Is Volkswagen the next big thing in the Automotive Industry?
Author: Eugene Guo | Editor: Shayna Leng | Updated August 8 2020
(Image of Volkswagens Concept ID3 Model)
Volkswagen's ambitious plan to produce 30 million EVs by 2030 to take on Tesla in the electric car market may change the company’s past image and lead to a rise in its stock value.
As of 2019, Volkswagen Group is the biggest car manufacturer in the world in terms of units sold (10.79 million) and total revenue. The VW Group includes a wide range of brands, such as Skoda, Bugatti, Lamborghini and Audi. From entry-level vehicles to luxury cars, this allows them to compete in almost every price bracket within the industry. Most impressively for a car manufacturer, Volkswagen group has pre-existing infrastructure established worldwide, with 124 factories located around the globe, of which 72 are found in Europe alone. The manufacturing process they have developed is also considered one of the best in the industry, allowing them to produce cars at extremely low costs. These factors mark Volkswagen as a strong competitor when they enter the EV market with their ID badge in 2022.
Tesla is no doubt the king of the EV market today, accounting for 78% of the electric car market in the United States alone. Despite its market dominance, Tesla faces recurring problems with regards to its production infrastructure and cash flow. This provides space for Volkswagen to grow in the EV market. With its strong cash flow and worldwide production infrastructure, Volkswagen’s plan has the potential to bring cheap EVs to the public to compete with Tesla.
This strategy just might work, Tesla’s current cheapest model (Model 3) offers an msrp (manufacturer suggested retail price) of 38,000 dollars. This is significantly more expensive than the msrp of 33,000 dollars for the cheapest model Volkswagen has announced to compete in the same price range -- The ID3.
On top of these future ambitions, Volkswagen has already begun a $2 billion dollar marketing campaign on its ID (VW electrical car segment) brand. Already on showcase are a wide variety of EV concepts including models such as the ID Cross and ID Buzz. In fact, Volkswagen has already entered the EV market through their subsidiary brands Audi and Porsche - their E-tron and Taycan models were launched 2019. This clearly evidences Volkswagen’s ability to produce EVs - and the market viability of their venture, with Taycan models selling double VW’s expected first year production units.
The successful production of the Taycan and E-tron show that Volkswagen definitely has the technological capabilities to compete with Tesla, with the Audi E-tron and Porsche Taycan boasting ranges of 218 miles and 201 miles separately. These numbers give us context to how Volkswagens electric battery technology is already slowly developing, though there is still a long way to go to reach ranges of 305-340 which the Tesla Model X and S are capable of. The ID3 model, set to be produced in 2022, will boast an even more impressive range of 340 miles. This impressive battery technology is the result of Volkswagen’s well-funded R&D: at least $200 million a year is used to develop lithium-ion batteries alone, a process ongoing since 2012. .
Data taken from Yahoo Finance:
Financial data from last two quarters of earnings for VWAGY
Financial Calculations from the company’s earnings report show that the company is currently undervalued as well with a DCF calculated Fair trade value of $21 per share, around 15% higher than the current market trading price for the company. Volkswagen's current reports also show strong cash flow with a 16.05 billion dollar increase in cash flow in 2020, up 391.43% by Y/Y comparison and boasting 32.82 billion dollars of cash on hand. The strong cash flow which Volkswagens possesses is a great competitive advantage they have over rivals Tesla. Even despite negative revenue growth in Q1 and Q2 of 2020 (as a result of the coronavirus), , the stock has still performed relatively stably only dropping 12% compared to its pre-pandemic highs, its competitors BMW and Nissan which fell 20.3% and 41.9% separately as a result of the virus.
Though Volkswagen seems prepared to enter the EV market, investors remain concerned as to whether or not consumers are ready for the change. Though the EV sector of the automotive market has been growing significantly for the past years, (with (stock prices?) rising as much as 57% from year to year, EVs still only account for a small percentage of global car sales - coming in at a mere 2.6% in 2019. Despite this, Volkswagen aims to produce a staggering 28 million EVs a year: If consumers prove to not be ready for the change, it is extremely likely that Volkswagen EVs would be forced to sell at a lower price and produce a great loss for the company. However, on the bright side , some posit that the main reason behind EV’s small market share is because of their high prices, as opposed to consumers’ dislike of their features. For example, the Tesla Model 3 (one of the cheapest EVs available today) dominated the US EV market with a 63% market share - evidencing consumers’ prioritisation of lower prices. Even with these incredible figures that the Model 3 produced, supply has still exceeded demand for the model. So though the small EV market is rightfully a concern to potential VW group investors, it must be acknowledged that VW has the potential to shift the market towards more affordable EVs.
Another concern for the company is their past image from the diesel scandal of 2015. The scandal left the companies imaged scarred and have fueled serious protests from environmentalists against Volkswagen in the past. This is of serious concern as environmentalists may be people who are most interested in taking Volkswagen has been focused on marketing themselves as a sustainable and environmental company since then and going all in on their electric car segment, but whether or not Volkswagen can shake off it’s bad reputation in the environmentalist community remains to be seen.
Though concerns over the size of the EV market and VW’s bad reputation towards environmentalists may be concerns for Volkswagen’s future as they place a huge bet on the EV market, Volkswagen still has great potential to be a fierce competitor in the EV market. With some analysts in the automotive industry suggesting a 57% market share for EVs in the US by 2040 if volkswagen can successfully push EVs to the mass, and with much governmental support coming the EV market’s way, Volkswagen’s ambitious investment on the rapidly growing EV sector has a great chance of paying off as they push affordable high quality electrical vehicles to the general public. If VW’s bet on the EV market pays off, it is likely to make the established automaker more powerful and dominant in the new affordable EV market, bringing the group to new heights.