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John Engle
John Engle
Articles (604) 

Volkswagen Is Making a Play for Tesla's Electric Crown

The world's biggest carmaker may soon be the world's biggest electric carmaker

February 03, 2021 | About:

Volkswagen AG (XTER:VOW3) is making a big play in the electric vehicle space. Indeed, unlike the many other established automakers that have largely contented themselves with merely establishing beachheads in the still nascent EV market, the company has committed to an all-out offensive.

Such has been the sheer speed and intensity of the German automotive giant's campaign that many industry watchers have been left scrambling to adapt their models and forecasts for the EV market to account for this new contender.

An electrifying vision

The impetus for VW's aggressive bet on EVs grew out of the 2015 Dieselgate scandal. In an effort to draw a clear line under that embarrassing episode and to chart a fresh course for the company, Volkswagen declared its commitment to an electric future and pledged to transform its business strategy and product roadmap accordingly.

While many industry watchers doubted the sincerity of VW's EV commitment at first, they were soon silenced when, in 2018, the company announced plans to spend $50 billion over five years to supercharge its EV development. Dubbed the "electric offensive" by CEO Herbert Diess, the investment has positioned Volkswagen for aggressive expansion in the space over the next several years.

VW has made swift progress on a number of fronts in the intervening years. It developed the modular electric drive, the proprietary drive platform at the heart of its EV architecture. It has invested in numerous projects connected to battery technology and production, including a more than $1 billion commitment to a joint venture with Swedish battery cell supplier Northvolt AB to build a 16GWh battery cell factory in Europe.

Charged up and ready to grow

2020 was a pivotal year for VW's EV strategy, as it marked the commercial rollout of the ID.3, the first vehicle built on its MEB drive platform. As it turned out, the ID.3 was a massive hit, topping the EV sales charts of several European countries since its September launch. In December, it was actually the best-selling model in the entire European Union.

Volkswagen sold 231,600 EVs in 2020, more than triple what it managed the year prior. And the company has shown no sign of slowing down. Indeed, the recent launch of the ID.4 SUV, VW's second MEB-powered EV, will likely further accelerate the trend. Unlike the ID.3, ID.4 will target the American market in addition to the EU and is currently projected to see sales in excess of 100,000 units in 2021.

The company's swift EV ascent has turned many analysts' heads. Redburn's Timm Schulze-Melander, for example, now believes that Volkswagen may have a shot at selling more EVs than Tesla Inc. (NASDAQ:TSLA), the current market leader, in 2021:

"We argue that in 2021, VW will rival Tesla as the No. 1 seller of battery-electric vehicles globally."

My verdict

Thus far, VW has made good on its promise of a rapid ramp-up of EV production. Its target of 1.5 million EV sales in 2025 certainly looks doable, especially if it can manage anything close to Schulze-Melander's forecasted 800,000 deliveries for 2021.

While I remain dubious about Volkswagen's chances for this year, I would not be surprised if it claims the EV crown in 2022. The company is clearly aiming for the top spot in this particular market. Based on its current trajectory, there is ample reason to believe that it will succeed in its goal in relatively short order. That could have powerful investment implications, not only for VW, but the whole EV market.

Disclosure: Author is short Tesla.

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About the author:

John Engle
John Engle is president of Almington Capital Merchant Bankers and chief investment officer of the Cannabis Capital Group. John specializes in value and special situation strategies. He holds a bachelor's degree in economics from Trinity College Dublin, a diploma in finance from the London School of Economics and an MBA from the University of Oxford.

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