Volkswagen is coming for Tesla. Here’s how it plans to dominate the US market

Volkswagen is gunning for Tesla.

Tesla is still king, with over 936,000 electric vehicles sold in 2021 and a share of about 14% of the global electric car market. But Volkswagen isn’t far behind. having grabbed about 11% of the market last year and doubled its EV sales compared with 2020.

Now, the company is making a push to take the top spot. Volkswagen will say goodbye to the internal combustion engine and phase out all gasoline-powered vehicles from its US line-up within the next decade. From then on, it will sell only electric cars.

The company plans to spend more than $7 billion over the next five years to boost its research and development and manufacturing capabilities in North America. Its new Battery Engineering Lab in Chattanooga, Tennessee, starts operations in May.

Volkswagen officials say they see a North American market opening and they’re ready to take it, geopolitical and inflationary headwinds be damned.

CEO and President of Volkswagen Group of America Scott Keogh spoke to CNN Business’ Nicole Goodkind about the auto landscape while unveiling the company’s new electric, VW Bus-inspired ID.Buzz minivan at the New York International Auto Show last week.

Three models of the Volkswagen ID.Buzz electric bus are shown at the Volkswagen Commercial Vehicles plant on April 2022 in Lower Saxony, Hanover, Germany.

This interview has been condensed and edited for clarity.

Volkswagen is making a big push in North America, looking at the auto landscape here – where do you fit in?

Keogh: Our competitors are Subaru, Toyota, and Honda– the mainstream imports. Historically, we’ve been there, but we got lost in the wilderness for a long time, but we’re back and that’s where we belong.

What about in terms of your electric vehicles?

Keogh: Electrification is our chance to skip the line a little bit. We invested early in electrification, we have factories set up, and we can accelerate now. This is the chance of a lifetime for us. I have always admired Elon Musk and Tesla, he said ‘make a cool car and good things happen.’ People don’t buy electric vehicles because they want to feel good or because they want to help society, most of them just want to buy a cool car. I think Elon Musk did that, and he executed, and you’ve got to admire that. We’re taking that cool car factor and scaling it up, the Volkswagen way.

Elon Musk speaking during an interview with head of TED Chris Anderson at the TED2022: A New Era conference in Vancouver, Canada, April 14, 2022.

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What are some of the problems Volkwagen is facing in the US?

Keogh: We were irrelevant and unliked.

We were late to SUVs, we were selling basically European cars and we missed it. The second thing is the TDI fiasco [in 2017, a federal judge ordered Volkswagen to pay a $2.8 billion criminal fine for “rigging diesel-powered vehicles to cheat on government emissions tests.”] that made us unloved and disliked. We’ve been working our tails off to rectify that.

We went from 14% of our cars being SUVs to 70%, we’re getting more relevant, and those vehicles are making us more liked. We’re profitable for the first time in decades.

How have supply chain kinks hurt your auto supply?

Keogh: The way this industry used to be is you’d have a one hundred day supply of cars on the ground, and you’d spend 10% to 12% of the manufacturer’s suggested retail price [MSRP] discounting those cars. Consumers would run around from six to seven dealers looking for the lowest price. It was a massive way of destroying value. Today, because of supply chain challenges, we have less than a 10-day supply of cars on the ground and you’re spending none of the MSRP on incentives. It’s a massive structural change and a lot of it is good.

But is that temporary?

Keogh: More supply will come, but I honestly believe that there’s no way it’s going to go back. There are structural changes that need to be made in terms of increasing production of semiconductors and it will take years and years and years before we have an adequate supply. Cars that used to have hundreds of chips now have more than 5000 semiconductors in them because of the added consumer electronics. I don’t see this shortage being fixed quickly, and that’s assuming the world is going to stay normal, or just semi-chaotic.

So how do you deal with metal shortages, the nickel and lithium needed to power your batteries?

Keogh: From a strategic point of view there’s only one choice. The automotive industry used to be vertically integrated across the board. Then Wall Street jumped in and said ‘we only want you to have the peak of the margin’ and then chunks of the industry got outsourced. That was beautiful for us, we sat in our factory and things arrived. Now things are reversing, and on things like semiconductors and batteries we need to go way, way deeper.

Traders, brokers and clerks on the trading floor of the open outcry pit at the London Metal Exchange Ltd. (LME) in London, U.K., on Monday, February 28, 2022. The turmoil unleashed in commodity markets by Russia's invasion of Ukraine worsened on Monday as LNG orders were paused, finance for trade in raw materials dried up and Black Sea wheat sales froze.

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So you see the manufacturing landscape in America changing?

Keogh: The upside is that it’s all going to happen in the US locally because it’s too expensive and risky to be shipping tons of cobalt and lithium across the ocean. This takes America back to when we said we want to be Apple and not Foxconn – we were going to focus on design jobs, engineering jobs and software jobs, but someone else would make the product. That’s not going to be possible with batteries, you can’t ship something that weighs a couple of thousand of pounds for 15 million cars from China, it’s going to be a transformation.

Is de-globalization a trend that’s here to stay?

Keogh: Oh, 100%. Just look at what we’ve been doing at Volkswagen. Our shortcomings in my opinion, were that we used to be a sales and marketing entity that sold German vehicles. Now we’re a fully industrialized company that has our own factories and our own purchasing department. About 92% of the vehicles we sell in the US are made in our factories in Mexico and Tennessee, and 85% of the material in the car is local from American suppliers. This de-risks a lot of potential logistical problems for us.

A customer stands near partially emptied shelves at a supermarket in Shanghai, China, Tuesday, March 29, 2022.

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How do you find people to work on your battery technology? Are you having trouble staffing?

Keogh: We’re working with Tennessee governor Bill Lee to introduce more technical training around our Chattanooga factory. I think some of the shortcomings of the American system revolve around college and debt, but there are other ways of looking at a career and we’ve had decent success on that front. A big challenge in America right now is we’ve moved into such a service economy. But if you want to look at your industrialization, we make maybe a half a million batteries in America right now, we’re gonna need to make nine million batteries. That’s hundreds of factories, and to get the talent in there, into the factories, will be transformational.