Can Volkswagen Be A “Winner” In The Electric Vehicles Segment?

Recently, Volkswagen AG (OTCMKTS:VLKAY)  announced that it would be investing $14 billion towards making electric cars in China, in addition to another $40 billion planned to be invested in autonomous vehicles and electric cars by 2022. This announcement comes after several automakers such as General Motors and Daimler have committed to offer electric versions of all their models in the next few years. Further, companies such as Tesla and Daimler are also looking to launch electric semi-trucks to meet the demand for clean energy vehicles. With China – which is a huge market for most auto makers — leading the initiative on clean fuel vehicles to tackle pollution, most players are ensuring that electric versions of their vehicles are in place, before regulators make it mandatory. The country is looking to make it mandatory for automakers to ensure that at least 8% of their sales in the country are via electric cars and  recent reports suggest that the country might eventually ban the sale of new petrol and diesel engine cars.  Other governments are considering similar regulations and the UK and France are likely to make electric cars mandatory by 2040.

So far electric cars have not replaced conventional vehicles leading to a negligible impact on oil prices. Reports suggest that less than 1% of the cars sold in the U.S. are fully electric. Smaller countries, such as Norway, are the leaders in adapting electric cars where these vehicles accounted for 27% of new car sales in June 2017. While it is easier for smaller countries to adapt to this change, China is likely to lead the electrification initiative with the highest potential range for all electric vehicles.  Total electric cars sold in China are potentially offering a range of 13 million miles, nearly 3 times the 5 million miles offered in the U.S.

While Volkswagen joins other players such as General Motors and Ford in committing to an “electric future,” Tesla remains the leader in this segment. Battery cost is likely to be the key determinant for winning in this segment as companies focus on affordable electric cars which are also profitable. While Volkswagen is making investments in new technologies, including procurement of battery cells, its ability to produce vehicles which can be sold at competitive prices without impacting margins will be crucial to win in this segment.

Further, as more electric vehicles (EV) hit the road, requirements for after-sales service and maintenance would be lower, impacting dealers of several traditional automakers. According to JP Morgan in addition to a lower demand for oil, dealerships depending on after sales service would be severely impacted by the EV revolution. Tesla’s direct sales model gives it a huge edge over other players in this situation. While companies such as Volkswagen are investing in technology to launch EVs in the future, their success will be determined by an efficient production model and a transition into an effective distribution system. Before this is achieved, EVs are likely to remain vehicles aimed at achieving regulatory requirements.

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