How does Volkswagen plan to deal with the electrification of vehicles?

The Volkswagen AG Group is currently undergoing one of the most significant changes in its history. In recent years, it has focused intensively on the electrification of its portfolio and digital transformation, while facing several challenges on the global stage. It is currently partnering with several technology companies, most notably Rivian in the field of electric vehicles. It has been paying a lot of attention to software issues that have slowed down the launch of some models, which is particularly critical in the context of autonomous technologies. Its luxury brands, such as Porsche and Audi, are benefiting from premium models, but mass-produced cars such as Skoda and SEAT are facing falling demand and pricing pressure.

Volkswagen has been planning a unified platform for electric vehicles, known as the Scalable Systems Platform (SSP), for years. It would replace current systems and simplify production across VW Group brands, reducing costs. It was originally due to debut in 2026, but its development has been beset by problems, particularly in the software area, causing it to be pushed back until 2028.

Volkswagen sees redundancies as the only alternative

In the context of necessary cost-cutting, Volkswagen announced layoffs months ago and even announced the possibility of closing some factories, which would be the first time in its 87-year history. At the end of November, it made these plans concrete with the closure of at least three factories in Germany, where tens of thousands of employees would lose their jobs. He aims to cut costs by €4 billion ($4.21 billion), which he hopes to achieve by cutting wages by 10% in addition to the layoffs. For this reason, he has come into conflict with the trade unions, which in turn are demanding a 7% increase for employees. Various strikes are already under way in Germany, but despite the escalation of these tensions, the carmaker considers the redundancies to be inevitable. Criticism of the trade unionists is also directed at the fact that, instead of a coherent long-term strategy, it is approaching a solution that will have a negative impact on the workforce in particular.

Cooperation with Rivian and opportunities in the field of electric vehicles

Volkswagen is trying to increase its competitiveness in the field of electric vehicles, in particular through its new cooperation with the American company Rivian, with which it has announced a joint venture. Volkswagen's initial investment was to be $5 billion, but in November 2024 the company announced an increase to $5.8 billion. The partnership is intended to impose Rivian's technology on Volkswagen, while the latter will use the funds to launch its latest R2 model, which is expected to hit the market in the first half of 2026. At the same time, the joint venture is expected to launch the first models of its own electric cars by 2027.

European car industry in crisis

The problems currently facing Volkswagen underline the wider challenges facing the European automotive industry. Electric cars represent a significant challenge for manufacturers, particularly in the face of growing competition. Chinese firms are filling markets with more affordable models thanks to massive incentives and cheap labour, which the EU wants to combat with new tariffs. However, car manufacturers, including Volkswagen, are criticising these moves because of the potential negative impact on their revenues, as China may, in their view, introduce retaliatory measures.

At the same time, there is a shortage of skilled labour in Europe and expensive components that drive up costs. The higher prices of European EVs are discouraging more frugal customers, who in turn are looking for more affordable alternatives. Because of this, carmakers are now reassessing their targets for a complete switch to electric vehicles in the coming years and are starting to focus on the 'happy medium' currently represented by hybrids. However, despite a temporary slowdown in demand, the electrification of the automotive industry remains the main goal of most European manufacturers, especially due to the EU's strict emission standards and the ban on the production of internal combustion cars by 2035.[1][2]

Economic results

The severity of the automotive industry's transformation was reflected in Volkswagen's latest third-quarter 2024 earnings results. Despite slightly higher-than-expected revenue of €78.36 billion ($85.41 billion), rising costs and slowing demand, particularly in China, have significantly reduced its profitability. Net profit was €1.37 billion ($1.49 billion), down 66% compared to the same period in 2023. Earnings per share were €3.34 ($3.64).* Total sales were impacted by a 7% decline in global vehicle deliveries. Volkswagen's high cost issues are also evident in its net profit margin, which declined for the fourth consecutive quarter . In the third, it fell to 1.74%, a significant difference from 3.92% in the previous quarter, or 5.11% for the comparable period in 2023.

Revenues for the full year 2024 are expected to stagnate

In its updated outlook for 2024, Volkswagen expects annual sales of around €320 billion ($348.8 billion), which would be flat compared to 2023. It also forecasts a sharp drop in annual net cash flow in the automotive division to €2 billion ($2.18 billion), down from €10.7 billion ($11.66 billion) in the previous year. Volkswagen attributed part of the drop in net cash flow to high spending on mergers and acquisitions. Of the EUR3.5 billion (USD3.81 billion) planned for this purpose, EUR2 billion (USD2.18 billion) represents the first part of the aforementioned investment in the upcoming joint venture with Rivian.[3]

Shares at 14-year low*

The unfavourable results in recent financial periods have also had an impact on the performance of Volkswagen's shares, which on Tuesday, 3 December 2024, were trading at their lowest level on the Frankfurt Stock Exchange since 2010. They have already lost almost 30% of their value this year and have continued their bearish trend since April.* However, the electric car initiative could put the carmaker back on the right track in the long run. Despite the slowdown in demand, electrification is inevitable and ultimately the commitment of carmakers to this segment will be key to their future and staying relevant. This provides hope for investors in the long term.

Evolution of the share price of Volkswagen Concern over the last 5 years. (Source: Google Finance)*

The potential impacts of restructuring are far-reaching

All the problems Volkswagen has faced recently will inevitably be passed on to the end consumer. However, this also depends on how the car company handles the transition to electric vehicles and whether it will be able to compete with other manufacturers in this sphere. As its weight in the German economy, as well as in the entire automotive industry, is unquestionable, its decisions may take a toll not only in the form of higher prices, but also negatively affect the livelihoods of entire communities that depend on jobs at Volkswagen factories and ultimately reduce the country's overall GDP.

Conclusion

Despite the financial burden, the steps in the case of the joint venture with Rivian are strategically significant, as they can bring Volkswagen closer to strengthening its position in the electric vehicle market in the long term, especially in the US. Although the pressure from other car companies is significant, Volkswagen is seeking to ensure its long-term competitiveness by investing in new technologies and partnerships. Its ability to optimise costs and accelerate returns on investment will be key to meet the challenges in the EV markets and maintain investor confidence. [1]

Adam Austera, Principal Analyst at Ozios

* Past performance is no guarantee of future results.

[1] Forward-looking statements are based on assumptions and current expectations, which may be inaccurate, or on the current economic environment, which may change. Such statements are not guarantees of future performance. They involve risks and other uncertainties that are difficult to predict. Results may differ materially from those expressed or implied by any forward-looking statements.

[1] https://www.europarl.europa.eu/RegData/etudes/ATAG/2024/762419/EPRS_ATA(2024)762419_EN.pdf

[2] https://www.policycircle.org/industry/electric-vehicle-industry-china/

[3] https://www.euronews.com/business/2024/10/30/volkswagens-earnings-disappoint-as-shares-plunge-to-24-year-low