Volkswagen gets reality check after Tesla's week of milestones

It's been a sobering week for Herbert Diess' electric vehicle ambitions.

While Tesla (TSLA.O) joined the trillion-dollar club, received a landmark order from Hertz and set a new sales record in Europe, the Volkswagen (VOWG_p.DE) chief presented a sales and deliveries outlook cut and a drop in quarterly profits that drove home one point: dethroning Elon Musk as the king of electric vehicles (EV) has got a lot harder.

"The recent achievements of Tesla are sending a clear message," Diess told analysts during a call on third-quarter results on Thursday that ended up being mainly about Tesla.

"We have to prepare for a new phase of competition."

A long-time admirer of Musk, Diess this year cranked up the pressure and outlined plans - including setting up six large battery factories in Europe - aimed at overtaking VW's U.S. rival as the world's top EV seller by 2025.

But a chronic semiconductor shortage has slowed Volkswagen's progress, laying bare the disadvantage volume car makers have compared with luxury rivals that sell fewer vehicles.

And with Tesla worth almost eight times as much as VW while selling just 5% of the cars, and its Model 3 becoming the first-ever EV to lead monthly European sales, at this stage it's more about keeping up, not catching up.

"They're gapping away in terms of their growth margins. They seem to have a structurally better access to chips. They seem to have a structurally better access to batteries," Patrick Hummel, head of European and U.S. Auto & Mobility Research at UBS, said during the call with Diess.

To make matters worse, Musk will soon start producing cars at Tesla's state-of-the-art plant in Gruenheide near Berlin, taking the battle for global car dominance to Germany, where some of the first automobiles were invented.

Diess, 63, who has steered the carmaker out of its Dieselgate emissions cheating scandal, said this will force local heavyweights to significantly raise their game to stop falling further behind.

"Tesla Gruenheide is for us for sure a new reference, setting new benchmarks when it comes to speed, productivity, also lean management and we have to adjust ourselves to that," he said during a call with reporters.

KEEP YOUR FRIENDS CLOSE, BUT YOUR ENEMIES CLOSER

Diess, who years ago got an offer to lead Tesla, has repeatedly singled out Musk's success at the EV pioneer which has disrupted the auto industry's established ways and whose $1 trillion valuation dwarfs that of Volkswagen.

Even though Volkswagen's shares are up 28% so far this year, its current valuation of around 121 billion euros ($141 billion) is a long way from the 200 billion Diess believes the company, which includes luxury brands Porsche and Audi, is worth. 

Diess, who became Volkswagen's CEO in 2018, even invited Musk to speak to his managers this month, seen as a move to put pressure on senior leadership to move more quickly to catch up with the U.S. carmaker. 

A central part of that push will be Volkswagen's Trinity project, under which the carmaker wants to build a flagship EV sedan at its Wolfsburg plant from 2025/26 and turn the factory into a challenger to Tesla's Gruenheide site.

This plan includes cutting the time it takes to assemble EVs to about 10 hours, Volkswagen Chief Financial Officer Arno Antlitz told Reuters, about the same time it takes Tesla to build its Model 3.

It's also clear that this will mean fewer jobs, which carries the risk of lengthy and painful battles with labour representatives, who traditionally have wielded significant power at the world's second biggest carmaker.

"We have to prepare manufacturing for much reduced labour in some of the lines. We have to prepare for less complexity, for more speed, line speed," Diess said.

Earlier this week, Volkswagen's new labour boss took Diess to task for being too focused on investors and not invested enough in the workforce, which is concerned that the EV switch will cost tens of thousands of jobs. 

CFO Antlitz said that even though both management and workers may agree on the need to overhaul Wolfsburg he acknowledged that finding common ground could be challenging.

"Of course there's the question, as usual, on 'how do we get there' but I'm convinced that we share this same vision with the works council."

When asked for comment, a spokesperson for Diess referred to his remarks made on Thursday. Spokespeople for Tesla in Germany were not immediately available for comment.