It’s been ten years since Volkswagen won the won Green Car of the Year award at the LA Auto Show. The Volkswagen Jetta TDI and the Audi A3 TDI won because of their innovative clean diesel engines. Then a massive scandal revealed that the clean diesel engines weren’t actually that clean: Volkswagen had been cheating on emissions tests. VW was stripped of its awards. Consumers and investors were furious, and the stock plummeted by more than 40%. Now four years later, Volkswagen has just released a mass-market electric car that’s much cheaper than a Tesla Model 3. But does Volkswagen’s stock have any gas left in the tank?
Volkswagen is Germany’s largest automaker and runs neck-and-neck with Toyota to be the world’s largest automobile company. In addition to its lower priced VW models, the company also owns brands like Audi, Bugatti, and Porsche. (Yes, this article is a great excuse to spend time ogling the new electric Porsche Taycan.)
The company took a major hit when it was caught cheating by the U.S. Environmental Protection Agency. The scandal cost VW €26 billion, and there may be more penalties to come. Volkswagen is still under investigation by the U.S. Securities and Exchange Commission, and former CEO Martin Winterkorn was charged with fraud in Germany. Investors should be cautious—more bad news is almost surely on the way.
It’s understandable that Volkswagen wants to turn the page on this story, and it seems like its strategy is to leap frog over internal combustion engines by investing €30 billion over the next four years to launch fifty different electric cars. As CEO Dr. Herbert Diess said in the company’s 2018 sustainability report, “On the road to emission-free mobility, we are putting all our weight behind the electric car.”
VW is betting that the future of mobility is electric, and hoping that people will forget about their dirty diesel history. We got a taste of the new branding with this week’s unveiling of an updated logo and the new ID.3 electric model. I’m not a car expert, but it looks pretty good in this early review. European deliveries will start in the middle of next year in with a base model priced at under €30,000. By comparison, the Tesla 3 starts at €57,000.
If you put the scandal aside, Volkswagen’s underlying financial situation looks fairly good. They’ve had growth in the top line (revenues) and the bottom line (profit) each year since 2015. The stock hasn’t been doing well, so investors looking to bet on electric vehicles might do better to invest in Volkswagen rather than pricey Tesla stock. But some people just won’t forgive Volkswagen for its past sins, so let’s take a look at Toyota, Volkswagen’s main rival.
Toyota launched the first Prius hybrid in 1997, and it has dominated the market for hybrid cars ever since. But it’s no surprise that you’ve never heard of a fully electric Toyota because it doesn’t exist. Toyota has made a strategic decision to sell hybrid vehicles for now and to develop zero emission hydrogen fuel cell vehicles in the future.
My concern with hydrogen fuel cells is that they require the construction of a whole new distribution network. Gas stations need to be replaced by hydrogen stations, whereas electric vehicles can be plugged in to the existing grid. This makes perfect sense for centralized vehicles, like buses and forklifts, but it’s hard to imagine that it’ll become mass market anytime soon. Really, it comes down to how rapidly consumers start adopting fully electric vehicles. Toyota will be behind the curve if we see exponential growth, but would likely win the long game if the internal combustion engine ends up experiencing a long, slow death or hydrogen fuel cells emerge as the most popular zero emission option.
While Toyota was a pioneer of hybrid electrics, and Volkswagen is betting big on the future of all-electric, both companies are trying to make sure a switch away from internal combustion vehicles doesn’t happen too quickly. They’d like to squeeze out as much profit as possible from the billions they have poured into their internal combustion production lines before they become obsolete.
According to InfluenceMap, a U.K.-based non-profit that maps the extent to which corporations influence climate policy, Toyota is the bigger obstacle to progressive policies. The company scored a D–, which is at the bottom end of the range of major automakers. InfluenceMap cited Toyota’s apparent support of the U.S. Administration roll back of fuel efficiency and greenhouse gas standards, its opposition to phasing out conventional vehicles in India and the U.K., and its lack of support for zero-emission vehicle mandates in China and the EU.
Volkswagen is not much better. The company scored a D+, which is the top end of the range of automakers. According to InfluenceMap, the company didn’t appear ready to support more ambitious CO2 targets in Europe despite a 2017 leaked internal document suggesting that it was. Conversely, in 2018, Diess strongly criticized EU proposals to tighten vehicle CO2 targets for 2030, arguing that they would negatively impact the sector’s international competitiveness. In 2018, Diess also warned against an ambitious transition towards electric vehicles in the transport sector and opposed bans on specific vehicle types, namely diesel.
Toyota’s financial statements are, understandably, in a better place than Volkswagen’s right now. Investors have seen more growth and less volatility with no major scandals beyond the odd product recall. With a higher clean revenue score, Toyota wins the Sustainable Stock Showdown for now, but Volkswagen is picking up speed in the race to all-electric vehicles. I’ll be keeping a close watch on these companies. If the market shifts quickly towards electric vehicles, Toyota could start eating Volkswagen’s zero-emissions dust.
Beta is a measure of a stock’s volatility in relation to the market. By definition, the market has a beta of 1.0, and individual stocks are ranked according to how much they deviate from the market. A stock that swings more than the market over time has a beta above 1.0. Lower beta means less risk.