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October 23, 2019 08:33 AM

VW's $50 billion bet on the ID3

Christopher Rauwald and Elisabth Behrmann
Bloomberg
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    VW hopes to counter the threat from Tesla's Model 3 with its ID3 hatchback (pictured). 

    At major global car exhibitions, Volkswagen Group typically presents itself as a big, happy family, where each brand, budget-oriented Seat and Skoda, VW proper, luxury Audi, road rockets Porsche, Lamborghini, and Bugatti, gets equal time to flaunt its latest innovations.

    But at the Frankfurt auto show this September, the choreography was different, with the company devoting the entire pre-show press conference to a single model: a full-electric hatchback called the ID3.

    As reporters and industry grandees gathered in a cavernous exhibition hall, videos depicted lush mountain landscapes to a soundtrack of chirping birds and New Age music.

    To highlight the breadth of VW's ambitions for the ID3, a parade of prototype electric vehicles from years past made cameos. Finally, the lights went dark, the music picked up, and a trio of ID3s drove onstage--the only car the company showed that evening.

    "This is an electric car for the people that will move electric mobility from niche to mainstream," CEO Herbert Diess told the crowd.

    It's a big bet for an automaker trying to reinvent itself four years after it admitted to cheating on diesel-emissions tests--a scandal that has cost VW more than $30 billion.

    That painful experience shocked the company into a radical reboot and a commitment to spend almost $50 billion on electric vehicles, more than any other automaker.

    After years of planning and promises, in 2020 VW will begin to see whether that massive investment is likely to pay off.

    The ID3, due by the second quarter of 2020, is the first of at least 70 electric cars in VW's pipeline. It will begin rolling off German assembly lines in November, and in 2020 two factories in China will start production, allowing VW to build more cars annually than Tesla has sold in its entire history.

    By 2022, the company expects to have eight facilities around the globe making battery-powered vehicles, from the ID3 to vans to Porsche's four-door Taycan.

    Diess, an automotive industry lifer who climbed the ranks at BMW and supplier Robert Bosch, has told managers that the electric initiative can help more than double VW's market value, to 200 billion euros ($223 billion), according to people familiar with the target.

    Yet with the global economy showing signs of sputtering, the timing is risky. Auto sales in China, the biggest market, are heading south at an unprecedented rate, and a wider downturn would surely cut demand for new vehicles, electric or not. This is happening as automakers grapple with the unresolved trade war between China and the U.S. and the unpredictability of Brexit.

    Potential customers, meanwhile, remain deeply concerned about driving range and a patchy charging infrastructure. "The industry is facing a double whammy," says Fabian Brandt, a partner at consulting firm Oliver Wyman. "They're managing a crisis of weakening demand while grappling with a generational shift."

    VW's record on big initiatives such as the electric push is not great, as the company has often been hobbled by its sprawling footprint, an ownership structure that grants a controlling stake to the heirs of the creator of the Beetle, and bylaws that give workers and political stakeholders major sway over key decisions.

    Constantly taking into account the diverging interests of management, the controlling clans, labor unions, and the German state of Lower Saxony can bog down decision-making. Audi stumbled with a would-be challenger to Tesla's Model X, the e-Tron, which hit the market in April, six months later than planned, and shortly thereafter was recalled over concerns about fire risk in its battery.

    While the ID3, priced from around $30,000 with a range of 200 miles (320 km) or more, is aimed at countering the threat from Tesla's Model 3, its stiffest competition will come from gasoline-powered cars such as VW's own Golf hatchback.

    The company has made an electric Golf since 2012, but the vast majority of sales are for combustion versions, and Volkswagen on Oct. 24 plans to unveil the latest iteration of the model as it seeks to straddle the old and new worlds.

    The Golf, though, also offers an object lesson in how VW can change when it gets things right. VW built its global brand after World War II with the Beetle. Then with sales of the Beetle tapering off, in 1974 the company introduced the Golf, which catapulted it to the top of the European industry.

    By applying that same sort of focus to its electric push, "VW could wind up coming through the CO2 challenge as a winner," says Tom Narayan, an analyst with RBC Capital Markets. "The ID3 is the cornerstone of the whole thing."

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