At a factory near Germany’s border with the Czech Republic, Volkswagen’s ambitious strategy to become the global leader in electric vehicles is coming up against the reality of manufacturing during a pandemic.
The Zwickau assembly lines, which produce the soon-to-be released ID. 3 electric hatchback, are the centerpiece of a plan by the world’s biggest automaker to spend $36 billion by 2024 developing and building electric vehicles (EV). At the site, where an East German automaker built the diminutive Trabant during the Cold War, Volkswagen (VW) eventually wants to churn out as many as 330,000 cars annually. That would make Zwickau one of Europe’s largest EV factories — and help the company overtake Tesla in selling next-generation vehicles.
But COVID-19 is putting VW’s and other automakers’ electric ambitions at risk. The economic crisis triggered by the pandemic has pushed the auto industry, among others, to near collapse, emptying showrooms and shutting factories.
As job losses mount, big-ticket purchases are firmly out of reach — in the United States, where Tesla is cutting prices, more than 36 million people have filed for unemployment since mid-March. Also, the plunge in oil prices is making gasoline-powered vehicles more attractive, and some cash-strapped governments are less able to offer subsidies to promote new technologies.
Even before the crisis, automakers had to contend with an extended downturn in China, the world’s biggest auto market, where about half of all passenger EVs are sold. Total auto sales in China declined the past two years amid a slowing economy, escalating trade tensions and stricter emission regulations.
EV sales are forecast to fall to 932,000 this year, down 14% from 2019, according to BloombergNEF. The drop-off is expected to stretch into a third year as China’s leaders have abandoned their traditional practice of setting an annual target for economic growth, citing uncertainties.
The global-market contraction raises the prospect of casualties. French Finance Minister Bruno Le Maire has warned that Renault, an early adopter of electric cars with models like the Zoe, could “disappear” without state aid. Even Toyota Motor, a hybrid pioneer when it first introduced the Prius hatchback in 1997, is under pressure. The Japanese manufacturer expects profits to tumble to the lowest level in almost a decade.
Automakers who for years have invested heavily in a shift to a high-tech future — including autonomous vehicles and other alternative energy-based forms of transportation such as hydrogen — now face a grim test.
Do their pre-pandemic plans to build and sell electric cars at a profit have any chance of succeeding in a vastly changed economic climate? Even as COVID-19 has obliterated demand, for the carmakers most committed to electric, there’s no turning back.
“We all have a historic task to accomplish,” Thomas Ulbrich, who runs Volkswagen’s EV business, said when assembly lines restarted April 23, “to protect the health of our employees — and at the same time get business back on track responsibly.”
Global EV sales will shrink this year, falling 18% to about 1.7 million units, according to BloombergNEF, although they’re likely to return to growth over the next four years, topping 6.9 million by 2024.
“The general trend toward electric vehicles is set to continue, but the economic conditions of the next two to three years will be tough,” said Marcus Berret, managing director at consultancy Roland Berger.
Volkswagen’s Zwickau facility became the first auto plant in Germany to resume production after a nationwide lockdown started in March. Before restarting, the company crafted a detailed list of about 100 safety measures for employees, requiring them to, among other things, wear masks and protective gear if they can’t adhere to social-distancing rules.
The cautious approach has reduced capacity — 50 cars per day initially rolled off the Zwickau assembly line, roughly a third of what the plant manufactured before the coronavirus crisis. (VW said this past week that daily output had risen to 150 vehicles, with a plan to reach 225 next month.) Persistent software problems also have plagued development of the ID. 3, one of 70 new electric models the VW group is looking to bring to market in the coming years.
Still, Ulbrich and VW CEO Herbert Diess over the past three months have reaffirmed Volkswagen’s commitment to electrification.
Diess has described the ID. 3 as “an electric car for the people that will move electric mobility from niche to mainstream.” Pre-COVID, the company had anticipated that 2020 would be the year it would prove its massive investments and years of planning for electric and hybrid models would start to pay off.
Other German automakers are similarly pushing ahead with EV plans. Daimler is sticking to a plan to flank an electric SUV with a battery-powered van and a compact later this year. BMW plans to introduce the SUV-size iNEXT in 2021 as well as the i4, a sedan seeking to challenge Tesla’s best-selling Model 3.
A potential obstacle for all these companies — apart from still patchy charging infrastructure in many markets — is the availability of batteries. Supply bottlenecks appear inevitable given that the number of electric-car projects across the industry outstrip global battery-production capacity. And boosting cell manufacturing is a complicated task.
For VW and others, the first big test of EVs’ appeal in a COVID-19 world will come in China. Diess has referred to China as “the engine of success for Volkswagen.” VW group deliveries returned to growth year-on-year last month in China, while all other major markets declined.
Not long ago, China appeared to be leading the world toward an electric future. As part of President Xi Jinping’s goal to make the country an industrial superpower by 2025, the government implemented policies that would boost sales of EVs and help domestic automakers become globally competitive, not just in electric passenger cars but buses, too.
With the outbreak seemingly under control in much of the country, China is seeing some buyers return to the showrooms, but demand for passenger cars is likely to fall for the third year in a row, putting startups like NIO at risk and hurting more-established players like Warren Buffett-backed BYD, which suffered from a 40% year-on-year vehicle sales decline in the first four months of 2020.
The Chinese auto market may shrink as much as 25% this year, according to the China Association of Automobile Manufacturers, which before the pandemic had been expecting a 2% decline. EV sales fell by more than one-third in the second half of 2019.
Companies can’t count on China’s level of support from President Donald Trump in the United States, where consumers who love their SUVs and pickups have largely steered clear of electric vehicles other than Tesla’s.
The United States lags China and Europe in promoting the production and sale of EVs, and that gap may widen now that Americans can buy gas for less than $2 a gallon.
“When you’re digging out of this crisis, you’re not going to try to do that with unprofitable and low-volume products, which are EVs,” said Kevin Tynan, a senior analyst with Bloomberg Intelligence. Weeks after announcing plans to launch EVs for each of its brands, General Motors delayed the unveiling of the Cadillac Lyriq EV originally planned for April. Then on April 29, the company said it would put off the scheduled May introduction of a new Hummer EV. The models are part of CEO Mary Barra’s strategy to spend $20 billion on electrification and autonomous driving by 2025, to try to close the gap with Tesla.
In another move aimed at winning over Tesla buyers, Ford Motor unveiled its electric Mustang Mach-E last November at a splashy event before the Los Angeles Auto Show. The highly anticipated model had been scheduled to debut this year. Ford has not officially postponed the release, but the company has said all launches will be delayed by about two months, potentially pushing the Mach-E into 2021.
Elon Musk, whose cars dominate the U.S. electric market, cut prices by thousands of dollars overnight. The Model 3 is now $2,000 cheaper, starting at $37,990. The Model S and Model X each dropped $5,000.
The ID. 3’s new electric underpinning, dubbed MEB, is key to VW’s strategy to sell battery-powered cars on a global scale at prices that will be competitive with similar combustion-engine vehicles. Automakers typically rely on such platforms to achieve economies of scale and, ultimately, profits. MEB will be applied to purely electric vehicles across all of the company’s mass-market brands, including Skoda and Seat.
VW plans to escalate its electric-car push by adding two factories, near Shanghai and Shenzhen, that it says eventually could roll out 600,000 cars annually, more cars than Tesla delivered globally last year.
While China is the initial goal, making a dent in Europe and the United States is the long-term one. Like China, Europe had been tightening emissions regulations significantly before the pandemic. New rules to reduce fleet emissions will gradually start to take effect this year, effectively forcing most manufacturers to sell plug-in hybrids and purely electric cars to avoid steep fines.
For VW, this crisis wouldn’t be the first time it started a new chapter in difficult times. Diess saw an opportunity coming off the manufacturer’s yearslong diesel emissions scandal that cost the company more than $33 billion to win approval for the industry’s most aggressive push into EVs. When VW unveiled the ID. 3, officials compared its historic role to the iconic Beetle and the Golf, not knowing that this might hold in unintended ways: The Beetle arose from the ashes of World War II, and the Golf was greeted by the oil-price shock in the 1970s.
“We have a clear commitment to become CO2 neutral by 2050,” VW strategy chief Michael Jost said, “and there is no alternative to our electric-car strategy to achieve this.”