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Volkswagen Places Record $25 Billion Bet on Electric Vehicles

This is not investment advice. The author has no position in any of the stocks mentioned. WCCF TECH INC has a disclosure and ethics policy.

Continuing with a theme of corporate reinvention (yesterday we looked at GM's effort to transform from a Detroit dinosaur into a modern, peer-to-peer transportation platform link), we can today report that Volkswagen Group AG (ETR:VOW3) has agreed to buy $25 billion in battery pack supplies as it continues its push to be the worldwide leader in electric cars.

Volkswagen is Very Serious About Electric Cars

Volkswagen recently gained notoriety when it was caught cheating in the great diesel scandal of 2015 which busted the automaker for cheating emissions tests and lying about fuel economy on diesel models. VW understandably wants to distance itself from that image as quickly as possibly and so is moving forward with an an aggressive electric car initiative. This massive battery play slots into their "Roadmap E" which is VW's master electric car strategy. The Wolfsburg-based automaker has three new electric vehicles debuting in 2018 and over ten releasing in 2019. They hope to have 16 factories cranking out electrified models by 2022 which will ultimately lead to the group offering 50 all electric models by 2025 across all of its brands.

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2018 will see the launch of the first "I.D." branded VW model. While "I.D." won't be a full standalone brand i.e Toyota's ill-fated Scion brand; I.D. models will be a bit of a sub-brand for Volkswagen with ID Buzz, ID Crozz, and ID Vizzion all on the roadmap. Also later this year will see the release of the much anticipated Audi e-tron all electric SUV:

Porsche is even chipping in via equipping its dealer network with ultra fast charging 800A units that can "provide 250 miles of charge in under 20 minutes". The luxury sports car brand is set to release its own all electric vehicle dubbed the Mission-E by the end of 2019 and it promises extreme performance if the 600 horsepower of the concept is anything to go by. It looks to be a direct competitor to the popular Tesla Model S.

One Supply Chain to Rule Them All

The main takeaway from this bit of news is that VW must be at least somewhat worried about the future supply of batteries if its willing to tie up $25 billion in raw material and parts costs all for models that are still years away from production. One of the main elements of battery pack production is cobalt which has been increasing in price at a rapid pace in the last few years (up 300% 2016 to 2018!) The group's Chief Financial Officer Frank Witter, when asked about rising if this move supplied enough cobalt stated, "For the first wave of products we did.. its certainly an issue for everyone. Prices are rising and we need to stay cool".

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Volkswagen's $25 billion move isn't a single purchase of cobalt or battery packs. Its a multi-vendor tender the automaker began taking bids for back in September 2017. Major players Samsung, LG Chem, and the Chinese firm CATL are said to be the tier 1 suppliers in the deal. Industry sources say VW was pushing for a multi-year fixed cost on cobalt but eventually caved and now is rumored to have agreed to floating spot price for future cobalt purchases. Of note is that the $25 billion ONLY buys them supplies for electric cars to be produced for Europe and Asia. A North American buy will likely happen in the near future as they are continuing to look for stable sources.

Volkswagen Vs Tesla: The Battle for Electric Car Leadership

Its becoming increasingly obvious that the global supply chain is very complex and challenging when it comes to cobalt and the rare earth minerals like Lithium that are needed for big car battery packs. While Tesla (NASDAQ:TSLA) has chosen to make in-house battery packs inside its huge Gigafactory in Nevada, VW has declined to sponsor development of battery packs and instead we find ourselves hearing about this $25 billion play to secure the necessary supplies from 3rd party vendors.

Tesla Gigafactory

Tesla is assuredly worried at the moves Volkswagen is making as this will of course help drive cobalt prices globally and on a broader scale signals just how serious the Volkswagen group has become about electric vehicles.  While Tesla spent $17.5 billion total in 2017 on battery materials, this one move easily eclipses Tesla's move and they have yet to even make a similar purchase agreement for North America. Tesla is already struggling to meet production forecasts for its "mainstream" Model 3 and this is only worse news for them.