Second Chance VW Turns to Electric to Regain Momentum in the U.S.

The diesel scandal cost Volkswagen dearly in the U.S. But as part of its punishment, the company was required to developed a network of charging stations for electric vehicles. VW is now doubling down on the strategy.
The Volkswagen plant in Chattanooga, Tennessee.

The Volkswagen plant in Chattanooga, Tennessee.

Foto: Erik S. Lesser/ picture alliance / dpa

The test laboratory is hidden away in an industrial park in Reston, Virginia, not far from the Washington, D.C., airport. Inside a corrugated metal structure, four men are sitting at folding tables and staring into their laptops. Nothing seems to disturb them as they work, and they don’t even look up when the roller door at the entrance rattles open and a yellow, electric Chevrolet drives in.

The car stops in front of a row of white metal posts out of which green light is shining, thick, black cables hanging down at their sides. They're charging stations for all different brands of electric cars, from Tesla to Porsche to Chevrolet, and thousands of them are to ultimately be set up at parking lots and highway rest stops across the United States.

The man behind the wheel of the Chevrolet is named Giovanni Palazzo, and he is the head of this vast project, the name of which is mounted in black lettering on the back wall of the warehouse: "Electrify America.” "We want to make the switch to electric cars as easy as possible,” he says. "We want e-mobility to finally become reality in the U.S.”

There is nothing in the building to indicate who is behind the multibillion-dollar project. The U.S. government? One of the tech companies based in Silicon Valley? Nope. It's an automobile producer from Germany: Volkswagen. And the company is pursuing the plan rather quietly. After all, Electrify America is anything but a showcase project for VW. It’s a punishment, part of the $20 billion settlement that VW agreed to with the American authorities following Dieselgate.

It was here in America where the diesel fraud began and where VW engineers began installing the fraudulent software into vehicles in 2007 to manipulate emissions values. To make sure that such a thing doesn’t happen again, the company was made to pay a hefty fine. And it was commanded to assist with the expansion of electric mobility in the U.S.

A Key Part of the Sales Pitch

Ironically, it is precisely this penalty that could help VW make a comeback in the States. The company no longer sells any new diesel cars at all in the U.S., instead focusing on electric  cars in the world’s second-largest automobile market (after China), with the clear goal of becoming the global leader.

The network of charging stations is a key part of the sales pitch to potential new customers. Indeed, when VW introduces its electric cars to the market, the charging network will already be sizeable. "It allows us to calm customers’ fears about range,” says Scott Keogh, head of VW in the U.S.

Without coercion from the American authorities, it seems likely that VW would not have acted so quickly. In Germany, automobile manufacturers dawdled for quite some time  before they finally began investing their own money in a charging station network. By the time BMW, Daimler, Ford and VW finally brought themselves to set up their own charging stations, a U.S. rival had already set up 5,000 of them around the world: Tesla. No producer is currently selling as many electric vehicles as Tesla and creating its own infrastructure has turned out to have been worth it. And even as VW was never truly successful with its efforts to establish a foothold in the U.S., Tesla is making ever deeper inroads into the home of the German automobile industry. Plans call for some 500,000 electric cars per year to ultimately be produced in the planned Tesla factory just outside of Berlin.

The battle between VW, the largest carmaker in the world, and Tesla, the most innovative carmaker in the world, isn’t just being fought in Virginia and Brandenburg, however. It is a global confrontation. Despite his company’s continued status as the world’s largest automobile company when it comes to traditional engines, VW CEO Herbert Diess makes no secret of the fact that his company is facing a significant challenge. Volkswagen, he says, must "get significantly faster,” he recently told his top executives. Otherwise, he said, according to the text of an internal speech, the successor to the Beetle and the Golf won’t be a Volkswagen at all, but a Tesla selling a million units per year. There is, in other words, a lot at stake. Which is why Diess is mandating a dramatic shift. Concerned about being left in the dust by Tesla, Diess has decided to do all he can to catch up to and pass the electric car pioneer. The company now plans to invest the gigantic sum of 60 billion euros in electric cars and digitalization.

Success, though, will only be possible if the company is able to supply all global markets with competitive e-autos. That also includes the U.S., where VW currently has a market share of a paltry 2 percent.

Not a Good Start

For years, Volkswagen focused all of its attention on developing diesel as its showcase, environmentally friendly technology. The plan called for "Clean Diesel” to generate billions in revenues in the U.S. and Europe while company executives viewed electric as being little more than a niche product. It was only around 2010 that VW began paying more attention to the technology, hiring a young Daimler manager from Italy who had brought the electric Smart to market. Giovanni Palazzo’s job at VW was that of coming up with ideas for how the company could actually make a profit with e-mobility.

But he didn’t get off to a good start. His proposal that VW build up its own network of charging stations as a key prerequisite to getting e-mobility off the ground was met with significant skepticism from the VW powers that be. Company executives saw it as a risky business model, believing that such a network should be up to the energy suppliers.

Electrify America CEO Giovanni Palazzo: "Our open network helps us to win more users and make our business model sustainable.”

Electrify America CEO Giovanni Palazzo: "Our open network helps us to win more users and make our business model sustainable.”

Foto: Stephen Voss

Before long, though, VW began to change its tune. When the emissions scandal blew up in fall 2015, Palazzo’s standing at the company changed immediately. For the better. The Italian was at the table when VW lawyers negotiated the multibillion-dollar settlement with the U.S. authorities, as part of which the company pledged to invest $2 billion in a nationwide network of charging stations. The company is obligated to build up, operate and maintain the network until at least 2026.

In summer 2018, Palazzo was sent to the U.S. as head of Electrify America, a subsidiary wholly owned by VW. Not far from Washington, he has now built up a small e-empire. In the offices in Reston, not far from the test laboratory, some 80 people are working on expanding the charging station network - looking for promising sites, contracting construction companies and negotiating with local authorities and energy suppliers. Many of the employees have been hired away from competitors like BMW, Ford and Tesla. Only one in 10 comes from VW.

The spatial and cultural distance to the mothership back in Wolfsburg is necessary to ward off skepticism. Other charging station companies, such as Chargepoint, were initially concerned that Electrify America was out to stymie them with the help of the billions in funding from VW. The website E&E News, which focuses on energy and environmental issues, wrote in January 2019 that VW was turning "from diesel pariah into electric gorilla.”

Expanding Across America

The mood, though, has lightened significantly since then. Electrify America and Chargepoint linked their networks last year, making 30,000 charging stations available to customers of both providers. Palazzo is also in contact with the VW rival Tesla, which currently operates the largest network of "fast charge points” in the U.S. They meet up to plan joint charging stations or to negotiate with agencies and energy suppliers.

The competitors are united in the goal of expanding their charging infrastructure as rapidly as possible. But while Tesla operates its own network to the exclusion of other brands, Electrify America is obligated to observe neutrality. Electric vehicles from all manufacturers are permitted to use their fast charging stations. It is a clear advantage, Palazzo says. "Our open network helps us to win more users and make our business model sustainable.”

Currently, Electrify America operates around 1,800 fast chargers, but plans call for almost twice that many by the end of 2021. Should Electrify America continue to expand at the same rate, the company’s network could include around 1,600 stations by the end of 2026 with more than 7,000 charge points.

Palazzo has long since established a growth strategy that goes far beyond America and the requirements laid out by the U.S. judiciary. Since 2019, a subsidiary known as Electrify Canada has been installing charge points north of the U.S. border and Palazzo is also looking into possible expansion to South American markets, having already secured the possible brand names. But he would need more funding for such a move, money that could come from VW itself or from external investors.

The company is currently taking advantage of every opportunity to pose as an e-mobility pioneer. Whereas VW in Germany continues to deny having violated any laws, in the U.S., the company has displayed much greater remorse for Dieselgate. Including in TV ads. One of them begins with a downtrodden engineer walking through a dark building as a news anchor’s voice reports that "more details incoming involving Volkswagen and the growing scandal ...” Once the engineer reaches his office, he has an epiphany and begins designing and building an all-electric VW Bus. The tagline reads: "In the darkness, we found the light.”

A Volkswagen History

Scott Keogh, who was named head of VW in the U.S. in November 2018, is a marketing professional. He says that in America, showing contrition and offering redress tends to be well received. If you get up off the mat like the film hero Rocky, he says, you’ll be given a second chance. "We have a fantastic message, and the Americans will love it,” he says.

The white hood of a car is hanging at the entrance to the company’s U.S. headquarters in the Washington suburb of Herndon, located at 2200 Ferdinand Porsche Drive. On it is written a sentence that sounds almost like a Bible verse: "I pledge to act with honesty, high moral character and ethical behavior in all that I do.” Beneath it are employee signatures.

Keogh recalls the America of the late 1960s, when VW quickly became a cult brand. From farmers to hippies, he says, almost everyone drove a Beetle back then. As did his parents. "All of us have a Volkswagen history,” he says. In the 1990s, the brand hit another highpoint with the Jetta and Golf models. But then, VW suddenly seemed to lose its grasp of what Americans wanted. Americans increasingly switched to SUVs and Volkswagen didn’t have one on offer for quite some time.

The company also failed to develop a pickup quickly enough, despite it being one of the fastest growing segments of the U.S. car market. Sales slowed as a result and VW’s U.S. subsidiary slid into the red. Executives back in Wolfsburg were unhappy, with works council head Bernd Osterloh referring to the company’s performance in the U.S. as a "catastrophe.”

DER SPIEGEL 10/2020
Foto: cgs

The article you are reading originally appeared in German in issue 10/2020 (February 29th, 2020) of DER SPIEGEL.

Then came Dieselgate in fall 2015. Surveys conducted soon thereafter found that almost a third of consumers completely avoided the brand, much higher than the industry average of just 8 to 9 percent. Four years later, 16 percent of customers are still avoiding Volkswagen.

From a technical point of view, the company badly needed new, cleaner engine technology, while from a marketing standpoint, it had to rid itself of its bad-guy image. "If you are seen as Darth Vader in the U.S.,” says Keogh, "you won’t be able to sell any cars.”

The VW Image

With the pressure on from U.S. authorities, the company went into damage control mode. Around 1,000 people were charged with answering around 2.7 million calls from angry customers in the U.S. and VW removed around 400,000 fraudulent diesel vehicles from the market. Since then, the company has been fighting to win back market share and to improve its image.

The company now has a few SUVs in its collection and their share of sales has rocketed upward within just a few years from 15 percent to more than 50 percent. Sales have recovered somewhat, though they are still below the 2014 level, the year before the diesel scandal blew up. Keogh says that the comeback is to be completed on the back of affordable electric cars.

The company’s factory in Chattanooga, Tennessee, is currently being expanded to enable the production of electric cars and plans call for the creation of around 1,000 new jobs. That is just a fraction of the number of new jobs Tesla is planning to create in Germany, but U.S. President Donald Trump nevertheless spoke of a "big win” on Twitter.

The American judiciary has seen progress as well. In summer, VW monitor Larry Thompson – who has been keeping a close eye on the company since the middle of 2017 – will be filing his final report. He hasn’t found any significant violations of late and there are good chances that the monitoring regime will soon come to an end.

 But the carmaker is facing other challenges as well, such as finally turning a profit in North America once again. The plan is for that to happen this year, but to ensure future growth, company strategists back at headquarters in Wolfsburg are considering working more closely together with a U.S. manufacturer. VW already cooperates with Ford when it comes to commercial vehicles and automated driving systems, but that alliance could be further expanded in coming years.

Indeed, company sources even say that VW is even considering selling cars in the U.S. under the Ford brand. In return, the American company could build pickups for VW. Ford’s expansive network of dealerships is also attractive to VW.

And should that happen, it would represent a serious challenge to Tesla, right in its own backyard.