Volkswagen races Tesla to China with electric car factories

United States-based Tesla may be what many people think of when it comes to electric cars, but German giant Volkswagen is giving it a run for its money in China. 

Volkswagen is preparing two factories in China to build electric cars in 2020, a direct challenge to Tesla’s rise.

The German carmaker is ramping up production of electric cars to about 1 million vehicles by the end of 2022, according to Volkswagen manufacturing plans seen by the Reuters news agency, which have not been previously reported.

The Chinese plants will have a production capacity of 600,000 vehicles, revealing Volkswagen’s ability to industrialise production faster than other pioneers in the electric vehicle market.

The speed and scale of Volkswagen’s electrification push highlight the advantages held by established manufacturers that can use existing factories and profit from other combustion-engined models to scale up faster than startups.

Tesla, for instance, is still trying to reach its goal of making more than 500,000 cars a year by building a new factory in Shanghai, China, while Volkswagen can rely on an established workforce in two of its plants in Anting and Foshan to build zero-emission cars.

“The truth is barriers to entry in autos remain high,” said Max Warburton, an analyst at Bernstein Research. “Making cars is hard. The move to electric vehicles will be expensive, but will probably be led by traditional manufacturers.”

Volkswagen is leveraging its large infrastructure of suppliers, factories and workers, long a handicap to its profitability, more aggressively than rivals BMW, Renault SA, General Motors Co and Tesla, which were all quicker to sell a custom-designed electric car.

Rather than adjusting production gradually, and using multi-powertrain platforms, Volkswagen is making an enormous bet on a dedicated electric vehicle architecture, known as MEB, in the hope of increasing economies of scale sufficiently to push down the price of electric cars to approximately 20,000 euros ($22,262).

The company is retooling eight plants across the globe by 2022 to specialise in manufacturing electric cars, and license its electric MEB platform to rivals, senior Volkswagen executives told Reuters, putting it on track to become the world’s largest maker of zero-emission vehicles.

One of these rivals is Ford Motor Co. A partnership with the company will give Volkswagen $10bn in revenue over the next six years.

Thomas Ulbrich, Volkswagen’s board member who oversees production of electric vehicles, told Reuters, “Ford and Volkswagen’s agreement will be a blueprint for further licensing deals.”

To futher fund its electrification shift, Volkswagen aims to increase sales of its combustion-engine sport utility vehicles (SUVs) to 40 percent of overall sales by 2020, up from 23 percent in 2018.

It is also increasing economies of scale by rolling out electric vehicle platforms to its Audi, Skoda, Seat and Porsche brands.

“The first MEB-based vehicle is an SUV model,” Volkswagen said about its China push.

In the short term, Volkswagen and its Chinese joint venture partners will invest 15 billion euros ($16.6bn) to produce 15 different electric cars for China alone by 2025.

The group said that it will be in a position to build 22 million electric cars by 2028, of which 11.6 million could come out of Chinese factories.

Taking on Tesla

Tesla has emerged as a serious competitor with a credible car, its Model 3, Volkswagen Chief Executive Herbert Diess told Reuters last week. But startups have a hard time entering mass production without sufficient production facilities, he said.

“The question is, can you expand your production quickly enough? The capital intensity is increasing,” Diess said.

Today, Tesla’s cars are generally perceived as cutting-edge and potentially more sophisticated than Volkswagen’s. Volkswagen’s ID.3, which starts production this year, has an operating range of between 330 and 550 kilometres (205 to 341 miles), below the 560km (348-mile) long-range Model 3 version offered by Tesla.

That is because Tesla has a sophisticated software algorithm to control how much electricity goes to the electric motor, air conditioning, seat heaters, in-car infotainment, and cooling system.

Volkswagen’s edge is more blunt: price and significant economies of scale.

The ID.3 has a starting price of under 30,000 euros ($33,363) in Germany. By contrast, Tesla’s Model 3 had an average selling price of $50,000 in the second quarter. The long-range version retails for 52,390 euros ($58,056) in Germany.

The Volkswagen vehicle’s lower price comes from the carmaker’s ability to place large orders for parts which, by nature of their size, help drive down the final price of their cars. Volkswagen is investing 50 billion euros ($55.5bn) to buy battery cells and will also license its MEB electric car platform to rival carmakers to further increase economies of scale.