Jul 07, 2023

VW’s Electric Plans Face Hurdles Including Technology, China

Volkswagen ID.3

Volkswagen led Europe’s embrace of the electric car revolution but times are getting harder as what was once a lonely furrow is now a major thoroughfare of hot competition.

The ID.3 sedan was Volkswagen’s first tailor-made all-electric vehicle and hit markets in late 2020. It was a lonesome pioneer at the time. Since then, all major manufacturers have joined the fray. Europe is being spooked by a wave of Chinese sedans and SUVs. Back then, Tesla was a marginal luxury-sector wannabe.

Volkswagen has just launched an updated ID.3 and it will struggle for attention in the crowd. Volkswagen said it has refined and upgraded the car with a sharper exterior and improved interior, although you’d be hard-pressed to tell the difference. The technology hasn’t changed much. And that’s a problem for VW, according to Matt Schmidt of Schmidt Automotive Research.

“I hear it’s already becoming legacy technology. VW simply doesn’t appear to be agile enough to respond quickly to the market like Asian and U.S. (manufacturers),” Schmidt said.

And times have moved fast.

According to investment researcher Jefferies, just under 750,000 BEVs were sold in Europe in 2020 for a market share of 6.2%. That accelerated to 1.6 million in 2022 (14.1%), will hit 4.8 million (35.0%) in 2025, and 9.3 million (58%) in 2030.

VW recently upgraded its BEV target to 80% of European sales by 2030, up from its previous plan of 70%. VW’s investment in BEVs is now set at €180 billion ($194 billion) over the next five years, including spending on batteries and its expansion in Europe, the U.S. and China.

According to Schmidt Automotive Research, in the first half of 2023, VW, and its Audi, Skoda, SEAT/Cupra and Porsche brands led European sales with 200,564 or 22% of the market. Tesla was second with 180,794 (19.8%), and Stellantis 3rd with 117,598 (12.9%) with its brands including Peugeot, Citroen, Fiat, Vauxhall, Opel, and Jeep.

VW recently launched the ID.7, a big electric sedan, expected to go on sale in Europe this fall, and the U.S. next year.

“The ID.7 is one of 10 new VW EVs set to launch from now until 2026,” according to investment bank UBS.

“Additionally, VW plans to introduce an entry-level model below €25,000 ($27,000) and new electric compact SUV alongside the ID.7. (These MEB platform based) vehicles will remain the key pillar of VW’s mass-brand EV offering for the foreseeable future,” UBS said.

Volkswagen ID.7 electric (Photo by Sean Gallup/Getty Images)

VW has said it will unveil “entry-level” hatchback and SUV BEVs priced under €25,000 in 2025, probably called the ID.1 and ID.2. This price point is roughly twice as much as current entry-level gasoline and diesel vehicles.

According to UBS, this means minor steps forward rather than big improvements and it wasn’t sure if this was enough to meet the competition, especially in the Chinese market where VW continues to lose market share.

Felipe Munoz, global automotive analyst at JATO Dynamics, said VW can compete globally not least because of its size as the 2nd biggest manufacturer in the world, but has problems with its software and the competitiveness of its technology.

“You can find better EVs (Tesla), better software (Tesla), but at the end the final products are decent ones. Besides, these cars are just the beginning, so it is normal to have difficulties,” Munoz said.

Recent reports suggest China’s economy is faltering. This might be a plus for European manufacturers if this inhibits China’s huge sales plans there, but a negative for the massive profits earned by Germans in China.

“I think that the Chinese economic slowdown is more a matter of concern than joy for VW. China made up 41% of the group’s global sales in 2022: 48% for VW Brand, 41% for Audi, 33% for Porsche. A downturn over there is likely to severely affect its business and profitability. VW Group is the Western (manufacturer) most exposed to the Chinese market, above Honda (38%), Tesla (36%), BMW (35%), Mercedes (34%), and quite ahead of Toyota (22%), GM (23%), Hyundai-Kia (6%), Stellantis (2.5%) in 2022,” Munoz said.

Volkswagen ID Buzz electric van. The ID.Buzz, is part of the ID line with which Volkswagen is ... [+] leading a multi-billion-euro charge into the electric car market. (Photo by John MACDOUGALL / AFP) (Photo by JOHN MACDOUGALL/AFP via Getty Images)

Investors might see VW’s perceived weakness in China’s BEV market as a warning sign as the European and other markets develop. Bernstein Research said this could threaten the next stage of VW’s BEV development for mass-market and entry-level BEVs.

“Volkswagen will need to convince investors why it will not be facing China-type problems in Europe and the U.S., as competition from both Tesla and Chinese (manufacturers) and incumbents (new platforms at Renault and Stellantis) accelerate in Western markets,” Bernstein Research said in a report.

Schmidt said if Europeans lose business in China the EU might seek to raise tariff barriers to Chinese massive plans to expand sales there. VW might find itself used as a pawn in negotiations to keep bilateral trade open.

The ID.2all study. Volkswagen has shown a design for the electric small car with which the Group's ... [+] core brand intends to expand its ID range downwards. The car is expected to launch by 2026, be roughly the size of a current VW Polo and be produced in Spain. Photo: Marcus Brandt/dpa (Photo by Marcus Brandt/picture alliance via Getty Images)

“If the Chinese market crashed VW would be in big trouble as they are highly exposed there but it may just give them a taste of what might have been inevitable anyway… a shrinking Chinese footprint compared to its other global markets,” Schmidt said.

“VW needs to expand ASAP in markets like North America, with Scout potentially playing a large role,” Schmidt said.

Earlier this year VW said it will invest $2 billion to build a new factory in South Carolina to build Scout brand all-electric trucks and SUVs.

It’s not clear how China’s slowing economy will impact plans for Europe. Success here is no foregone conclusion, said JATO’s Munoz.

“The slowdown in growth could affect the Chinese expansion plans, or could encourage them, as they will look for growth opportunities. In any case, this Chinese “invasion” is going to take time. The current Chinese cars might be as good as the Western ones, but their reputation abroad is not good at all. It will take a lot of money, but most important a lot of time, to change that,” Munoz said.

The Volkswagen ID.3 Pro 58 kWh is priced at €42,515 after tax ($46,000) it competes with vehicles like the Kia Niro, MG4, Nissan Leaf, Hyundai Kona, Citroen e-C4, Peugeot e-2008, and BYD ATTO 3. It seems to be well-built and has impressive regenerative braking. The price is high, and it suffers from the perennial electric car’s inability to sustain high, legal long-distance cruising speeds.

VW ID.3 Pro

Power – 201 hp electric motor

Torque – 310 Nm @ 16,000 rpm

Gearbox – Single-speed

Battery – 58 kWh lithium ion

Claimed battery range – 266 miles (WLTP)

WintonsWorld test range capacity – average 229.5, 13.5% shortfall

Highway cruising range estimate – 131 miles

Highway cruising penalty – 43%

Acceleration – 0-60 mph 7.2 seconds

Top speed – 99 mph