Volkswagen Pushes for Redemption With Electric Cars

Automaker Plots Mobility-Solutions Business In Wake of Emissions Scandal

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Volkswagen
Volkswagen

Volkswagen will seek redemption in electric cars, autonomous driving and ride-sharing after its cheating on diesel-emissions technology led to the biggest scandal in its history and hastened a corporate overhaul.

The shift will entail more than 10 billion euros ($11.2 billion) in investments by 2025, financed in part by cost-cutting at the namesake VW brand and bundling together its fragmented parts operations, the company said Thursday at a press briefing at its Autostadt exhibition center in Wolfsburg.

"We expect that by (2025) we will be selling about 2 to 3 million pure-electric automobiles a year," VW Group CEO Matthias Mueller said.

The crisis has exposed the risks of Volkswagen's rigid structure and focus on expansion, an environment that both fostered the cheating and led the carmaker to largely miss the trends that have fostered the likes of Tesla Motors Inc. and ride-sharing service Uber Technologies Inc.

Shifting gears now will be a challenge financially, as Volkswagen faces at least 16.2 billion euros in crisis-related costs, as well as commercially, with the company's ecological credibility in tatters and its tech programs lagging competitors.

"It has historically been hard for an auto business so proud of its engineering heritage and expertise to make the leap into new technologies," said Kristina Church, a London-based analyst with Barclays Plc. "If some good were to come out of the diesel crisis, it would be the full transformation of VW," in terms of future mobility as well as a structural overhaul of the business and brand structure.

The shares fell 3.3 percent to 116.20 euros at 5:00 p.m. in Frankfurt.

Profit Boost

While expanding in new areas, Volkswagen expects to raise its operating return on sales to between 7% and 8% by 2025, up from 6% before special items last year. One target to be reined in is research and development spending, which had surged under MR. Mueller's predecessor Martin Winterkorn.

The company is negotiating with labor unions for as much as 8 billion euros in annual productivity gains, with a particular focus on Volkswagen's namesake marque, the 12-brand group's largest unit, which was struggling even before the company admitted to installing software to cheat on emissions tests in as many as 11 million cars. Volkswagen will present details on financial targets and how it'll put the plan into place by the end of the year.

"The future program we're unveiling today ushers in the biggest change process in the history of Volkswagen," Mr. Mueller said. "We are building a new, a better and an even stronger Volkswagen."

More than 250 employees from across the company helped draft the strategy with Mr. Mueller, who took over in September, a departure from the close-knit circle that set the agenda under predecessors Mr. Winterkorn and Ferdinand Piech.

Change Aversion

Volkswagen's ownership structure has fed its aversion to change. The majority of its common stock is held by the Porsche-Piech families, which vote as a bloc and have struggled to find a voice amid the scandal, while both its powerful unions and second-largest shareholder, the German state of Lower Saxony, are more interested in securing jobs at the 600,000-employee giant.

"In order to create momentum, they need to develop speed to execute the various planks of the new strategy," said Erich Joachimsthaler, partner at New York-based consultancy Vivaldi Partners Group. "That will require a flatter hierarchy and more decentralization. It is a massive business transformation."

Volkswagen has so far merely dipped its toe into the electric-vehicle market with battery-powered versions of the Golf hatchback and Up! city car, while its Audi unit doesn't have a single all-electric model. To catch up, the company plans to introduce more than 30 electric cars by 2025. It forecast sales of as many as 3 million of its battery-powered vehicles annually by then, the equivalent of as much as 25% of its global sales.

Mobility Solutions

Volkswagen also plans to establish a mobility-solutions business that will develop its own services and acquire companies in areas such as ride-hailing, robo-taxis and car-sharing. The goal is to generate billions of euros in revenue from the efforts by 2025, the carmaker said. A $300 million investment last month in ride-hailing app Gett was Volkswagen's first foothold in the burgeoning field.

To vie with Google's efforts to develop self-driving vehicles, Volkswagen aims to create its own system for autonomous vehicles and license it to other companies by the end of the decade.

The new strategy may also include an expansion of Volkswagen's truck operations into the U.S. The division is targeting a significant presence in "all key regions," the company said. It owns the Europe-focused MAN and Scania brands and sells trucks in Latin America under the VW badge, but it isn't active in North America.

Volkswagen also renewed its commitment to invest in the U.S., a trouble spot even before the diesel scandal. The company will also continue to expand in Asia with "advanced talks" over a cooperation to produce entry-level cars with a regional peer. That would be a step beyond a long-discussed, never-materialized push to develop VW's own budget brand with a Chinese joint venture partner.

The timing of the strategy statement is a signal that Volkswagen is past the worst of the cleanup. Still, the company will face shareholders on June 22 without a settlement in the U.S. A federal judge pushed back the deadline for an agreement, originally set for June 21, by a week late Wednesday. The company also has yet to publish a report explaining how the cheating came about and was covered up for so long.

"It's not another company now, it's just an evolution," said Sascha Gommel, a Frankfurt-based analyst with Commerzbank AG. "First they have to prove they really learned something."

-Bloomberg News

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