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Volkswagen Down 59%, Loses $50 Billion in Market Cap, Profits less than half of 2012: Why Is Volkswagen Losing the Car Market Race?

Volkswagen logo
Volkswagen, once the world's leading automaker delivering millions of vehicles annually, now faces a challenging landscape. The company, known for iconic brands like Audi and Porsche, has seen its reputation and financial performance suffer in recent years.

A pivotal moment came with the emissions scandal, which significantly eroded trust in the brand. This translated into a decline in net income, nearly halving since 2012. The stock price reflects a similar trajectory, plummeting 59% in just two years.

While these figures might appear comparable to recent drops experienced by Tesla, the context is crucial. Tesla's fall stemmed from a much loftier peak – a trillion-dollar market cap compared to Volkswagen's $100 billion. Volkswagen's struggle to maintain even a $100 billion valuation raises significant concerns.

Volkswagen Stock

The broader automotive industry faces headwinds, particularly in the electric vehicle (EV) sector. However, traditional automakers like Toyota have navigated these challenges demonstrably well. Toyota consistently delivers just a few million more cars than Volkswagen but commands a market cap five times larger, exceeding $300 billion.

Even from a profit perspective, Volkswagen delivers nearly half of Toyota's profits, but again, they only boast ⅕ of the valuation which simply makes it crystal clear just how bearish investors are on Volkswagen. So, here’s the dire state of Volkswagen and what happened to the once-dominant auto giant.

The Diess Dilemma: Innovation vs. Finances at Volkswagen:

Former CEO Herbert Diess's tenure at Volkswagen was marked by a push for electrification and a focus on Tesla as a benchmark. While some might view Diess as a leader out of touch with the traditional auto market, the reality is more nuanced.

CEI Herbert Diess

Diess was a vocal advocate for electric vehicles (EVs) and autonomous vehicles (AVs), recognizing the transformative potential of these technologies. He openly admired Tesla's achievements, even making statements praising Elon Musk and the company's innovations.

Herbert has said. “Elon Musk delivers results that many have deemed impossible.” “In five to ten years the world’s most valuable company will be a mobility company — that can be called Tesla, Apple, or Volkswagen.” “What worries me the most is the capabilities in the assistance systems. 500,000 Teslas work as a neural network that continuously collects data and offers the customer a new driving experience every 14 days, with improved properties. No other automobile manufacturer can do that today.”

Now, Herbert isn’t stupid. He knows that making such statements might hurt Volkswagen’s stock price in the short term and that he may be driving consumers straight to Tesla by constantly praising them. But he was ok with this as he was trying to play the long game with Volkswagen. He strongly felt that Tesla was headed in the right direction and he wanted to shock Volkswagen investors and board members into taking quick action.

Volkswagen Hybrid plan

Diess's vision for Volkswagen's future materialized in a proposed €84 billion investment plan for EV and AV development. This ambitious strategy aimed to propel Volkswagen to the forefront of the future mobility landscape. However, the timing couldn't have been more challenging. The global pandemic had taken a toll on Volkswagen's finances, with a significant stock price decline and a recent quarterly loss. Faced with these financial realities, the board of directors expressed hesitation towards such a large-scale investment.

The clash between Diess's long-term vision and the board's short-term financial concerns ultimately led to his departure.

Investors did not view Herbert as a forward thinker aiming to guide the company correctly. Instead, they saw him as someone who had lost his way, especially given his proposed investment, large enough to buy Mercedes Benz, the fourth largest automaker by market capitalization.

Herbert had some support, notably from Thomas Ulbrich, Volkswagen's CTO, who made bold statements like, "Tesla has a 10-year start on rivals in electric cars and software." This support further divided the boardroom between those wanting to commit fully to electric vehicles (EVs) and autonomous vehicles (AVs) and those preferring a cautious, methodical approach like Toyota.

The board did agree on the need for cuts. Herbert proposed cuts to invest in EVs, while others aimed to maximize profits during the pandemic. Labor leaders, holding nine of the nineteen supervisory board seats, strongly opposed labor cuts, especially during the pandemic.

This left the boardroom divided. Eventually, the labor leaders were outvoted, and a compromise was reached. Volkswagen approved Herbert’s investment plan on the condition that he stepped away from daily operations, replaced by Ralf Brandstaetter, a cost-cutting expert, to ensure efficient use of funds.

While the plan seemed solid on paper, pairing a visionary with a cost-cutter did not produce the expected results.

Software Issues in Volkswagen's EV Efforts:

The primary issue with Volkswagen’s EV efforts is poor software. This problem is not inherent to EVs. Legacy automakers can simply modify their existing internal combustion engine (ICE) vehicles by installing batteries and electric motors, as Ford did with the F150 Lightning, which is essentially the same as the gas-powered F150 but runs on electricity.

However, legacy automakers often combine their EV initiatives with efforts to modernize their vehicles, as seen with Volkswagen and Mercedes Benz. These modernization efforts frequently lead to additional problems. Customers not only have to adjust to using an EV, with the associated challenges of charging and range, but also contend with subpar software.

Volkswagen’s software issues are so significant that the company is investing $3.7 billion in a joint venture to address them. Ultimately, it may be more practical for consumers to choose a Tesla, known for its highly refined software, or a traditional car available in electric or hybrid variants.

Volkswagen's Struggles with Recalls and Market Challenges:

Volkswagen's EVs, as well as their other vehicles, have been significantly impacted by recalls. Despite being a long-established automaker with decades of industry experience, Volkswagen has faced recall issues similar to those of newer companies like Rivian and Lucid. Late last year, Volkswagen recalled all of their ID.4 EVs in the US due to flammable interior materials. More recently, they recalled over 260,000 gas vehicles because of leaky fuel pumps. Consequently, Volkswagen has not delivered better reliability, either in terms of car quality or software.

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However, these issues only represent part of the story. Much of Volkswagen's current situation stems from general market sentiment and competition rather than specific errors by the company. Regarding market sentiment, the average consumer is not as enthusiastic about EVs as investors and enthusiasts had anticipated. Concerns about charging and range make many consumers prefer hybrid vehicles, waiting for advancements in charging technology and infrastructure. This is reflected in sales data: last year, sales of plug-in hybrids increased by 83%, while regular EV sales grew by only 21%. As a result, Volkswagen is shifting from an EV-first approach back to hybrids.

Byd sales chart

The competition poses another significant challenge. EV startups like Tesla, Rivian, and Lucid enjoy much more hype and media coverage than Volkswagen. However, the most considerable concern for Volkswagen comes from Chinese EV makers, particularly BYD. Although not well-known in Western markets, BYD has gained substantial popularity in China and other Asian markets. BYD is now the third largest automaker in the world by market capitalization and is delivering over 2 million vehicles per year, surpassing Tesla in volume. This growth has come at Volkswagen's expense, as they lost their position as the best-selling brand in China to BYD last year. In the Chinese electric vehicle market, Volkswagen has fallen to eighth place.

Looking ahead, Volkswagen is expected to continue losing market share, raising questions about the company's future prospects.

An Uncertain Future for Volkswagen:

The future for Volkswagen appears uncertain. Former CEO Herbert Diess, known for his forward-thinking approach, was ousted in mid-2022, leading current executives to adopt a more cautious stance on EVs. Given the slower-than-expected adoption of EVs, this cautious approach may be prudent. For example, Toyota has taken a slow and methodical approach to electrification, and their stock price remains high. Toyota's reputation for reliability gives consumers confidence in their gradual progress with EVs, technology, and self-driving features, ensuring that when they do adopt new technologies, they do it right.

Volkswagen, however, lacks such a strong reputation. The company has faced numerous challenges, including the "Dieselgate" scandal, unreliable software, and multiple recalls. Despite significant investments, Volkswagen has not emerged as a leader in EVs or autonomy. Additionally, Volkswagen has sold off major brands like Bugatti and is gradually divesting its stake in Porsche. It seems Volkswagen’s current size is largely due to its historical presence rather than recent achievements.

While Volkswagen is unlikely to disappear entirely, it risks becoming a diminished version of its former self, similar to what happened to industry giants like Philips an

d GE. This reflects the dire state of Volkswagen today.

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