Will VW Do Enough to Survive the Next Wave of Change?

Overview and Analysis Context

“Volkswagen…Das Auto”. A three-word slogan that is recognizable by consumers the world over. As one of Germany’s most iconic brands and one of the world’s largest automakers, VW was built on the lineage of being the “people’s car” with a brand promise of highly engineered quality and reliability. In 2007, VW’s leadership envisioned “Strategy 2018“ as a decade long battleplan to become the world’s leading automaker through volume and a multi-brand acquisition strategy including the likes of Audi, Porsche, Bentley, and Lamborghini, with Volkswagen being the flagship. Smartly, VW leveraged its key iconic brands with its core value propositions for its vehicles including: (1) great-engineering (2) fuel-efficiency and being (3) environmentally friendly. While diesel vehicles comprised 50% of revenues in the European market, the underperforming North American market represented only 3% of revenues.

Core to “Strategy 2018“ was VW’s heavy CAPEX investments in 10 new global plants and shared vehicle platforms, the launch of a range of new products, and pushing volume sales of every brand under the VW umbrella targeting total annual sales of 10M vehicles by 2018. With the relentless drive for growth above all else, profitability was put at risk. By 2015, VW’s workforce costs rose to a concerning 17% of revenue. In the planned decade of heavy investment spending, growth at all costs, and the notion that “failure is not an option”, VW’s culture and governance structure became the silent victims of their resulting success. In 2017, the culture of ‘infallible success’ ultimately resulted in “Dieselgate”, where illegal ‘defeat software’ was installed on 11 million cars to fool regulatory emissions tests.

Serendipitously, while VW was distracted with navigating Dieselgate, the forces of innovation and disruption were well underway in reshaping not only the auto industry but the entire global transportation landscape. New trends and threats appeared including: (1) technology companies (2) new business models (3) geo-political tensions (4) shifting demographics / consumer preferences and (5) rising climate change concerns. Fortuitously, in 2007 while VW was focused on executing Strategy 2018, a new scrappy battery electric vehicle (BEV) startup Tesla arose.

Elon Musk became CEO of Tesla in 2008 and envisioned the world’s transition to sustainable energy. By 2017, Tesla was leading a deep paradigm shift and had become a formidable competitor with a market cap of $60B with a singular focus on BEV and the future of sustainable transport. All major auto incumbents were under threat. VW’s Strategy 2025 was borne to combat this shift.

Challenges and Key Questions

This analysis attempts to answer the questions: (1) Is having BEV in VW’s line up enough? (2) Did the culture, governance, and reward systems at VW position them to be innovative, agile, and market aware? (3) Were the multi-billion dollar investments deployed in the right long-term assets for a future where internal combustion engine (ICE) vehicles may not dominate? (4) Did VW have a strategy for the changing consumer preferences that shifted from “purchasing a car” to seeking a total “experience” that aligned with consumers’ values and “digital lifestyles”. Consumers now expected cutting edge technology enabled cars that are environmentally friendly, adaptable to their mobile lifestyles, and have a great user experience like their iPhones.

VW’s build out of 30 BEV vehicles over the next decade while commendable, is a very predictable but uninspiring strategy. Building more vehicles, BEV or otherwise, does not address market needs or solidify VW’s differentiation enough. Consumer preferences include continuous over-the-air (OTA) product updates, future proofed capabilities like full autonomous driving, low maintenance and operating costs, high performance, all at an accessible price.

To deliver on these, VW needs to critically re-establish trust with its customers and then to think deeply about the supporting EV business and technology infrastructure required to showcase the total value proposition of VW’s electrification strategy, and it can’t be a compliancy play. These include deep fly-wheel strategies around: (1) software capabilities to deliver agile customer ‘experiences’ (2) build competitive advantage from their car fleet data (3) lowering battery costs and increasing performance in both production and tech advancements (4) leveraging BEVs as a beachhead for an ‘in’ into consumer’s lifestyles. As VW is a monolithic entity, its biggest risk is legacy cultural momentum, time, and thus speed to market. If VW’s strategy continues to be building more ‘cars’, their longevity may be questionable.

While VW has admittedly identified the disruption and sea change in the auto industry, the cultural and governance challenges remains a substantial risk. From VW’s leadership there is still a sense that BEVs are a “work-in-progress”. This skepticism may prove to be their undoing. From the case, we see that VW is investing in its future through a myriad of outsourced and JV partnerships for key core strategic pieces like technology, batteries and charging networks. A core question is does VW’s plan invest enough in internal capabilities that will give rise to a competitive moat that is not dependent on their partners? A leading competitor, Tesla have strategically vertically integrated to ensure both speed and ability to control the entire customer experience, a key differentiator valued amongst new car buyers. While VW has invested billions, core concerns are does this allow VW to leap-frog past existing competitors or does it just catch VW up? Is this a platform advantage that can be leveraged more than once? Will the output of VW’s investments create an “experience” for customers rather than a point product purchase? Only time will tell.

The Road Ahead

Disruption is inevitable and VW must think about whether they believe the sea change is happening. Attitudes drive culture and reflect through management actions / decisions. While VW has made bold financial bets, I challenge them to make bold courageous ideological bets that address the effects of climate change, the democratization of transport, and the human-machine experience between consumers of the service and the inevitable new transportation platforms. VW’s strategy should entail a deep analysis of how to leverage an ecosystem of value adds that include BEVs, fleet mobility integrated into Smart City infrastructure, new subscription service models including direct-to-consumers (cut out dealer network), and heavy investments into the world’s largest EV market, China, learning strategies that can be transferrable to other markets. Lastly, if VW were to think about the car platform as an iPhone in every way, would that change their design-thinking approach?

Stanford is a technology entrepreneur and an amateur futurist very much interested in how technology can be used to better humanity. Currently, he's pursuing a life long passion of continuous and higher learning and in the midst of pursuing an MBA. Besides ensuring he keeps a close pulse on the phenomenon of digital transformation happening to all businesses these days, he's often found thinking about what's coming around the next corner in the technology innovation landscape.