‘We Can Stop Tesla’ Volkswagen AG’s Electric Vehicles Strategy

Case Study This case was written by Rajan Shah and reviewed by K. Bhagyalakshmi, Amity Research Centers Headquarter, Bangalore. It is intended to be used as the basis for class discussion rather than to illustrate either effective or ineffective handling of a management situation. The case was compiled from published sources. © 2018, Amity Research Centers Headquarter, Bangalore. Website: www.amity.edu/casestudies/ No part of this publication may be copied, stored, transmitted, reproduced or distributed in any form or medium whatsoever without the permission of the copyright owner.

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‘We Can Stop Tesla’: Volkswagen AG’s Electric Vehicles Strategy

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Author: Rajan Shah

‘We Can Stop Tesla’: Volkswagen AG’s Electric Vehicles Strategy

Abstract: Tesla Motors (Tesla), the pioneer electric car maker, with its vision to ‘develop and produce all-electric, zero-emission car with incredible power’ had threatened the traditional German automakers. Being a disruptor, Tesla enjoyed the first mover advantage, thanks to its brand power, unique growth profile, extensive supercharger network, direct selling model and most importantly well-established battery supply chain. Meanwhile in mid-2017, faced with ‘existential challenge’ in the electric car market, Volkswagen AG, aimed to ‘leapfrog’ Tesla through its ‘e-mobility’ strategy, and decided to manufacture 1 million electric cars annually by 2020. In order to support this initiative, Volkswagen announced a ‘Roadmap E’ strategy, with a total investment of €72 billion by 2022. Volkswagen decided to add 16 production sites by the end of 2022 for manufacturing electric vehicles dedicatedly. At the same time, the company had also finalised battery supply deals in China and Europe amounting to €20 billion. According to industry observers, the competitive advantage of Volkswagen included cost advantage, car-building architecture, millions of loyal customers and brand value. Moreover, the industry observers opined that Tesla lacked a sharp technological edge and the company’s business was not ‘cash generative’. With Volkswagen attempting to challenge Tesla in the electric car market, the industry observers pondered whether it was easier for Volkswagen to scale up, overcoming the tough competition from the industry pioneer Tesla, which had established a cult status in the EV industry?

Case Study “In The Old World It Is Toyota, Hyundai, And The French Carmakers. In The New World It Is Tesla.”1

– Herbert Diess, CEO, Volkswagen Passenger Cars

s more and more countries were coming forward to phase out the combustion engine technology, German auto makers including Volkswagen AG (Volkswagen), BMW, Daimler

AG (Daimler) were ‘struggling to adapt to the advent of the electric car, held back by conservatism and internal challenges.’ In due course, the German automakers witnessed an emerging competition from Tesla Motors (Tesla), an American electric car maker. Karl-Thomas Neumann, the former Opel CEO, mentioned, “Tesla now has a cult status that other brands can only dream of.” However, Simon Hage (Simon), Editor at ‘Der Spiegel’, a German weekly news magazine published in Hamburg, opined, “The U.S. company still isn’t making a profit on its

1 Stumpf Rob, “Volkswagen Identifies Tesla as its Biggest Competitor”,

http://www.thedrive.com/sheetmetal/13244/volkswagen-identifies-tesla-as-its-biggest-competitor, August 6

th 2017

“© 2018, Amity Research Centers HQ, Bangalore. All rights reserved.”

A

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electric vehicles, but unlike the German automakers, Tesla does not have to worry about a massive existing car business. This helps explain Tesla’s aggressive approach to marketing, which makes it seem like the company is less interested in selling cars than in changing the way the world uses energy.” Drawing a parallel instance, Simon, highlighted, “Ten years ago, another technology sector made the mistake of underestimating its challenger: the mobile communications industry. Manufacturers like Nokia and Blackberry had long been the undisputed market leaders, but success made them sluggish. New, more innovative competitors had hardly appeared on the scene before the former pioneers were forced from the market.”2

The Global Electric-Vehicle Market: An Overview The ‘Paris Agreement’ or ‘Paris Climate Agreement’, which was announced in December 2015 and came into enforcement in November 2016, was able to draw consensus among almost 200 countries across the world to cut Greenhouse Gas Emissions (GHEs). Experts hailed such development as ‘first time in the history’; a single agreement dealing with the climate change united all worlds’ nations. Among all, the key element of the accord was ‘to keep global temperatures “well below” 2.0C (3.6F) above pre-industrial times and “endeavour to limit” them even more, to 1.5C.’ Welcoming this development as ‘remarkable’, Dr. Bill Hare, CEO of Climate Analytics3 mentioned, “It is a victory for the most vulnerable countries, the small islands, the least developed countries and all those with the most to lose, who came to Paris and said they didn’t want sympathy, they wanted action.” In addition, John Schellnhuber, Director of the Potsdam Institute for Climate Impact Research, noted, “If agreed and implemented, this means bringing down greenhouse-gas emissions to net zero within a few decades. It is in line with the scientific evidence we presented.”4

International Energy Agency (IEA), an autonomous agency, working ‘to promote energy security amongst its member countries’ identified that ‘the electrification of transport’ would play a crucial role in achieving the ‘decarbonisation of the energy systems’. At the same time, the electrification of short distance vehicles (including two and three wheelers) and public transport vehicles (including freight delivery vehicles) was considered to play an important role. According to IEA, “Electrifying road transportation has multiple benefits, including the reduction of emissions of local pollutants and noise and the promotion of energy security and decarbonisation through increased energy efficiency and diversification. If transport electrification goes hand-in-hand with the decarbonisation of the electricity supply, it will also be effective for significantly reducing GHG emissions.”5 Meanwhile, in order to foster the electrification strategy for road transport, an Electric Vehicles Initiative (EVI) was launched in 2010 as part of the ‘Clean Energy Ministerial (CEM)’, which was ‘a high-level dialogue among Energy Ministers from the world’s major economies’. EVI was ‘a multi-government policy forum dedicated to accelerating the introduction and adoption of electric vehicles worldwide’. IEA was designated as the ‘EVI Co-ordinator’ for the

2 Hage Simon, “The Arrival of Tesla – German Auto Giants Face an Existential Challenge”,

http://www.spiegel.de/international/business/tesla-german-auto-giants-face-a-new-electric-rival-a- 1167633.html, September 15

th 2017

3 A not-for-profit climate science and policy institute based in Berlin, Germany.

4 Briggs Helen, “What is in the Paris climate agreement?”,

http://www.bbc.com/news/science-environment-35073297, May 31 st

2017 5 “Global EV Outlook 2017: Two Million and Counting”,

https://www.iea.org/publications/freepublications/publication/GlobalEVOutlook2017.pdf, 2017

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member countries which included ‘Canada, China, Finland, France, Germany, India, Japan, Mexico, the Netherlands, Norway, Sweden, the United Kingdom and the United States’.6 According to Frost and Sullivan (F&S), nearly 1.6 million Electric Vehicles (EVs) were likely to be sold globally. In its report titled ‘Global Electric Vehicle Market Outlook, 2018’, published on March 27th 2018, F&S mentioned, “The electric vehicle market reached the 1.2-million sales mark for the first time, with more than 165 models available for sale. China is leading the market with 48% market share followed by Europe with 26%.” The report further highlighted, “Based on the announcements, EVs now have a market potential of about 25 million units that will be sold by 2025; more than 400 models will be made available…11 OEMs have announced EV milestones and targets. If all the announcements made so far were to come true, there will be about 25 million EVs sold by 2025 or 20% of all cars sold would be EVs. Energy and petrochemical companies have started investing heavily in establishing electric vehicle charging stations, as they are likely to be the biggest beneficiaries of the electric vehicle market.”7 Various categories of EVs, such as Electric Cars (segmented as battery-electric vehicles (BEVs), plug-in hybrid electric vehicles (PHEVs) and fuel cell electric vehicles (FCEVs)), reported record sales of 750 thousand units worldwide in 2016. According to the IEA, “With a 29% market share, Norway has incontestably achieved the most successful deployment of electric cars in terms of market share, globally. It is followed by the Netherlands, with a 6.4% electric car market share, and Sweden with 3.4%. China, France and the United Kingdom all have electric car market shares close to 1.5%. In 2016, China was by far the largest electric car market, accounting for more than 40% of the electric cars sold in the world and more than double the amount sold in the United States.” (Exhibit I).

Exhibit I Global Electric Car Stock

Source: “Global EV Outlook 2017: Two Million and Counting”, https://www.iea.org/publications/freepublications/publication/GlobalEVOutlook2017.pdf, 2017

Further, IEA report highlighted that, “China was by far the largest electric car market in 2016, with 336 thousand new electric cars registered. Electric car sales in China were more than double the amount in the United States, where 2016 electric car registrations rebounded to 160 thousand units after a slight drop in the previous year…European countries accounted for

6 “Electric Vehicles Initiative (EVI)”, https://www.iea.org/topics/transport/evi/

7 “Global Electric Vehicle Market Outlook, 2018”, http://www.frost.com/sublib/display-report.do?id=MDAB-01-

00-00-00&bdata=bnVsbEB%2BQEJhY2tAfkAxNTIyOTAyNDQ2MTcy, March 27 th

2018

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215 thousand electric car sales. Both globally and in the European Union, the electric car market is still concentrated in a limited number of countries. In Europe, most of the electric cars sold in 2016 were registered in just six countries: Norway, the United Kingdom, France, Germany, the Netherlands and Sweden. Globally, 95% of electric car sales are taking place in just ten countries: China, the United States, Japan, Canada and the six leading European countries.”8 Experts opined that ‘market attractiveness’ played a major role in the growth momentum of electric cars. In a broader sense, the market attractiveness of EVs was defined as “the degree to which – from a customer perspective – the purchase of an EV instead of a conventional vehicle is a more attractive option, in both monetary and non-monetary terms.” Further, the market attractiveness was dependent on ‘market-specific’ and ‘non-market-specific’ attributes. According to Accenture, a leading global professional services company, in its report titled, ‘Electric Vehicle Market Attractiveness: Unraveling Challenges and Opportunities’, highlighted, “Despite the current low oil price, global EV sales figures have been growing rapidly: from 36,000 units sold in 2011 to more than 270,000 four years later. However, the market share of EVs as a percentage of the global automotive market in 2015 was only 0.3 percent. An increase to just 3 percent would equate to 2.7 million EVs.” Further, the report added, “One of the biggest and strongest catalysts for EV Market Attractiveness is the presence of monetary and non-monetary government subsidies.”9 (Exhibit II).

Exhibit II Market Attractiveness Factors for EVs

Source: “Electric Vehicle Market Attractiveness: Unraveling Challenges and Opportunities”,

https://www.accenture.com/t00010101T000000__w__/gb-en/_acnmedia/PDF-37/accenture-electric- vehicle-market-attractiveness.pdf, 2016

Fostered by such favorable environment, by the end of December 2017, global auto manufacturers had invested nearly $90 billion for the rollout of various EVs. The investment by the automakers in terms of geographical spread stood at $19 billion in the US, $21 billion in China and $52 billion in Germany. According to Dieter Zetsche, Daimler AG’s (Daimler) Chief Executive, “We will see whether demand will drive our (electric vehicle) sales or whether we will all be trying to catch the last customer out there. Ultimately, the customer will decide.” At the same time, Jim Lentz, Chief Executive of Toyota Motor Corp’s (Toyota) North American

8 “Global EV Outlook 2017: Two Million and Counting”, op.cit.

9 “Electric Vehicle Market Attractiveness: Unraveling Challenges and Opportunities”,

https://www.accenture.com/t00010101T000000__w__/gb-en/_acnmedia/PDF-37/accenture-electric-vehicle- market-attractiveness.pdf, 2016

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operations, opined, “It took Toyota 18 years for sales of hybrid vehicles to reach 3 percent share of the total market. And hybrids are less costly, do not require new charging infrastructure and are not burdened by the range limits of battery electric vehicles. What’s it going to take to get to 4 to 5 percent. It’s going to be longer.”10 In the due course, Ford Motor Co. (Ford) announced that the company had planned to invest nearly $11 billion by 2022 in EVs. According to Jim Hackett, Ford’s Chief Executive, “The automaker would slash $14 billion in costs over the next five years and shift capital investment away from sedans and internal combustion engines to develop more trucks and electric and hybrid cars.” Moreover, on Ford’s EVs’ strategy, Bill Ford, Chairman of Ford, mentioned, “We’re all in on this and we’re taking our mainstream vehicles, our most iconic vehicles, and we’re electrifying them. If we want to be successful with electrification, we have to do it with vehicles that are already popular.” Mary Barra, Chief Executive of General Motors (GM) had also ensured investors that by 2021; the company determined to register earnings from the sales of electric cars.11 (Exhibit III).

Exhibit III OEMs’ Electric Car Ambitions

Source: “Global EV Outlook 2017: Two Million and Counting”, https://www.iea.org/publications/freepublications/publication/GlobalEVOutlook2017.pdf, 2017

Among various players, Tesla Motors (Tesla) which was co-founded by Elon Musk (Elon) and group of engineers, had a clear goal for the company to ‘Develop and produce all-electric, zero-emission car with incredible power, torque whilst not compromising the range.’12 In 2008, Tesla launched its first car named ‘Tesla Roadster’ with some grave features such as ‘3.7 seconds to 60mph, 245 miles range and went for the price tag of $110,000.’ Moving on, in 2012, Tesla launched ‘Model S’, the company’s ‘first premium electric sedan’ by ‘redefining the usual sedans that everyone has ever known before.’ In 2015, Tesla came out with ‘Model X’, an SUV with ‘Falcon Wing doors and a lot room that allows for cars utilization in, nearly, any

10

Lienert Paul, “Global carmakers to invest at least $90 billion in electric vehicles”, https://in.reuters.com/article/autoshow-detroit-electric/global-carmakers-to-invest-at-least-90-billion-in- electric-vehicles-idINKBN1F505K, January 16

th 2018

11 “Ford Plans to Invest $11 Billion to Electrify Its ‘Most Iconic’ Vehicles”,

http://fortune.com/2018/01/14/ford-11-billion-electric-car-investment/, January 15 th

2018 12

“Background of Tesla Motors”, http://mixcsy.wixsite.com/teslaensi313

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scenario.’ By 2020, the company planned to make its ‘Model 3’ as a mass market electric car.13 (Annexure I–A & I–B). With such vision and business strategy, by July 2017, Tesla was acknowledged by Bloomberg New Energy Finance, a research organisation, popularly known as BNEF as a clear winner as far as the US electric car market was concerned. According to BNEF’s ‘Long-Term Electric Vehicle Outlook’, by 2021, the cumulative deliveries of Tesla would stand at 0.7 million vehicles. BNEF, in its report noted that “Tesla will be able to distance itself from established automakers and dominate many of the world’s biggest markets for battery-powered vehicles.”14 (Exhibit IV). Identifying Tesla as a disruptive company, Toni Sacconaghi, IT Hardware and Electric Vehicles Analyst at Bernstein Research, mentioned, “Tesla is indeed disruptive. This will happen quickly because EV (electric vehicle) adoption will be huge. Tesla’s first mover advantage and brand power should enable it to gain market share.” He further added, “Tesla will be much more profitable than traditional auto manufacturers. Tesla has a unique growth profile and has reasonable valuation in light of its tremendous option value.”15

Exhibit IV Tesla – Leading the Way for Electric Cars

Source: Ballentine Claire, “Tesla Projected to Win U.S. Electric-Car Race”, https://www.bloomberg.com/news/articles/2017-07-06/tesla-seen-pulling-away-from-gm-for-clear-

u-s-electric-car-lead, July 7 th

2017

Along with the first mover advantage and brand power, ‘Great Speculations’, a contributor group devoted to investing ideas at Forbes noted, “Tesla has a competitive edge in this market given its supercharger network and direct selling model…Tesla’s supercharger network which hosts more than 3,000 superchargers in the U.S. providing convenient charging options to its car users, definitely gives it a competitive edge, given that no other player has been able to replicate this kind of network so far.” The group further noted, “Competing with Tesla on the charging network might be tough for other auto makers, given its first mover’s advantage.

13

“Company Profile”, http://mixcsy.wixsite.com/teslaensi313/company-profile 14

Ballentine Claire, “Tesla Projected to Win U.S. Electric-Car Race”, https://www.bloomberg.com/news/articles/2017-07-06/tesla-seen-pulling-away-from-gm-for-clear-u-s-electric- car-lead, July 7

th 2017

15 Winton Neil, “Is Tesla The Big Disruptor Or A Minor Irritant? Take Your Pick”,

https://www.forbes.com/sites/neilwinton/2017/06/08/tesla-the-big-disruptor-or-minor-irritant-take-your- pick/#6d3176fe7b78, June 8

th 2017

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Tesla is the only automaker exclusively developing electric cars on a significant scale and this gives it an edge over other automakers that also need to focus on their traditional models.”16 Moreover, in addition to the supercharger network and direct selling model, Tesla was able to build its own battery supply chain. According to Zach, Director of CleanTechnica17 and Planetsave18, “Tesla’s battery packs are routinely estimated to be a good tier cheaper than other EV batteries. Part of that is thanks to the quality of Panasonic’s cells, but part of that is also Tesla’s continual improvement of the packs and the battery chemistries. Tesla’s constant work to improve its batteries is one side of the cost-cutting calculus, but another important side is simply scale. Scaling up production results in greater manufacturing efficiencies, manufacturing improvements, and cost reductions.” The electronics and software used in the electric cars was another area which offered competitive advantage to Tesla. According to Zach, “Tesla’s approach to software is a tier (or more) above the competition. It used to be that cars were big machines with small computers in them. In the future, cars are going to be computers on wheels, and Tesla is leading us there. Its software team rolls out over-the-air updates like we get on our smartphones, tablets, and computers, continuously improving owner vehicles.” He further added, “With an electric car, the improvement capabilities that come from better software are beyond imagine. I think it’s safe to say that cars of 2025 and 2035 will be very different animals than cars of 2015. If I were to put my money on who most leads us to those computers on wheels, I’d put it on Tesla.” Along with the tangible factors, Tesla was successful in building the ‘intangible’ strengths. On such aspect, Zach highlighted, “One is that it has developed a reputation for producing superb products. The Tesla Roadster transformed the image of electric cars from small, slow vehicles to blindingly fast vehicles of desire.” He further added, “As if that wasn’t enough, Tesla produced the cheaper Model S sedan that ended up winning just about every big auto award. After some updates, it also set the record for quickest production sedan in history, with a 0 to 60 (mph) acceleration that beats even some supercars. It’s simply on another level.”19 Meanwhile, according to the analysis of Trefis, a dedicated research firm, “Tesla has ambitious plans for the future, looking to shift from a niche producer of electric sports cars to an established volume automobile manufacturer.” But, “Tesla’s value depends on its future electric vehicle sales, which, in turn, depends upon the potential size of the market. There are various factors that could affect the potential size of the market, such as the price of oil, fuel efficiency improvements in its internal combustion engine cars, the cost of batteries, recharging infrastructure, and government incentives”, the analysis further highlighted.20 However, Brian Johnson, an Analyst at Barclays Plc., opined, “Tesla will face intense competition by next decade from legacy OEMs who are expanding their electric options. We’ve long argued that Tesla as an EV company is not truly disruptive, in that legacy OEMs will eventually wake up and offer fully electric vehicles by the early 2020s.”21

16

“Should Tesla Be Worried About Competition?”, https://www.forbes.com/sites/greatspeculations/2016/01/04/should-tesla-be-worried-of- competition/#4d4a56a94ebe, June 4

th 2016

17 The most popular clean-tech focused website in the world.

18 A world-leading green and science news site.

19 Zach, “Tesla’s Competitive Advantages- 5 Big Ones”,

https://evobsession.com/tesla-competitive-advantage-5-big-ones/, April 29 th

2015 20

“Tesla (TSLA)”, https://www.trefis.com/stock/tsla/model/trefis?easyAccessToken=PROVIDER_fdb11db659bd1a59ae20da362d0 b1971a252c2be#, August 17

th 2017

21 “Tesla Projected to Win U.S. Electric-Car Race”, op.cit.

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Volkswagen AG: Challenging Tesla’s Supremacy In late 2016, Volkswagen AG (Volkswagen) decided to completely reposition itself in the market under its ‘TRANSFORM 2025+’ strategy. Dr. Herbert Diess22 (Diess) said, “Our goals are high and our strategy is very ambitious. We want to benefit from change and to take Volkswagen into the lead in the new automobile industry with determination. Over the next few years, Volkswagen will change radically. Very few things will stay as they are. In the final resort, the new strategy is a major transformation program.” At the same time, highlighting the company’s ‘e-mobility’ strategy, he opined, “From 2020, we will be launching our major e- mobility offensive. As a volume manufacturer, we intend to play a key role in the breakthrough of the electric car. We are not aiming for niche products but for the heart of the automobile market. By 2025, we want to sell a million electric cars per year and to be the world market leader in e-mobility. Our future electric cars will be the new trademark of Volkswagen.”23 With a strong such ‘e-mobility’ strategy, in May 2017, Volkswagen was confident to ‘leapfrog’ Tesla, which manufactured 80,000 electric cars in 2016 and plan to manufacture 1 million electric cars per year by 2020. On this, Diess mentioned, “Anything Tesla can do, we can surpass.” He further opined, “What Tesla will achieve in the premium market, VW will achieve in the volume market. We are confident that in this new world we will become a market leader.” With Volkswagen planning to take over Tesla in the electric car market, the industry observers raised an important question – “is it easier for a start-up with proven technology to scale up, or for a traditional carmaker with scale to transform its operations?” Detailing about the advantages to Volkswagen in such move, Diess mentioned that, “VW will have ‘leapfrogging cost advantages’ thanks a wider rollout of its “MQB” platform, or car-building architecture, which helps the different VW brands to share parts, technology and assembly sequences.” He further added that, “[Tesla] is a competitor we take seriously. Tesla comes from a high-priced segment, however they are moving down. It’s our ambition, with our new architecture, to stop them there, to rein them in.” However, the big challenge for Volkswagen in its electric cars’ strategy was the need for massive investments in both combustion engine technology and electric mobility, and maintaining focus on the overall cost cutting. On this, Arno Antlitz, Member, Board of Management, Volkswagen Brand, with responsibility for Controlling and Accounting, mentioned, “We foresee substantial financial burdens looming… The increased capital spending would be ‘overcompensated’ by savings from the ‘future pact’.”24 However, the German analysts opined that Tesla would win the electric cars race as the traditional auto makers were ‘complacent’ in their approach towards the electric cars. They further added that the ‘upstart will win a near monopoly of the market’. Analysing Tesla’s readiness for the competition, Alexander Haissl (Haissl), Analyst at Berenberg Bank based in Germany, opined, “Tesla is out investing the competition, which hampers itself by seeking to save money by building on legacy engineering rather than developing new and focused technology.” He further added, “[Manufacturer] complacency about electric vehicle (EV)

22

He is Chairman of Volkswagen Brand Board of Management of the Volkswagen Passenger Cars Brand & Member of Board of Management, Volkswagen AG. 23

“TRANSFORM 2025+ Volkswagen presents its strategy for the next decade”, https://www.volkswagen-media-services.com/en/detailpage/-/detail/TRANSFORM-2025-Volkswagen-presents- its-strategy-for-the-next-decade/view/4257735/7a5bbec13158edd433c6630f5ac445da, November 22

nd 2016

24 McGee Patrick, “Volkswagen plans to ‘leapfrog’ Tesla in electric car race”,

https://www.ft.com/content/a43ac2ce-3198-11e7-9555-23ef563ecf9a, May 7 th

2017

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technology is worse than perceived. Despite more talk of developing EVs for mass-market adoption, a lack of real action and strategic commitments betray their underlying conviction, with no clear pathway to high-volume EV production before the mid-2020s.” In his research, Haissl mentioned that the traditional auto manufacturers were not able to showcase clear vision for next 20 years and at the same time their efforts were concentrated on bringing down the costs and integrating their existing production. They lacked dedicated focus for ‘high- volume production of new electric vehicles.’ Praising Tesla’s commitment, Haissl opined, “To contrast Tesla with even the most forward looking (manufacturers), we estimate Tesla will invest $32.7 billion over the next 5 years – roughly 40% more than Daimler and Volkswagen combined have committed for their EV projects.” He further added, “Tesla/Panasonic continue to exhibit a clear advantage on cell and pack technology compared to all peers, on chemistry, cooling and cost. Clear visibility about high-volume cell-sourcing strategies continue to elude traditional manufacturers.” At the same time, analysing Volkswagen’s move, Haissl, opined, “Larger investments into battery capacity could be necessary. To supply its electric fleet by 2025, VW needs about 150 gigawatt hours of battery capacity a year and capacity planned so far isn’t enough. One major advantage for VW is its huge scale for better economics.” Identifying a clear competitive advantage for Tesla, Dr. Dean Dauger25 mentioned, “Tesla will win a long period of ascendancy mainly because of its decision to make its own batteries…The Germans have no way of getting their competitive electric vehicles before 2025 at the earliest in any great numbers because they simply won’t have access to enough batteries at competitive prices.”26 In due course, Diess also acknowledged, “Tesla belongs among the competitors which has abilities that we currently do not have… Tesla has good electric motors, a fast charging network, autonomous driving technology, internet connectivity, and a new approach toward vehicle distribution.” He further added, “This shows that we need to significantly improve. We can do this. We measure ourselves against Tesla quite deliberately. Our goal: Using our abilities not just to catch up, but even to overtake.”27 In order to strengthen its electric mobility initiative, in September 2017, Volkswagen announced ‘Roadmap E’, ‘the most comprehensive electrification initiative in the global automotive industry’. On such move, Matthias Müller (Müller), Chairman of the Board of Management of Volkswagen, mentioned, “With ‘Roadmap E’, we are opening up a new chapter in our Group’s history. And setting the scene for e-mobility’s final breakthrough. Then it is up to customers to decide how fast it will gain widespread acceptance.” As a part of the initiative, an official announcement of the company noted, “The Group will need more than 150 gigawatt hours of battery capacity annually by 2025 for its own e-fleet alone. This is equivalent to at least four gigafactories for battery cells. To meet this demand, the Company has put one of the largest procurement volumes in the industry’s history out to tender: over €50 billion.” “In order to meet this huge requirement, a tender process has been initiated with regard to long-term strategic partnerships for China, Europe and North America. The procurement project is one of the largest in the history of the automotive industry, with a total order volume of over €50 billion just for the Group’s future volume vehicles based on the

25

He is computational physicist and President of Dauger Research Inc., Huntingdon Beach, California. 26

Winton Neil, “Tesla’s Focus Means Victory Versus Complacent Mainstream In Electric Cars, Analyst Says”, https://www.forbes.com/sites/neilwinton/2017/06/29/tesla-focus-means-victory-versus-complacent- mainstream-in-electric-car-market-report/#43409dc577e7, June 29

th 2017

27 “Volkswagen brand CEO says Tesla has abilities Volkswagen lacks”,

https://www.reuters.com/article/us-volkswagen-tesla-diess/volkswagen-brand-ceo-says-tesla-has-abilities- volkswagen-lacks-idUSKBN1AK261, August 4

th 2017

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Modular Electrification Toolkit. That will meet the Group’s needs for the first wave of e- mobility. Looking further ahead, Volkswagen is already gearing up for the next generation: solid-state batteries. The Group also plans to bring this forward-looking technology to market maturity together with partners,” the announcement further noted. Highlighting the proposed development as crucial, Müller explained, “For us, the transformation of transportation and the energy transition are inseparable. And creating a comprehensive charging infrastructure rapidly – in cities and on highways – will be critical to success. In Europe, and particularly in the automotive stronghold of Germany, much more needs to be done. Only then will customers’ trust grow. And only then will electric cars come out of the niche – and achieve relevant market share in years to come. I’m convinced this will succeed if politicians, the energy industry and automakers work in harness.” With ‘Roadmap E’ initiative, Volkswagen aimed to electrify its entire fleet of 300 models across brands and markets, by 2030.28 In due course, in November 2017, Volkswagen approved €34 billion ($40 billion) spending plan ‘to become a global leader in electric cars.’ On this, Müller said, “With the planning round now approved, we are laying the foundation for making Volkswagen the world’s No. 1 player in electric mobility by 2025.” At the same time, the total investment committed by Volkswagen stood at €72 billion by 2022.29 Subsequently, in the early 2018, Volkswagen announced expansion plans for the production of electric vehicles. The company decided to add 16 production sites by the end of 2022 for the production of electric vehicles in addition to its existing three sites. At the same time, the company had finalised battery supply deals in China and Europe amounting to €20 billion. On such aspects, Müller mentioned, “Over the last few months, we have pulled out all the stops to implement ‘Roadmap E’ with the necessary speed and determination. Things are really moving. A change of course for the Volkswagen super tanker – full speed ahead to the future!” He further added, “We are systematically addressing the issue of safeguarding supplies of raw materials. We expect to make significant progress with regard to energy density, and therefore range, as well as reducing the amount of cobalt.”30 (Exhibit V). Panos Mourdoukoutas, (Panos), Professor and Chair of the Department of Economics at LIU Post in New York opined, “Volkswagen had the scale and the scope to take on and beat pioneer electric car maker Tesla.” He further opined that with Volkswagen jumping ‘on the electric car bandwagon with its own line of battery and hybrid cars’, it would certainly throw a tough competition for Tesla, driving prices of electric vehicles lower and eroding profit margins. “Volkswagen has the scale and the scope to beat Tesla at its own game…Try $280.8 billion in revenues…from a broad portfolio of several well-known models and brands, which includes VW, Porsche, Audi, Skoda, Lamborghini and Bentley.” He further added, “Tesla by contrast is a small new automaker with roughly $12 billion in sales coming from a narrow portfolio of sedans and sport utility vehicles. That’s a significant competitive advantage for Volkswagen,” added Panos (Annexure II).

28

“The Volkswagen Group launches the most comprehensive electrification initiative in the automotive industry with ‘Roadmap E’”, https://www.volkswagenag.com/en/news/2017/09/Roadmap_E.html#, September 11

th 2017

29 Cremer Andreas and Schwartz Jan, “Volkswagen accelerates push into electric cars with $40 billion spending

plan”, https://in.reuters.com/article/us-volkswagen-investment-electric/volkswagen-accelerates-push-into- electric-cars-with-40-billion-spending-plan-idINKBN1DH1M8, November 17

th 2017

30 Lindland Rebecca, “VW Details Aggressive Push To Expand Electric Vehicle Production”,

https://www.forbes.com/sites/rebeccalindland/2018/03/13/vw-continues-to-rebuild-expanding-its-roadmap-e- at-2018-annual-press-conference/#2bf673c694b3, March 13

th 2018

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Exhibit V Volkswagen Vs Tesla

Source: Chris Reiter and Christoph Rauwald, “VW Just Gave Tesla a $25 Billion Battery Shock”, https://www.bloomberg.com/news/articles/2018-03-13/vw-secures-25-billion-battery-supplies-in-

electric-car-surge, March 13 th

2018

In addition, Mario A. Gonzalez-Corzo, Lecturer, Columbia University opined, “The problem for Tesla investors is profitability rather than sales. Tesla’s ‘profitability problem’ is evidenced by the fact that, despite reporting notable increases in sales since its IPO in 2010, its key profitability ratios (e.g., gross profit margin, operating profit margin, net profit margin, ROA, and ROE) remain in negative territory.” He further added, “Now, with automobile giants like Volkswagen joining the electric car race and competition heating up, things are expected to get worse.”31 Meanwhile, Max Warburton (Warburton), Analyst with Bernstein Research opined, “Tesla is not a disruptive company. It has not significantly impacted the conventional auto industry, it is not moving fast enough to pressure incumbents, and it has not invented a product that is cost- competitive with typical automobiles.” He further added, “Tesla’s core business is not cash generative…Tesla has no clear technology edge in batteries or autonomous driving. It is about to face multiple EV competitors from Europe for the Model S and Model X… Model 3 will be late and won’t be profitable.” Dedicatedly on the financial front, Warburton commented, “Just looking at its (Tesla) financials and cost of doing business – I think it’s pretty terrifying, and I struggle profoundly to understand Tesla’s valuation and what people are expecting this company to be. I simply struggle to see how making EVs is a commercially attractive activity.” (Annexure III). At the same time, on Tesla’s most ambitious ‘Model 3’, Warburton opined, “If the Model 3 does sell in big numbers, this will put huge pressure on an already tottering service network, if the British operation is typical.” He further added, “The sales and service network, at least in the U.K., cannot deal with the current cars (Model S and Model X) because they have so many problems. I do not have any idea how Tesla is going to deal with rolling out Model 3 and frankly, everyone I’ve spoken to at Tesla in the U.K. has no idea how they’re going to deal with it either. In fact, lots of them are going to leave before Model 3 launches because it’s just too stressful working there. If Model 3 quality is as poor, the service network is going to face major problems.”

31

Mourdoukoutas Panos, “Volkswagen Is Taking on Tesla”, https://www.forbes.com/sites/panosmourdoukoutas/2018/03/14/volkswagen-is-taking-on- tesla/2/#10d762e95121, March 14

th 2018

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In spite of the challenges faced by Tesla, Ferdinand Dudenhoeffer, Professor and Director of the University of Duisberg-Essen’s Center for Automotive Research, highlighted, “Tesla will be the greatest success story in automotive history…Tesla’s lead in EVs and autonomous cars will provide dynamic growth and he is also ahead with the charging network, batteries and also modernizing the retail system. I’m pretty sure model 3 will be a success and with Model Y in 5 to 7 years Tesla will have annual sales of 1 million or more.”32 Meanwhile, Brian Obudho, Writer at HotCars, ‘the World’s Most Entertaining Car Site’, opined, “VW is a major brand with years of experience and millions of loyal customers, and this alone should make Tesla panic. Worse, VW wants to make these cars for the volume market–not for the premium market like Tesla does. While this is still something debatable, the reality is that VW is a reputable carmaker–with scale–that wants to transform its operations, while Tesla is a startup that’s trying to scale up. VW has numerous cost advantages, among other perks, and the odds will be in its favor.” (Annexure IV). He further added, “There have been major concerns over the wide demand-supply gap because Tesla has consistently failed to deliver as promised…Tesla may, over the next few years, still not be able to add assembly lines fast enough to keep up with the competition. This only means that Tesla won’t have the capacity to dominate in the grand scheme of things.”33 Amidst such scenario, Diess ambitiously opined, “We see Volkswagen as the company that can stop Tesla, because we have abilities Tesla doesn’t have today.” At the same time, he also mentioned, “We have to watch out, because we have a lot of work in front of us, and the challenges that lie ahead are enormous.”34

32

“Is Tesla The Big Disruptor Or A Minor Irritant? Take Your Pick”, op.cit. 33

Obudho Brian, “20 Reasons Why Tesla Will Lose The EV Race”, https://www.hotcars.com/20-reasons-why- tesla-will-lose-the-electric-vehicles-race/, February 5

th 2018

34 Rauwald Christoph, “Late to the Battery-Car Race, VW Says It Can Still Blunt Tesla”,

https://www.bloomberg.com/news/articles/2017-07-07/late-to-the-battery-car-race-vw-says-it-can-still-blunt- tesla, July 7

th 2017

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Annexure I–A Tesla’s Product Offerings

Source: “Tesla’s Product Line”, http://mixcsy.wixsite.com/teslaensi313

Annexure I–B Tesla’s ‘Model 3’ (Features and Specifications)

Source: “Tesla vs. GM, Ford, BMW, Toyota, Volkswagen [INFOGRAPHIC]”, https://www.valuewalk.com/2017/07/tesla-vs-gm-ford-bmw-toyota-volkswagen/, July 13

th 2017

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Annexure II Key Financials*

Company Revenues Profit Margin

Volkswagen Euro 280.8 billion 3.15%

Fiat Chrysler $131.96 billion 2.50%

Tesla $11.76 billion -16.68

*as of March 14 th

2018

Source: Panos Mourdoukoutas, “Volkswagen Is Taking on Tesla”, https://www.forbes.com/sites/panosmourdoukoutas/2018/03/14/volkswagen-is-taking-on-

tesla/2/#10d762e95121, March 14 th

2018

Annexure III

Market Share of Major Players

Vehicles Produced (in 2016)

Market Capitalisation

(% Change – Q1 2015 to Q1 2017)

Source: “Tesla vs. GM, Ford, BMW, Toyota, Volkswagen [INFOGRAPHIC]”, https://www.valuewalk.com/2017/07/tesla-vs-gm-ford-bmw-toyota-volkswagen/, July 13

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Annexure IV ‘Roadmap E’ of Volkswagen

Source: Lima Pedro, “Volkswagen expects to become global leader in e-mobility by 2025”, https://pushevs.com/2017/10/14/volkswagen-expects-become-global-leader-e-mobility-2025/,

October 14 th

2017

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