I got a lot of questions from yesterday’s Reuters report that Volkswagen (OTCPK:VLKAF) is looking to price its from-the-ground-up Tesla (TSLA) Model 3 competitor at $23,000 or even less: VW plans to sell electric Tesla rival for less than $23,000.
Can Volkswagen make a profit selling it at $23,000 or less?
Why is Volkswagen going to sell it this cheap?
Are Volkswagen’s costs really that much lower than Tesla’s?
Isn’t this low price going to put pressure on Tesla’s margins?
Let’s first establish what we are talking about. Volkswagen is launching 50pure battery-electric vehicles (BEVs), out of which the first launch phase consists of 27 BEVs on the MEB platform that will be done by the end of 2022.
There will be another 23 BEVs on the other (non-MEB) Volkswagen Group BEV platforms, as well as another 30 plug-in hybrids (PHEVs) on top of those first 27 MEB-based vehicles. The $23,000 news concerns the very first of these nameplates, which is undergoing durability testing right now and enters production in a year - November 2019.
This production begins in a city in Germany called Zwickau, and it currently has the capacity to produce 330,000 cars per year. It will take until at least the end of 2020 for this factory to produce this $23,000 EV at that annualized rate.
Actually, this $23,000 EV won’t be the only EV produced in that plant. You also should expect variants of this car under the Seat, Skoda and Audi brand names - as well as a crossover-SUV that will be exported to the U.S. in the second half of 2020. This crossover-SUV has the code name “Crozz.” (I hope a different final name is chosen…)
Volkswagen has identified a total of 16 factories that will be making BEVs on the MEB platform, starting at various points over the next three years. There are 10 of them in Europe, five in China and one in the U.S. Zwickau, Germany, is merely the first one, where production starts in November 2019.
Aren’t Volkswagen and its Audi brand already making EVs? Yes they are. The biggest volumes are for the VW eGolf, which is made in Wolfsburg and Dresden, Germany - and the Audi eTron, which is made in Brussels, Belgium. I am not counting those, because they are built on a pre-MEB platform that was already decided on around the end of 2013 - five years ago.
Volkswagen is building 72 eGolf units per day in Dresden and about 80 eGolf units per day in Wolfsburg - and Audi stated on September 17 that it's building 200 eTrons per day in Brussels. Deliveries of the Audi eTron are set to start in Europe in about a month from now, and the eGolf has been on sale for over three years already - and is one of the best-selling EVs in Europe.
About that $23,000 price: How and why?
For all of you who are asking: Let’s assume that Volkswagen isn’t profitable at $23,000. Why are they going to sell it for that price? ...there is an important thing to understand: This is a politically determined price. It’s a “solve for X” situation.
So, what is “X” in this equation?
In China, California (plus a few other states) and Europe, politicians have mandated that a certain number or percentage of cars must be sold that are either BEVs or have BEVs characteristics for fleet-mix purposes. You have to sell so-and-so many of them as a percentage of your fleet mix. This is the “X” for which you have to solve, at whatever price the market will bear. For example, in California and about 10 other U.S. states you have to sell between 15% and 16% of them by 2025.
Let’s take the analogy with Apple (AAPL). Assume the U.S. government said that for every three iPhones Apple had to sell one iPad Pro. Then Apple suddenly cuts the price of the iPad Pro to $199.
Would you ask: Can Apple make money selling the iPad Pro at $199? No, you would understand that $199 is not a free-market price or otherwise connected to cost. It's a politically determined price. Even if Apple loses money selling the iPad Pro at $199, you are still doing it because you can still make money selling iPhones for $799 and up.
The same thing is true for Volkswagen - and other automakers. EVs will be sold at a loss - whether at $23,000 or even less - so that VW can sell regular gasoline vehicles such as the Tiguan and Atlas SUVs at solid profit margins. For all we know, Volkswagen will discount this $23,000 car down to $15,000 if need be. Heck, why not $10,000? The floor is the limit. They will price it as low as it takes to sell as many units as the politicians have mandated. Say hello to the $99 or $39 monthly all-in lease price.
What is the net of all this for Volkswagen and all the other automakers? If they lose more money selling EVs at a loss than they make money selling gasoline vehicles at a profit, they eventually go out of business. Factories will close and millions of people will go unemployed.
Impact on Tesla: Very bad for margins
For as long as automakers are forced to sell EVs below market price (and cost), and they remain in business before this policy naturally bankrupts them if allowed to continue forever, Tesla will be faced with competition with which it will be impossible to compete. Tesla has no offsetting profitable regular gasoline car/SUV/truck business. It only swims in the one pool where automakers are forced to sell below cost.
I’m one of the relatively few people who had a chance to sit inside a pre-production mock-up “chassis with partial interior” version of the $23,000 Volkswagen Tesla-competitor. This is the one that will be in production a year from now, November 2019.
While many details, including the exact shape of the key body panels and the instrument panel, were hidden from me, I could get a good sense of the seat comfort and the space around the driver and all other passenger positions around the car. It is a spacious and comfortable car - slightly larger in terms of the interior than the current VW Golf.
You can indeed think of this VW electric car as a VW Golf in terms of length/width, with a slightly higher roof and an interior that's closer in size to the VW Passat. The smallest version of the battery will be 48 kWh, and on the large end of the scale it could be 83 kWh. There will likely be at least one or two intermediate sizes, above 48 kWh but smaller than 83 kWh.
At the low end, the range could be as low as 180-185 miles on the U.S. EPA test cycle. It will be a higher number on the European test cycle. On the high end, the range will be around 300 miles on the U.S. EPA test cycle.
The base car will be rear-wheel drive, just like the Tesla Model 3. One year into production, all-wheel drive will be added for an estimated $4,000 extra - again, very similar to the Tesla Model 3.
Where the Volkswagen $23,000 car and Tesla Model 3 differ is that the Model 3 is a sedan, whereas the VW $23,000 will be a hatchback, more similar to the Tesla Model S -- which is a hatchback, not a sedan.
For those of you who are asking, the definition of a sedan is a body style where the rear opening hinges at the bottom of the C-pillar. The definition of a hatchback is a body style where the rear opening hinges at the top of the C-pillar. Therefore, the difference between a hatchback and a wagon or SUV is more in the "slope" of the C-pillar than where the opening hinges.
So there, you have the answers to the questions about Volkswagen’s $23,000 (or less) Tesla Model 3 competitor. It’s coming, and it will be sold below cost - because it has been decided that way by the politicians who set the rules. Think of it like rent control - but for the automobile industry.
Disclosure: I am/we are short TSLA.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: At the time of submitting this article for publication, the author was short TSLA. However, positions can change at any time. The author regularly attends press conferences, new vehicle launches and equivalent, hosted by most major automakers. Volkswagen hosted a factory tour and production background briefing.
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