What led to the crisis at VW? Analysis of the future strategy

A wave of criticism and explanations about the crisis at VW is currently running through the media. Some are saying “now it’s payback time for putting everything on electric cars”. Others are saying that “VW has been too hesitant in its approach to electromobility”. What is true? After all, the VW crisis is just a harbinger for other western manufacturers and other industries.

They fail because of their false assumptions about the future

We at FMG have to emphasize this almost every day:

The management team’s assumptions about the future fundamentally determine the strategy and decisions of every company. If the assumptions about the future are wrong, the strategy is dangerous.
Companies fail primarily due to inadequate assumptions about the future.

Assumptions about existential future issues determine the strategy

There are two competing assumptions about the future of the automotive business for each of three future questions:

To what extent will customers in China buy German cars in the long term?
1. German technology has been popular and respected in China for decades, which has been rewarded with high sales figures and prices. This will remain the case until 2035.
2. Customers in China are increasingly proud of their own manufacturers and appreciate their software expertise, numerous innovative extras and, above all, their low prices, which are the result of government subsidies and extremely tough competition. VW’s catastrophically falling sales figures in China show the only relevant reality. German and American manufacturers will be niche suppliers with minimal sales in China in 2035.
What types of drive will be purchased in ten years’ time?
1. In 2035, more than 50% of new vehicles will still be sold with a combustion engine. Including plug-in hybrids.
2. By 2035, around 90% of cars sold in almost all markets will be battery-powered. The same transformation will take place for trucks, it will just take longer. The sharp decline in e-car sales in Germany in 2024 is actually a global increase of around 20%.
How much will the drive types cost in purchase price and total cost per kilometer?
1. Electric vehicles, both cars and trucks, are more expensive than combustion engines and will remain so.
2. Electric vehicles, both cars and trucks, are already roughly on a par with combustion engines in terms of overall costs. However, purchase prices will fall by at least 10% per year until 2035. This is due to experience and learning effects, which enable a fairly constant reduction in manufacturing costs with each cumulative doubling of production. In the case of combustion engines, a doubling would not occur even in fifty years.

Future strategy A: Build on old strengths, change gently and slowly

Those who are convinced by the future assumptions 1.1, 2.1 and 3.1 see the VW strategy as follows:

VW has made a big mistake with its “all-electric” strategy (note: this strategy does not exist at VW).
The ban on the sale of vehicles with local CO2 emissions (incorrectly referred to as the “combustion engine ban”) must be withdrawn so as not to harm the German automotive industry.
The refocus on plug-in hybrids, mainly combustion engines, secures profitability and also contributes to CO2 reduction.
It will still be possible to sell combustion cars and trucks to China and less developed countries for decades to come because they cannot afford electric vehicles and have no infrastructure for them.
All of this ensures the yield needed to invest in the gradual transformation to electric drive systems by 2050.
We have been building cars for a hundred years. So of course we can do electric cars better than upstarts like Tesla or BYD.

Future strategy B: Build up new strengths quickly and with focus, despite pain

Anyone who is convinced by the future assumptions 1.2, 2.2 and 3.2 sees a different strategy as the right one:

Sales of combustion cars peaked in 2017 and have been falling ever since. In reality, sales are falling exponentially. The production of combustion engines will therefore “de-scale”. Ever lower sales with ever lower capacity utilization make combustion engine production more expensive per unit, less profitable and ultimately loss-making. The strategy of “using combustion engine profits to finance electrification” can no longer work.
Electric cars with the same performance will also have ever greater price advantages in terms of purchase price. This means that there is no longer any argument for buying a vehicle with a combustion engine. The charging infrastructure is sufficient today and will grow every year as the vehicle population grows. Charging times are decreasing more and more. Less than ten minutes from 20 to 80% is foreseeable, although this is only relevant for long distances. All of this also applies on a different scale to South America, Africa and South Asia.
For developing regions of the world, local power generation from solar, wind and water is cheaper and politically more robust than importing oil, diesel and gasoline. Sales of combustion engines will also collapse there and electric vehicles will dominate the market. Chinese suppliers are already very present there today. Western suppliers now need to get into the minds of buyers there quickly.
As a result, the share of electric vehicles in the world’s largest car market in China, as well as in all other markets with a time lag, will continue to grow strongly in line with an S-curve. The share of combustion engines (including plug-in hybrids) will shrink sharply following a negative S-curve. Accordingly, any investment in combustion engines is less profitable in the long term than an investment in electric drives.
For the above reasons, the only really fast-growing type of drive is battery electric. It is “the future”. Hardly anyone will still be buying combustion engines in 2035. Bans are unnecessary. If you want to survive or even be successful as a manufacturer, you have to concentrate on this type of drive. In development, production, marketing and sales. The sooner the better, in order to achieve economies of scale with large sales figures and to be competitive in terms of costs. VW is becoming less and less convincing with its vehicles in the world’s largest car market in China, as the shrinking sales figures show. Not with combustion engines, and even less with electric cars. This has put VW in a strategically and financially precarious position. Unfortunately, this is just the beginning.
All of this should have started in 2017 or earlier, when VW was still selling over ten million vehicles a year.

Future strategy A is not rationally tenable

As the future has not yet happened, anyone can believe anything and think they are right. However, if you have responsibility for hundreds of thousands of employees and their families, not to mention the shareholders, we believe you have a duty to make your assumptions about the future more professional, i.e. more rational and more robust. And thus also the strategic orientation and investments based on these assumptions. This has not happened at VW.

The future assumptions 1.1, 2.1 and 3.1 are not tenable from a rational point of view.

This means that the strategy based on these assumptions about the future is also untenable.

VW was on the right track - almost

VW CEO Herbert Diess had recognized all of this and wanted to implement a consistent strategy at VW with a focus on electrification. Just a few years ago, VW was considered one of the most promising manufacturers on the electric car market. Serious experts already saw VW overtaking Tesla. Incidentally, this was all long before “the traffic lights” and before “the greens”.

Such radical change cannot take place without pain. Job losses, enormous investments in new things and giving up the familiar. Herbert Diess communicated this clearly. Herbert Diess was fired. Because he wanted to do the right thing for the future. He was fired by those who prefer to stay in the here and now. Even though the world is changing inexorably to the detriment of VW. One expression of this is the dividend of 4.5 billion euros paid for 2023. In a well-managed company, outside the distortions of the stock markets and politics, this dividend would not have been paid.

Unfortunately, VW as an overall organization is still not in a position to change as much and as quickly as it needs to in order to avert the emergency. For example, VW has to cooperate with Rivian and XPeng. Audi has to cooperate with SAIC. The reason is that despite enormous investments and thousands of developers, VW has still not managed to develop its own software platform.

It may seem presumptuous to question the intelligence and experience of thousands of highly paid managers at VW. However, economic history has shown many times that it is precisely the largest companies with the greatest resources and highly qualified managers that are less likely to pursue forward-looking strategies.

VW has therefore not focused too much on electric drives, but too little.

It is interesting to note what the VW works council chairwoman Daniela Cavallo, of all people, is calling for:

A picture of the future!

Our speech! Herbert Diess had one. In our view, the right one.

An urgent request to you

If I may make one recommendation: take a very critical look at your assumptions about the future. The existence of your company depends on their quality. In most cases, these central convictions, on which all decisions are based, are not even documented. Let alone thoroughly and rationally justified. Of course, this also applies to small companies. Please avoid this enormous risk. It is not difficult.

What led to the crisis at VW? Analysis of the future strategy

They fail because of their false assumptions about the future

Assumptions about existential future issues determine the strategy

Future strategy A: Build on old strengths, change gently and slowly

Future strategy B: Build up new strengths quickly and with focus, despite pain

Future strategy A is not rationally tenable

VW was on the right track - almost

An urgent request to you

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