Who would have thought that just a few years ago: A paradigm shift is taking place in the automotive industry. Forced and apparently just in time. After more than 150 years, the combustion engine – diesel as well as petrol – has reached the end of its product cycle. This type of propulsion, which has been pampered for decades by the technology leaders in this fossil discipline and vehemently defended against all rational criticism (environmental pollution), must give way to a more contemporary alternative: the battery-powered electric motor. (Whether the fuel cell as an energy source would not ultimately be the better, because more sustainable solution, remains to be seen).

 

Tesla’s technological edge

Tesla, long ridiculed, did pioneering work in this discipline and is still ahead in important technology areas. The fact that Tesla is now worth around four times as much as Volkswagen is partly based on this technological lead but is also an expression of investors’ euphoric overvaluation. By way of comparison: in 2020, Tesla produced just under 500,000 vehicles, while the VW Group produced just under 8.9 million cars (VW, Audi, Porsche, Skoda, Seat, Bentley).

The overvaluation of the other e-car manufacturers is similar. According to UBS, these new entrants – including Tesla – have a combined market share of just 2% worldwide, but their cumulative stock market value is already almost as high as that of the “traditional” suppliers with 98% market share.

Late into the full swing

With a delay, the German premium manufacturers have now also joined the e-trend and are immediately going full steam ahead in order to close the gap to the e-competitors. The VW Group wants to play in the top league in terms of electromobility and digitalisation at all costs. In terms of investment budget, the Wolfsburg company is already in first place. They want to invest around 42 billion USD for e-vehicles by 2025.

That is significantly more than the competition wants to spend in the same time: according to UBS, GM and Daimler will spend USD 28 and 27 billion respectively, Ford and Tesla around USD 22 billion each. BMW wants to spend about 18 billion USD on e-mobility and the Stellantis Group, which was formed by the merger of Fiat and PSA, is the seventh-largest carmaker and has budgeted about 12 billion USD.

 

 

Race for gigawatts

VW Group CEO Herbert Diess sees “the battery as the drive of the future” and wants to deliver seven out of ten cars of all Group brands with electric drives by 2030. VW is relying on a uniform battery cell for all models, which is expected to reduce production costs by 30% to 50%. In order to be able to achieve this ambitious goal logistically, VW wants to produce the batteries in-house – just like Daimler and other competitors. In Europe, VW plans to build six battery factories with a combined capacity of 240 gigawatt hours in the next few years, investing 1 to 1.5 billion EUR per factory.

Until now, car manufacturers have been sourcing their batteries from suppliers in Korea, Japan or China, with whom Tesla also cooperates, writes the NZZ. Many Asian battery manufacturers are now building production capacities in Europe; also literally on a gigantic scale. The Fraunhofer Institute for Systems and Innovation Research ISI in Karlsruhe estimates that between 2025 and 2030, Asian production capacities of up to 300 gigawatt hours (GWh) per year will emerge in Europe, which will be matched by announcements from European battery manufacturers of the same magnitude. According to the ISI, this means that by 2025 capacities totalling 300 to 400 GWh per year are likely to be created in Europe, and by 2030 around 500 to 600 GWh per year.

 

Ambitious targets

VW, which sees itself as the future world market leader in electric mobility, is sticking to its tried and tested modular system for traditional vehicles. So far, there are two electric kits. In addition, a completely new e-module is to be introduced around 2025. Furthermore, not least for cost reasons, the technical infrastructure for all the Group’s brands is to be standardised. The standardisation of the complex systems and applications is a huge task and only in its initial stages.

BMW, which has so far been rather timid with e-cars like the i3, is no less ambitious in its targets and wants to offer 13 fully electric models in two years. In the Munich boardroom, it is assumed that sales of e-MWs will increase by 50% on average every year until 2025. From 2030, the Mini will be the first brand in the group to be available only with electric drive. Daimler is showing the Bavarians how it’s done: Smart car from Stuttgart is already electric only.

 

The combustion engine as a discontinued model

In return, the Munich-based company is underlining its commitment to e-mobility with the announcement that it will gradually discontinue the production of combustion engines in its German factories. As early as next year, each of the four large German BMW plants will produce at least one fully electric vehicle, they say.

The centre of the BMW universe is also being upgraded for the new E-age. From the Munich main plant, where production of the e-model i4 will begin this year, the production of combustion engines is to be gradually outsourced to Austria (Steyr) and the UK (Hams Hall) by 2024. Subsequently, the main plant is to be converted at a cost of around EUR 400 million and supplemented by an assembly plant for electric drives.

 

End of an era

Similar changes are on the horizon in Stuttgart. Daimler’s main plant in the Untertürkheim district is also being trimmed for electromobility. From 2024, an electric powertrain is to be produced there for the brand with the star. The era of petrol and diesel engines is slowly coming to an end at both BMW and Daimler. New engines are unlikely to emerge. Customers should decide when the combustion engine’s last hour has come. Competitors have already made up their minds. Jaguar’s end is scheduled for 2025, Volvo’s for 2030.

 

The range is growing – the price disadvantage is disappearing

The price disadvantage of electric cars – today they are still about 30% more expensive than combustion engines – is steadily shrinking and should disappear in a few years. The sticking point are the batteries, but their capacities are constantly being improved so that the range of e-cars of currently around 300 km (depending on driving style) is continuously increasing. Correspondingly, the manufacturing costs of the batteries (currently around 150 USD per kilowatt hour) are steadily decreasing (economies of scale). According to Citigroup, they could have fallen to 100 USD by 2023, while the average range should have increased to 400 km by then.

 

The charging infrastructure is still lacking

Car manufacturers are still concerned about the meagre supply of charging points. German providers are building their own Europe-wide fast-charging network with other cooperation partners under the Ionity brand. VW is also focusing on further initiatives in Europe, the USA and China to expand the public charging infrastructure and wants to cooperate in Europe with energy suppliers such as BP, Iberdrola and Eni. BMW and Daimler tend to favour the expansion of their own charging stations in Europe.

 

The crux with the operating systems

Like the heart (the battery), the brain of an electric car (the operating system) will be more complex than that of its piston engine predecessor in order to integrate all services (internet, navigation, autonomous driving, voice control, etc.) – and to update all options in a single operation with a possible update via the internet. Inevitably, the manufacturers must also see themselves as software companies and either develop the corresponding operating systems themselves at great expense and effort (which is not possible overnight) or buy them in (which creates dependencies). Just like with the batteries.

Here, too, Tesla sets the standard. While the established manufacturers are just starting to programme powerful operating systems for their vehicles, Tesla is already earning a lot of money with them. Cooperations could help – with competitors or with Google or Apple. The problem is that if you lean too closely on the big players from Silicon Valley, you risk losing control over your own customer data.

So VW, Daimler, BMW and Co. develop their basic systems themselves. At a cost of billions and time. Since 2020, VW has even set up a complete software company, Cariad (formerly Car.Software), where by the end of 2025 around 15,000 employees worldwide will be taking care of the start of a new digital age in the company’s cars. VW plans to invest at least 7 billion EUR in this.

 

A daunting task

In the future, cars must be able to do what smartphones can already do today, for example receive updates via the Internet, Over the Air (OTA), as this is called in IT jargon. With such OTA updates, one can save the one or other recall when a software error has to be corrected. Tesla, for example, not only corrects programme errors via OTA, but also sells software updates very successfully, for which customers are willing to pay thousands of dollars.

 

Control unit confusion at the competition

Tesla does this so well because all of its vehicles are designed around a single operating system. In the vehicles of the established carmakers, it works the other way round and is much more complicated. Here, up to 120 different control units in the car, each with different programming languages, ensure that what the driver wants to happen happens at any given moment: raising the window, listening to the radio, assisting the steering, increasing the braking force, automatically maintaining distance or speed, etc.

This is where the established car industry has to catch up with Tesla in terms of programming. Such a complex programming language mess cannot be untangled by an OTA update. The most important step on the way to a uniform operating system is therefore completely new vehicle electronics. Instead of many individual control units, a few central computers must do the work – and in a uniform programming language. The car computers of the new generation also need new chips for fast, trouble-free, energy-efficient and flexible processing of the enormous amounts of data, which must be much more powerful than those installed so far.

 

The future begins

All this takes time. But slowly, the first vehicles from the established manufacturers are rolling off the production line with at least partially OTA-enabled electronics. BMW has already been installing its BMW OS 7 operating system in its fleet of new cars since 2018 and says it can already update every line of software in the vehicle. Daimler’s own development, the MB.OS operating system, is scheduled for market launch in 2024. The flagship makes the start. The software of the new S-Class is to be able to be constantly improved by update in the course of its life.

According to Spiegel, the VW operating system will be used in an Audi for the first time in 2024. Like BMW, Daimler and Tesla, the company is relying on a Linux-based basic architecture because it offers the highest performance. VW is also cooperating with Microsoft to build an automotive cloud.


Manred Kröller
Financial journalist

 

 

This post has been translated automatically

 

 

Subscribe to our newsletter to never miss any new posts.