VW – New Auto.

New Auto raises new issues.

• VW has outlined how it plans to transform from a petrol-powered box shifter into a vendor of software and services, but this throws up a number of challenges which VW must address head-on if it is to have any chance of attaining its goals.
• VW has presented its “NEW AUTO” strategy and has set out some bold ambitions but the financial targets it has set should not be very difficult to meet.
• In a nutshell, VW intends to:
  • First, carbon: emissions from the fleet should fall by 30% by 2030 with 100% of the fleet being carbon-neutral by 2040.
  • Carbon emissions is a grey area because to be properly carbon-free, the power that is used to charge these vehicles needs to be generated without using fossil fuels.
  • Furthermore, the metal that is used to make the chassis will also need to be manufactured in a carbon-free way and steel is one of the most carbon-heavy industries present today.
  • Typically, electric vehicles are touted as being clean because they don’t have any direct carbon emissions but it is not very difficult to argue that with current manufacturing and electricity generation, they are not much cleaner than their petrol equivalents.
  • This is the greatest challenge that faces the electrification of transportation as there is no way that renewable sources will be capable on their own of meeting the increase in electricity demand required for all cars to move to being electric.
  • This is why the world is returning to the idea of nuclear power which is demonstrably less dangerous than coal or gas in terms of mortality and emits no carbon whatsoever.
  • I have a large position in the uranium mining sector to capitalise on this trend over the next 4-5 years.
  • There is much here that is out of VW’s control and as a result meeting these targets in real terms will be much harder than anyone thinks.
  • Second, platform: where the move to electric vehicles provides an opportunity to greatly reduce and simplify manufacturing.
  • NEW AUTO calls for a single, fully digital EV platform (SSP) from 2026 that will be used to make all of its vehicles and will be available to other OEMs to use.
  • VW is backing this up with an €800m investment in R&D in Wolfsburg where the SSP will be created and designed.
  • This will be complemented by a single software platform created by the in-house software development company called CARIAD.
  • This software stack will handle all aspects of the vehicle from managing the onboard systems to over-the-air updates, autonomous driving, and the infotainment unit and its services.
  • VW needs to do far more than just make new platforms.
  • It needs to ensure that they are flexible such that hardware can be upgraded post-sale as well as very close to launch to ensure that the experience being offered can compete with the devices that users bring with them into the vehicle.
  • Failure to achieve this will mean that users continue to shun vehicle software and use their smartphones instead which will completely bypass VW’s (and others’) strategy to capitalise on digital services in the vehicle.
  • RFM research indicates that this will be crucial to long-term profitability as demand for vehicles is likely to substantially decline as electrification and autonomous driving reduce the number of vehicles needed and how often they have to be replaced.
  • Third, financial targets: which have very little, if anything, to do with this transition and should be easy to reach.
  • By 2025, VW intends to increase operating margins by 100bp from the 7-8% that it makes today to 8-9%.
  • VW is also undergoing a large cost reduction program and so this target should not be very hard to hit.
  • VW has called this out as this will be the foundation upon which it intends to build for the future.
  • The reality is that VW needs to substantially increase its margins in order to offset any decline in vehicle demand and vehicle services represent an excellent opportunity to do this.
  • A decent software and services business should be looking to earn operating margins of around 30-40% and a revenue stream of this nature would greatly help VW to increase its profitability and survive in the longer term.
• The net result is that VW is saying many of the right things but translating these intentions into real-world products that succeed will be much more difficult.
• There is no reason why VW can not achieve these goals but it requires a change in mindset that RFM has yet to see in the automotive industry.
• This is going to be the biggest hurdle towards success because stepping back from a doomed business that still generates cash to benefit a future transition is very hard for any manager to do.
• This is why it is the transition of VW’s 660,000 employees to this new model and mindset over the next 10 years that will make or break the NEW AUTO strategy.
• I have been very cautious about the OEM’s ability to affect this transition but saying the right things is a good first step.
• Now VW has to execute it which is by far the biggest challenge.