Sunday May 30th 2021
With volts-steam ahead
VW wants to make it to the top with chips and batteries
From Helmut Becker
Volkswagen is increasingly trying to be self-sufficient in the manufacture of its e-cars. Is that a good role model? Do-it-yourself is actually economically Stone Age – it costs more above all. But carmakers have no other choice.
It is always amazing how topics that moved the minds of learned economists and entrepreneurs a hundred years ago keep reappearing in the specifications of the automotive industry. Today, on the one hand, a – almost ideological – religious war is raging over the future of a climate-friendly type of mobility: Continue with combustion engines as before, but with non-fossil, “green” fuels such as hydrogen or e-fuels. Or with electric cars, preferably only with battery-based electricity (BEV) or electrified as a plug-in hybrid (PHEV). This religious war already existed at the beginning of the last century, when motorization was at the beginning: Benz combustion-powered carriages versus electric vehicles. Thanks to his spark plug, Robert Bosch decided in favor of the combustion engine.
Today the question arises again: What has the future: “Green” combustion engines with non-fossil fuel or e-cars with green electricity? But there is another question that needs clarification: What do I produce as an economy or a company myself, what do I buy from outside because it is cheaper and better?
Keyword: correct vertical integration
For the national economies, economist David Ricardo gave the decisive answer with his model of comparative cost advantages. Assuming free, liberal foreign trade between peoples, Ricardo showed that it makes sense, for example, to produce cloth in England and wine in Portugal – and not the other way around or both at the same time.
The same problem arose with the increasing division of labor in industry with the question of the “correct” vertical range of manufacture: How much should or must a company do itself? How much should it buy from outside as external added value? What is the commercial optimum? As a side note: Trumpism is not included in this Ricardo model. The theorem of the comparative cost advantages only works with free, politically unhindered world trade.
Existential Problems?
For the German auto industry, which is extremely dependent on foreign trade and with its focus on combustion engines, the problems became existential. The main question to be decided was: electromobility yes or no? After much hesitation, German manufacturers – and the rest of the global auto industry – have now fully jumped on the electrification train that IT genius Elon Musk set on the rails in 2010. For the German combustion world champions, who are used to success, initially a marginal phenomenon, then with the increasing market success of the tiny electric Tesla and since the massive environmental criticism of fossil combustion cars, a shock that triggered hectic activities. Because climate change, with the public condemnation of all CO2 emissions, has radically sidelined combustion technology, although fossil fuels are not responsible for the exhaust gases, but rather the engines.
Suddenly electromobility was in demand and politically highly subsidized – and the German auto industry was left empty-handed, apart from a few tentative attempts by BMW with the i3 and i8. The media and stock exchanges already saw the end of the venerable German automobile routes with their high-tech combustion technology.
Better than the rest?
A fundamental mistake! The German carmakers have launched a technology-electric offensive of unprecedented proportions, discovered the Chinese market and expanded its breadth and depth in terms of technology. Overall, they are – Tesla or not – more competitive today than ever before. Rising world market shares despite increasing Chinese competition are proof of this. At the end of 2021, they will be offering around 150 different electric models in all shades and in all segments. In Europe they are the market leader, in Germany every fourth new car is now electric, more than in the US market eight times larger.
As a result, it can be said that the German auto industry has never been as technologically strong as it is today! It masters everything: Gaps, electronics, combustion technology solo or in combination with electric drive (PHEV), electric drive solo (BEV). It is at home in all markets in the world. The combustion technology has not been written off either, remaining doubts remain about the sustainability of electromobility. Battery innovations on the one hand or synthetic fuels will tip the scales. And it has a leading position in the largest world market for automobiles: China.
“Self-catering” VW
The second question of the right vertical range of manufacture has been particularly acute for the German automotive industry since battery-based electric cars have played a role in the future viability of the industry. German car engineers can build excellent drives and motors, the construction of high-performance battery cells along with electronic control of the entire handling is not part of their know-how repertoire. Following Ricardo’s wise knowledge, politicians did not initially see the need to implant battery production in Germany.
Buying batteries at reasonable prices in Asia, which had proven itself in other electronic devices, has long seemed the most sensible solution. Until, with increasing dependency on Asian battery know-how and politically growing supply risks in covering the enormous battery requirements for the planned expansion of electromobility, politics and business began to rethink. Ricardo went off board, do-it-yourself and Co. took over the helm.
This is also the case with the German electric car lighthouse Volkswagen. VW tries to be “self-sufficient” with its own battery factories; the other German premium manufacturers are pursuing similar, albeit smaller, plans. VW has set itself the goal of making 70 percent of its European sales with electric cars by 2030, and is planning to build six Giga battery factories, each with a battery kit capacity of up to 500,000 electric cars, and is investing 40 billion euros for this.
In-house chip development is also planned. In addition to the software for self-driving cars, Volkswagen also wants to develop the necessary high-performance chips in-house. This harbors dangers because the return to self-sufficiency is Stone Age and means higher costs for companies and a loss of prosperity for society. But the economist as well as VW have no other choice, because the risks of being permanently cut off overnight from the supply of existential parts such as battery cells for electric cars are diminishing; of both the company and the economy as a whole. Do-it-yourself minimizes risk, but costs more money.
Economics was called “Political Economy” in its beginnings. The trend in industry towards a return to greater vertical integration for reasons of political risk shows that the venerable theorems of economics are also being sidelined in foreign trade theory. In the monetary and national debt theory they are already.
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