Industrials

Chris Bryant is a Bloomberg Gadfly columnist covering industrial companies. He previously worked for the Financial Times.

Mid-way through the presentation of a new electric-vehicle at the Paris motor show on Thursday, Volkswagen made everyone watch an honest and rather heartfelt video whose theme was basically this: if you royally screw up you can either sit on your hands or try to change. VW's doing the latter in a big way.

Herbert Diess, head of the VW brand, pledged the world's biggest maker of dirty diesels will completely change its spots: it plans to become the global market leader in electric cars instead.

Costly Comeback
VW is trying to put the diesel scandal behind it. Its shareholders aren't yet convinced
Source: Bloomberg

VW unveiled an electric hatchback concept car called the I.D. that it promises will cost the same as a Golf diesel and will be available to buy by 2020. Sure, that's much slower than the Tesla Model and General Motors, whose Chevrolet Bolt and Model 3 are coming by next year. But it's still remarkable for a company which not so long ago was pretty snotty about electric vehicles. It suggests VW's pledge to sell as many as 3 million electric cars by 2025 -- or about one quarter of its sales by then -- wasn't just hot air. 

To be sure, VW doesn't have much choice. Its diesel engines are tarnished and it's wise not to throw good money after bad trying to defend the technology. This is still a high-risk approach which will have big consequences for the company and its investors.

True, if its electric car can achieve its promise of a driving range of up to 600km (370 miles) before a re-charge is needed, consumers' electric vehicle "range anxiety" should finally be assuaged.  And if battery costs continue to fall as expected, consumer uptake of electric vehicles may happen much more quickly than many people think. 

VW is comparing the I.D. to the launch of the Beetle and Golf, but the truth is nobody knows whether consumers will buy anywhere near as many e-cars as those beloved models, or how much they'll be willing to pay for them. Sales of BMW's i3 electric car have so far been pretty uneven to say the least. 

Catch-Up Potential
The VW brand doesn't make much profit. Now it's facing an expensive push into electric cars
Source: Company reports
*automotive division, where applicable

So VW's target of achieving a more than 15 percent return on capital employed in the automotive division by 2025 should come with a health warning. The core VW brand's operating margin is already very low -- just 1.7 percent in the first half of 2016, compared to 6.8 percent at Peugeot.

In addition, almost all of VW's production plants are geared up to build combustion engine vehicles -- some of that capital surely now won't deliver the returns originally envisioned. Thousands of workers will need to be retrained or redeployed.  Diess told Bloomberg TV that three to four "tough years" of restructuring would be required for the brand to become more competitive. Given the power that workers wield on VW's board, that's not going to be an easy task.

And of course, VW still doesn't know how much the diesel scandal will end up costing it -- the latest noises out of the U.S. don't sound at all good. It's set aside 17.8 billion euros ($20 billion) so far but it's hard to see that being enough. 

But for once I'll leave my cynicism there. VW has made a bold commitment to completely change the way it does business. It's going to cost a lot of money and there's no guarantee it will succeed. Still, it's absolutely the right thing to do. Not bad VW -- keep it up and you just might redeem yourself.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Chris Bryant in Frankfurt at cbryant32@bloomberg.net

To contact the editor responsible for this story:
Jennifer Ryan at jryan13@bloomberg.net