Volkswagen’s boss, Herbert Diess, is realistic about the threat posed by software-savvy and richly valued rivals such as Tesla, but he’s adamant that VW can prevail. On current form, he may be right.
The German car giant has added almost €45-billion of market value so far this year and its shares are at their highest since 2015, when the diesel emissions scandal abruptly steered the company down a dark road. VW’s more widely traded preferred shares have climbed 36% since the start of January, far outstripping Tesla — which has declined slightly since then, having risen more than 700% in 2020.
VW’s €125-billion market capitalisation is still barely a fifth of Tesla’s, and the German group’s investors still don’t ascribe full value to cash-generative premium brands like Porsche and a leading market position in China. Nevertheless, VW has the wind at its back suddenly. So, what’s changed?
Hints that the valuable Porsche franchise might get a separate stock market listing have helped, even though VW’s management gave the impression this week that it’s not an immediate priority. The rotation in equity markets away from scarcely profitable growth stocks towards those likely to benefit most from the post-pandemic recovery has also played a role. Analysts expect VW to generate a whopping €16-billion of operating profit this year.
Another big difference is that VW has become far more adept at highlighting its hugely ambitious electric vehicle strategy. Diess has taken Musk’s self-promotional routine, hewn off the rough edges, and thrown it back at him.
Catch-up with Tesla
Thanks to new battery-powered models such as the VW ID.3, Audi e-tron and Porsche Taycan, VW’s electric vehicle plan has become a lot more credible. The group is already the largest seller of battery vehicles in Europe, and globally it could draw level with Tesla in electric car sales within a couple of years.
By 2030, about half of the group’s new car sales will be electric vehicles. To meet that demand it has outlined plans to build half a dozen battery plants in Europe together with external partners. VW’s investment in early-stage battery company QuantumScape has paid off, too, at least on paper. VW booked a €1.4-billion gain on the investment in its 2020 accounts.
VW still lags behind Tesla in vital areas like over-the-air vehicle software updates and autonomous driving but it has a credible plan to catch up. VW will develop its own “software stack” rather than rely on Google or any other Silicon Valley import, an effort that will cost billions of euros. If, at the end, VW is valued more like a software company than a metal basher, the money will have been well spent.
For those who fear Europe is destined to lose its industrial edge to the US and China, this is very encouraging. Few could afford to take such risks but VW has €27-billion of net liquidity and analysts expect it to keep generating heaps more cash.
In the past, VW’s heavy spending seemed to benefit its engineers more than it did investors. The company has 670 000 employees — a potential future problem given that making an electric vehicle is less labour intensive than producing one powered by a combustion engine.
The company’s sheer size can become an advantage, Diess insists: The more vehicles that incorporate its hardware and software, the more easily it can amortise those investments. In a sop to number-crunching analysts, he has promised to slash fixed costs by 5% by 2023.
Retail investors have been the ones setting the direction of the stock market lately — and may have been behind the surge in VW’s less-traded ordinary shares on Tuesday. These amateur investors respond to different cues and VW is no longer too proud to borrow some crowd-pleasing ideas from Musk.
The company held a livestreamed “Power Day” event this week to showcase its battery activities, which shamelessly copied Tesla’s battery and autonomy events. VW spoke about building a network of “gigafactories”, using Musk’s sexy terminology for battery production facilities. Though less at home with meme culture and cryptocurrencies than his rival, Diess also uses social media to push the message that VW should be valued like a tech company.
One thing he hasn’t done yet is given himself an amusing new title like the Technoking of Tesla. But if Diess keeps this up, his anointment as TechnoKaiser can’t be far off. — By Chris Bryant, (c) 2021 Bloomberg LP
