It sounds to me like the VW group may be abandoning the entry-level market to focus on higher margin models. Goodby Skoda, hello Audi. The lower priced BEVs market may be left to the Chinese and the $25k Tesla platform.
Apparently not. VW unveiled its ID2all propotype today, a hatchback with a target price of 25K euro, or about $26.6K:
It’s a long way to go from here to production, of course - and VW’s low price for the ID2all may end up going the way of the $35K Model 3. But they’re clearly signaling that they intend (at least today) to challenge for the mass market.
Remember EV’s have fewer parts. The biggest problem with ICE costs and otherwise are the number of parts. I am not saying build an ICE you can build an EV with greater ease.
I am saying the barriers to entry for EV are lower than for ICE.
That is still not obvious. My opinion was based on the following from the VW CFO:
“The key target is not growth,” VW’s new group CFO told the Financial Times last week. “We are more focused on quality and on margins, rather than on volume and market share.” VW Group has just announced it will kill off at least 100 different car models, about 60% of its portfolio, in the coming years. https://www.marketingweek.com/mark-ritson-volkswagen-profit-before-sales/
Entry-level models typically have low margins.
The flip side of the ID2 announcement is that VW has been trying to license the platform upon which the ID2 is built (the MEB) to its competitors. Ford for example will be producing two MEB models in Germany that are projected to be priced below the Mach E. This doesn’t seem like a business strategy where market share is a priority. It is good for margins, not so much for car sales.
So what is VW’s strategy with the “mass market” low cost BEVs? Will it continue to license out its EV platform to competitors? Will the ID2 be a focus or is VW just hedging its bets, waiting to see what Tesla and BYD bring to the low cost BEV table? Who knows.
I mean - maybe? After all, that statement is pretty general, and from about a year ago. Meanwhile, a year has passed - and VW has just unveiled their new model ID2all. Which is badged as a VW model, not licensed out to another company, and they’re stating that they plan to bring it to production. Perhaps they’ll change their mind, but it’s certainly a data point against the idea that they’re going to cede that segment of the market to the Chinese and Tesla.
As an aside, licensing the MEB platform out to other companies doesn’t mean that VW isn’t planning on heavily participating in that market segment. As your article points out, they licensed the platform to Ford for two SUV’s - that’s the segment the ID4 is in, and they made and sold 175K of those last year.
It occurs to me that even with reduced margins, if you’re the only car in that segment, rather than one of 50 competing in the higher price category, you might do very well indeed.
This might be relevant if VW was mass producing the car today. Unfortunately it is still at least two years away. And all of this is just wishful thinking until car companies figure out battery production. One can only make as many cars as one has batteries for. That was the lesson of 2022 for even the small amount of BEVs being sold that year.
The big legacy car companies all have plans to mass produce EV batteries by about 2026. Meanwhile BYD is one of the world’s largest battery companies while Tesla is gearing up two gigafactories to mass produce its next generation battery. BYD and Tesla are probably the only car companies capable of producing over a million BEVs in 2023 and that advantage will likely extend through 2024.
Presumably a smaller car requires less power to go any given distance. If that’s correct, then a small electric car will require fewer batteries (and presumably weigh less in the first place because of its size and component size.)
I’m not making any predictions, I’m noting that almost all EV’s so far have aimed at the luxury market, and there is a hole down below if/when someone produces for the lower end.
Finding a target hole is nothing new; it’s what the Japanese “luxury” car makers did when they introduced Acura, Infiniti, and Lexus. At the time there was the cheap end: Chevy, Toyota, Ford, a few big Detroit cars in the middle: Buick, Oldsmobile, etc. and a few quite expensive luxury cars: Mercedes, BMW, Cadillac, Lincoln. The Japanese correctly identified the “better than Datsun, cheaper than Mercedes” hole and filled it quite full.
And I expect in two years battery capacity will continue to grow, but we shall see.
The problem is that those small electrics have been made (e.g., Leaf, Bolt, Zoe, etc) and they can 't compete with ICEs at the equivalent price range, even with incentives. To make a BEV that performs well enough to compete with an ICE requires a battery that costs so much it can only be profitably incorporated in a luxury vehicle.
It is generally stated that price parity between BEVs and ICEs will be reached when batteries cost $100 KWh. In 2021, the average cost was about $130 KWh depending on who did the survey, which jumped to about $160 KWh in 2022 due to supply issues. In short, even Tesla cannot currently make a BEV that is cost and performance competitive with a Corolla or Accord ICE. That will require a technological advance in battery design and production over what is currently available.
Tesla is reported to be close to reaching $60 KWh with its 4680 cell format made in its Gigafactories, hence rumors of the $25K Model 2. They’ve talked about the tech advances that make this possible, and guys like Sandy Munro have torn down the batteries and are convinced that Tesla is very close, but who really knows? Can VW, GM, and Ford do the same despite a late start? Unlike BYD they have no experience at making batteries so it would seem to be a bit of a challenge.
The bottom line is that with current BEV technology it is not possible to build an entry level BEV that the masses will buy over ICEs without a government mandate or big incentives. The challenge is picking the companies capable of developing that technology soonest. They will be the likely winners.
It’s not just a cost of the battery problem. To make EVs competitive with ICE vehicles every ounce counts. Sandy Munro summarizes it well, “The best part is no part.” You arrive at the right insight:
The bottom line is that with current BEV technology it is not possible to build an entry level BEV that the masses will buy over ICEs without a government mandate or big incentives. The challenge is picking the companies capable of developing that technology soonest. They will be the likely winners.
Can you guess who is leading the charge? At Tesla they don’t just design newer and better cars, they design newer and better factories to make those newer and better cars. Elon Musk calls it, “The machine that makes the machine.”
Bottom line for VW, by the time they introduce their affordable EV Tesla will be producing their third generation mass market EV. While VW introduced a prototype, Tesla revealed how and where they will build their yet to be shown prototype. One reason, maybe the real reason, is that Tesla now develops the EV and the factory to build it at the same time by the same team of engineers. The change starts at the very top, redesigning how to design a product.
I mean, if you only look at the U.S. market, you could draw that conclusion. But in Europe, 38% of last year’s sales were EV’s, and 25% were BEV’s. Two of the best-selling models - the Dacia Spring and the Fiat 500e - are entry-level BEV’s. The Spring is actually cheaper than $26K. Combined, they sold 115K units in Europe last year. For comparison, the Model 3 only sold 91K.
The entry-level BEV market is already in full swing in Europe. Both Tesla and VW are going to be years late to that segment. There’s no need for some radical new technological advance. And of course, the same is true in China.
Could that have happened without the significant mandates and incentives present in Europe? Maybe not - but it doesn’t matter. Because those mandates and incentives currently exist, aren’t likely to disappear, and are presently sufficient to get large numbers of consumers to buy EV’s.
I know that Europe, and most other countries, have substantially higher taxes (both initial purchase taxes and ongoing registration fees) than the USA has. So it is possible that they can set those taxes up in ways that encourage EVs over ICE vehicles. I don’t know if that is what they do, but it is entirely possible (similar to the way the USA recently created a new tax credit for EV purchases). Let’s say country X has an 80% purchase tax on a new midsize sedan, so a $35k car becomes $63k with taxes. If they discount the EV purchase tax to 50%, a $40k car becomes $60k after taxes. Similar price, but lower fuel costs (because gasoline is also highly taxed, while electricity less so, but mainly because EV electricity usage is FAR more efficient than ICE gasoline usage). For a large majority of people, it become a no brainer to switch to EV the next time they need to replace their vehicle.
The incentives are almost sure to disappear. Once EVs becomes the “standard”, they will disappear, and you will hardly find new ICE vehicles for sale. And once EVs becomes the vast majority of all sales, even the mandates will become moot because no automaker in their right mind will retool for ICE in, say, 10 years from now.
True. I meant over the relevant timeframe of the market shifting. Btresist’s point AIUI was that BEV technology wasn’t ready for that shift to take place at the entry-level segment. But that’s not true, since entry-level BEV’s are selling like hotcakes in Europe (and China). Incentives and mandates play a part in that, but they’re likely to remain in place long enough for entry-level BEV’s to permanently occupy that niche in the market.
Or not. VW has created a new area in the VW group called the “Platform Business” that helps external OEMs (what I call competitors) develop BEVs. Having VW engineers help competitors build competing products doesn’t seem consistent with their old business model of selling as many VWs as possible, but is in line with a focus on margins over market share. It is also consistent with their stated plan of greatly reducing the variety of models, providing consumers fewer VW vehicle options.
My guess is that VW has come to the conclusion that most profits in the autonomous EV world will eventually come from software and batteries, rather than the selling of vehicles. The more companies dependent on VW hardware, the greater the demand for custom VW software and batteries.
I can see auto companies still making ICE cars and vehicles for the growing market in the developing world. Minus EU bans on imports, those could fill a market demand in Europe.
Car companies do not figure out battery production. They talk to the battery experts (developers, mfrs, and so on) to see “what is currently available in the near-term future” and THEN guesstimate from there. That is what Tesla does. They take existing tech and apply it (perhaps in novel ways), but they are always using “current tech”.
Software is a very high leverage business; you create the software once and sell it a bazillion times if you can with insignificant marginal cost. (See: Microsoft).
Batteries are exactly the opposite, very old line manufacturing, even if a “new” product. For every battery you have to extract minerals, refine them, weave them together in a certain pattern, put them in a housing, and ship them to the end user. There’s no reason a car manufacturer has to do that (they don’t need to provide gasoline for ICE cars either) except that the industry wasn’t developed and Musk needed it to be, so he created his own supply chain because he had to.
A manufacturer doesn’t need to supply all its own parts when others can do the heavy lifting for you (see: Automobile tires).
And I have serious doubts about VW selling software to other manufacturers, except possibly those already under the VW umbrella, who have such small production runs it would be costly to build it from scratch themselves.
Reportedly, one reason for Diess being tossed by the VAG Board was continuing foulups in the software division. Another reason cited was the consistent fall in sales y/y, for several years. Apparently, someone at VAG cares about volume, in spite of what Diess and his CFO said.
Not sure why you believe this. BYD and Tesla are both battery companies that also make cars. VW has created a separate battery development division called PowerCo that it is considering doing an IPO with. In effect, VW is trying to become a battery company that also makes cars. Even slow to electrify Toyota is a leader in battery patents and is aggressively developing a solid state battery soon to be used in their hybrids. These companies don’t just talk to battery experts, they hire them.
Not sure why you believe this. Batteries (plus software) is to a BEV what an engine is to an ICE. It is the primary component that differentiates brands and models. It is what determines BEV performance, like range, power, and charge time. It is the primary determinant of BEV cost. Most of the major BEV makers are building their own battery factories and investing boat loads of money on battery R&D.
The paradigm for a high margin business with high brand loyalty is vertical integration, with Apple as the prime example. Tesla and BYD are vertical integration models for BEVs and the OEMs are starting to copy them. GM, Ford, VW are all scrambling to build battery factories and develop their own software for autonomous driving.
BEVs will have operating systems as sophisticated as those found in smart phones, if not more so for autonomous driving. Who will provide these? Whoever does could make a lot of money. There are two business models exemplified by Google and Apple. One licenses Android to other companies for high margin profits. The other uses the MacOS to build brand loyalty so as to sell products for high margin profits. VW with its platform business seems to be eyeing the first while Tesla wants to be the Apple of energy and transportation.
Not sure why you believe this. BYD may have started with batteries, but they describe themselves as an automaker. Which also makes batteries. Tesla started with cars, I believe, and added batteries because they needed them.
Not sure why you believe this. VW is already one of the largest automakers in the world. “Batteries” is a pretty mundane product, while cars are much higher in the value chain.
Not sure why you believe this. A motor is an engine. A battery is analogous to gasoline. For the record, car manufacturers in the early days produced their own tires, but realized their competence was better spent on improving the assembly line and sourcing parts. Ford’s “Rouge” experience taught him that. Others took the lesson, and Firestone and other tire makers (along with other component suppliers, including engines) were born.
Not sure why you believe that. Apple does not own any chip fabs, nor produce cases, nor cameras, nor circuit boards. They design the basic module and the chips, and outsource everything else.
I’m sure you’re misinformed. Google makes nothing off Android, which it licenses freely. It makes Android money via their App Store, in which independent vendors supply software and Google takes a slice. While that is profitable (in the scheme of Google it’s a pittance), Google’s main reason for Android is so that they are not under the thumb of the iPhone and Apple. We see what Apple did to Facebook with the flick of a software, imagine if they elected to have their own search, or send traffic to Bing, or whatever. Android was a strategic move for longevity, not for profitability in and of itself.