Costly electric vehicles confront a harsh coronavirus reality
- The economic crisis triggered by the Covid-19 pandemic has put the electric vehicle ambitions of Volkswagen and other major carmakers at risk
- Even before the crisis, carmakers had to contend with the downturn in China, the world’s biggest car market, where about half of all EVs are sold
At a factory near Germany’s border with the Czech Republic, Volkswagen’s ambitious strategy to become the global leader in electric vehicles (EVs) is coming up against the reality of manufacturing during a pandemic.
The assembly lines in the German town of Zwickau, which produce Volkswagen’s soon-to-be released ID.3 electric hatchback, are the centrepiece of a plan by the world’s biggest carmaker to spend 33 billion euros (US$36 billion) by 2024 developing and building EVs. At the site, where an East German carmaker built the diminutive Trabant during the Cold War, Volkswagen eventually wants to churn out as many as 330,000 cars annually.
That would make Zwickau one of Europe’s largest electric car factories – and help the company overtake Tesla in selling next-generation vehicles.
As job losses mount, big-ticket purchases are firmly out of reach – in the US, where Tesla is cutting prices, more than 36 million people have filed for unemployment since mid-March. Also, the plunge in oil prices is making petrol vehicles more attractive, and some cash-strapped governments are less able to offer subsidies to promote new technologies.
That drop-off is expected to stretch into a third year, as China’s leaders have abandoned their traditional practice of setting an annual target for economic growth, citing uncertainties. Economists surveyed by Bloomberg expect just 1.8 per cent GDP growth this year.
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The global market contraction raises the prospect of casualties. French finance minister Bruno Le Maire has warned that Renault, 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.
Carmakers who for years have invested heavily in a shift to a hi-tech future – including autonomous vehicles and other alternative energy-based forms of transport, 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? Even as Covid-19 has obliterated demand, for the car makers most committed to electric, there is no turning back.
“We all have a historic task to accomplish to protect the health of our employees – and at the same time get business back on track responsibly,” Thomas Ulbrich, who runs Volkswagen’s EV business, said when assembly lines restarted on April 23.
Global EV sales will shrink this year, falling 18 per cent to about 1.7 million units, according to BloombergNEF, although these are likely to return to growth over the next four years, topping 6.9 million by 2024.
“The general trend toward electric vehicles is set to continue, but the economic conditions of the next two to three years will be tough,” said Marcus Berret, managing director at consultancy Roland Berger.
Volkswagen’s Zwickau facility became the first car plant in Germany to resume production after a nationwide lockdown started in March. Before restarting, the company crafted a detailed list of about 100 safety measures for employees, requiring them to, among other things, wear masks and protective gear if they cannot adhere to social distancing rules.
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. Volkwagen said on Wednesday that daily output had risen to 150 vehicles, with a plan to reach 225 next month.
Persistent software problems also have plagued development of the ID.3, one of 70 new electric models the Volkswagen group is looking to bring to market in the coming years.
Still, Ulbrich and Volkswagen chief executive Herbert Diess have reaffirmed over the past three months the company’s commitment to electrification. “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,” Diess wrote in a post on LinkedIn in April. “We are fighting hard to keep our timeline for the launches to come.”
Diess has described the ID.3 as “an electric car for the people that will move electric mobility from niche to mainstream”. Pre-Covid-19, Volkwagen had anticipated that 2020 would be the year it would prove its massive investments and years of planning for electric and hybrid models would start to pay off.
A more pressing worry that could hamper Volkswagen’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. Volkswagen 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.
Other German carmakers are similarly pushing ahead with EV plans. Daimler is sticking to a plan to flank an electric sport utility vehicle (SUV) with a battery-powered van and a compact car later this year. BMW plans to introduce the SUV-size iNEXT in 2021 as well as the i4, a car seeking to challenge Tesla’s bestselling Model 3.
A potential obstacle for all these companies – apart from still patchy charging infrastructure in many markets – is the availability of batteries. 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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For Volkswagen and others, the first big test of EVs’ appeal in a Covid-19 world will come in China. Diess has referred to China as “the engine of success for Volkswagen”. The company’s deliveries returned to growth year-on-year last month in China, while all other major markets declined.
Not long ago, China appeared to be leading the world toward an electric future. As part of President Xi Jinping’s goal to make the country an industrial superpower by 2025, the government implemented policies that would boost sales of EVs and help domestic carmakers become globally competitive, not just in electric passenger cars but buses, too.
The Chinese car market may shrink as much as 25 per cent this year, according to the China Association of Automobile Manufacturers, which before the pandemic had been expecting a 2 per cent decline. EV sales fell by more than one-third in the second half of 2019.
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Other Chinese manufacturers are also counting on support from the government, including tax breaks and an extension to 2022 of subsidies, originally expected to end this year, to make EVs more affordable.
For now, the Chinese government will also look to help makers of internal combustion engine vehicles, at least during the worst of the crisis, said Jing Yang, director of corporate research in Shanghai with Fitch Ratings. But “over the medium-to-long term, the focus will still be on the EV side”.
Companies cannot count on that same level of support from President Donald Trump in the US, where consumers who love their sport utility vehicles and pickup trucks have largely steered clear of EVs not named Tesla.
The US lags China and Europe in promoting the production and sale of EVs, and that gap may widen now that Americans can buy gas for less than US$2 a gallon.
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“When you’re digging out of this crisis, you’re not going to try to do that with unprofitable and low-volume products, which are EVs,” said Kevin Tynan, a senior analyst with Bloomberg Intelligence.
Just weeks after announcing plans to launch EVs for each of its brands, General Motors Co delayed the media debut, originally planned for April, of the Cadillac Lyriq EV. Then on April 29, the company said it would put off the scheduled May introduction of a new Hummer EV. The models are part of chief executive Mary Barra’s strategy to spend US$20 billion on electrification and autonomous driving by 2025, to try to close the gap with Tesla.
In another move aimed at winning over Tesla buyers, Ford unveiled its electric Mustang Mach-E last November at a splashy event ahead of the Los Angeles Auto Show. The highly anticipated model had been expected to debut this year. Ford has not officially postponed the release, but the company has said all launches will be delayed by about two months, potentially pushing the Mach-E into 2021.
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During most of the shutdown in California, Tesla managed to keep producing some cars thanks to better relations with local officials regulating its other factory, in Shanghai. That plant closed as the virus spread from Wuhan in late January, but the local government helped it reopen a few weeks later in early February.
The ID.3’s new electric underpinning, dubbed MEB, is key to Volkswagen’s strategy to sell battery-powered cars on a global scale at prices that will be competitive with similar combustion-engine vehicles. Carmakers typically rely on such platforms to achieve economies of scale and, ultimately, profits. MEB will be applied to purely electric vehicles across all of the company’s mass-market brands, including Skoda and Seat.
Volkswagen said it spent US$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 said will be vital in narrowing the gap with Tesla.
Volkswagen plans to escalate its electric car push by adding two factories, near Shanghai and Shenzhen, that it said could eventually roll out 600,000 cars annually – more cars than Tesla delivered globally last year.
While China is the initial goal, making a dent in Europe and the US is the long-term one. Like China, Europe had been tightening emissions regulations significantly before the pandemic. New rules to reduce fleet emissions will gradually start to take effect this year, effectively forcing most manufacturers to sell plug-in hybrids and purely electric cars to avoid steep fines.
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Because of the mandates, Europe’s commitment to electrification is not going away, according to Aakash Arora, a managing director with Boston Consulting Group. “In the long term, we don’t see any relaxation in regulation,” he said.
“We have a clear commitment to become CO2 neutral by 2050, and there is no alternative to our electric car strategy to achieve this,” Volkswagen strategy chief Michael Jost said.