Photographer: Krisztian Bocsi/Bloomberg
Energy

There’s One Thing Volkswagen Can Do to Stop the Bleeding

Beat Tesla.

First we learned Volkswagen sold 11 million diesel cars specifically designed to conceal deadly NOx emissions. Now we’re told another 800,000 have been coughing up faulty readings of carbon dioxide—the very thing more than 80 world leaders are addressing at climate talks in Paris this month. 

It’s hard to imagine a more damaging scandal. This is a company that built its modern brand on efficiency, engineering and warm fuzzy feelings (think flower vases built into VW bugs and commercials of dear friends driving under the spell of Nick Drake’s Pink Moon). Deception, pollution, and lung cancer: These do not inspire warm and fuzzy feelings.

Since the scandal erupted, Volkswagen has lost almost half its market value, and prices for its cars are dropping. To avoid losing a generation of enthusiasts, there are three things the company must do to tow itself from the muck: 

  1. Come clean. If there are more problems out there, Volkswagen needs to find and disclose them immediately. A long, slow trickle is worse than a big confession. 
  2. Fix the problems. Customers bought Volkswagens thinking they were zippy, fuel-efficient, environmentally friendly vehicles. Fix the cars to be just that, or offer refunds. 
  3. Beat Tesla. 

While Volkswagen's engineers were writing software code to dupe the world into thinking diesel could be a clean-burning fuel, Tesla was building the battery-powered car of the future. Forget emissions cheating—electric cars don’t even have tailpipes. Tesla has a multi-billion-dollar head start, but this is Volkswagen, the biggest automaker in the world. VW could crush it.

A few weeks ago, Volkswagen issued a press release pledging to make efficiency a higher priority in the wake of the scandal, with a focus on electric cars and hybrids. But it’s mostly incremental stuff: a new modular platform to create electric drivetrain versions of popular cars, and a high-performance next-generation Phaeton aimed at the affluent Tesla crowd.

This is still playing catch-up, which nearly every other carmaker (plus Google and Apple) is doing as well. It’s not enough. 

So far, none of the biggest carmakers have gone all in on electric cars. BMW has received a lot of favorable comparisons to Tesla in the past year, but let’s be real: The hybrid BMW i8 is a work of engineering art, but the plug is practically useless, offering an electric range of about 20 miles before the fossil fuels kick in. The i3, while more affordable than the current lineup of Teslas, has a range of about 80 miles per charge, less than a Nissan Leaf.

There is simply no electric car on the market today that is remotely close to the top-of-the-line Tesla: 

  • Range: almost 300 miles
  • Punch: 0 to 60 miles per hour in 2.8 seconds
  • Features: industry-leading "auto pilot" that's constantly improving 
  • Release date for the more affordable, $30,000 Model 3: 2017 

VW could be a Tesla killer (or at least a respected rival) if it really put its mind to it. It has two big advantages: money and scale. Tesla is spending about $1.7 billion this year to build its business, and Wall Street hates it. Not an earnings call goes by that analysts don’t fume over how much cash the company is burning. But by VW standards, that’s a small price to pay. Volkswagen spent almost 8 times that much on research and development alone last year and has about $30 billion in cash. 

Tesla’s biggest problem is scaling up its operations. The company’s new Model X has a waiting list that stretches into the second half of next year, and its emerging battery business is booked until 2017. With the more affordable Model 3, to be unveiled in March and go on sale in 2017, CEO Elon Musk hopes to go from 50,000 sales in 2015 to 500,000 in 2020. Many analysts don't think that's possible. Volkswagen, by comparison, already sells 10 million cars a year. Scale is not a problem.   

Volkswagen has been humbled to a stock valuation of about $58 billion, or 7.5 times its estimated 2015 earnings. Upstart Tesla has a market cap of $30 billion without turning a profit. Tesla gets a lot of good will from customers and investors, because it’s putting it all on the line to make the future of cars arrive sooner.

No major automaker has done the same, though a smattering of more-competitive electric cars is slated for the next three years. If Volkswagen really wanted to, it could still be first to sell a 300-mile-range all-electric car for under $30,000.  The only way to make up for the past is to commit to the future.  

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