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Analysis: Volkswagen could soon steal Tesla’s crown

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After years as the undisputed king of the electric car, Tesla (TSLA) could be matched sale by sale by Volkswagen (VLKAF) as early as 2022, according to UBS analysts, who predict it The largest car manufacturer in Europe will go on to sell 300,000 more battery powered electric vehicles that Tesla in 2025.
Ending the reign of Tesla would be a huge milestone in the transformation of Volkswagen into one power plant for electric vehicles. Badly burned by the scandal of its diesel emissions in 2015, the largest car manufacturer in Europe invests 35 billion euros ($ 42 billion) in electric vehicles, betting on its future in new technologies and in a dramatic change in fossil fuels.

“Tesla is not just about electric vehicles. Tesla is also very strong in software. They really make the car work as a device. They’re making good progress on the standalone. But yes … we’re going to challenge Tesla,” Volkswagen CEO , Herbert Diess told CNN’s Julia Chatterley on Tuesday.

This week, Volkswagen has stressed the scope of that ambition. It said it will sell more than 2 million electric vehicles by 2025, build its own network of large battery factories, hire 6,500 IT experts over the next five years, launch its own operating system and become the second largest company in the world. Europe’s largest software. SAP (SAP).
UBS analysts told reporters last week that investors failed to appreciate the speed with which Volkswagen is gaining ground on Tesla and the money the German company can earn by using electric cars over other established vehicle manufacturers , included Toyota (TM) i General Motors (GM). UBS has increased its target price for Volkswagen shares by 50% to € 300 ($ 358).

“We are more confident than ever that Volkswagen will offer the unique combination of volume growth, making them the largest in the world [electric] vehicle manufacturer, along with Tesla, as early as next year, while its margins will be stable or even grow from there. That’s totally underappreciated, ”UBS analyst Patrick Hummel said.

Volkswagen, which owns Porsche, Audi, Skoda and SEAT, sold 231,600 battery-powered electric vehicles in 2020. It is less than half the number of sales Tesla made, but represents a 214% increase over the previous year. Rapid growth is expected to continue, as Volkswagen launches 70 electric vehicles by the end of the decade. It will operate eight electric vehicle plants by 2022, producing models in almost every segment, from small cars to SUVs and luxury sedans.

According to UBS, the global race for dominance of the electric car market will be reduced to the Californian advance and the German industrial giant. He expects Volkswagen to surpass its own target by producing 2.6 million electric vehicles by 2025, followed by Tesla with 2.3 million. Toyota, which sold more cars than anyone last year, ranks third with 1.5 million electric sales (excluding hybrids). Hyundai Motor Group (HYMTF) i Nissan (NSANF) will produce approximately one million vehicles, followed by General Motors with 800,000.

Switching to overdrive

Volkswagen is in a better position than its rivals due to its modular production platform, or MEB. The platform, which was used to produce the ID.3, a compact electric hatchback, will allow the vehicle manufacturer to quickly produce a large number of vehicles while reducing costs.

UBS estimates that making an ID.3 currently costs Volkswagen € 4,000 ($ 4,770) more than producing an equivalent Golf powered by gasoline or diesel. But a sharp drop in the cost of batteries (the most expensive part of an electric vehicle) means the difference in production costs will be eliminated by 2025, according to UBS.

An ID.3 floats along the assembly line at a Volkswagen plant in Germany.

Volkswagen on Monday unveiled plans to open six battery manufacturing “factories” in Europe by 2030, with the aim of reducing the cost of battery cells by up to 50%. “A lower price for batteries means more affordable vehicles, which makes electric vehicles more attractive to customers,” Diess said.

Volkswagen’s huge production scale, which sold 9.3 million cars last year, will also help cut costs. In addition to MEB, the group is developing an independent platform for premium Audi and Porsche brands, which will allow it to launch electric vehicles across its full range of products.

Investors are starting to reward the company. Shares of Volkswagen jumped 6.5% to € 207 ($ 247) on Tuesday, up 35% so far this year.

Where Tesla is driving

Despite the recent rise in stock prices, Volkswagen is worth much less than Tesla. The market value of the competitor led by Elon Musk first advanced that of Volkswagen in January 2020, and the gap has widened dramatically since then. Volkswagen has a market capitalization of 111 billion euros ($ 133 billion), compared to Tesla’s $ 680 billion.

Part of the difference is explained by Tesla’s continuity in battery costs, software and the profitability of its electric cars. According to UBS, Tesla has “a more sophisticated IT hardware architecture” and its “software organization is at a different level.” Volkswagen has delayed Tesla in autonomous driving technology for several years.

Model 3 vehicles at the Tesla gig factory in Shanghai.

Some investors believe that Tesla will be able to take advantage of its software advantage greatly. In addition to offering wireless upgrades to their cars, a concept that was a pioneer in the company, Tesla will soon be able to do things like charge a subscription fee to owners to use their autonomous driving software. It is much closer to changing the nature of vehicle ownership than established vehicle manufacturers like Volkswagen.

UBS estimates that the software’s profit potential represents about two-thirds, or $ 400 billion, of Tesla’s market value.

“We believe most of that [$400 billion in] the value can be generated by software, mainly autonomous driving. With this, Tesla has the potential to become one of the most valuable software companies, ”their analysts wrote.

Geely spends $ 4.6 billion on a battery plant as its electric car ambitions grow
However, there may be setbacks. Tesla has recently expanded its “full autopilot” software to about 2,000 owners, however some drivers were denied access for not paying enough attention to the road.

Dan Ives, an analyst at Wedbush Securities, said earlier this year that the electric vehicle market is “the world of Tesla and other people pay rents.” But with 150 vehicle manufacturers pursuing the same goal, Tesla will have to stick to its strategy, he added.

“While growth will be key, its profitability profile will be under the microscope of investors to move forward to better discern how quickly Tesla can increase its margin structure, especially with higher margin sales coming out of China over the next few years, ”Ives said.

For both Volkswagen and Tesla, their ambition to dominate the electric car market depends on their ability to be more like each other. Volkswagen needs to quickly upgrade its software capabilities, while Tesla would benefit from the German company’s ability to generate millions and millions of high-quality vehicles each year.. Volkswagen announced earlier this month that the first wireless software updates would be delivered to ID.3 this summer.

Ives predicts that Tesla would manufacture 1 million cars a year by 2022 and that it could reach 5 million a year by the end of the decade.

With consumers now looking for electric cars, especially in Europe, the race between Volkswagen and Tesla will accelerate rapidly. According to UBS, electric cars will account for 20% of global new vehicle sales in 2015 and 50% in 2030.

“We are on a new playing field in front of companies entering the mobility market from the world of technology,” Diess said on Tuesday. “Stockbrokers continue to view the Volkswagen Group as part of the ‘old car’ world. By constantly focusing on software and efficiency, we are working to change that view.”

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