SNAPSHOT2 min read

Can Volkswagen catch Tesla in the electric vehicle race?

Tesla’s vehicle deliveries soared in 2021 but legacy automakers are running a marathon, not a sprint.

02/02/2022
feb-22-vw-and-tesla

Authors

Rodrigo Kohn
European Equities Analyst

Tesla raised some eyebrows last month as it unveiled an 87% year-on-year rise in vehicle deliveries to over 936,000. In terms of battery electric vehicles (BEVs), this puts it some distance ahead of its European rivals, including Volkswagen AG with less than a half of Tesla’s deliveries (452,900).

603890-Tesla-VW-chart1

There are three main reasons for Tesla’s significant outperformance versus its rivals when it came to the delivery of BEVs in 2021:

  1. A greater commitment to bringing important parts of the supply chain in-house. We see this at its most pronounced in Tesla’s early ambition to be both a user and supplier of battery cells. In doing so, the company gained a head start on managing what is (and will remain for some years) an incredibly tight supply chain, especially in regards to rare metals and minerals.
  2. Where Tesla’s supply chain does rely on external players, its early scale and ambitious products placed it at the front of the preference queue for suppliers. In simple terms, the company was better placed to buy chips during the 2021 shortage. This was because of bigger order volumes (1m units targeted vs 500k at VW last year) and content per vehicle (more advanced software functions like high level self driving require greater computing power and higher value chip content).
  3. Tesla was ready for the BEV transition because it is all it has ever planned for. By the end of 2019, Volkswagen was readying its first BEV plant (Zwickau) while Tesla already had three ‘Gigafactories’.

603890-Tesla-VW-chart2

Meanwhile, with BEV demand soaring across Europe and China, Tesla’s established portfolio of Models S, 3 and Y offered choice to the consumer without compromising on performance. By contrast, most legacy European carmakers were only really moving towards their first serious next generation BEV launch (Renault’s ZOE, Stellantis/Peugeot’s e-208 and VW’s ID3).

Hurdles in Volkswagen’s path

Among the traditional automakers, Volkswagen can be considered an innovation leader when it comes to BEVs. However, it can’t hide from the fact it has a legacy cost base to manage. After all, those BEV deliveries of 452,900 come in the context of total vehicle deliveries of nearly nine million.

For Volkswagen, the production of internal combustion engine (ICE) cars has to be managed down carefully so as not to drop volumes below the profit breakeven point. There are also staff who need retraining on electric vehicle production.

Perhaps most importantly, Volkswagen has a shareholder base that could be spooked by any dilution in profit margins. A faster switch to BEV production last year would certainly have brought about a fall in profit margins. Despite an accelerated drop in battery cost, the most profitable BEVs are still only at breakeven operating margins.

So far, the stock market has been willing to reward Tesla for the future profitability of its BEVs, but hasn’t done the same for the traditional carmakers.

Volkswagen wants to produce more BEVs than Tesla but has set 2025 as the deadline for this. This seems realistic given the budget: Volkswagen has €52 billion of BEV-related investment coming over the next five years and a total budget relating to BEV, hybrids and software of €89 billion. On research & development spend alone, Volkswagen’s annual spend of €15-20 billion p.a. dwarfs Tesla’s current $1.5 billion.

It’s not all about the BEV race

Other companies have different strategies and are not competing in the same BEV race. Stellantis, formed by the merger of Fiat Chrysler with Peugeot, is one such example.

Despite a very successful roll-out of early BEVs, Stellantis is now one of the few carmakers that believes a mixed powertrain strategy of BEV, PHEV (plug-in hybrid EVs) and MHEV (mild hybrid EVs) is the most efficient way to achieve both industry-leading profit margins and compliance with emissions regulations.

The key thing with Stellantis is that mass market products dominate the brand portfolio. As BEV profit margins improve, government subsidies for purchases will taper off. This means that the process of BEV adoption for the less wealthy consumer will be far more gradual, leaving companies like Stellantis to continue to service their needs via hybrids.

A highly cost efficient platform approach is required for this, so good execution of such a strategy is crucial. That said, if CEO Carlos Tavares’ record on improving profit margins at Peugeot is anything to go by, Stellantis stands a good chance of being the carmaker to pull this off.

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Authors

Rodrigo Kohn
European Equities Analyst

Topics

Cazenove Capital is a trading name of Schroders (C.I.) Ltd which is licensed under the Banking Supervision (Bailiwick of Guernsey) Law 2020 and the Protection of Investors (Bailiwick of Guernsey) Law 2020, as amended in the conduct of banking and investment business. Registered address at Regency Court, Glategny Esplanade, St. Peter Port, Guernsey GY1 3UF, (No.24546) . Schroders (C.I.) Limited, Jersey Branch is regulated by the Jersey Financial Services Commission in the conduct of investment business. Registered address at IFC1, Esplanade, St Helier, Jersey, JE2 3BX, (No.31076).

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