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Elon Musk Has a Serious Rival: the TechnoKaiser

Herbert Diess’s electric-vehicle strategy might just work for Volkswagen. 

Volkswagen AG’s boss Herbert Diess is realistic about the threat posed by software-savvy and richly valued rivals such as Tesla Inc., but he’s adamant that VW can prevail. On current form, he may be right.

The German car giant has added almost 45 billion euros ($53.5 billion) of market value so far this year and its shares are at their highest since 2015, when the diesel emissions scandal abruptly steered the company down a dark road. VW’s more widely traded preferred shares have climbed 36% since the start of January, far outstripping Tesla — which has declined slightly since then, having risen more than 700% in 2020.

VW’s 125 billion-euro market capitalization is still barely a fifth of Tesla’s, and the German group’s investors still don’t ascribe full value to cash-generative premium brands like Porsche and a leading market position in China. Nevertheless, VW has the wind at its back suddenly. So what’s changed?

Hints that the valuable Porsche franchise might get a separate stock-market listing have helped, even though VW’s management gave the impression this week that it’s not an immediate priority. The rotation in equity markets away from scarcely profitable growth stocks toward those likely to benefit most from the post-pandemic recovery has also played a role. Analysts expect VW to generate a whopping 16 billion euros of operating profit this year.

As my Bloomberg News colleague Christoph Rauwald writes, another big difference is that VW has become far more adept at highlighting its hugely ambitious electric-vehicle strategy. Diess has taken Musk’s self-promotional routine, hewn off the rough edges, and thrown it back at him.

Thanks to new battery-powered models such as the VW ID3, Audi e-tron and Porsche Taycan, VW’s electric-vehicle plan has become a lot more credible. The group is already the largest seller of battery vehicles in Europe, and globally it could draw level with Tesla in electric-car sales within a couple of years.

By 2030 about half of the group’s new car sales will be electric vehicles. To meet that demand it has outlined plans to build half a dozen battery plants in Europe together with external partners. VW’s investment in early-stage battery company QuantumScape Corp. has paid off, too, at least on paper. VW booked a 1.4 billion-euro gain on the investment in its 2020 accounts.

VW still lags behind Tesla in vital areas like “over the air” vehicle software updates and autonomous driving but it has a credible plan to catch up. VW will develop its own “software stack” rather than rely on Google or any other Silicon Valley import, an effort that will cost billions of euros. If, at the end, VW is valued more like a software company than a metal basher, the money will have been well spent.

For those who fear Europe is destined to lose its industrial edge to the U.S. and China, this is very encouraging. Few could afford to take such risks but VW has 27 billion euros of net liquidity and analysts expect it to keep generating heaps more cash.

In the past VW’s heavy spending seemed to benefit its engineers more than it did investors. The company has 670,000 employees — a potential future problem given that making an electric vehicle is less labor intensive than producing one powered by a combustion engine.

The company’s sheer size can become an advantage, Diess insists: The more vehicles that incorporate its hardware and software, the more easily it can amortize those investments. In a sop to number-crunching analysts, he has promised to slash fixed costs by 5% by 2023.

Retail investors have been the ones setting the direction of the stock market lately — and may have been behind the surge in VW’s less-traded ordinary shares on Tuesday. These amateur investors respond to different cues and VW is no longer too proud to borrow some crowd-pleasing ideas from Musk.

The company held a livestreamed “Power Day” event this week to showcase its battery activities, which shamelessly copied Tesla’s battery and autonomy events. VW spoke about building a network of “gigafactories,” using Musk’s sexy terminology for battery production facilities. Though less at home with meme culture and cryptocurrencies than his rival, Diess also uses social media to push the message that VW should be valued like a tech company.

One thing he hasn’t done yet is given himself an amusing new title like the Technoking of Tesla. But if Diess keeps this up, his anointment as TechnoKaiser can’t be far off.

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