Volkswagen sees the green in green technology

Volkswagen in BRIC countriesThe automotive industry is in transition. Growing environmental concerns and ever increasing oil prices are accelerating a shift from gasoline to electric vehicles. Volkswagen AG will be ready to meet the surge in demand for these “green” vehicles (hybrid, electric, biofuel cars) and for the components that are used to make them.  Development of small, inexpensive environmentally-friendly vehicles and continued expansion of manufacturing and selling these vehicles in emerging markets are keys to the company’s success.  These two mutually-reinforcing activities give VW advantageous positioning in the intensely competitive automotive industry and will propel it to achieve its ambitious goal to become the largest automobile manufacturer in the world by 2018.

VW has already committed to spend $71 billion over the next five years in an effort to overtake Toyota Motor Corporation.  Over half of this capital investment will fund the research and development of energy-efficient vehicles and green technology.  By comparison, this expenditure is almost 25 per cent higher per annum than Toyota’s investment according to the company’s medium-term plan released last year.  Despite this large outlay, VW CEO Dr. Martin Winterkorn contends that only 3% of the company fleet will be electric by the end of the decade.  If this is the case, why is VW investing so much money in developing electric batteries that will be used to power these vehicles?

“The way to the electric car is not a sprint but a marathon!” Winterkorn commented in a speech given last year.  The company anticipates large payoffs in the international arena going forward.  However, instead of focusing its efforts on manufacturing electric cars based on inadequate battery technology, like BYD and GM, VW is focusing on developing superior batteries that will enable it to dominate the electric car market in the future.

The company strategically hired Mark Eberhard, the talented co-founder and former CEO at Tesla Motors, as its electric battery guru.  “It is just barely possible to build an electric car today,” says Eberhard, referring to the current limitations in technology and limited appeal electric vehicles have for consumers.  Enhancement of batteries is key to the success of the electric vehicle. To make the EV appeal to the consumer, these vehicles must be equipped with superior batteries that increase driving distance, charge faster, and are more reliable.

An emerging trend in the industry is the formation of partnerships between auto manufacturers and battery manufacturers. Toyota-Panasonic-Tesla and GM-Hitachi are other alliances that have already begun pooling their resources and expertise.  For its part, VW has partnered with Sanyo, Toshiba, Bosch-Samsung and BYD on battery chemistry research, possibly moving away from lithium.

The demand for electric vehicles is expected to explode in emerging markets, where pollution is a major health and environmental concern. These problems are particularly severe in China, the top CO2 emitting country in the world, where the number of vehicles on the road is growing exponentially.  China overtook the USA as the world’s largest automotive market in 2009, and it is now on its way to become the center stage for electric vehicles technology.  The Chinese government is under immense pressure to address these serious pollution problems and it aims to become the world’s leader in the production and sales of electric vehicles. China’s aggressive approach has included issuing large subsidies to local auto manufacturers and individual electric vehicle consumers and massive investments in the development of critical EV-specific infrastructure such as charging stations and grid systems.  Most of its efforts are designed to encourage Chinese firms to produce more green vehicles, but these policies, which increase the demand for electric vehicles, will also benefit foreign auto manufacturers like VW.

However, challenges persist in the electric vehicle market in China in the form of inadequate infrastructure, discouragingly high list-prices (even after subsidies), and a short driving distance of about 50 km per charge.  China’s leading battery and auto manufacturer BYD has been facing all of these challenges for some time. The company had been pursuing the development of F3E, a fully electric vehicle, but abandoned the program after discouraging market reviews. It realized that given the challenges, the Chinese consumer was not ready for the adoption of full EVs.

With all its expertise in developing batteries and knowledge of the local market, BYD is without a doubt a force to reckon with.  However, VW has a greater strategic position in China.  It has superior technology and is known for offering far better quality in its products than any Chinese manufacturer.  Secondly, VW`s investments in battery research are easily the largest in the industry and involve the most renowned researchers of the field.  Thirdly, VW has chosen to wait until the market conditions for electric vehicles are just right and the supporting infrastructure is in place. And lastly, its strategic alliance with Suzuki will enable it to produce tailor-made vehicles for China: small, efficient and low-cost EVs that are perfect for its narrow, congested streets, and the short commuting distances typical of the average consumer there.

Regarding concerns about its major global competitors, VW has little to fear. Being the first foreign manufacturer to enter China 30 years ago, it now controls a dominant 19% of the Chinese market share. Together with local partners (FAW-Volkswagen and Shanghai Volkswagen), it has nine plants in the country, rolling out 20 VW, Audi and Skoda models. In addition, it is strengthening its manufacturing capacity with further investments equaling 10.6 billion Euros ($14 billion) over the next five years. Another indication of its preparedness is the appointment of Dr. Karl Thomas Neumann as president and CEO of VW Group China. Dr. Neumann is an industry expert in electric vehicle technology and was formerly the head of Volkswagen’s global EV business.

Another key component of VW’s growth strategy involves greater domination of the market in North America, where the company has ramped up its investments and set up manufacturing plants in Chattanooga, TN and Silao, Mexico.

The German company has had a strong presence around the world but has never really focused its efforts on being a leading US automobile manufacturer. Winterkorn said, “VW has been too cautious for too long in North America.”  Once the economic crisis occurred in 2008, and GM and Chrysler filed for bankruptcy, VW capitalized on the opportunity to increase its presence in the market.  Servicing the US demand for smaller, fuel efficient cars, VW has enjoyed an increased market share and has continued to strengthen its presence in the region. 

However, this expansion is risky because the US market is already oversaturated.  Although VW has had a favorable financial position the past couple of years, it is unlikely that its margins will soar in North America. VW’s growth strategy, to manufacture aesthetic and economical cars tailored for consumers in different regions of the world, is as broad as it is vague and is least of all differentiating.  In addition, VW’s merger with Porsche, and its plans to increase its financial stake in the truck manufacturing company MAN suggest that Volkswagen is over-extending itself with activities that do not fit its primary strategy of producing green vehicles for emerging markets.

VW must focus its strategic positioning on differentiating itself in growing markets. The company will not be successful if its strategy is based on imitating other auto manufacturers in markets that have already been developed. Although its timing in establishing market presence has been superb, it is critical that its activities reinforce its strategy and are consistent with each other.

Developing green technology and expanding capacity in emerging markets are fundamental to VW’s long-term strategy and will enable the company to meet its very ambitious goal of surpassing Toyota as the largest auto manufacturer in the world.  VW was a pioneer in China three decades ago establishing manufacturing facilities to sell cars to a market that did not yet exist.  Today, it is again the forerunner, introducing technologies that may pave the way for the automobile of the future.

This report was a group project for the Global Strategy class of Thunderbird School of Global Management Professor Nathan Washburn, Ph.D.