Tesla overtakes German automakers in global EV race

(Bloomberg) – German automakers have announced bold plans over the past few years to switch to electric cars and challenge the dominance of Tesla Inc. Instead, they are only falling behind.

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Tesla delivered 889,015 cars in the first half of this year, more electric vehicles than Volkswagen AG, BMW AG, Mercedes-Benz Group AG and Porsche AG sold together.

The Germans are struggling as software issues delay key models and contribute to falling sales in China, their biggest market, where Tesla and local champion BYD Co. have taken the lead. They even play second fiddle in their home market, where Tesla remains the leading brand of electric vehicles. Investors will hear from three of the German companies this week, with Porsche releasing its quarterly results on Wednesday, followed by Mercedes and VW on Thursday.

As Tesla pushes for more volume with aggressive price cuts, it’s increasing the pressure on traditional manufacturers who are struggling to keep up. Tesla’s electric vehicle sales rose 30 percentage points faster than VW’s in the three months to June, widening its lead.

As the Germans are mired in tough talks with unions over retooling their combustion-era production sites, Tesla plans to expand its German factory and prepares to build a new plant in Mexico.

“Tesla is still miles ahead of German automakers in all major markets,” said Matthias Schmidt, an auto analyst based near Hamburg. “They’re under pressure to increase volumes to achieve the kind of economies of scale needed to make electric vehicles profitable.”

German automakers prospered in the past because they perfected the production of gasoline and diesel-powered vehicles, with hundreds of high-quality local auto parts manufacturers supplying them with gearboxes, fuel injectors and crankshafts. Now that the drums are taking over, their “Vorsprung durch Technik” has evaporated.

In Europe’s largest economy, inflationary pressures, a shortage of skilled workers and high energy prices are adding to the structural challenges posed by the switch to electric vehicles. Expectations of German automakers are at their lowest since the 2008 financial crisis, according to a survey by the Ifo Institute in Munich published this month.

Read more: Europe’s economic engine is failing

The greatest threat to the Germans is their weakened position in China. VW, BMW and Mercedes have dominated combustion car sales in the world’s biggest car market for decades, but have lately fallen behind Chinese brands that have done better at producing affordable electric vehicles with technology and software tailored to local tastes. Mercedes slashed prices in China of its flagship electric sedan, the EQS, late last year after disappointing sales.

VW, in particular, came under pressure as BYD overtook the company’s sale in China during the first quarter. Sales of electric vehicles from the German manufacturer in China fell in the first half in a market that grew by 20%.

Electric vehicles are expected to account for 90% of the Chinese market by 2030, making it urgent for Germans to accelerate more competitive electric vehicle offerings. Last month, Europe’s biggest automaker replaced Audi’s CEO, partly because it wants to halt the brand’s slide in the country.

China’s current electric vehicle leaders “will tighten their grip on the market,” HSBC analysts said in a report this month. “With the exception of Tesla, we believe they will all be Chinese electric vehicle brands.”

Read more: Tesla and BYD set the tone for rising electric vehicle sales

All is not lost. Elon Musk has left a window of opportunity open for incumbents looking to catch up, having launched his latest new passenger vehicle – the Model Y – in 2020. Tesla hasn’t redesigned the Model 3 since it went into production six years ago, although work on a refresh is underway.

BYD, meanwhile, is avoiding the U.S. market due to trade barriers, and several smaller Chinese EV startups may not survive the industry’s price war.

German companies still generate good profits by selling combustion engine models, including in China. Mercedes and BMW are not following Tesla in the high-end price segments and are still roughly doubling EV sales, year-over-year. German plans to introduce EV-focused platforms around the middle of the decade to reduce the cost of their electric cars and equip them with new technology could change the dynamic.

VW is readying a sub-£25,000 compact electric vehicle – a popular car for the electric era – just a few years from production. Europe’s biggest automaker recently beefed up its rolling five-year spending plan to 180 billion euros, more than two-thirds of which is on software and electric vehicles. Its ID.7 sedan, which will hit showrooms later this year, features an augmented reality display that streams information into the driver’s field of vision.

Read more: VW doubles China with new models to stem the slide

Mercedes will introduce an electric version of its CLA compact sedan in the United States next year to better compete with Tesla’s Model 3, according to an Automotive News report. It also electrifies the iconic G-Wagon.

BMW is betting that its “Neue Klasse” underpinnings, which are expected to arrive around 2025, will help boost sales. The manufacturer aims to halve the cost of batteries and increase autonomy and charging speed by 30% compared to current models.

“The Germans’ next-generation EV platforms could be a game-changer,” Bloomberg Intelligence analyst Michael Dean said. “That’s when you’ll see a big push from them, also in China.”

–With assistance from Monica Raymunt and Linda Lew.

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