BERLIN -- Volkswagen Group will invest 180 billion euros ($193 billion) in the next five years into areas including battery cell production, digitalization in China and expanding its presence in North America, while spending on combustion engines will decline.
More than two-thirds of the five-year investment budget -- 122 billion euros -- is allocated toward electric vehicles and software as the group, whose brands include Porsche, Audi, Bentley, VW and Skoda, intensifies a push to challenge Tesla's leadership on electric vehicles.
"We have set clear and ambitious targets and took necessary decisions to streamline processes," CEO Oliver Blume said during the automaker's annual press conference on Tuesday. This year "will be a decisive year for executing strategic goals and accelerating progress across the group," Blume said.
The automaker is increasing overall spending by 13 percent compared with its last annual update.
The difference from the previous plan is primarily down to more investment in its battery business, raw materials, and a $2 billion plant in South Carolina for its Scout brand, Chief Financial Officer Arno Antlitz said.
With markets in turmoil over the collapse of Silicon Valley Bank, Antlitz told analysts that the company could postpone some battery investments if the market did not grow as expected. "The overall target is having at all times solid financials," Antlitz said.
VW is still aiming launch an affordable EV costing around 25,000 euros ($26,795) at today's prices by 2025, produced on a second-generation version of its all-electric MEB platform.
Antlitz said he hoped the company would by then have struck enough raw material sourcing deals and expanded battery production to bring down EV costs, 40 percent of which stem from the cost of the battery.
"We expect to reach 20 percent electromobility in new sales from 2025 and are already investing two-thirds in that area," Antlitz said. "On the other hand we need to keep combustion engines competitive... that is a double burden."
VW's investment in combustion engine technology will peak in 2025 when tough new Euro 7 emissions regulations in the European Union come into force and decline from then on, as it works toward its target of 50 percent all-electric sales globally by 2030.
VW said it is finalizing high-performance software for its premium and luxury brands which could in the medium-term be applied across the company, in an attempt to improve operations at its software unit Cariad.
The unit has gone over budget and fallen behind on its goals, suffering an operating loss of 2 billion euros in 2022 on revenue of 800 million euros, according to the carmaker's annual report released on Tuesday.
On Monday, Blume said Cariad will be ready to deliver the premium software package to Porsche in time for the launch of the full-electric Macan SUV in 2024.
China a 'major challenge'
VW is also investing in China, its biggest market, to improve competitiveness with local models to help stop a slide in market share, particularly among EVs.
Blume said turning around sliding market share in China is a major challenge. "We want to translate our strength in internal combustion engines in China to e-mobility," he said.
VW sold just under 40 percent of its vehicles in China last year, where its market share slipped to15 percent from 19 percent in 2020. The drop is more pronounced among electric cars, where local manufacturers such as BYD and NIO offer attractive models at competitive prices.
EV sales in China are expected to reach 50 percent by mid-decade, adding urgency to accelerate VW’s offerings, Blume said.
Bernstein analyst Daniel Roeska said in a note that the "substantial" investments in VW’s battery business and spending on combustion engines to keep up with emissions regulations "will present a key worry for investors" concerned about drag on cash flow.
On Monday, VW announced plans to build a battery plant in Canada, its first outside Europe, as the company seeks to fast-track an expansion in the U.S. to lessen its dependence on China.
VW earlier this month sent shares soaring with an optimistic outlook for the year ahead despite ongoing supply chain challenges, forecasting a 10 percent to 15 percent rise in revenue on 14 percent higher deliveries.
Its 2022 earnings margin was at the upper end of its forecast at 8.1 percent, with sales and earnings above 2021 levels despite supply-chain turmoil dragging its net cash flow far below target.
Capital markets day
Profit rose across all brands last year, including mass-market marques Skoda, Seat and VW, which combined had an operating profit gain to 4 billion euros in 2022, up from 3.5 billion euros the previous year even as deliveries declined.
Delivering further gains will become more difficult as supply bottlenecks ease to boost vehicle output, Antlitz said in an interview with Bloomberg Television.
VW will share the results of a 'virtual equity story' exercise instigated by Blume, which had all of the company's brands prepare for a listing as a training exercise, at a capital markets day on June 21.
The most likely next stock market candidate is VW's battery unit PowerCo.
Reuters and Bloomberg contributed to this report
