Sales

Developing new electric cars with better ranges could boost Volkswagen’s U.S. business. The U.S. is the world’s largest PEV market, with sales crossing 100,000 units through November, a 22% year-over-year improvement. Volkswagen’s deliveries rose 4.6% through November (excluding figures for commercial vehicle divisions Scania and MAN), but sales in the U.S. declined 2.6% during this period, despite the 5% rise in the country’s automotive market. ^[2] Volkswagen’s disappointing U.S. volume sales are mainly on the back of an 11% fall in sales for its own branded passenger cars, which form over 60% of the group’s net sales in the U.S., mainly due to negative customer perception, high prices of the imported models, and customer loyalty towards domestic car companies such as GM and Ford. ^[3] If Volkswagen manages to get the solid-state battery technology up and running in cars, the new technology might give an edge to Volkswagen in the electric vehicle segment, and in turn boost the company’s U.S. sales.

However, relying on the small PEV segment to revive Volkswagen’s overall U.S. sales might be over-ambitious as of now. Electric car sales are still negligibly small, even in the U.S., and are expected to impact the company’s overall volume figures only in the long run, depending on how the demand for PEVs grows. The new battery technology is only in the initial testing stage as of now, and the tests to show if the system is viable for cars are expected to be completed not before the end of next year. Whether Volkswagen manages to threaten Tesla’s technological supremacy in the PEV market remains to be seen, but the auto industry will keep a close eye on the development of the new solid-state batteries, which could potentially revolutionize the electric car market.

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1. VW said to buy battery startup stake for Tesla challenge [↩]
2. Volkswagen Group November volumes [↩]
3. Volkswagen passenger cars November volumes [↩]