The sudden surge in stock price of Volkswagen Group (VOW3.DE), which has been hovering around 150 euros since 2021, has surpassed 50% and briefly became the company with the highest market value in Germany. As of June 2nd, its stock price on the Frankfurt Stock Exchange was 240.35 euros, representing a daily increase of 2.25% and a market capitalization of 139.857 billion euros. In contrast, Tesla’s (NASDAQ:TSLA) stock price has experienced a significant decline, with a closing price of 605.12 US dollars on June 2nd, down by one-third compared to its peak of 900.4 US dollars on January 25th, and a current market value of 582.93 billion US dollars.
The “Volkswagen up, Tesla down” pattern in the capital market reflects the quiet changes in the fundamental strengths of the two companies and the industry. According to Tim Rokossa, an analyst at Deutsche Bank, as Volkswagen’s ID.4 compact SUV is launched globally, its delivery volume of electric vehicles will surpass Tesla’s fastest in 2021.
In the European market, Volkswagen’s electric vehicle delivery volume has already exceeded Tesla’s. According to the EV Sales website’s statistics on the ranking of new energy vehicle models in Europe in April 2021, Tesla’s Model 3 delivery volume in the European market was only 1,244, down 95% from the previous month, while Volkswagen’s ID.4, ranked first, delivered 7,565 vehicles.
“As traditional car manufacturers launch a series of new electric vehicle models, Tesla’s dominant position in electric vehicle sales over the years is likely to end soon,” commented Oliver Zipse, CEO of BMW Group (BMW.DE). with the entire industry moving forward quickly, Tesla’s continued high growth is not easy to maintain.From a technical perspective, it is possible for traditional car manufacturers to catch up with and even surpass Tesla. “In terms of car manufacturing, the internal system, decision-making processes, and new car issuance processes of traditional enterprises may affect their ability to timely reflect their own or new technologies in the car,” said Xu Daquan, executive vice president of Bosch China, to One Car (ID: carcaijing). Secondly, from a car-making perspective, traditional automakers must change their business models while catching up with Tesla. Thirdly, traditional automakers may not be very good at collecting all the in-car data and analyzing users’ usage habits.
Scaling is a natural advantage of traditional car companies. The Public Relations, Communications and Corporate Social Responsibility Department of Volkswagen Group (China) replied to One Car (ID: carcaijing): “Many new car makers’ product strategies start from the top-down, targeting high-end segmented markets, launching high-end models first, and entering the high-end segmented market in the case of low production, only to ensure that each car sold can have higher profits and premium capabilities. However, Volkswagen has its own economies of scale, including traditional car companies, are also launching offensives in the high-end new energy vehicle market.”
According to Deutsche Bank, if the market applies the valuation ratio of Tesla and NIO to Volkswagen’s electric vehicle business, the value of this part will reach $230 billion, far exceeding Volkswagen’s current total market value (140 billion euros, approximately $171.5 billion).
The market is big enough, it is too early to talk about who will win or lose. “I think the Chinese car market is entering the ‘Warring States Period’ where many companies rise together. The era of electrification and intelligence is not only an opportunity for newcomers but also an opportunity for independent car companies to surpass leading foreign and joint venture car companies in the era of combustion engine cars,” said Zhu Yi, senior managing director at China Renaissance, in an interview with One Car (ID: carcaijing). It is difficult to predict which one or several car companies will gain significant market share at present, but it can be foreseen that the “Warring States Period” will be a time when Chinese brands may actually break out of China and participate in global competition.
Traditional car companies are fiercely launching new energy cars.
Tesla’s first-mover advantage is being eroded. In 2019, Tesla’s sales in the European new energy vehicle market reached as high as 31%, but with the launch of new models from other car makers, it slipped to 13% in 2020. In April of this year, Model 3 had fallen out of the top 20 new energy cars sold in Europe, and was replaced by Volkswagen’s ID.4 and ID.3, occupying the top two spots on the sales chart.”Tesla shareholders should be worried about this. What’s more shocking is that Audi e-tron and other direct competitors are on the list, but Tesla Model S and Model X are not in the top 20.” Peter Garnry, Head of Equity Strategy at Saxo Bank, said that Renault, Volkswagen, and Hyundai have all outperformed Tesla in the past few months, indicating that market competition is heating up.
Compared with new car manufacturers such as Tesla and NIO, the biggest advantage of traditional automakers in the field of new energy is scalability. The intensive introduction of models and the large-scale production of electrification platforms have led to a significant increase in traditional automakers’ new energy models since 2020.
At the same time, what new car manufacturers cannot match is that many traditional automakers such as Toyota and BMW provide a series of solutions that include BEV (pure electric), FCEV (fuel cell), HEV (hybrid), and PHEV (plug-in hybrid) in various energy driving directions, with a larger market space than that of pure electric vehicles alone.
New energy vehicles are constructing the “second growth curve” of traditional automakers, which has led to a significant increase in stock prices that have remained stable for many years. On May 26th, Ford Motor (NYSE:F) announced that it expects electric vehicles to account for 40% of its global sales by 2030 and announced a package of new energy development plans. Influenced by this news, Ford’s stock rose 8.51% to $13.90, the highest in almost five years.
“This is the best development opportunity for Ford Motor in terms of business growth and value creation since Henry Ford produced the Ford Model T car in a large scale, and we are fully committed to seizing it,” said Ford CEO Jim Farley publicly.
Compared with new car manufacturers who need large financing, traditional automakers are not short of money and are willing to spend it. This time, Ford plans to invest more than $30 billion in the field of electric vehicle development (including battery development) before 2030. Daimler (DEI.DE) also announced that it will invest over 70 billion euros in research and development, real estate, factories, and equipment from 2021 to 2025 to continue to accelerate electrification and digital transformation. Volkswagen has also developed two electrification platforms, MEB and PPE, and promised to invest billions of dollars to accelerate electrification.
The accumulation of traditional automakers in new energy vehicles cannot be underestimated. Their traditional car-making processes, management capabilities, technical reserves, and industrial chain layouts provide them with inherent advantages to catch up in the new energy race.
Cao He, President of All-Link Auto Investment Management (Beijing), said in an interview with Carcaijing (ID: carcaijing): “After the transformation, traditional automakers will still occupy the primary share of the competition in the new energy market through exerting advantages on the industrial chain. The current rise in the stock prices of ‘the Volkswagens’ is not surprising and reasonable.”According to Marklines data, the average penetration rate of new energy vehicles for mainstream traditional car companies globally was close to 2% in 2019, which represents a one-percentage-point increase from 2017. By 2025, the average penetration rate of new energy vehicles is expected to reach approximately 10-15%.
“We can be certain that every market segment in the future will have new energy vehicle models. In the next two years, we hope that Mercedes-Benz will have a place in the field of electrification among luxury brands,” said Yang Ming, President and CEO of Beijing Mercedes-Benz Sales Service Co., Ltd., in an interview with the CarCaJing ID.
However, Mercedes-Benz faces the challenge of low market awareness when it comes to the Mercedes-Benz EQ brand, despite the brand recognition enjoyed by the Mercedes-Benz name. This is a challenge also faced by other traditional car manufacturers in promoting their new energy brands.
“Electrification has significantly lowered the threshold for car manufacturing, which is a prerequisite for technology giants to enter the industry. In this trend, the evaluation criteria for a good car will become more diverse, and the weight of intelligent configuration will become heavier. Vehicle manufacturing will become more ‘people-oriented’,” said Zhu Yi, in an analysis for CarCaJing.
Wei Jiyuan, Deputy General Manager of the Information Strategy and Network Security Department of SAIC Group, believes that the transformation is very complex, and that “technology is not the most important factor. The key is the contradiction between enterprise thinking and awareness, including the contradiction between short-term benefits and long-term investment in technology innovation, the contradiction between digitized talent management and the construction organization of digitized development, and so on.”
Intelligence is the Shortcoming
The advantage of traditional car manufacturers is their scale, while their disadvantage in the field of intelligence is also apparent.
“ID.3’s autonomous driving is far behind that of Tesla,” said Gong Min, head of the automotive industry at UBS, after dissecting both the Volkswagen ID.3 and Tesla Model 3, in an interview with CarCaJing.
According to Gong Min, the autonomous driving of the Volkswagen ID.3 has reached level L2+, capable of basic functionality such as following other vehicles, emergency braking, lane keeping, and automatic parking. However, the car cannot make autonomous decisions or switch lanes by itself. Due to limited hardware, the car only has two cameras (Tesla has eight). One of the cameras looks ahead, enabling adaptive cruise control and emergency braking, while the other one looks behind, ensuring the vehicle is in the center of its lane. In addition, there are three millimeter-wave radars but no lidar, and the hardware configuration is relatively basic.
Herbert Diess, CEO of Volkswagen Group, once admitted that Tesla is superior to Volkswagen in information systems and high-level assisted driving. To catch up with Tesla, Volkswagen still has a long way to go. The difficulty in catching up is not related to electrification, but rather the software domain represented by autonomous driving.To share costs, several alliances have been formed in the field of autonomous driving: Volkswagen and Ford have formed an alliance; Waymo and Renault-Nissan have formed an alliance; Intel, Mobileye, and BMW have collaborated, with FCA, Delphi, and Continental joining later; General Motors acquired Cruise, and Honda has also invested; Mercedes-Benz, Nvidia and Bosch have joined forces to lay out their strategy, and so on.
Traditional car companies, which have been developing for centuries, naturally lack the intelligent network genes of internet companies. “New forces in car-making continue to introduce new products, putting great pressure on us. They have no old baggage and are natives of the internet. However, the pursuit of safety and the trend of intelligent vehicles among traditional car companies are conflicting,” Wei Jiyuan told Chuxing Yike (ID: carcaijing).
The trend is clear. Traditional car companies are not without response, but developing a pure electric platform for electronic architecture from scratch requires a lot of time and money, so many car companies choose to carry out electrification through oil-to-electricity conversion. Without changing the logic of top-level design and launching bottom-layer and electronic architectures that support intelligent software, it is also difficult to enter the new era in the field of new energy.
Transformation toward intelligence is not only an attempt in terms of technology, but also represents a change in thinking behind it. Gong Min said that the software architecture of fuel cars and electric cars is different. Previously, the engine had its own software, the battery had its own software, and even the chip controlled the glass up and down. Now, the inevitable trend is the central integration of the entire software, which is equivalent to a central brain that controls every area. Tesla is a pioneer in this field. In Model 3, it first used three controllers, left body controller, right body controller, and automatic driving and entertainment domain controller, to control the entire vehicle’s electrical system.
“The biggest challenge is a change in thinking,” Xu Daquan believes. Traditional companies need to introduce new thinking, change the inherent decision-making, quality, technology and deployment processes within the company. First, we need to change business units, then reduce decision-making processes, expand cooperation, and invest in new innovative companies.
Talent is especially important, not only to introduce talents in the intelligent network domain but also to retain talents through incentive systems, but there is currently a general shortage. The data provided by the global job market social platform LinkedIn to Chuxing Yike (ID: carcaijing) shows that talent with intelligent travel skills in traditional car companies is severely lost, down by 3% compared with the same period in 2020. 86% of car companies have talent shortages while a large number of talents are flowing to internet companies, increasing by 6% compared to the same period last year.
It’s Difficult to Replicate Tesla’s Market Value Growth
In 2020, Tesla and the “Wei Xiaoli” trio (NIO, Li Auto, and XPeng) saw significant market value growth, creating a phenomenal and inspiring story. This reflects the capital market’s recognition of new energy vehicles, and the vast and real market demand for intelligent electric vehicles has also endorsed it.Multiple auto industry analysts told Carcaijing (ID: carcaijing) that before and in 2020, traditional auto companies lagged behind in the new energy vehicle market, resulting in Tesla, Nio and other new brands representing the investment trend in new energy vehicles. These new brands also successfully subverted investment logic.
Since 2021, the traditional auto companies’ strong sales of new energy vehicles, launch of new models, and broad strategic layout have made the capital market see their potential. BMW, which was once dominated by Nio, has already achieved a market capitalization lead. Ford and GM stock prices also soared to record highs, three times their low stock prices.
“Whether it’s BYD or BMW, everyone recognizes the trend of future new energy and intelligence,” said Zheng Yun, global senior partner of Roland Berger and head of the Greater China automotive industry center, in an interview with Carcaijing. “In the capital market, when investors look at a company’s targets, they will discuss the extent and integration of this target to capture such a large opportunity in the industry transformation.”
As traditional automakers catch up, the inevitable correction of just two or three models of “Little Wei” has occurred. Nio’s stock price plunged to a recent low of $30.71 per share on May 13, 2021, while its stock price hit a high of $66.99 per share on January 11, 2021. On May 13, 2021, XPeng’s stock price was ¥22.73 per share, and its highest price in 2020 was $74.49 per share. Due to significantly overvalued market capitalization, Hillhouse Capital sold all its stock in “Little Wei” held in the fourth quarter of 2020.
Who will be the winner in the new four of the future? Judging from market capitalization and sales, traditional automakers, as well as new forces in vehicle manufacturing and technology companies, are in a competition. In 2021, Hillhouse Capital bought shares in Nio and XPeng again, and also invested in BYD and Great Wall Motors in the A-share and Hong Kong stock markets. “In the first quarter of this year, the stock prices of new energy vehicles have been adjusted, with consecutive declines, and even cut in half. Our secondary market team has carried out a new round of build-up for new energy vehicles,” according to Hillhouse Capital.
“Electrification of passenger cars is an inevitable trend. However, due to factors such as increased costs of intelligence, the development speed will not be as fast as expected,” warned Wei Jianjun, chairman of Great Wall Motors. The biggest challenge for traditional automakers is the change of system, mechanism, and culture, which may delay the transition from traditional cars to new cars.
The new wave has given newcomers opportunities, but traditional automakers can still rely on combustion engine vehicles to support market share for a longer period of time. For new players in vehicle manufacturing and technology companies, there is only one opportunity.”The window of opportunity for car companies to transform is actually very small. In about 3-5 years, the pattern of intelligent new energy vehicles will form a relatively stable situation,” warned Zheng Yun. For the transformation of traditional car companies, they need to take care of their own business while exploring new businesses. The market has higher requirements for traditional car companies. On the contrary, for new start-ups with smaller sizes and new generation models, everyone’s valuation pulling ability will be more optimistic.
“Turning an elephant is indeed difficult, and the historical burden is also heavy. Our transformation has advantages and disadvantages. We can use the resources of the group and the experience of traditional manufacturing to take a different path,” said An Conghui, CEO of Geely Intelligent Technology, when the JiKe brand was established.
Cao He predicts that traditional car companies have too large of a market value, and valuation is difficult to drive, making it hard to achieve phenomenal growth. And companies such as NIO and XPeng have already overdrafted their stock price increases before the year, and it’s difficult to return to their high points from before the year.
Turning around an elephant, traditional car companies’ new energy market value pulling ability may be difficult to replicate the myths of “Tesla’s” several tens of times. How to compete for the right to speak in the new energy market, achieve software charges and iterations, is the most practical dream of “the masses”.
This article is a translation by ChatGPT of a Chinese report from 42HOW. If you have any questions about it, please email bd@42how.com.