electric car race is just beginning

On the southern edge of Brussels, where the city turns to suburbs, the future of Germany’s most successful automaker is taking shape inside a peculiar sort of car factory. Here, there are no exhaust pipes, transmissions or fuel tanks. There are no spark plugs, radiators or manifolds. What the Volkswagen Group factory does have, however, are batteries stacked to the rafters.

Thirty-six shoebox-sized battery modules, each containing a dozen lithium-ion cells, are packed into seven-foot long electric-battery packs and slung under the floor of each sport utility vehicle produced here. The first electric SUV from Volkswagen’s luxury Audi brand, the e-tron, can go 400 kilometers (nearly 250 miles) on a single battery cycle and be recharged in as little as half an hour. The styling is conventional, the interior is luxurious and the ride is nearly silent.

The e-tron SUV has one job for Volkswagen: Prove that a carmaker that has relied almost exclusively on the internal combustion engine since it was founded 82 years ago can produce electric vehicles people want to buy and policymakers will embrace as they cast around for ways to tackle the climate crisis. Success means that Volkswagen will overtake rivals, including Tesla, in electric car sales and fend off new challengers from China and Silicon Valley; failure could signal the beginning of the end for a company with 665,000 employees and annual revenue of $265 billion.

Volkswagen isn’t alone. Established carmakers around the world are ripping up their business models in the hope of adapting to a new world in which electricity replaces gasoline and diesel. Factories are being overhauled to produce electric cars, and automakers are snapping up every battery they can find. The high cost of developing electric cars is forcing some companies to find partners and turning others into acquisition targets. The need to meet strict emissions standards in China and Europe means that executives are paying far more attention to the policies being put in place in Beijing or Brussels, than what rivals are building in Detroit or Wolfsburg, Volkswagen’s hometown.

The German group, which also owns Porsche, Bugatti, Skoda, Lamborghini and SEAT, is rising to the challenge with a radical transformation that is unparalleled since World War II. The company is spending €30 billion ($34 billion) over the next five years to make an electric or hybrid version of every vehicle in its lineup, and it plans to launch 70 new electric models by 2028. By the end of 2030, it wants four of every 10 cars it sells to be electric, a mass market play that hinges on the success of a new line of vehicles called the “ID.”

The overhaul has profound implications for the world’s largest carmaker as it tries to turn the page on its costly diesel emissions scandal. Volkswagen is spending billions of dollars to retrofit factories from Germany to China to produce cars based on its modular electric car production platform, or MEB. The company has also signaled that it will use some of the money it makes from selling fuel-powered cars to produce its own batteries and build charging networks.

The initiatives are expensive. But the level of investment by Volkswagen and its competitors, coupled with the aggressive emissions targets set by regulators, show there’s no turning back. All of this leads to a new question: Can Tesla maintain its lead in the global race to the electric car?

History isn’t the best indicator of who will emerge from this battle victorious. The industry has a poor track record with electric cars. General Motors’ EV1 appeared on American roads in 1996, the same year the auto industry successfully lobbied against a mandate from the California Air Resources Board to make more electric vehicles. The model was canceled in 2003, producing a trail of unhappy customers and the conspiratorial documentary ‘Who Killed The Electric Car?’ Chevrolet pulled the plug on the Volt, which never sold in significant numbers, last year. Nissan’s Leaf remains in production but it has failed to achieve the level of commercial success envisioned by the company’s former chairman, Carlos Ghosn. More broadly, demand has been hampered by fears over the driving range of the cars, a lack of charging infrastructure and high sticker prices.

Until recently, Volkswagen never had much reason to bother with electric cars. Instead, it poured investment dollars into making its diesel engines more fuel efficient and affordable, which helped it to sell huge volumes of cars and overtake Japanese rival Toyota. In 2018, Volkswagen delivered a record 10.8 million cars. It says just 40,000 of those, or 0.4%, were electric vehicles. Another 60,000 were plug-in hybrids. Global sales of electric cars have been only slightly less anemic: 1.3 million of the roughly 95 million cars sold around the world in 2018 were battery electrics, according to the consultancy LMC Automotive.

Disinterest on the part of traditional carmakers cleared the way for the opening laps of the race to be won by Tesla, the company run by indefatigable entrepreneur Elon Musk. Tesla sold over 220,000 electric cars in 2018, according to LMC Automotive, roughly 70,000 more than its nearest competitor, Chinese state-owned BAIC Group. The global alliance of Renault, Nissan and Mitsubishi Motors sold roughly 130,000 electrics last year, while Volkswagen’s German rivals BMW and Daimler sold 33,000 and 14,400, respectively. At the bottom of the heap was Toyota, the world’s second largest carmaker, which has chosen to focus on hybrid cars and fuel cell technology. It sold only 1,000 electric vehicles last year, an increase from zero in 2017. LMC, whose data does not include sales in South America, Canada and Mexico, or commercial vans, has Volkswagen selling 26,000 electrics.

Build it and they will come

While the electric car has a checkered past, there is a consensus among auto industry executives and analysts that a tipping point is approaching where mass adoption will become unavoidable because of falling battery costs, pressure from regulators and generous government subsidies. “These factors have come together to force the traditional industry to take electrification seriously — faster than we had previously expected,” said Max Warburton, an analyst at research firm Bernstein. “This is now really happening.”

According to Bernstein, dramatic declines in the price of batteries will allow leading automakers to sell fully electric vehicles for less than cars powered by gasoline and diesel as soon as 2022. Electric cars, they argue, are already gaining traction: As recently as 2010, annual sales were close to zero. “There’s just such an incredible amount of money being poured into electric cars,” said Al Bedwell, the director of global powertrain at LMC Automotive.”I’ve been looking at this industry for 20 years, and my real gut feeling is that it’s kind of unstoppable now.”

Everything changes

Tesla has one major advantage over its more traditional competitors: No baggage. The American upstart doesn’t have a big dealership network, entrenched unions or a legacy business to manage. “It’s a very costly exercise for traditional carmakers to get into the electric vehicle space in a big way,” said Bedwell, the LMC Automotive analyst. “At the same time, they’ve got to support all of their conventional activities. That’s where most of their revenue is. Volkswagen, for instance, can’t stop selling internal combustion engine cars. It can’t stop selling diesel cars in Europe.”

The urgent need to free up cash for new technology is causing automakers to find partners to share the costs. BMW and Daimler, which compete hard in the luxury market, have announced a partnership focused on highly-automated and autonomous driving. They’re also investing $1 billion in a new venture to develop mobility services, including ride-sharing and charging systems for electric cars. Ford will build vehicles using Volkswagen’s electric platform under a deal announced in July. Volkswagen will meanwhile join its US rival in investing in Argo AI, an autonomous vehicle company valued at $7 billion. More dramatic changes are under consideration. In May, Fiat Chrysler proposed a merger with Renault that would have created the world’s third largest carmaker and produced annual cost savings of more than €5 billion ($5.6 billion). When the proposal was withdrawn, Renault lamented the lost opportunity, saying the merger had “great financial merit” and “compelling industrial logic.”

The survival of some of the world’s most storied car brands hangs in the balance. According to LMC Automotive’s forecast, the huge amount of investment being deployed by Volkswagen will help it sell over 1.4 million electric cars a year by 2025 — more than any other carmaker and over three times the sales Tesla is expected to produce. The alliance of Renault, Nissan and Mitsubishi Motors is on track to rank second in 2025, selling nearly 590,000 electric vehicles that year. China’s Geely, which owns Volvo, will rank third. Tesla will be fourth with 413,000 vehicles, followed closely by Toyota. Daimler, Hyundai, General Motors and Ford are each forecast to sell between 330,000 and 400,000 cars in 2025.

“Thirty years ago or 40 years ago, a diesel was a no-go engine. It had nearly no horsepower, it needed like one minute to pre-heat the system before you could start the engine, all this stuff. And then you see what diesel can do today, it’s a totally different story,” explained the executive. “The same I think is true for electric mobility. We have now [reached] a point where you can make cars like the e-tron that really meet the demands of a lot of customers. They are not perfect, but they are very good.”

Speaking in March as he unveiled the Model Y, Tesla CEO Musk said: “Our goal all along has been to try to get the rest of the car industry to go electric.”

Whoever comes out on top, Musk will soon get his wish.