Volkswagen’s 2025 Vision: Leading the Green and Digital Revolution

Volkswagen Group, one of the world’s largest automakers, launched a major strategic transformation initiative in 2016 called “Together – Strategy 2025” to address disruptions in the automotive industry and position itself for future success. This was followed by an enhanced “ACCELERATE” strategy in 2021 to further accelerate the pace of transformation.

Key Drivers

1. Emissions scandal fallout: VW was reeling from the 2015 diesel emissions cheating scandal that severely damaged its reputation and finances. A strategic overhaul was needed to rebuild trust and reorient the company.
2. Industry disruption: The automotive industry was being disrupted by trends like electrification, autonomous driving, shared mobility, and digitalisation. VW needed to adapt to remain competitive.
3. Regulatory pressure: Tightening emissions regulations, especially in Europe, necessitated a shift towards electric vehicles and lower carbon footprint.
4. New competitors: Tech companies and EV startups were entering the auto industry, threatening traditional automakers.
5. Changing consumer preferences: Growing demand for EVs, digital features, and mobility services required new products and business models.

Volkswagen Strategy Overview

Together – Strategy 2025 (launched 2016)

Vision: To become a world-leading provider of sustainable mobility

Volkswagen Group’s Together – Strategy 2025 set forth an ambitious vision to transform the company into a global leader in sustainable mobility. This vision represented a significant shift from the company’s traditional focus on conventional internal combustion engine vehicles. It acknowledged the growing importance of sustainability in the automotive industry and positioned Volkswagen to address emerging consumer preferences and regulatory pressures. By placing sustainability at the core of its strategy, Volkswagen aimed to not only adapt to changing market conditions but also to lead the industry’s transition towards more environmentally friendly transportation solutions.

Key goals:

1. Transform core automotive business

The transformation of Volkswagen’s core automotive business was a central pillar of the Together – Strategy 2025. This goal involved a comprehensive overhaul of the company’s product portfolio, manufacturing processes, and business models. Key aspects included accelerating the development and production of electric vehicles, improving the efficiency of internal combustion engine vehicles, and integrating digital technologies across the value chain. The strategy also emphasised the need to enhance the company’s agility and innovation capabilities to respond more effectively to rapidly changing market demands and technological advancements.

2. Build new mobility solutions business

Recognising the shifting landscape of transportation, Volkswagen set out to build a new mobility solutions business as part of its strategy. This goal aimed to expand the company’s offerings beyond traditional vehicle sales and leasing. It encompassed the development of new services such as car-sharing, ride-hailing, and other mobility-as-a-service (MaaS) offerings. By diversifying into these areas, Volkswagen sought to capture new revenue streams and position itself as a comprehensive mobility provider, catering to evolving consumer preferences for flexible, on-demand transportation options.

3. Strengthen innovation and financial performance

To support its ambitious transformation, Volkswagen emphasised the need to strengthen both its innovation capabilities and financial performance. On the innovation front, the company planned to increase investments in research and development, focusing on key areas such as electrification, autonomous driving, and connectivity. This included fostering a culture of innovation across the organisation and collaborating with external partners to access cutting-edge technologies. Simultaneously, the strategy recognised the importance of maintaining strong financial performance to fund these investments. This involved initiatives to improve operational efficiency, optimise the company’s brand portfolio, and explore new revenue opportunities.

ACCELERATE Strategy (launched 2021)

Aimed to accelerate the pace of transformation

The ACCELERATE strategy, launched in 2021, built upon the foundation laid by Together – Strategy 2025 but aimed to significantly accelerate the pace of Volkswagen’s transformation. This new strategy was developed in response to the rapidly evolving automotive landscape, intensifying competition, and the urgent need to address climate change. ACCELERATE recognised that the industry was changing faster than initially anticipated and that Volkswagen needed to move more quickly to maintain its competitive position and achieve its long-term goals.

Key focus areas:

1. Faster shift to electric vehicles

A cornerstone of the ACCELERATE strategy was to dramatically speed up Volkswagen’s transition to electric vehicles. This included setting more ambitious targets for EV sales, accelerating the development and launch of new electric models, and rapidly scaling up EV production capacity. The strategy also emphasised the need to continue improving battery technology and reducing the cost of EVs to make them more accessible to a broader range of consumers. By focusing on a faster shift to EVs, Volkswagen aimed to establish itself as a leader in the electric mobility market and meet increasingly stringent emissions regulations.

2. Develop software competencies

Recognising software as a key differentiator in the automotive industry’s future, ACCELERATE placed a strong emphasis on developing Volkswagen’s software competencies. This involved significant investments in software development capabilities, including the expansion of the company’s in-house software unit, CARIAD. The goal was to increase the proportion of software developed in-house, giving Volkswagen greater control over the user experience and enabling faster innovation cycles. This focus on software also aimed to position Volkswagen’s vehicles as digital platforms, capable of continuous improvement through over-the-air updates and new feature additions.

3. Autonomous driving

Autonomous driving technology was identified as a critical area for future growth and innovation in the ACCELERATE strategy. Volkswagen committed to intensifying its efforts in this field, both through internal development and strategic partnerships. The strategy outlined plans to gradually introduce autonomous driving features across the company’s vehicle lineup, starting with advanced driver assistance systems and progressing towards fully autonomous vehicles. By investing in this technology, Volkswagen aimed to enhance vehicle safety, improve the driving experience, and open up new mobility possibilities for its customers.

4. New data-based business models

The ACCELERATE strategy recognised the growing importance of data in the automotive industry and sought to capitalise on this trend by developing new data-based business models. This included exploring opportunities to monetise vehicle data, offer personalised services to customers, and create new revenue streams beyond traditional vehicle sales. Volkswagen aimed to leverage its growing fleet of connected vehicles to gather valuable data insights, which could be used to improve its products and services, as well as to create entirely new offerings. This focus on data-driven business models represented a significant shift in Volkswagen’s approach, positioning the company to compete more effectively in the digital age.

Key Strategic Initiatives

Electrification Push

Volkswagen has made a massive commitment to electrification, pledging €35 billion in investments in electric vehicles (EVs) by 2025. This substantial financial commitment underscores the company’s determination to be a leader in the EV market. The ambitious goal is to have 70% of its sales in Europe and 50% in the US and China be electric vehicles by 2030. This represents a dramatic shift in Volkswagen’s product mix and demonstrates the company’s belief that EVs are the future of the automotive industry.

To support this electrification strategy, Volkswagen has developed the modular electric drive matrix (MEB) platform. This standardised EV platform allows for efficient and cost-effective production of various electric models across the company’s brands. The MEB platform has already been utilised to launch the ID family of EVs, which includes models like the ID.3 hatchback and ID.4 SUV. These vehicles represent Volkswagen’s new generation of purpose-built electric cars and are crucial to achieving the company’s ambitious EV sales targets.

Software & Digitalisation

Recognising the growing importance of software in the automotive industry, Volkswagen has created CARIAD, a dedicated software unit. CARIAD’s mission is to develop in-house software capabilities, with the goal of having 60% of vehicle software developed internally by 2025. This shift towards in-house software development allows Volkswagen to have greater control over the user experience and functionality of its vehicles.

In addition to vehicle software, Volkswagen is also focusing on developing new digital services and revenue streams. These could include features like over-the-air updates, in-car entertainment systems, and connected car services. By expanding its digital offerings, Volkswagen aims to create new sources of recurring revenue and strengthen customer relationships beyond the initial vehicle purchase.

Autonomous Driving

Volkswagen has partnered with Argo AI, a leading autonomous vehicle technology company, to develop self-driving capabilities. This partnership allows Volkswagen to leverage Argo AI’s expertise in artificial intelligence and robotics, accelerating the development of autonomous driving features for its vehicles.

The company has set an ambitious goal to make autonomous driving widely available by 2030. This includes not only personal vehicles but also potential applications in ride-sharing and commercial transportation. By investing in autonomous technology, Volkswagen is positioning itself to be competitive in what it sees as a key area of future mobility.

New Mobility Services

Recognising that the future of transportation may extend beyond traditional car ownership, Volkswagen has created MOIA, a ride-pooling service. MOIA operates in select cities, offering shared rides in electric vehicles. This service allows Volkswagen to gain experience in the mobility-as-a-service sector and potentially capture market share in urban areas where car ownership is declining.

Volkswagen has also invested in Ionity, a high-power charging network for electric vehicles. By supporting the development of charging infrastructure, Volkswagen is working to address one of the key barriers to EV adoption and support its overall electrification strategy.

Operational Excellence

To fund its ambitious transformation plans, Volkswagen has implemented cost reduction and efficiency programs across its brands. The company has targeted €3 billion in annual savings through measures such as streamlining production processes, optimising its supply chain, and reducing complexity in its vehicle lineup.

These operational excellence initiatives are crucial for maintaining profitability as the company invests heavily in new technologies and transitions its product mix towards electric vehicles, which currently have lower profit margins than traditional combustion engine vehicles.

Cultural Transformation

Volkswagen has recognised the need for cultural change to support its strategic initiatives. The company has introduced new leadership principles and an integrity program, aiming to foster a more open, collaborative, and ethical corporate culture. This is particularly important given the company’s past issues with the diesel emissions scandal.

Additionally, Volkswagen has launched diversity initiatives and is promoting new ways of working. This includes efforts to increase the number of women in management positions and the adoption of more flexible work arrangements. These cultural changes are designed to help Volkswagen attract and retain top talent, particularly in competitive fields like software development and electrification.

Portfolio Optimisation

As part of its strategic realignment, Volkswagen is focusing on its core brands: Volkswagen, Audi, and Porsche. These brands represent the bulk of the company’s sales and profitability, and are seen as having the strongest growth potential in the evolving automotive market.

At the same time, Volkswagen has been divesting non-core assets. For example, the company sold MAN Energy Solutions, which produces large-scale engines for ships and power plants. This divestment allows Volkswagen to concentrate its resources on its core automotive business and future mobility technologies.

Regional Strategies

Volkswagen has tailored its strategy to address the specific needs and opportunities of key markets. In China, the world’s largest automotive market, Volkswagen has increased its local R&D capabilities and EV investments. This includes developing China-specific electric vehicle models and partnering with local technology companies.

In North America, Volkswagen is investing in new EV production facilities. This includes retooling existing plants and building new ones dedicated to electric vehicle production. By localising EV production, Volkswagen aims to reduce costs, shorten supply chains, and better tailor its products to the North American market.

Implementation and Results

Rapid Acceleration of EV Development and Launches Across Brands

Volkswagen Group has made significant strides in accelerating its electric vehicle (EV) development and launches across its multiple brands. The company has invested heavily in research and development, retooling factories, and training staff to support this rapid transition. By leveraging its economies of scale and shared technology platforms, Volkswagen has been able to roll out new EV models at an impressive pace. This includes vehicles like the ID.3 and ID.4 under the Volkswagen brand, the e-tron lineup from Audi, and the Taycan from Porsche. The accelerated development has allowed the company to offer EVs across various segments and price points, catering to a wide range of consumer preferences.

Growing EV Sales: 452,900 EVs Sold in 2021, Up 96% Year-over-Year

Volkswagen Group’s efforts in EV development have translated into substantial sales growth. In 2021, the company sold 452,900 electric vehicles, representing a remarkable 96% increase compared to the previous year. This growth outpaced the overall EV market and demonstrated the strong consumer reception of Volkswagen’s electric offerings. The sales figures also indicate that the company’s strategy of offering EVs across multiple brands and segments is paying off, allowing it to capture a significant share of the growing EV market. This rapid growth in EV sales is a crucial metric for Volkswagen as it seeks to transition away from internal combustion engine vehicles and establish itself as a leader in the electric mobility space.

Established Software Unit CARIAD with 5,000 Developers

Recognising the increasing importance of software in modern vehicles, Volkswagen Group established CARIAD, a dedicated software unit. This move represents a significant shift in the company’s approach to vehicle development, acknowledging that software is becoming as crucial as hardware in the automotive industry. CARIAD employs 5,000 developers, a clear indication of Volkswagen’s commitment to this area. The unit is responsible for developing a unified software platform that will be used across the group’s various brands, enabling more efficient development of new features and technologies. This in-house software development capability is expected to give Volkswagen a competitive edge in areas such as vehicle connectivity, autonomous driving, and over-the-air updates.

Operational Savings of €2.6 Billion Achieved by 2020

As part of its transformation strategy, Volkswagen Group implemented various cost-saving measures across its operations. By 2020, these efforts resulted in operational savings of €2.6 billion. These savings were achieved through a combination of initiatives, including streamlining production processes, optimising the supply chain, and reducing administrative overhead. The cost reductions have been crucial in freeing up resources for investment in new technologies and EV development. Moreover, these savings have helped to offset some of the high costs associated with the company’s transition to electric mobility, demonstrating Volkswagen’s ability to manage its transformation while maintaining financial discipline.

Increased R&D Spending to €14.1 Billion in 2020

Volkswagen Group significantly ramped up its research and development spending, reaching €14.1 billion in 2020. This increased investment reflects the company’s commitment to innovation and its recognition of the need to develop new technologies to remain competitive in the rapidly evolving automotive industry. The R&D spending has been directed towards key areas such as electric powertrains, battery technology, autonomous driving systems, and connected car technologies. By allocating substantial resources to R&D, Volkswagen aims to stay at the forefront of technological advancements and ensure that it can offer cutting-edge products to its customers across all its brands.

Stock Price Recovery: From Low of €92 in 2015 to €150+ in 2021

Volkswagen’s stock price has shown a strong recovery since its low point in 2015, which was largely due to the emissions scandal. By 2021, the stock price had climbed to over €150, representing a significant increase in shareholder value. This recovery reflects growing investor confidence in Volkswagen’s transformation strategy and its ability to navigate the shift to electric mobility. The stock price improvement also indicates that the market is recognising the potential long-term value of Volkswagen’s investments in new technologies and its efforts to position itself as a leader in the future automotive landscape.

Challenges

High Upfront Investments Impacting Near-Term Profitability

Volkswagen’s ambitious transformation strategy requires substantial upfront investments, which are putting pressure on the company’s near-term profitability. The development of new electric vehicle platforms, battery technologies, and software systems necessitates significant capital expenditure. While these investments are crucial for long-term success, they can negatively impact short-term financial performance. This creates a challenge for Volkswagen in balancing the need for future-oriented investments with maintaining attractive financial metrics for investors. The company must carefully manage its resources and communicate its long-term vision effectively to ensure continued support from shareholders during this transitional period.

Execution Risks in Software Development

As Volkswagen shifts towards becoming a software-driven company, it faces significant execution risks in this new area of focus. Developing complex software systems for vehicles is fundamentally different from traditional automotive engineering, requiring new skills, processes, and organisational structures. The company’s ambitious goals for its CARIAD software unit, including creating a unified software platform for all its brands, carry the risk of delays, cost overruns, or functionality issues. Successfully managing these risks is crucial for Volkswagen to deliver on its promises of advanced vehicle connectivity and autonomous driving features.

Legacy ICE Business Still Dominant but Declining

While Volkswagen is making significant strides in electric vehicle sales, its legacy internal combustion engine (ICE) business still accounts for the majority of its revenue and profits. However, this traditional business is facing declining demand in many markets due to shifting consumer preferences and tightening emissions regulations. Managing this decline while simultaneously ramping up EV production presents a complex challenge. Volkswagen must carefully balance resource allocation between supporting its still-profitable ICE business and investing in its future EV operations. This transition period requires delicate management to maintain overall profitability and market share.

Continued Fallout and Costs from Emissions Scandal

The 2015 emissions scandal continues to have repercussions for Volkswagen, both financially and in terms of reputation. The company has faced billions in fines, settlements, and recall costs, which have impacted its financial performance. Moreover, rebuilding trust with consumers and regulators remains an ongoing process. This legacy issue adds an additional layer of complexity to Volkswagen’s transformation efforts, as the company must not only focus on its future strategy but also continue to address the fallout from past mistakes.

Chip Shortage Impacting Production

Like many automakers, Volkswagen has been significantly affected by the global semiconductor shortage. This supply chain disruption has forced the company to reduce production at various plants, impacting its ability to meet demand for both its traditional and electric vehicles. The chip shortage highlights the vulnerabilities in the automotive supply chain and presents a challenge for Volkswagen in managing its production schedules and inventory. Addressing this issue requires developing more resilient supply chains and potentially exploring vertical integration in critical component areas.

Key Learnings

Importance of Long-Term Strategic Vision to Drive Transformation

Volkswagen’s experience underscores the critical importance of having a clear, long-term strategic vision to drive organisational transformation. The company’s commitment to electric mobility and software-driven vehicles has provided a North Star for decision-making across the organisation. This overarching vision has enabled Volkswagen to align its resources, investments, and organisational structure towards a common goal, despite the challenges and uncertainties involved in such a significant transformation. The clarity of vision has also helped in communicating the company’s direction to stakeholders, including employees, investors, and customers, fostering support for the changes being implemented.

Need for Cultural Change Alongside Strategic Initiatives

The transformation at Volkswagen goes beyond just technological and product changes; it requires a fundamental shift in organisational culture. Moving from a traditional automotive manufacturer to a technology-driven mobility provider necessitates new ways of thinking, working, and innovating. Volkswagen has learned that successful implementation of its strategy requires fostering a more agile, innovative, and collaborative culture across the organisation. This includes embracing new working methodologies, encouraging cross-functional collaboration, and developing a workforce with diverse skills that span automotive engineering, software development, and digital services.

Balancing Legacy Business with Future-Focused Investments

One of the key learnings for Volkswagen has been the need to carefully balance its legacy internal combustion engine business with investments in future technologies. The company has had to navigate the challenge of maintaining profitability and market share in its traditional business while simultaneously allocating significant resources to electric vehicle development and other future-focused initiatives. This balancing act requires careful financial management, strategic resource allocation, and the ability to make tough decisions about which areas of the business to prioritise. Volkswagen’s experience highlights the importance of managing this transition in a way that doesn’t compromise the company’s financial stability or its ability to invest in the future.

Developing New Competencies (Software, Batteries) is Critical

Volkswagen’s transformation journey has underscored the critical importance of developing new competencies, particularly in areas like software development and battery technology. The company recognised that success in the future automotive landscape would require more than just traditional automotive engineering skills. This realisation led to significant investments in building in-house capabilities, such as the creation of the CARIAD software unit and investments in battery research and production. The process of developing these new competencies has been challenging and time-consuming, but it’s proving to be essential for Volkswagen’s long-term competitiveness in the evolving automotive industry.

Partnerships Key for New Technologies Like Autonomous Driving

As Volkswagen ventures into new technological territories, particularly in areas like autonomous driving, the company has learned the value of strategic partnerships. Developing these complex technologies entirely in-house would be prohibitively expensive and time-consuming. Instead, Volkswagen has engaged in various partnerships and collaborations with technology companies, startups, and other automakers to accelerate its development efforts and share risks. These partnerships have allowed Volkswagen to access specialised expertise and technologies, enabling faster progress in cutting-edge areas while managing the associated costs and risks.

Regional Strategies Needed to Address Market-Specific Needs

Volkswagen’s global presence has highlighted the importance of tailoring strategies to address market-specific needs and regulations. The company has learned that a one-size-fits-all approach is not effective given the varying pace of EV adoption, differing regulatory environments, and diverse consumer preferences across regions. As a result, Volkswagen has developed region-specific strategies, particularly for key markets like China, Europe, and North America. This approach allows the company to adapt its product offerings, marketing strategies, and investment priorities to align with local market conditions, maximising its chances of success in each region.

Volkswagen Group’s transformation journey demonstrates how a legacy automaker can reinvent itself to address industry disruption and position for future success. While challenges remain, VW has made significant progress in pivoting towards electrification, software, and new mobility solutions. The company’s ability to execute on its strategic initiatives while managing its traditional business will be key to long-term success in the evolving automotive landscape.

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