About 180 miles south of Berlin sits the small town of Zwickau, home to a sprawling Volkswagen factory—and a perfect encapsulation of the past century’s epic history. Generations of German autoworkers have built cars in the area, since the dawn of the combustion engine in the early 1900s, through the Nazi regime, the devastating Second World War, and decades of Cold War isolation from the West, when Zwickau’s auto production was a prized Communist asset in the heart of East Germany.
But step inside the Zwickau factory now and the clanging noise of robots and steel car parts is the soundtrack of a new epic drama—one that will define the $4 trillion global auto industry for decades to come: the EV revolution. Here in Volkswagen’s first all-electric car factory, the company is live-testing the strategy for its long-term growth, in which EVs will become an ever bigger part of the world’s auto market.
The question in this new battle is not whether Volkswagen can survive the world’s steady shift from the combustion engine vehicles that it began making 87 years ago; its endurance seems assured. Last year it earned a whopping $348 billion in revenues and delivered 9.24 million vehicles.
Rather, the question is whether Volkswagen can successfully pull off a transition to electric vehicles quickly and efficiently enough, as the global EV market begins to lift off in earnest and competition for EV tech and raw materials heats up among China, the U.S., and Europe. The answer could determine whether the manufacturing giant emerges a winner in this new EV age, or whether it will be outwitted and outpaced by nimble newcomers. And as more Chinese electric cars surge into global auto markets, other legacy carmakers will likely face the same dilemma.
As Volkswagen is discovering, increasing one’s odds in the contest is both complex and dizzyingly expensive, with no leeway for slow-footedness. It launched its EV strategy only in the mid-2010s, years after Tesla and China’s BYD had sold their first electric cars.
In Zwickau, Volkswagen plowed more than $1.3 billion over the past five years into turning its combustion-engine factory into the company’s first pure-EV production facility—a top-to-bottom retrofit that it now regards as its blueprint for how to transform some of Volkswagen’s other 120 plants globally. Despite the investment, Zwickau is falling short of expectations: Two years after the first EVs rolled off the assembly line, production figures are slipping, from 247,000 in 2023 to a projected 220,000 cars this year.
Even so, Volkswagen is pushing ahead with plans to increase its EV output hugely in the coming years, no matter the expense, including aiming to sell 4 million EVs in China by 2030, and for more than half of cars it sells globally to be electric by then. A lack of action, it believes, could prove far more costly.
Volkswagen’s EV plan revolves around creating and increasingly acquiring battery technology and platforms that can work across multiple models, leveraging its giant size.
“We are very committed to our strategy,” Volkswagen CEO Oliver Blume tells Fortune. Proof of that, he says, is the roughly $130 billion the company has committed to a massive EV ramp-up over the next five years, of which Zwickau is a key element. For years, many insiders questioned the need for such a mammoth investment in electrification. But that internal debate is now settled, according to Blume. “I think that electromobility is the prime technology of the future for the automotive industry,” he notes, fresh from signing a $5 billion partnership with California electric carmaker Rivian to jointly develop next-generation EV software.
The question for Volkswagen is whether its deep pockets and huge scale of production can be harnessed in the transition, or whether its sheer size will slow it down. “There is an advantage to being big, and there is a detriment to being big,” says Joe McCabe, president and CEO of AutoForecast Solutions, industry data analysts in Chester Springs, Pa. “The new producers can be like speedboats.”
The last time Fortune visited Volkswagen’s massive German auto plants, in early 2022, just that kind of “speedboat” had roared up: Tesla. Elon Musk’s spectacular growth in EV sales had turned Tesla into a leader in electric cars in both China and the U.S., virtually inventing the global EV market in little more than a decade. By 2022, Musk had his sights set on Europe, a market of 450 million people with long-held loyalty to indigenous brands like Volkswagen, BMW, and Mercedes. Adding to Volkswagen’s discomfort, Musk had broken ground on Tesla’s first European gigafactory, a three-hour drive east of Volkswagen’s iconic headquarters in Wolfsburg, Germany.
While Tesla’s factory had not yet opened at that time, its threat was already clear in Wolfsburg. Then–CEO of Volkswagen Herbert Diess told Fortune at the time that the company’s sluggish response to the EV revolution was the result of its vast size—Volkswagen employs about 680,000 people across the world, more than half of them in Germany. Diess called it “an empire” that had been lulled into feeling “rock-solid and unbeatable.”
Today that sense of invincibility has left Volkswagen, and so has Diess, whose exit in September 2022 came after tensions over his push to develop EV software from scratch. The resulting Cariad software division was plagued with glitches and delays, costing the company valuable time in rolling out electric models.
But even with new partnerships, Volkswagen, as well as Tesla, now confronts the threat from a far bigger “empire”: China. The rise of Chinese EVs has stunned lawmakers in the U.S. and Europe.
The sales of Chinese electric vehicles are still relatively small in Europe, and are largely unavailable to American buyers owing to a mix of tariffs and restrictions on some critical minerals from China.
But it is not the sales figures themselves that are spooking Western governments and auto giants like Volkswagen. It is the speed at which those figures are increasing—echoing for many Tesla’s unexpected surge into the market 15 years ago. China’s total car sales have accelerated at a mind-boggling pace, increasing more than fourfold this century, from about 6 million combustion-engine and electric vehicles in 2000 to about 26 million last year, compared with total car sales of 17 million in the U.S. and 13 million in Europe. About 14 million EVs were sold globally in 2023, of which 60% were in China, according to the International Energy Agency.
Last year, the Shenzhen producer BYD, China’s largest EV company, overtook Tesla for the first time as the world’s biggest electric-car seller, tripling its exports in just one year, in part by shipping thousands of vehicles to Europe, where it has opened sales rooms in Stockholm, Paris, and Berlin. While BYD’s Europe business represents less than 1% of its global sales, that share could increase sharply once BYD’s first European factory opens in Hungary next year. “The sales are still very low, but the quality is high, and they have a good pricing system,” Jens Katzek, head of the Automotive Cluster East Germany, a regional industry group, says of Chinese EVs. Last year, China’s EV producers sold 4.66 million vehicles globally versus Tesla’s 1.81 million and Volkswagen’s 770,000.
“There is an advantage to being big, and there is a detriment to being big. The new producers can be like speedboats.”
Joe McCabe, CEO, AutoForecast Solutions
When I arrived in Zwickau in late June, millions of Europeans were glued to their TVs, watching the European Championships—a monthlong soccer extravaganza featuring 24 countries. Few fans would have missed seeing the premier car sponsor, BYD, whose three letters were splashed across the edge of the pitches. It was a striking change from previous tournaments, when Volkswagen had been the partner. The switch stung—especially in Zwickau.
“It was really on the minds of people,” says Katzek. “People realize suddenly, there’s something from far away you’d never heard about before.”
Like the U.S. government, the EU has scrambled to try to ward off the impact of Chinese EVs, and to protect a century of carmaking prowess. After a six-month probe, it announced in June that it would impose steep tariffs on Chinese EVs starting in October, including a 17% tariff on BYD cars, on top of existing 10% import duties, and a 38% tariff on SAIC—the Shanghai carmaker with which Volkswagen formed its first Chinese joint venture when it arrived in China in 1984.
The Volkswagen group built a huge business for itself in China in the decades before those Chinese automakers took off. It has 39 auto plants in China, a workforce of more than 90,000, and an estimated 3,000 dealerships. “That’s a big network,” says Blume, who did his PhD studies in Shanghai. “We count on a strong relationship in the country.”
Even so, that relationship might not sustain sales as the country increasingly shifts to EVs. Last year, BYD overtook Volkswagen-branded cars as the top seller (of both fossil-fuel and electric cars) in China. The Chinese market is saturated with more than 100 EV companies that have slashed prices in a struggle to survive; more than 12 manufacturers shuttered production in 2023, according to a Chinese industry association. Added to that are a raft of incentives for consumers to buy Chinese-made EVs rather than fossil-fuel cars, including quicker delivery times and cheaper registration fees.
More and more, the EV factories that do survive, like BYD and its smaller competitors Nio and XPeng, produce high-end cars with state-of-the-art technology—often outshining old Western partners like Volkswagen.
That much was clear at the Beijing Auto Show in April, where 900 exhibitions drew large crowds. “The non-Chinese stands had no interest from the public or the press,” recalls Felipe Muñoz, senior global analyst for JATO Dynamics, an automotive consulting firm. “The Western carmakers were looking at how [Chinese rivals] had become so powerful so fast, and wondering what to do and why did they let this happen.”
The answer to that is complex, including perhaps that Western auto giants believed they were “unbeatable” empires, in the words of Diess. “They should have foreseen the rapid evolution of EVs in China,” says Muñoz, who argues that one problem was crafting strategy in Europe, remote from the rapid changes. “They were the leaders, and when all these shifts came, they were not ready,” he says.
Two years after the first electric cars rolled off the Zwickau assembly line, Volkswagen execs and autoworkers describe the factory’s rapid transformation as the result of their finely tuned precision planning. The production floor had made VW Golf cars for decades. Volkswagen gutted it, installing its modular electric toolkit chassis, which was built in-house and fits dozens of different car models within the group. At full capacity, the Zwickau facility can build 360,000 cars a year—about one every minute—turning out three Volkswagen and two Audi models, and one SEAT hatchback.
Yet Zwickau’s operations are far from full capacity. EV orders hover around 240,000 a year and have sunk with high inflation rates and the arrival in Europe of cheaper Chinese EVs. Worse, last December the German government halted its generous tax breaks on new EVs almost overnight, owing to the country’s budget crisis—a move recounted angrily in almost every conversation I had in Zwickau. Orders dropped almost immediately.
In half-year results in July, the company forecasted that profits on sales could fall 1% this year over last, and said it may shut its Brussels plant that produces Audi EVs, which would mark its first factory closure in 36 years. Globally, Volkswagen delivered more than 2.24 million vehicles in the second quarter—down 3.8% from the same period in 2023.
Last year, Zwickau cut one of its three eight-hour production shifts and laid off some workers on temporary contracts. “A couple of years ago we were the lighthouse of the industry,” says Marc Stephan, vice president of production in Zwickau, who spent four years at Volkswagen’s Chattanooga plant before transferring to the EV factory in 2022. “Now we are more like the seismograph of the industry.”
That is the pessimistic outlook, however—one that is not universally shared. McCabe, of AutoForecast Solutions, believes the company will ultimately emerge as an industry front-runner—and possibly the winner—since its mix of EVs and combustion-engine vehicles allows it to hedge one segment against the other, giving it a more dependable future than Tesla or BYD.
Volkswagen is also ramping up its EV technology—as evidenced by its Rivian investment—and its electrification efforts. Two years ago Volkswagen split off its battery operation as a subsidiary called PowerCo. The new unit in July signed a $130 million deal with San Jose–based QuantumScape to license next-generation solid-state EV batteries that retain 95% power for 300,000 miles. Volkswagen also adapted its 50-year-old combustion-engine plant in the west German town of Salzgitter to produce EV batteries, capable of powering about 4 million EVs a year.
“[Volkswagen] already [has] the sales channels and a significant footprint in the BEV space,” McCabe says, referring to battery-powered EVs. Based on his company’s data, he says, “if we fast-forward to 2028, we have Volkswagen taking a leadership position globally in BEVs.”
Blume hopes that prediction is correct. The strategy has shifted since he took over as CEO two years ago, from the nearly century-old auto giant steadily becoming an all-electric company to continuing to offer hundreds of options, including many fossil-fuel cars. That breadth of options is especially important in the U.S., where only about 8% of new-car sales are pure electric. “It is about … being flexible,” he says.
Few are as deeply familiar with evolution as the autoworkers of Zwickau, generations of whom have worked in car plants through wars and Communist isolation. The EV race is just the latest global transformation.
This article appears in the August/September 2024 issue of Fortune with the headline, "Inside Volkswagen's EV comeback."
